Essential Estoppels

by Lorelei Stevens, President
Wall Street Brokers, Inc.
Copyright © 1998 All Rights Reserved

To "estop" means simply to stop, or to prevent. In the case of notes, an estoppel is a signed statement by the payor certifying for the benefit of the note buyer that the payor's statement of facts is correct as of the date of the statement, regarding such things as that a note exists, that there are no defaults and that payments are paid to a certain date. Delivery of the statement by the payor prevents (estops) the payor from later claiming a different statement of facts.

When you buy a seller-financed note, you should get an estoppel letter signed by the payor. The estoppel letter confirms four basic matters: 1) all terms of the note; 2) the current balance owing; 3) that there are no claims, defenses, rights, or offsets against the note; and 4) that you are relying on the payor’s representations.

You need an estoppel letter to assist in preventing future disputes with the payor. The co-operation of the payor, by signing an estoppel letter, is a good start to a promising relationship. A payor who owes money on a note isn’t likely to sign unless the contents of the estoppel letter are correct. The signed estoppel letter helps to legally "close the payor’s mouth" about some issues, because the payor’s signature is a verification of the terms, conditions and mathematical calculations concerning the note you are buying. If the payor later alleges not to owe all or part of the note by filing a legal claim, the payor’s representations on the signed estoppel letter can help you win in certain cases.

The estoppel letter does have legal substance. It is likely to assist you in avoiding some future personal defenses the payor might have about the note obligation. Some common examples of personal defenses are property defects and unfulfilled promises by the seller of the property.

With an estoppel letter in hand, you may be able to increase your standing as a Holder-in-due-course, an elite legal position.

Your estoppel letter asks the payor to verify and confirm everything that is relevant about the note. While the form can vary, the four most important elements to include in the estoppel letter are:

While in the process of obtaining the estoppel letter from the payor, you might take the opportunity to seek additional information you need. Some of these items may include the property address or legal description, fire/hazard insurance information, whether or not the property is owner occupied, the mailing address, telephone number, social security number and employer of the payor. While not a true part of the estoppel letter, this information is useful.

Since most payors don’t know their exact balance, it is wise to furnish the payor with an amortization schedule and/or a copy of the payment history for review.

It is useful to attach a copy of the signed note to the estoppel letter so the payor can affirm it. This can protect you from a seller who furnished you with an inaccurate or incomplete copy of the note.

When the seller has signed a preliminary agreement to sell you the note, begin your communication with the payor. Tell the payor that you have a written agreement with the seller to purchase the note. Explain that you, as the new note owner, want your relationship with the payor to get off to a good start. Emphasize that none of the terms of the note will change, except that you will be receiving the payments instead of the seller. Assure the payor that this change will not cost the payor any extra money. Point out that the estoppel letter is for mutual protection to avoid any misunderstandings. Ask if the payor agrees with the terms of the note as represented by the seller. During this process, you may need to furnish supporting documentation.

When you are in verbal agreement, give the payor an estoppel letter to sign. However, any time you can get an estoppel letter signed is helpful. The best time is after you have a written, preliminary agreement with the seller but before you pay any money to the seller. Try as early as you can, after you have obtained a copy of the signed note and have calculated outstanding balance;. Understand, however, that the payor is not getting any money from you and is benefiting little, if any, by your purchase of the note. Know that the estoppel letter is not a priority for the payor. Therefore, the payor is likely to procrastinate.

While it is more official to have a notarized estoppel letter from the payor, it is not essential and may cause more delays and problems. Usually documents are notarized when they need to be recorded. Since an estoppel letter is rarely a recorded document, you don’t need a notarized signature. A notary adds one more witness to the signing, but affords no other legal protection. In addition, obtaining notarization might require more effort than a payor is willing to put forth.

The payor often has a valid reason for not signing the estoppel letter. If there are legitimate complaints, it may be up to you to negotiate with the payor and seller to reach an agreement so the estoppel letter can be signed. If the complaints can’t be resolved, this can be a warning for you to stay away from the deal.

