Legal Definitions - no-setoff certificate

A no-setoff certificate is a formal document signed by a party who owes money or has ongoing obligations (such as a tenant paying rent or a borrower making loan payments). In this certificate, the signing party confirms to a third party (often a new owner or lender) that they have no current claims, disputes, or defenses against the original party they owe money to, which would allow them to reduce or "set off" the amount of their future payments.

Essentially, it's a promise that the payments will continue as agreed, without any deductions for past issues or disagreements with the original party. This certificate provides assurance to the new owner or lender that the income stream from the obligation is reliable and won't be diminished by prior disputes.

Here are a few examples to illustrate this concept:

• Commercial Lease Assignment: Imagine a company, Tech Solutions Inc., leases office space from Property Holdings LLC. Property Holdings LLC decides to sell the office building to a new owner, Urban Developments Corp. Before purchasing the building, Urban Developments Corp. wants to ensure that all tenants will continue paying their full rent without any deductions. They might request that Tech Solutions Inc. sign a no-setoff certificate. By signing, Tech Solutions Inc. would confirm that it has no outstanding claims against Property Holdings LLC (e.g., for unfulfilled maintenance requests or overcharges) that would allow it to reduce its future rent payments to Urban Developments Corp.

  This illustrates the term because Tech Solutions Inc. is waiving its right to "set off" any past grievances with the original landlord against future rent payments to the new landlord, thereby assuring Urban Developments Corp. of a stable income stream.

• Loan Portfolio Sale: Consider a small business, Green Grocers, that took out a business loan from Community Bank. Later, Community Bank decides to sell a portfolio of its loans, including Green Grocers' loan, to a larger financial institution, Global Capital Partners. To make the loan more attractive and secure for Global Capital Partners, Community Bank might ask Green Grocers to sign a no-setoff certificate. In this document, Green Grocers would affirm that it has no existing claims or defenses against Community Bank (e.g., for alleged misrepresentations during the loan application or service issues) that would allow it to reduce or withhold its loan payments to Global Capital Partners.

  This demonstrates the term as Green Grocers is confirming that its payment obligations to Global Capital Partners will not be reduced by any past disputes it might have had with Community Bank, making the loan a more secure asset for the new owner.

• Vendor Contract Transfer: A manufacturing company, Precision Parts Co., has a long-term contract with Logistics Solutions Inc. for shipping and warehousing services. Logistics Solutions Inc. decides to sell its entire logistics division to a competitor, Rapid Delivery Services. As part of the acquisition, Rapid Delivery Services wants to ensure that Precision Parts Co. is satisfied with the services provided so far and has no outstanding claims (e.g., for damaged goods or missed deadlines) that would allow it to reduce future payments or terminate the contract. Precision Parts Co. might be asked to sign a no-setoff certificate, confirming that it has no such claims against Logistics Solutions Inc. that would impact its payment obligations to Rapid Delivery Services.

  Here, the no-setoff certificate assures Rapid Delivery Services that Precision Parts Co. will continue to honor the contract and make full payments, without using past issues with Logistics Solutions Inc. as a reason to reduce or withhold payment.