Daily Development for
Friday, July 26, 1996

by: Patrick A. Randolph, Jr.
Professor of Law
UMKC School of Law

LANDLORD/TENANT; ESTOPPEL CERTIFICATE: Where lease contains a "bankruptcy clause" giving the tenant the right to terminate if the landlord "failed in business," and landlord transfers title to mortgagee in lieu of foreclosure, tenant's execution of estoppel certificate with knowledge that landlord had sold the building to mortgagee in a "settlement" is sufficient to justify the conclusion that tenant is estopped from later invoking the bankruptcy clause as a consequence of the deed in lieu. Resolution Trust Corporation v. District of Columbia, 78 F.3d 606 (D.C. Cir. 1996).

The original landlord transferred title to the building to its mortgagee by deed in lieu of foreclosure pursuant to the terms of a settlement agreement. The tenant was notified shortly thereafter that the mortgagee was "purchasing" the building in accordance with the terms of a settlement agreement, and was asked to sign an estoppel certificate stating that there were no existing defaults under the lease. The tenant signed the estoppel certificate, but several months later (after the mortgagee had been placed in receivership and the RTC had succeeded to all of its rights with respect to the lease), informed the RTC that it had learned about the facts surrounding the transfer and was terminating the lease in accordance with the bankruptcy provision of the lease, which provided that the tenant could terminate the lease if the landlord "failed in business."

The court held that the estoppel certificate was not unenforceable as a result of misleading representations, as the tenant had asserted, and that the tenant was thus barred from invoking the bankruptcy clause to terminate the lease. The court found that using the word "purchase" was not misleading because the deed in lieu of foreclosure was a transfer for consideration (the cancellation of the debt secured by the mortgage) and thus fit the definition of a purchase. Further, the court questioned whether the tenant could have detrimentally relied on the statement in light of the fact that the estoppel certificate referenced the settlement agreement, which should have alerted the tenant that the transaction was equivalent to a foreclosure.

Comment: An interesting feature of the case is the timing of the estoppel certificate. The statement of facts in the opinion indicates that the tenant assigned the lease to the mortgagee on May 21, and transferred title to the propery on May 22. The court goes on as follows:

"The [Tenant] received a notice of the transfer two weeeks later, on June 3. . . Prior to the transfer, [Lender] had asked [Tenant] to sign an estoppel certificate . . . The [Tenant] signed the certificate on July 20."

Note that the court does not indicate that the Tenant actually agreed to execute the estoppel certificate prior to the transfer. If it did not, then how is the Tenant "estopped?" Often, when there is a "rush to transfer," details such as estoppel certificates (and sometimes even legal opinion) are viewed as mere "boiler plate" that can be patched on later. This is not the case, of course. Good lawyering means sticking to your guns in getting the deal closed right or not at all. We all know this, although we're all probably guilty of "risk taking" when the going gets tough. That's OK, so long as it's understood that it's the firm and its malpractice carrier who are taking the risk.

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