Post Closing Occupancy Agreements

Post Closing Agreements

Working out the logistics of a seller moving out of one apartment and into a new apartment can be very sensitive and complicated. If the two closings cannot be handled simultaneously, then the seller will need to move out of the existing property, place his or her belongings in storage and stay in a hotel until the purchase can be completed. This can be a very large hassle and expense to the seller.

Alternatively, a seller of a property may request that they remain in possession of their home after the closing. A post closing occupancy agreement (also known as a post-closing possession agreement) allows a seller to continue to live in his home after settlement, under an arrangement where the seller is essentially renting the home back from the new purchaser. Generally, this is due to the fact that that the seller may be purchasing a new home and needs the proceeds of the sale to complete the purchase. In order to avoid moving out of the sale premises several days before the closing, the seller may request that they remain in possession until their purchase is concluded. Sometimes the seller will be renovating their new home and may want to remain in possession of the old home while the work is being completed. In other instances, sometimes a purchaser may ask to close before the seller is ready so that the purchaser does not lose a favorable interest rate with the purchaser’s lender.

But don’t take this agreement lightly – it has significant ramifications and should only be used only as a last resort. The parties should agree to the terms of the agreement before a contract is signed – this will prevent a misunderstanding at the time of closing. Whatever the reason for an occupancy agreement after closing, the agreement should address the following points:

  1. Written Agreement Always have a written occupancy agreement signed at the closing prepared or reviewed by the respective lawyers. This document will set forth time limitations that the seller can remain in possession and what happens if the seller fails to vacate the premises on the date agreed to.
  2. Escrow The occupancy agreement should provide that either the seller’s or the purchaser’s attorney will hold a sum of money in escrow pending delivery of the premises. The escrow is similar to a security deposit that may be seen in a residential lease. The monetary amount of the escrow will depend on the length of the holdover. For example, as little as $1,000 to $2,000 may be sufficient if the possession is a few days but $5,000 to $10,000 may be required for an extended possession period. The deposit will cover, among other things, any expenses associated with any damages caused to the premises during the possession period and expense associated with retaining a lawyer to evict the seller if they fail to vacate the premises when they were supposed to.
  3. Carrying Costs The occupancy agreement should provide that the seller shall pay the purchaser an occupancy fee during seller’s possession of the property. At a minimum, the Seller should pay the purchaser for the purchaser’s carrying costs during the occupancy period (ex. Interest on the mortgage, real estate taxes, common charges, maintenance, etc.). Sometimes, an agreed amount (ex. $150 per day) is negotiated. The seller should keep all utilities in the seller’s name until the apartment is delivered to the purchaser.
  4. Monetary Damages The occupancy agreement should contain a provision that if the Seller fails to vacate the premises by the date stipulated in the agreement, the seller will pay a penalty for each day the seller remains in possession. This amount is negotiated but should be in addition to the carrying costs. For example, if the carrying costs are $150 a day, the penalty may be as much as $250.00 in addition to the carrying costs. The concept is that if the seller continues to reside in the purchaser’s apartment after the date the seller has agreed to vacate, the purchaser can suffer monetary damages (i.e. placing their belongings in storage, staying in a hotel, etc.).
  5. Insurance A purchaser should insist that the seller maintain their existing homeowner insurance policy during the occupancy period. The seller should be required to provide proof of the insurance by providing an insurance certificate naming the purchaser as an insured. While insurance companies are not happy to keep coverage in affect, many will continue the policy upon request. However, there are several problems associated with this. The seller no longer owns the home, so in the event of a claim, the seller’s insurance company may refuse to pay the claim. The buyer nevertheless should also maintain their own insurance (effective upon closing). In either case, the seller should carry coverage for the seller’s personal belongings and automobiles. Remember, if someone is hurt on the property during the occupancy period, the purchaser can get sued because the purchaser is now the owner.
  6. Release of Escrow The occupancy agreement should reflect that the property must be delivered in the same condition as set forth in the contract of sale (i.e. no leaks, all appliances in working order, no damage, etc.). Once the seller vacates the property, the purchaser will need to promptly inspect the property to make sure there are no issues. If there is no damage and the seller vacates on a timely basis, then the escrow can be released to the Seller. However, if it is discovered that there is damage or something does not work, the Purchaser may need to obtain an estimate. The cost of the repair should be paid out of the monies held in escrow. In any event, the agreement should provide that the escrow monies should not be released until the purchaser inspects the premises and advises that the money can be released. If there is a disagreement about the condition of the property after the seller vacates (example a scratch on the floor that the seller says was always there and the purchaser says is new), the risk is that the escrow monies can be held in escrow indefinitely until any issues have been resolved.
  7. Access The agreement should allow the purchaser access to decorators and contractors and an inspection after the seller vacates.
  8. License vs. Lease The one important point in the agreement that is frequently overlooked and may have the most important legal consequence is that the agreement should stipulate that it is not a lease but a license. If the agreement is ever litigated, the purchaser will want to make sure that the matter does not wind up in Landlord Tenant court as these courts are overwhelmed with cases and sometimes provide a more favorable decision for a tenant (in this case, the seller).

If the seller remains in possession of a co-op apartment after the closing, it is wise to confirm that the co-op corporation does not need to approve the post closing occupancy by the seller (this may be deemed a sublet and against the co-op policies). In addition, any expense imposed by the co-op in connection with the post closing occupancy should be paid by the seller

One other thing that a buyer should do before agreeing to allow the seller to rent back after closing is to check with his lender to see whether the lender will permit it. Typically, lenders will allow a short rent back. For anything longer, the buyer could be in violation of the covenant in the loan documents that states that the property will be owner-occupied.

One of the biggest problems with a post closing occupancy is if the seller fails to vacate and remains in possession after the terminate date and the escrow does not cover the cost and expense to evict the seller. It is wise to include a provision in the agreement that states that the amount of Seller’s liability will not be limited to the amount held in escrow.

All in all, a possession agreement can work fine if the parties are reasonable and act in good faith. However, problems can arise when the purchaser inspects the premises after the seller vacates and finds damage. This can tie up the escrow deposit until the parties agree to a reasonable adjustment for such repairs.

*DISCLAIMER. Nothing herein is offered as legal advice. All information in this article is for informational purposes only. Please consult with an attorney before taking any legal actions.