Whether buying or selling tenant-occupied rental property, it’s always a good idea to require a tenant estoppel for each tenant. Most of the time, tenant estoppels are only required for properties with five or more residential units, but investors in smaller properties can benefit from their use, too. Information provided in the estoppel can notify both parties of risk in the deal and provide an extra level of disclosure that reduces risk.
Here are five solid reasons why investors should require a tenant estoppel, even if the property is a single unit home or condo.
1. Clarification of lease terms: Most estoppels summarize lease terms in simple language, thereby removing any legaleeze that tenants may have ignored because it confused them. An opportunity to see lease terms in easy to understand language could help insure lease compliance in the future.
2. Disclosure of informal agreements: Although more common in multi-family properties than single family homes, informal agreements may exist in any size property to provide a tenant with rent discounts or special privileges if they perform services on the property. These services could include lawn care, common area clean-up, rent collection, or even enforcing House Rules among other tenants. The tenant might fear creating a tax liability for the amount of the discount if the agreement is in writing, so it’s sealed with a handshake. The tenant might also believe the deal lasts as long as they occupy the property, even if it is sold, so potential buyers need to have any such agreements – or the lack of agreements – confirmed in the estoppel.
3. Notification of tenant non-compliance or default: Unless sellers provide a complete lease file that includes documentation of past and current problems with tenants, the estoppel is a good place to summarize current problems – from habitual late rent payments to non-compliance with House Rules.
4. Confirms that tenant resides in the property and have not sublet the space in whole or in part: Most estoppels require the tenant to confirm they actually live on the premises and that all persons also residing there have been identified on the lease.
5. Disclosure of tenant claims: Sometimes tenants make financial claims that begin informally, but have the potential to become the subject of litigation in the future. The claim could be for reduced rent due to their furnace not working for a week or something major like medical expenses because the tenant slipped and fell on a wet sidewalk. If any claims exist that could effect future obligations of the property, buyers should know about it. Requiring tenants to disclose possible claims – or confirm that no such claims exist at the time of sale – could protect sellers from future liability.
The average estoppel takes just a few minutes to complete, but the information they provide could protect buyers and sellers far into the future. If you have questions about tenant estoppels, drop me a line: Contact Us.