When a homebuyer and seller sign a real estate contract or purchase and sale agreement, they agree in advance to the terms of the transaction; e.g., purchase price, the amount of deposits, inspection and mortgage financing contingencies and other provisions. One of the terms the parties agree on is a date to transfer the title, referred to in the contract as the "closing date." Despite being referred to as the closing date, it is actually a closing deadline and an essential part of the contract.
Typically the contract to purchase or purchase and sale agreement (P&S) states that the seller will vacate the property prior to closing, removing all personal belongings and leaving only those items that were agreed to be left behind, such as a refrigerator, washer and/or dryer. The homebuyer does a final walk through shortly before the closing to make sure the property is in the condition agreed upon, sometimes referred to as broom swept condition. The homebuyer is not allowed to move in or store personal belongings at the premises until after the closing is completed, the deed is recorded, and the proceeds (money) are disbursed.
Sometimes unexpected and unavoidable situations arise in which the buyer desires to move into the home prior to the closing deadline. The following are several common reasons:
1. The closing has been delayed, often because of a delay in mortgage financing, and the homebuyer consequently would be homeless because perhaps the buyer’s lease expired or the buyer was planning on selling one property and purchasing another on the same day.
2. The homebuyer is relocating and the options for residency are (a) the home they are purchasing or (b) interim housing, such as a hotel or short-term rental, which often is extremely expensive.
3. The homebuyer wants to enroll children into school, and the school system will not allow it without proof of residency. Note: some school districts allow for school enrollment with a signed purchase and sale agreement, but requirements may vary between school districts.
What a use and occupancy agreement does is allow the homebuyer to move into the property prior to the closing date under certain agreed-upon terms and conditions. The clear benefit is that the buyer can avoid having to move twice (or more), and it provides them with a smoother post-closing transition into the new home. Of course, if the buyer would otherwise be homeless but for the opportunity to move in prior to the closing date, that would be a pretty big benefit as well.
The advantage to the seller is that, if agreed on, the seller could receive from the homebuyer use and occupancy payments, which is particularly beneficially if the seller already moved out of the home or the property was vacant prior to the closing.
In circumstances when a homebuyer really needs to move into the home before the closing date, a use and occupancy agreement might be the only option that can keep the transaction together. A use and occupancy typically is utilized when a homebuyer is in a really tough spot and not just simply for convenience.
There is definitely no “standard form” use and occupancy agreement, however; there are several common provisions in a use and occupancy agreement.
1. Rate: Most use and occupancy agreements state a fee from the homebuyer to the seller for the use and occupancy of the property. There is no industry standard, but a common rate is a per diem of the seller’s “carrying costs” for owning the property. The carrying costs are calculated by adding the daily prorated mortgage (if any), taxes, insurance, and condo/HOA fee (if applicable). If the closing deadline is delayed because of the seller or a title issue on the property, many times the rate will be nothing or nominal.
2. Term: A use and occupancy agreement is designed to bridge the gap between the beginning of the occupancy and the closing date; however, there is usually a termination of occupancy date just in case the closing does not come to fruition.
3. Failure to vacate: There is often language that describes the penalty if the homebuyer does not vacate the property by the termination date.
4. Use limitations: A use and occupancy agreement typically provides limitations on usage, such as a provision prohibiting the homebuyer from committing any undue waste, or make any structural alterations or significant changes to the property, such as painting, installing flooring or changing fixtures.
5. No tenancy created: An important provision for the seller is that the use and occupancy agreement makes it clear that although the homebuyer is occupying the property – by storing belongings and/or residing at the home – there is no landlord-tenant relationship established. Buyers should expect there to be specific language that states that the agreement is not a lease nor is there any legal tenancy created, so the homebuyer using and occupying the premises does not have any of the rights the law provides tenants. Often the agreement will state that the use and occupancy agreement is merely a “license” to use and occupy the premises.
6. Homeowner’s insurance: One way or another, a use and occupancy agreement should state who is responsible for maintaining homeowner’s liability insurance throughout the term of the agreement.
7. Liability indemnification: A use and occupancy agreement typically contains a “hold harmless” clause, which states that the seller is not responsible for any losses or damages to buyer’s property or caused by (or to) buyer’s guests or invitees. A buyer also typically has to agree to be responsible for any damages caused to seller’s property during the agreement, as well as indemnify seller against any liability resulting from the buyer's use and occupancy of the home.
8. Right of access: The use and occupancy agreement might cover what rights of access, if any, seller has to the property (or a portion thereof) during the term.
9. Utilities: If the term of the use and occupancy agreement is intended to be long (which is not typical), the agreement might cover who is responsible for paying for utilities and/or how certain fuel prorations are going to be covered once the closing takes place.
Whenever a homebuyer and seller sign a use and occupancy agreement, the buyer should do a “walk through” prior to the term beginning. This is important for two reasons. First, if the transaction does end up closing, this is really the best (and sometimes only) opportunity to ensure the property was in the requisite condition as stated in the purchase and sale agreement. Second, the use and occupancy agreement likely will state that the buyer is responsible for any damage to the property caused during the term of the agreement. A walk through enables the buyer to note and document any issues or damage, so the buyer will not be responsible for damage caused prior to beginning the term, if the transaction ultimately does not close.
Though there are several circumstances that result in the need for a use and occupancy agreement, the most common is that the lender is simply not able to close the mortgage loan by the closing deadline. Another common issue is a delay as result of new construction or when a home is undergoing substantial renovations. Buyers should be careful under these circumstances because if the delay on the closing is due to construction, it is very likely that the seller does not have an occupancy permit issued by the city or town; therefore, though it might be mutually beneficial, a use and occupancy agreement under these circumstances would likely be a violation of the law because it is illegal to reside in a property that does not have an occupancy permit.
Whenever a homebuyer is seeking a use and occupancy agreement, the homebuyer should definitely discuss the pro’s and con’s of such an agreement with his or her buyer agent and go over the details of the agreement with their real estate attorney prior to signing anything.
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