Early Occupancy Agreement: What is it?
What is an early occupancy agreement?
An early occupancy agreement is an enforceable contract between a buyer and seller of real property. These agreements allow the buyer(s) to take possession of the property before the closing date.
The Alberta Real Estate Association (AREA) has a form called the Early Possession Addendum that has been created for use in residential real estate transactions in Alberta. The purpose of this addendum is to set out the standard terms of any arrangement concerning possession of the property by the buyer(s) prior to closing. Early possession can be granted for the convenience of either a seller or a buyer. For the seller, it could be an agreement to allow her to move out after closing. For the buyer, it could be an agreement to move in before closing.
Early possession arrangements are typically used where the buyer will be taking possession before closing but cannot yet register title due to one reason or another that is not covered by normal financing conditions. Generally, the seller and buyer have already agreed on the price and the closing arrangements. Early possession is often used in the case of new developments, for example, condominiums or single family homes, where the buyer has already agreed to purchase the property before construction is complete. In these cases, the seller may agree to allow the buyer to move into the property early. While the buyer is in possession, the seller will be able to cite the buyer for not closing if the buyer fails to close.
Under the usual rules of bare possession, the possession of the property by the buyer will not cut off the title of the seller to that property . Therefore, the buyer will assume the risk of loss from anyone to whom the seller may grant the same privilege of possession. For mortgage security, despite the fact that the possession is with the bilateral recognition of both sides, the mortgagee is entitled to treat the property as subject to its charges in the same manner it would be were the property still with the seller.
The early possession addendum is typically used in conjunction with the home inspection, financing, and/or sale of another property conditions. Once the conditions have been satisfied or waived, the buyer may take possession on a date agreed to by both parties but not before the day after the possession date set in the original residential purchase contract. In addition, the buyer’s lawyer may have to provide a letter that the balance of sale proceeds (net of adjustments) are being paid to the seller on the date of early possession. Ultimately, unless otherwise agreed, the balance of the purchase price under the residential purchase contract is paid to the seller on the closing date per the terms of the purchase contract.
An early possession agreement may be negotiated by the parties or their realtors. While the standard terms for possession are set out in the AREA’s Early Possession Addendum, customizations to this template are common (and sometimes required). Some agreements are quite simple and simply set out rental terms. Others may deal with more complex arrangements such as allocation of damage or insurance provisions.
Ultimately, if you are considering an early possession arrangement, speak to both your lawyer as well as your realtor to understand the impact it may have not only on your transaction but on others to follow.
Essential Elements of an Early Occupancy Agreement
An early occupancy agreement will include the key details that are crucial for both parties to agree on. These include:
Dates – which specify the day and time that possession will occur.
Terms of Occupancy – which may range from a few days to a few months, depending on what has been agreed upon.
Rent – which denotes the amount of money the buyer is to pay to the seller for the period of time that they are occupying the property prior to close.
Liability – which is a shared agreement between the seller and buyer in regard to damages that are incurred and/or the cost of appropriate insurance in case of any unforeseen accidents.
Conditions – which specifies if the seller or buyer is responsible for maintenance (laws, taxes, condo fees, etc.) and other living costs until the official close.
Contingencies – which denotes the number of days that the buyer may remain in the property before they must make an extension to the occupancy.
Benefits of Early Occupancy for Buyers and Sellers
For buyers, early occupancy not only allows them to gain access to their new home sooner than otherwise allowed under the contract, it also permits them to side-step the hassle (and expense) of moving twice. Move-in costs can add up quickly when hiring a moving company or renting a large truck, so where possible, the expedited move-in can be a money savings as well. It often allows the buyer enough time to have a few new touches put on the home before they move in (e.g., new paint, or new flooring). The buyer may even prefer an empty home to decorate and add their personal touch to the home before moving in furniture and other belongings. For example, newly married couples or blended families looking to merge their households may appreciate having a clean slate to make a home for their family.
