By: Gregory J. Spaun Published: August 2018

Knowledge of Contrary Facts Negates Effect of Estoppel Certificate

Regardless of whether you are in the construction business, the financial industry, or are a brick-and-mortar retailer, chances are that if you own a business, you have a commercial landlord for one or more of your business locations. In the commercial real estate business, landlords who undertake certain transactions, such as refinancing or selling the leased property, often require tenants to sign estoppel certificates. Estoppel is an equitable concept that prevents a party from doing something that he or she otherwise has every legal right to do because of a promise, a representation, or some other reason. Estoppel certificates are meant to provide the financier, purchaser, or other party to the landlord’s transaction with assurances that there are no defaults or other problems under the tenant’s lease, and that the tenant has no claims against, or issues with, the landlord. Accordingly, in the context of an estoppel certificate, when signed by the tenant, they “estop”, or prevent the tenant from later raising a claim against the landlord that was not specifically disclosed in the certificate. In the case of Aerotek, Inc. v 757 3rd Avenue Associates, LLC, argued by this author, an appellate court declined to enforce an estoppel certificate, notwithstanding that it was signed by the tenant.

In Areotek, the leases at issue provided that Areotek (and a sister-entity) were entitled to be reimbursed for certain tenant improvement allowances by the landlord. Areotek submitted initial documentation in support of its request for reimbursement of the tenant improvement allowances in August of 2014, and it followed up with final documentation (which included final lien releases from its contractors and suppliers) on December 4, 2014. Two months later, the landlord executed an agreement to sell the building in which Areotek was a tenant, and it represented to the buyer its belief that Areotek was no longer entitled to be reimbursed for the tenant improvements. In order to close its sale, the selling landlord asked Areotek to sign an estoppel certificate stating that Areotek had “no further rights to receive any allowances or Landlord contributions for tenant improvements pursuant to the terms and conditions of the Lease”, which it did. After the sale closed, the landlord refused to reimburse Areotek for the tenant improvement allowances, and Areotek sued.

In response to the lawsuit, the landlord made a motion to dismiss, citing to the estoppel certificate and the language stating that Areotek had no further rights to receive the allowances. In opposition, Areotek argued that estoppel, as an equitable construct, required the party claiming the doctrine (here, the landlord) to have “clean hands”, and that this landlord did not have clean hands because it accepted the certificate with knowledge of a contrary—and true—state of facts. The trial court denied the motion on that ground, and an appeal was taken. On the appeal, this author argued that Areotek took no action to suggest that they were withdrawing their reimbursement request, or that they were willing to forgo payment, and that the landlord therefore had no grounds to believe that the facts stated in the estoppel certificate were actually true. The Appellate Division affirmed, finding that the allegations were clear that the landlord accepted the estoppel certificates “with knowledge of the contrary, and true, state of the facts”, and that without “action to suggest that [Areotek was] withdrawing their reimbursement request or that they were willing to forgo payment”, the landlord could not rely on those estoppel certificates to bar Areotek’s claim.

While the tenant ultimately prevailed against the motion to dismiss its lawsuit, the fact of the signed estoppel certificates was hard to overcome. The outcome of the case rested on equitable grounds of “clean hands”, the doctrine that one who seeks to invoke equity must have behaved equitably itself. As the court ruled here, a landlord with knowledge that the facts recited in the estoppel certificate are not true, and with knowledge that contrary facts are true, cannot invoke the equitable remedy. However, as equity is a relative concept that is applied in each case, a tenant who is asked to sign such a certificate would be well advised to consider the effect of signing such a certificate, and to consult with competent counsel in order to help weigh the effects of such a signature. Or else, in a less clear cut case, the certificate may be enforced to your detriment.

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