let’s talk: ESTOPPEL CERTIFICATES
This week we are closing on a new triplex up in NY – exciting times for our team. Unfortunately this transaction was anything but smooth. We are buying into a situation where one tenant moved out mid-closing, another tenant has not paid rent since October and therefore we are relying on the third tenant to carry the weight of the building when it comes to rental income. Not the best of all situations. Luckily, this building has POTENTIAL and is in a GREAT location so we feel excited to continue moving forward with it but I want to talk about one of the hiccups we are running into as we close on this property – an estoppel certificate. So let’s talk about what they are and why one is important in this deal.
So, as we do, let’s talk Real Estate, let’s talk ESTOPPEL CERTIFICATES…
WHAT IS AN ESTOPPEL CERTIFICATE?
An estoppel certificate is a written note between the landlord and the tenant that outlines the following; current conditions of the lease, the relationship between the tenant and the landlord, and details regarding the rights of the current tenants living in the rental property.
WHY DO WE NEED ONE HERE?
This transaction is not your typical “transfer of lease” transaction. Ideally, all of the leases in the building would be current, and the seller would simply assign us the leases, listing us as the new landlord and all would be well. In this particular transaction, both leases are expired and the tenants are merely living off of the month-to-month clause that is typically at the end of most leases (most leases typically say, if neither party provides 30 days notice to terminate the agreement at the end of the lease, the lease automatically turns into a month-to-month agreement). Furthermore, we know that one of the units is not paying AND beyond that, the seller is refusing to give us the security deposit because he thinks he is entitled to it due to lack of rental payment over the last few months. SO what this estoppel agreement SHOULD say is that the non-paying tenant is in violation of the lease, has not been paying rent and that they forfeited their right to the security deposit once they do finally move out. While this still sounds sketchy for us to take on (re: the legal battles we may be facing as well as repairing any damage this non-paying tenant may make to the property) we negotiated a cash credit to help us cover those costs in the future.
While some may be concerned that I am so open to talk about this situation while we are living it, I feel confident that we are always on the right side in terms of a legal and ethical perspective in terms of how we handle ourselves in all of our real estate dealings. While we never look forward to walking into situations where there is a non-paying tenant, we know that it is part of the industry and we hope we can work out an agreement that works for all parties. Now that we know the storm we are walking into, do you think we are crazy for taking this on?! Have you walked into a similar situation before?! Let us know!
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