Sellers also find advantages to early occupancy. For instance, if the seller needs to make a down-payment on their next house prior to sale of their current residence (for fear that they will lose the dream home of their choosing), an early occupancy agreement may allow them to do so sooner. In some instances, a seller may not want prospective buyers to view their home still in a "lived-in" state, and prefer to have it staged for showings without creating the inconvenience of having to move out twice, cancelling potentially expensive short-term rentals or hotel accommodations, and/or arranging for their property manager to coordinate showings.
Risks and Drawbacks
There are numerous risks involved in an early occupancy agreement which both buyers and sellers should be aware of. These risks can be legal, financial and/or property condition related.
The most significant legal risk is possession. Possession is not the same as title. You may have possession rights but not title to a property you occupy. An early occupancy agreement typically provides that title to the property is conveyed to the buyer even though actual possession is given after closing. Once an early occupancy agreement is signed by the buyer and seller and after the closing has occurred, if there is any disagreement between the buyer and seller, the seller cannot deny possession rights to the buyer; unless the buyer has acted contrary to the terms of the early occupancy agreement.
Financial risks also exist. For example, utilities, taxes, condominium fees, maintenance and repair costs can be costly if it is not clearly specified under the early occupancy agreement who is responsible for each. If the seller premises indicate that the seller will be responsible for any of these costs, then the seller must be prepared to honour such repairs (if they intend to honour the seller’s promise in the sales agreement). If not, the buyer could attempt to recover these costs from the seller by way of a claim against the seller. The buyer could also complain against the seller to the warranty program if these repairs can be classified as warrantable items under the applicable warranty program. A catchall provision in the early occupancy agreement requiring the seller to repair all items brought to the attention of the seller by the buyer may be impossible to uphold if the complaint made by the buyer is not supported by evidence, such as photographs.
The condition of a property is also a risk once parties move inside the property, assuming that the buyer has not yet taken possession under the terms of the agreement. In many cases, a party can often spout excuses for damage caused while in possession of the property or trying to fix something that was already broken. Such damage usually results in extra money being spent to fix the problem. For that reason, it is important that buyers inspect the property just before taking possession so that it can be witnessed and documented that the damage existed prior to taking possession.
How to Draft and Negotiate a Early Occupancy Agreement
The drafting of an early occupancy agreement is vitally important. A party needs to understand the mechanics of the agreement, how it is properly drafted and exactly what their legal rights and obligations are under it. Think of an early occupancy agreement as a mini-lease agreement. The same rules apply. The tenant is bound by the terms and conditions of the lease until it expires or is terminated.
A negotiation will start with the agreed upon date when the tenancy shall begin. For a variety of reasons, this date may not coincide with the closing date of a home sale (for instance, closing may take two to three weeks longer than the tenant desires). In some cases, the term may lapse before the closing date, necessitating an extension of the early occupancy period.
A key factor in the early drafting process is addressing potential contingencies. What happens if the transaction does not close on the target date? Are there time constraints that will dictate how late an early occupancy agreement can extend beyond the closing date? If the transaction is an arm’s length transaction, i . e., both parties are represented by legal counsel and the transaction is a typical residential real estate transaction, the drafting process can be relatively straightforward. The parties typically agree to a lock-out clause which "locks out" a defaulting party for a determined period of time so as to provide the other party with additional leverage for demonstrating performance by the defaulting party. A lock-out gives the non-offending party time to regulate its affairs while the other party is in default.
The goal in negotiating an early occupancy agreement is to find a balance between flexibility and stability for all of the parties involved. Timing, whether it is the date of occupancy or a closing at the end of the short term, should be clearly delineated. Ideally, an early occupancy agreement should also encourage cooperation between all parties, ensuring that all must act in good faith to resolve any issues.
Legal Considerations and State Requirements
Understanding the legal implications of early occupancy agreements can be complex, as many jurisdictions have specific provisions designed to regulate these agreements. For example, some states, such as California, have laws that govern early occupancy agreements. The California Department of Consumer Affairs provides an early occupancy form that includes critical information on how to draft an enforceable agreement.
