Daily Development for Monday, August 7, 2000

By: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law
Of Counsel: Blackwell Sanders Peper Martin
Kansas City, Missouri
randolphp@umkc.edu

LANDLORD/TENANT; ESTOPPEL CERTIFICATES: California court holds that tenant is always and in every case bound by estoppel certificate even when the contents are demonstrably wrong.

Plaza Freeway Limited Partnership v. First Mt. Bank, 81 Cal. App. 4th 616, 96 Cal. Rptr. 2d 865 (Cal. App. 2000)

Tenant is a successor in interest to the original tenant under a 25 year lease. Landlord is a successor to the original landlord. A dispute arose as to the exact date upon which the term would end. The original lease stated that the term would begin 180 days after the landlord delivered the premises ready for tenant's build out or, if earlier, the time that tenant commenced business. The lease language contemplated that the parties would execute an addendum defining the commencement date, but none was executed. The parties knew when tenant opened for business, and the tenant argued that this was the date from which the lease term was to be measured, but it was not clear when the property was made available to the tenant. Had the property been made available more than 180 days before the tenant opened for business, then the lease commencement date would have been earlier than the tenant's opening date.

The dispute became significant in the context of an attempt by the tenant to exercise a renewal option, which the lease required to be exercised twelve months prior to expiration The landlord contended that the tenant renewed the option too late, while the tenant disagreed, and held over. A suit was brought for unlawful detainer, and, of course, the critical question was just when the original lease lawfully ended.

In 1992, in connection with the transfer of the lease to the present landlord from its predecessor, the tenant had signed an estoppel certificate providing that the lease term ended on October 31, 1998. If that date was correct, then the tenant's exercise of the renewal option was untimely.

The trial court noted that the original lease could have commenced on November 1, 1973, making the October 31, 1998 termination date correct, only if the landlord had delivered possession to the tenant in buildable condition on the date the lease was signed. But the court noted that the lease provided that the landlord had 120 days from the date of execution to get the building site ready, suggesting that the lease premises was not delivered to tenant in buildable form on the very date of execution. As there was no real evidence when the property was delivered to the tenant, and the October 31 date appeared inconsistent with reality, the court accepted the landlord's argument that the lease commenced when the first tenant took possession, and ended twenty five years later, making the renewal option exercise timely.

As to the estoppel certificate, the court noted that the tenant's rents amounted only to 1.7% of the total rentals from the shopping center, and that consequently the landlord had not significantly relied upon the estoppel certificate in investing in the property. Thus, the termination date set forth in the estoppel certificate, which could not be verified independently, would not control.

In making this determination, the court had to look beyond a provision of California law that provided that the facts set forth in a written instrument are conclusively binding upon the parties to the instrument and their successors. It concluded, based upon some California precedent, that the term "instrument" really meant "agreement," and that an estoppel certificate is not an "agreement."

On appeal: Held: Reversed. The court of appeals found other California authority reading the meaning of the term "instrument" more broadly, and including estoppel certificates. Tenant loses.

Although that little piece of statutory interpretation likely is relevant only to California lawyers, but subsequent reasoning of the California Court of Appeals goes a little farther. The court noted that, indeed, the California statute was intended to implement the common law rule of "estoppel by agreement," and its interpretation of the statute to include estoppel certificates satisfies policy objectives in that it will "promote certainty and reliability in commercial transactions. A contrary conclusion would defeat the purpose behind the widespread practice of using estoppel certificates."

Comment: The editor learned of this case from the excellent Pircher, Nichols & Weeks real estate law newsletter. That firm's commentator had this to say about the case:

"Reading between the lines, this appears to be a resultoriented decision in which the appellate court avoided an analysis based on equitable principles of estoppel because it was constrained by the lower court's factual determination that there was no detrimental reliance. Ironically, although the court's "application of section 622 to estoppel certificates [was intended to] promote certainty and reliability in commercial transactions", this case leaves open several important questions:

Lease Requirement. What if the certificate was not required by the lease? The court's holding refers to the lease requirement. Did the court determine that this was essential to establish consideration? Landlords should always draft estoppel certificates with customary reliance language, especially if the tenant's delivery of a certificate is not required by the lease.

Knowledge of Error. What if the tenant could prove that the purchaser knew at the time of purchase that the tenant had made a mistake in the certificate? Could the tenant rescind or reform the certificate? It would be imprudent for a purchaser or lender to rely on a certificate under such circumstances.

DoubleEdged Sword? Would the purchaser have been bound by the certificate if it contained a mistake in favor of the tenant? If "the facts recited in the instrument are conclusively presumed to be true as between the parties thereto", is the purchaser one of "the parties thereto" and therefore bound even if it does not sign the estoppel? Until the legislature or the judiciary provides further guidance on the subject, the recipient of an estoppel certificate should carefully review it to confirm its accuracy."

Comment 2: The comment's above, in the editor's view, demonstrate the weakness of the case, and the need for a different holding. The estoppel certificate is called what it is called for a reason. It invokes the power of equity. If equity is involved, then most of the issues raised above could be resolved on an ad hoc basis by a court. In the ordinary case, the contents of the estoppel certificate would be binding, at least when relied upon, but in other cases, where equity dictates otherwise, there would be no binding affect. The California decision should not be extended.

Comment 3: Just to raise one more issue: What if the estoppel certificate is signed and delivered, but the transaction for which it was prepared does not go through? Is the certificate any less an "instrument" within the court's interpretation of the statute? Would the landlord or other third parties be able to rely upon the contents of the certificate even if they were not the intended beneficiaries, or if they were intended to rely upon it in a different context? These questions underscore the merits of limiting the California statute to a true implementation of the "estoppel by agreement." If the parties agree, by a written instrument for consideration, to declare that certain facts are true, then they should be bound by such declaration. That's should be the beginning and end of the doctrine.

Readers are urged to respond, comment, and argue with the daily development or the editor's comments about it.

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