Understanding Estoppel in Real Estate: Title and Escrow Manual
Estoppel in real estate is an indispensable closing document. It’s part of the title and escrow professionals’ due diligence process, which prevents disputes, clarifies financial obligations, and ensures that all parties have a mutual understanding of the property’s terms.
Ultimately obtaining property estoppels leads to smoother and more reliable real estate transactions, and the more title and escrow professionals know about it, the better they’ll be equipped to obtain them quickly and stress-free.
So let’s break down the concept of estoppel real estate, go over what it means, and how it affects title and escrow work.
What is Estoppel in Real Estate?
To define estoppel in real estate, let’s first look at what estoppel means in general.
Estoppel is a legal principle that prevents someone from arguing something contrary to a claim they previously made if someone else relied on that original claim.
In various industries, estoppel comes into play to prevent someone from going back on an agreement. For example, in banking, a signed loan agreement or documented approval can serve as evidence of estoppel, preventing the bank from later denying the loan.
In telecommunications, a written confirmation of a rate plan ensures the company can’t change the rate. In healthcare, documented approval from an insurance company for a medical procedure invokes estoppel, obliging them to cover the costs.
Retail stores must honor advertised discounts because the advertisement acts as a promise to customers. These documented assurances are in essence estoppels.
But what about real estate?
Estoppel in Real Estate Definition
In real estate, an estoppel certificate is a document that confirms the accuracy of property-related information, such as lease terms and financial obligations. This certificate, also known as an estoppel letter, protects against property disputes.
The estoppel certificate is typically requested by title and escrow agents during property transactions, usually from homeowner’s associations, to ensure no misunderstandings or undisclosed issues regarding the property.
Types of Estoppel in Real Estate
On top of being used in different industries, it has different real estate applications. Here are a few examples.
Association Estoppel
The association estoppel is a legal document obtained from a property’s governing homeowners’ association or condo owners’ association. It shows all outstanding fees or fines due as of a certain date. This document protects the buyer from being responsible for any unpaid fees from prior owners and is one of the most vital closing documents, that title and escrow professionals should secure.
Equitable Estoppel
Digging a bit deeper into law terminology, there is equitable estoppel, which prevents a party from asserting rights or facts contradictory to their previous actions or statements, and detrimental to another party.
In property transactions, this could be, for example, when a neighbor tries to build outside the agreed property boundaries. Another instance where equitable estoppels apply in real estate is when a homeowner agrees to sell their property and changes their mind after the would-be buyer gives up other options.
Tenant Estoppel
This estoppel is common in commercial real estate. It’s a certificate or letter signed by a tenant that verifies the terms, conditions, and status of their lease. It provides proof of cash flow and third-party verification, which can be crucial during due diligence or underwriting processes.
Proprietary Estoppel
Proprietary estoppel prevents a property owner from denying someone else’s rights to use or own property if that person has been led to believe they have such rights and has relied on this belief to their disadvantage.
For instance, if a homeowner promises a family member future ownership of a home, and the family member moves in and invests in renovations based on this promise, the homeowner cannot later deny their claim.
The proprietary estoppel ensures fairness by holding property owners accountable for their promises when others have acted on those promises and would suffer a loss if the promise were not kept.
The Impact of HOA Estoppels in Real Estate
As a title and escrow professional, you’re likely dealing with properties in HOA communities and also need to obtain HOA estoppel letters, as they’re an important part of the closing process.
How important?
- Verification of Fees, Dues, and Violations
HOA estoppel letters typically include information such as current assessments, delinquent assessments, special assessments, fines and violations, transfer fees, insurance information, and details about amenities and services. This information is needed for understanding the financial standing of a property within an HOA and protecting the interests of your customers.
- Clarity on Rules and Regulations
The estoppels provide information on the HOA’s rules and regulations, helping your clients (the buyers) understand any restrictions or requirements they must adhere to, once they acquire the property.
- Preventing Disputes
By documenting the current standing of the property with the HOA, estoppels help prevent future disputes over unpaid fees or non-compliance with HOA rules.
- Transparency for Buyers and Lenders
Part of a title and escrow professional’s job is to be fully transparent and assure buyers and lenders there are no hidden issues with the property’s HOA status, and the real estate estoppel helps you do that.