Such forms will typically require the transaction to comply with state-specific requirements. The failure to comply with such requirements can have severe legal ramifications. An unrecorded early occupancy agreement or a transfer of title without compliance with these requirements may lead to a loss of title insurance coverage, as discussed in "Early Occupancy: Tips for Buyers and Sellers."
With regard to other states, the National Association of Realtors provides a state-by-state analysis in their Regulatory Issues Report for "Post-Closing Occupancy by Buyer before Closing" in March 2016. Though this resource is a few years old, the analysis remains instructive, as it describes the legal requirements for early occupancy in each state. For example, Hawaii requires that occupancy agreements be in writing and contain the buyer’s name, the address of the property, a legal description of the property, the date the buyer will take possession and the duration of the occupancy. Ohio requires the purchase contract be amended, and also requires a statement that neither landlord nor tenant may assign the agreement to another party. Virginia has a similar requirement, including identifying the tenant.
More often than not, though, the legal obligations of the parties regarding early occupancy agreements are matters of local law, calling for compliance with local zoning requirements. In addition, violating the specific requirements of the written occupancy agreement may result in litigation for breach of contract.
Early occupancy agreements are best approached not as a transactional convenience but as an enforceable contract. Early possession of property may prevent the need for application for a home loan that specifically funded the cash purchase. However, buying property with no loan to fund the purchase creates a need to document the change in the buyer’s money position, as at least a portion of the purchase price was expended as rent. Sellers providing early occupancy must identify the reason a rent payment should be collected from the buyer rather than allow the buyer to occupy the property rent-free (as is common). It may be wise for sellers who are averse to collecting rent to seek other closing alternatives such as seller-carry back, lender financing or seller lease-back.
The key consideration for buyers and sellers alike in early occupancy agreements is compliance. In general, a seller or buyer may take early occupancy of the subject property regardless of local laws or the requirements for that jurisdiction without breaking any laws, but the legal gravitas of the underlying contract itself still applies. An enforceable early occupancy agreement must be compliant with local laws, if any, and well-drafted. That also means such agreements can provide the basis for the real estate professional to deal with a commission that is not paid at closing (or that is otherwise adjusted). More than ever, real estate professionals must be engaged to manage the process of an early possession in order to avoid complaints from buyers and sellers later.
Common Examples and Scenarios
Early occupancy agreements are often implemented in the following scenarios:
1. Sale and Subsequent Purchase of Property. This is a fairly straightforward scenario where two agreements would be entered into. The Seller enters into an Agreement of Purchase and Sale (APS) with respect to the sale of a property and also enters into another lease agreement with the proposed purchaser for early occupancy of that property prior to closing. The seller might sell the property on the condition that the purchaser remains in the property and pays rent until a later date.
Example: The Seller agrees to sell the real estate and the Purchaser has their own property which will close in 3 months’ time from the date of signature. The Purchaser requires the proceeds of the sale of their property in four months in order to close the transaction. As such, the Seller agrees to rent the property to the Purchaser for four months at the rate of $3 , 000.00 per month while the Purchaser occupies the property.
That scenario is not too uncommon and represents what would commonly be at issue in a realtor contemplated sale and subsequent purchase of property scenario.
2. Sale of Real Estate with a Tenant in Possession and Where the Tenant’s Lease Expires Well After Closing of the New Purchase. Early occupancy agreements can become complicated if there is a sale of property where a tenant is in possession and the lease agreement with the current tenant will expire after the new purchasers take occupancy.
Example: The Purchaser of a property, enters into a lease agreement with a seller for the use and occupation of the real estate, until the tenant vacates the property.
The Purchaser has now agreed to the terms of the lease agreement with the tenant in occupation and must therefore assume the tenant’s lease despite the fact they are a subsequent Purchaser. The Purchaser may then have the ability to negotiate with the tenant who remains in the property, to terminate the lease agreement or be subject to its terms.
In this situation it is recommended that the Purchaser seek an indemnity for any rents owing for the period of occupancy after taking possession of the property as well as an indemnity for loss of the use of the property for that period.