Understanding what is estoppel in real estate

When diving into the world of real estate, you’ll encounter numerous terms and concepts that are crucial for ensuring smooth transactions. One such concept is estoppel. Although it might sound complex, understanding what is estoppel in real estate is essential for anyone involved in buying, selling, or managing property. Let’s break down what this key principle in common law systems means and why it matters.

What is estoppel in real estate?

Estoppel in real estate is a legal principle that prevents a party from arguing something contrary to a claim they have previously made. Or, prevents an action they have taken when another party has relied upon that original claim or action to their detriment.

The whole point of estoppel is fairness and consistency, ensuring that a party cannot change its position to the detriment of another party that relied on the initial stance.

In real estate, estoppel often appears in the form of an estoppel certificate or estoppel letter. This document plays a critical role in property transactions, particularly in the context of leased properties. A lender, financial institution, or bank will request an estoppel letter or certificate from the homeowners association (HOA) before finalizing the purchase of a property within the HOA community. 

The estoppel letter ensures there are no extra costs from unpaid HOA fees or any upcoming special assessments when buying a property. It also proves ownership at closing, giving extra assurance to both buyers and sellers. It helps them safeguard their interest and cash flow. 

What is an estoppel certificate?

An estoppel certificate is important information in real estate transactions to confirm the details of lease agreements between landlords and tenants. It verifies the terms and status of the lease, such as:

• Starting dates of the lease period.
• The amount of rent and security deposit.
• The duration of the lease and the renewal options if any.
• Whether either party has any claims against the other.
• Any other agreements or amendments related to the lease.

Why is an estoppel certificate important?

Estoppel ensures fairness by stopping people from benefiting from dishonesty or inconsistency. It protects those who rely on others’ actions or promises and prevents harmful changes in position. By enforcing estoppel, the legal system upholds fairness and justice, stopping manipulation through deceit or inconsistency. Estoppel certificates are vital.

For homebuyers and loan lenders

When purchasing a property that has existing tenants, new buyers, investors or lenders need to understand the terms of the current leases. An estoppel certificate provides this assurance, allowing them to make informed decisions. It confirms that the tenant acknowledges the lease terms and their current status, reducing the risk of future disputes.

For landlords

Estoppel certificates can protect landlords by providing documented proof of the lease terms as acknowledged and signed by a tenant. This can be particularly useful in preventing tenants from later claiming different terms or conditions.

For tenants

By signing a tenant estoppel certificate, tenants can ensure their understanding of the lease terms is recognized and agreed upon by the landlord. This mutual acknowledgment can help resolve potential conflicts quickly.

For HOA management company

The homeowners association is safeguarded in case of a lawsuit over financial issues with a homeowner. An estoppel letter serves as crucial proof of the legal agreement between the HOA and the buyer at the time of the property sale. 

How does estoppel work in practice?

Imagine you’re buying a commercial real estate with several tenants. Before finalizing the purchase, you request estoppel certificates from each tenant. One certificate might confirm that Tenant A pays $2,000 per month in rent, has a lease valid for another three years, and has no outstanding disputes with the landlord.

Once Tenant A signs this estoppel certificate, they cannot later claim they were paying less rent or that their lease was shorter. This protects you as the buyer by providing accurate and reliable information about the property’s income and lease status.

What are the common types of estoppel in real estate industry?

In real estate, estoppel is a crucial legal principle that ensures fairness in transactions by preventing parties from contradicting their previous statements or actions. Here are some common types of estoppel that frequently arise in the realm of real estate:

Estoppel by deed

Estoppel by deed occurs when a person has executed a deed (a legal document that grants ownership of the property) and later attempts to deny the truth of the statements made in that deed. This type of estoppel ensures that once someone has transferred property through a deed, they cannot later claim they didn’t have the right to transfer it.

Example: If a seller transfers a piece of land to a buyer through a deed, they cannot later claim ownership of that land or contest the transfer, even if it turns out there was an issue with their original ownership claim.

Tenant estoppel

An estoppel certificate, often used in the leasing context, is a signed statement by a tenant affirming the terms and status of their lease agreement. This document confirms details such as rent amount, lease duration, and any outstanding issues between the landlord and tenant. It protects potential buyers or lenders by providing a clear and reliable record of the lease’s terms prior to closing on the property.

Example: A commercial tenant signs an estoppel certificate stating they pay $3,000 per month in rent and have no disputes with the landlord. This certificate is then relied upon by a buyer considering purchasing the property. The tenant cannot later claim they had unresolved disputes when the certificate was signed.

Promissory estoppel

Promissory estoppel arises when one party makes a promise to another, and the second party relies on that promise to their detriment. In real estate, this can often involve informal promises or assurances that lead to significant actions based on those promises.

Example: A landlord promises a tenant that they will extend the lease for another year. Based on this promise, the tenant renovates their rental space. If the landlord then decides not to extend the lease, the tenant may do their due diligence and invoke promissory estoppel to enforce the promise and secure the lease extension.

Equitable estoppel

Equitable estoppel, or estoppel in pais, prevents a party from taking a legal position that is contrary to their previous actions or statements, especially if such a shift would harm the other party who relied on the original claim.

Example: A property owner verbally assures a neighboring property owner that they can use a portion of their land for a driveway. The neighbor, relying on this assurance, invests money in paving the driveway. Later, if the original owner tries to revoke permission, equitable estoppel can prevent this, protecting the neighbor’s right to use the driveway.

Collateral estoppel (Issue preclusion)

Collateral estoppel prevents a party from re-litigating an issue that has already been resolved in a previous legal case. In real estate, this can relate to disputes over property boundaries, easements, or other property-related issues.

Example: If a court has previously decided on the boundary line between two properties in a lawsuit, neither party can bring a new case to challenge that boundary line again. The issue has already been legally settled, and collateral estoppel enforces this finality.

What are some common situations involving estoppel?

• Property sales: Ensuring all tenants acknowledge their lease terms.
• Refinancing: Lenders may require estoppel certificates to verify lease terms.
• Dispute resolution: Using estoppel certificates to resolve conflicts over lease terms.

Last thoughts

Understanding what is estoppel in real estate is crucial for anyone involved in property transactions. It brings transparency and reliability to the process, ensuring all parties are on the same page regarding lease agreements. Whether you’re a buyer, seller, landlord, or tenant, knowing how estoppel works can help you navigate real estate deals with confidence and security. 

So, the next time you are part of a property transaction, remember the role of estoppel and how it can safeguard your investment and agreements.

Written by Ramona Sinha. June 9, 2024

Ramona is the Senior Content Writer for Kukun. This experienced blogger uses simple and succinct words to decipher the complex phenomenon called life. She has written articles covering a broad range of topics, such as real estate, lending and mortgage, finance, business, taxation, home designs, home improvement projects, decor concepts, and more. An avid traveler, she’s a digital nomad at heart and an animal lover from the depth of her soul.