You cannot legally force a payor to sign an estoppel letter. If the payor is unwilling to sign it but has not expressed any disagreement with its terms, you may decide to risk buying the note anyway. If so, it’s wise to document all of your contacts with the payor. Send the estoppel letter to the payor through certified mail, along with a cover letter. State that you are relying on the information in the estoppel letter as being an accurate basis for you to pay money to the seller. Explain that if the payor doesn’t respond by a certain deadline, you will be forced to assume that the terms are accurate. Later, if you end up in court because of claims advanced by the payor, your position could be given greater credibility based on your efforts.

If you are a beginner at buying notes, it is recommended that you don’t buy any note without an estoppel letter. While nothing is foolproof, in the event of problems, an estoppel letter can keep your risk at a reasonably tolerable level.

As a more experienced note buyer, you can take a good look at the value of the security for the note, the legality of the documents and the credit and financial information you have obtained about the payor. You may choose to follow your educated instinct about the note, either closing the deal or discarding it. Recognize that you are taking more of a risk without an estoppel letter. Be willing to accept that risk and be able to afford the loss of money.

If you are ever in a situation of needing to resell the note, realize that the number of potential buyers is reduced without a signed estoppel letter from the payor. If you do find a buyer, but have no estoppel letter from the payor, you may be required to financially back up the note! An estoppel letter from the payor can diminish your liability.

Possibly some note buyers don’t know about estoppels, or they may be concerned about how difficult or how long it takes to get a payor to sign an estoppel letter. It’s true that the estoppel letter may delay the deal, but it isn’t difficult to obtain when the information is correct and you’re dealing with a reasonable payor.

The main concern is that when the payor discovers the note is being sold, the payor can become a major competitor. The payor, then, may want to pay off the balance at a reduced price, eliminating the note altogether. Therefore, some note buyers simply choose to take a gamble by ignoring the payor. Sometimes you may lose a deal to the payor, but that’s better than losing your money! It can be to your financial detriment to buy the note first and subsequently discover there are problems with the payor!

A legal rationale is that if the note is bought in good faith without contacting the payor, the note buyer is likely to automatically qualify as a holder-in-due-course without an estoppel letter. Lack of notice of any problems may prohibit the payor from winning claims against the note. The reality is that you are not legally protected if the mathematical balance is incorrect, or if there are undisclosed terms of the note. Most legal problems are with the payor, which could easily have been discovered if you’d asked for an estoppel letter. You might be a holder-in-due-course without contacting the payor, but that position is expensive to prove in court.

Another legal rationale is that even an estoppel letter isn’t a protection from a payor’s real defenses, such as fraud, forgery, incapacity, coercion, etc. As a practical matter, requesting an estoppel letter can help you avoid many situations where the payor has a real defense. Simply by asking, you may find out that real defenses exist and decide to pass on the deal! Besides, real defenses are a tiny percentage of all defenses made by payors and the signed estoppel letter can be valuable protection against the majority of payor defenses!


There may not be problems with the payor or misinformation about the note. However, it’s prudent to ask the payor to verify all the terms of the note! You may be involved with an honest seller who does not understand the specifics or know there is a problem. Or, you could be dealing with an anxious seller who, needing cash, is hiding information from you. The estoppel letter is a safeguard against a seller who gives you inaccurate information about the note.

It’s exciting to buy notes; but it’s also easy to become hasty and neglect important and necessary details, such as getting an estoppel letter from the payor. If, however, you overlook any steps along the way, your neglect may cause you to lose money when problems later arise.

Without an estoppel letter you have a severe blind spot in your deal. Remember, a good note is one that pays! The payor is the most important component of the transaction because the payor is the one who is responsible for payment. It is well worth the effort to have open communication with the payor and obtain verification through an essential estoppel letter!

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