In some states there are specific regulations governing HOA estoppel letters, providing mechanisms protecting all parties involved in the real estate transaction.
What Should Title and Escrow Pay Attention When Obtaining Estoppels?
When obtaining estoppel certificates, title and escrow professionals must be meticulous to ensure a smooth transaction process and protect the interests of their clients.
Here are a few points in the process to focus on.
1. Accuracy of Information
The primary purpose of an estoppel certificate is to confirm the accuracy of key details related to the property, such as lease terms, financial obligations, and any existing disputes.
The title and escrow professional should carefully review the information provided by the HOA to ensure it aligns with other documentation. Any discrepancies should be addressed immediately to avoid complications later in the transaction.
2. Timeliness
Obtaining estoppel certificates on time is key. Delays in receiving these documents can hold up the entire closing process. It’s important to request estoppel certificates as early as possible in the transaction to allow time for any necessary corrections or additional information gathering.
Establishing clear deadlines and following up regularly can help ensure that estoppel documents are received promptly.
There are of course times when acquiring the estoppel might get delayed due to the HOA’s lack of response. In these cases, we recommend you try different communication channels and even visit the HOA at their address, similar to what our team does, when necessary.
3. Compliance with Local Regulations
Different states and municipalities may have specific requirements or regulations governing the issuance of estoppel certificates, particularly for properties within HOAs.
Title and escrow professionals must be aware of these regulations and ensure that the estoppel certificates they obtain comply with all legal requirements. This includes ensuring that the certificate is signed by the appropriate parties (like the HOA board) and contains all necessary information.
4. Clear Communication
Effective communication with all parties involved—HOAs, buyers, and sellers—is a must when obtaining estoppel certificates. Being clear in your communication helps prevent misunderstandings and ensures that everyone is aware of their responsibilities and any potential issues that the estoppel findings may cause.
Conclusion
In this guide, we explored what estoppels in real estate mean, what their role in property transactions is, and offer title and escrow professionals tips on how to manage obtaining estoppels.
We stressed why accuracy, timeliness, and concise communication, are essential for every title and escrow professional in ensuring clear property title and smoothless closing.
Understanding the different types of estoppels and their significance will help you as a title and escrow professional to better protect your clients and prevent potential legal disputes down the line.
If you prefer, however, to focus fully on building stronger client relationships, we can help with streamlining the HOA estoppel.
Get in touch with team Rexera to learn how.
Frequently Asked Questions
- What Does Estoppel Mean in Real Estate?
In real estate, estoppel refers to a legal principle that prevents a party from asserting something contrary to what is implied by a previous action or statement if another party has relied on that action or statement. Specifically, an estoppel certificate is used to confirm the accuracy of important property-related details, such as lease terms, financial obligations, or the status of a property within a homeowners’ association (HOA).
This document ensures that all parties involved in a real estate transaction—buyers, sellers, lenders, and tenants—have a mutual understanding of the property’s terms and conditions, thereby preventing future disputes and ensuring a smoother transaction process.
- What Is The Function of an Estoppel Letter During a Property Closing?
An estoppel letter, often called an estoppel certificate, plays a crucial role during a property closing by confirming the accuracy of important information related to the property. This document typically details lease terms, financial obligations, and any outstanding fees or violations, particularly in properties governed by homeowners’ associations (HOAs).
The estoppel letter ensures that the buyer, seller, and lender have a clear understanding of any existing obligations, preventing surprises or disputes after the transaction is completed.
- Who Is Responsible for Covering the Estoppel Fee?
The responsibility for covering the estoppel fee typically depends on the terms of the purchase agreement or the practices in the local market. In many cases, the seller is responsible for paying the estoppel fee as part of their obligation to provide accurate information about the property’s financial status, particularly concerning homeowners’ associations (HOAs).
However, it can also be negotiated between the buyer and seller during the transaction process. Title and escrow professionals need to clarify that with both the seller and buyer early on to avoid any misunderstandings at closing.
In Florida, the estoppel fee is typically paid from the proceeds at the closing or settlement of the property. If the closing does not occur, the property owner must pay the fee.
Rexera in the News
This is a huge win for us – so THANK YOU for all you do!"
