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Be Careful What You Sign — It May Come Back to Haunt You: Estoppel Certificates and their Effect

| 2 minutes

Tenants are routinely requested by landlords to execute estoppel certificates in favour of purchasers or lenders as to the status of their leases. Most tenants ensure there are no ongoing performance defaults (such as a failure to repair) or monies owing by the landlord (such as for year-end adjustments).  How many tenants review their lease carefully before signing?

In a recent decision by the Ontario Superior Court of Justice (1960529 Ontario Inc. v. 2077570 Ontario Inc., 296 Brunswick LP Corp., and CMLS Financial Ltd. 2017 ONSC 5254) a representative of the landlord appeared in the tenant’s office with a form of estoppel certificate that needed to be signed then and there to allow a sale and financing of the building. The estoppel certificate confirmed there were no defaults under the lease.

Devilish cartoon character

It appears the tenant forgot their lease had a right of first refusal to purchase the building. The tenant signed the estoppel and the sale and financing closed.  The new landlord then exercised a demolition provision in the lease and gave notice of termination.

At that point the tenant realized that they should have been given the right to buy the property. They moved for a series of orders allowing them to do so.  Unfortunately the court held that the tenant effectively waived their right of first refusal when they signed the estoppel certificate confirming there was no default under the lease.  Note that unlike many estoppel certificates the certificate in question did not specifically refer to rights of first refusal or options to purchase in the lease–it was silent on the point.

The lessons learned:

  1. Ask the landlord for a description of the transaction for which the estoppel is sought and review the lease to determine what rights the tenant may have and what formalities (such as an assumption or non-disturbance agreement) are required in respect of that transaction.
  2. Make clear that the estoppel certificate is not to be taken as an amendment of the lease or waiver of tenant’s rights under the lease.

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