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Pre- and Post-Settlement Occupancy Agreements

Reprinted from Update Online

By Beau Brincefield

Whether you represent the buyer or the seller, if you are involved in a real estate sales transaction in which the buyer is going to occupy the property before settlement or the seller is going to occupy the property after settlement, it is important for you to make sure that the terms of the occupancy are properly documented. Sometimes, the parties and real estate agents involved in such transactions fail to focus on the fact that an agreement for the purchaser’s occupancy of the property before settlement or the seller’s occupancy of the property after settlement is, basically, a lease between the parties. As such, the occupancy agreement should cover the same basic issues that are dealt with in any properly drafted Lease Agreement.

It is also important to make sure that both buyer and seller have the proper types of hazard and liability insurance coverage for the property during the occupancy. Who bears the risk of loss if the property is damaged or destroyed by a fire or other calamity during the occupancy period? The purchaser who takes possession prior to settlement cannot rely on the homeowner’s policy that will commence on the date of settlement. The purchaser is not yet the owner of the home.

Although the seller remains the owner of the home during the pre-settlement occupancy by the purchaser, the seller is no longer the occupant of the home and the seller homeowner’s policy may not cover the property during the purchaser’s pre-settlement occupancy period. A phone call to the seller’s insurance agent can resolve the question.

Conversely, when the purchaser allows the seller to occupy the property after settlement, the purchaser is the owner of the property but not the occupant and the seller is the occupant but not the owner. Each of the parties needs to make sure that their insurance polices provide proper coverage for their respective statuses, both before and after settlement.

Is the occupant to pay rent to the owner? If so, how is the rent to be calculated? When is it to be paid?

What is the duration of the occupancy period and what kind and amount of security deposit will the owner of the property receive? Obviously, the more substantial the security deposit, the safer the arrangement will be for the owner of the home.

Does the Agreement include a provision for payment of utilities and maintenance of the property, including all fixtures, equipment, appliances and furniture, if any?

If the purchaser occupies the property before settlement, will the final inspection of the property be conducted when the purchaser occupies the property or at the time of settlement? If the seller is remaining in the property, the purchaser should have an opportunity for inspecting the property both before settlement and at the time when the seller’s post-settlement occupancy concludes.

Among the most important provisions in any occupancy agreement is the provision dealing with what happens upon any default or non-compliance with the agreement by either the buyer or the seller. Remember that a Pre-settlement Occupancy Agreement can be breached by either the purchaser/tenant or the seller/landlord. Similarly, a post-settlement occupancy agreement can be breached by either the seller/tenant or the purchaser/landlord. Appropriate provisions need to be drafted that deal with each of these contingencies. In other words, if you have a pre-settlement occupancy agreement, what happens if each party defaults? Similarly, what happens if either of the party defaults in a post-settlement occupancy agreement? If you think through the different consequences of default by one party or the other, you may need to develop significantly different provisions that will govern the consequences of default by each of the parties.

Consider the various ways that a purchaser/tenant may breach the pre-settlement occupancy agreement: For example, what happens if the purchaser/tenant fails to settle on time? Can the purchaser/tenant extend the settlement date? Can the seller terminate the purchase contract, forfeit the security deposit and evict the purchaser/tenant?

What are the remedies of the purchaser/tenant if the seller/landlord refuses to settle at the appointed time? What adverse consequences need to be considered in drafting those remedies?

If you are dealing with a post-settlement occupancy agreement, you would certainly want the agreement to provide at least that, if there is a default by the seller/tenant, the per diem occupancy charge will double or triple. However, depending on the circumstances of each individual case, the purchaser/landlord may incur substantial additional expenses in addition to legal fees and other legal expenses related to enforcing the agreement that may not be covered by simply doubling or even tripling the per diem occupancy charge. For example, the additional costs of temporary accommodations, storage expenses for furniture, and the expenses for a double move can all be substantial, depending on the circumstances.

In sum, pre- and post-settlement occupancy situations require conscientious drafting of appropriate written agreements that cover all of the important and foreseeable contingencies that might arise both in the performance of the agreement and its potential breach by either party.

Finally, make sure that all of the appropriate parties, both buyers and sellers, sign the occupancy agreement.

James C. “Beau” Brincefield has been a practicing real estate attorney for more than 30 years. He held a real estate broker’s license before becoming a lawyer and has served as the Chair of the Real Estate Sections of the Alexandria, District of Columbia and Virginia State Bars. Mr. Brincefield also holds a Masters Degree in Real Estate and Finance. He has been active in real estate construction, development, marketing, property management and finance in the Washington Metropolitan area for many years and is the senior attorney in the law firm of Brincefield Hartnett Maloof and Paleos, P.C. in Alexandria, Virginia.

Reprinted from The NVAR Update, November 2001.