What is an Estoppel Agreement and When Should You Use It?Feb 28, 2023
Have you ever tried to purchase a multifamily property and found that the owner ran the business on the back of a cocktail napkin? How can you make heads or tails out of the financials well enough to take it to a lender, let alone your rich Aunt Mabel?
We all know (at least my clients do) that when you start the financial due diligence process you put on the hat of a forensic accountant and start to rebuild the financials using third party documents that verify the information (i.e., bank statements). But what do you do when that owner gives you the same excuse you hear so many times “I have several properties and I commingle the funds from all my properties”. I call BS on that one.
But here’s what you do. Pull out your handy-dandy estoppel agreement. Fancy term, I know, but very effective nonetheless. An estoppel agreement is a legally binding document that serves to confirm the terms of a contract or other agreement between two parties. It can also be used to stop one party from making statements that contradict those made in a prior agreement—hence the name “estoppel.”
What Is an Estoppel Agreement?
An estoppel agreement is a legal document that provides assurance of the facts related to a given transaction or relationship between two parties. It can be used to confirm any verbal or written agreements between the parties, including their obligations and rights. The purpose of an estoppel agreement is to ensure that all parties are aware of the facts and expectations related to their respective roles in the transaction.
When Should You Use an Estoppel Agreement?
Estoppel agreements can be used in many different situations, such as landlord-tenant relationships, asset transfers, mergers and acquisitions, business sales, loan agreements, and more. Generally speaking, if there are any questions about how a particular transaction will play out or what each party’s responsibilities are within it, then an estoppel agreement can help provide clarity on these matters. This makes them especially useful for businesses that have multiple layers of ownership or complicated financial arrangements.
In addition to providing legal protection against future disputes and misunderstandings, estoppels can also serve as a form of due diligence for potential investors by providing detailed information on various aspects of the company in question. This includes details on ownership structure and financial matters like taxes and liabilities.
How Do You Use an Estoppel Agreement in the Due Diligence Process?
Very simply, you use a form estoppel agreement and mail it to all tenants and have them answer the questions that will verify the terms of the lease; start date, term date, base rent, late fees, special terms. Then have them sign it.
This will give you the third party verification that the terms that the seller claims to exist on the deal actually exist on the deal.
The trick about estoppel agreements for due diligence is that they tend to be used exclusively for smaller (<20 units) properties. Above that, things tend to get dicey (and cumbersome).
In conclusion, understanding what an estoppel agreement is and when you should use it is essential for investors, business owners and professionals alike. Estoppels provide legal protection against future issues by confirming the terms of an existing contract or other agreement between two parties in writing. These documents can also be used as part of due diligence for potential investors by providing detailed information on ownership structure and financial matters like taxes and liabilities. If your business has complex arrangements with multiple partners or stakeholders involved, then having an estoppel agreement in place may prove invaluable down the line!