Never Fear, The Use and Occupancy Agreement Is Here!

by Rich Vetstein on May 4, 2015 · 11 comments

in Closings, Leasing, Massachusetts Real Estate Law, Purchase and Sale Agreements, Title Defects

Superman's_classic_poseLike Superman, A Use and Occupancy Agreement Can Save the Day, But Be Aware of the Risks!

Tom and Mary Ryan, and their two little kids, Abigail and Jake, are relocating from California to the Boston area so Tom can take a job with a local tech company in Burlington. They have already sold their California home, and have been living in a cramped rented condominium in Santa Monica for two months already. Their loan has hit some snags because Tom was out of work for half of 2013, and had some IRS issues, although he is on solid footing now with his new job. The closing is scheduled for the end of this week and they have their cross country movers booked and scheduled and their life is now packed in boxes. Just when they finish packing their last box, their loan officer calls with somber news. “Tom, unfortunately, our underwriting department is dealing with delays getting your tax transcripts from the IRS. We are going to have to push back the closing for about a week. I’m so sorry.” Canceling the movers will cost several thousand dollars, and they will have to cancel furniture shipments as well. To make matters worse, new tenants are supposed to move into Tom’s rented condo unit right after they leave.

While all characters appearing in this work are fictitious, and any resemblance to real persons, living or dead, is purely coincidental, Tom and Mary are in trouble. With the prevalence of back-to-back closings and unforeseen underwriting issues and title defects, these situations are not uncommon. And with new TRID closing disclosure rules coming online in August, which are bound to cause even more loan approval delays, we may be seeing more of these situations in the months to come.

Fortunately, there is a solution to this situation. The sellers are willing to let the Tom, Mary and family move into the home prior to the closing under a Use and Occupancy Agreement. This will enable the buyers to complete their move, move into the house, but before the actual closing. A use and occupancy agreement, however, is not without its risks and downside, which I will discuss below.

One of the most important aspects of a Use and Occupancy Agreement is what it is versus what it is not. The agreement should specify that it creates a mere license to occupy the premises, not a tenancy or a landlord-tenant relationship. This will make it easier to remove/evict the occupants if something goes wrong. In any event, if the sellers are forced to remove the occupants, they will still have to resort to judicial eviction proceedings, which in Massachusetts can potentially take several months. This alone is the biggest drawback of a Use and Occupancy Agreement. The seller should always put language in the agreement that the buyers will be responsible for all attorneys’ fees and costs in case of an eviction.

The parties have to agree on a rental rate, typically based on the fair market rent for the premises or the mortgage and carrying costs. Websites such as www.rentometer.com can give you an idea of what a fair rental rate should be. Your Realtor should give you guidance as well. The rent should be divided by 30 for a per diem basis. You can also charge penalty rent if the term is extended past the original deadline.

The sellers should also include general indemnification language providing that “during the period of occupancy, Buyers shall maintain the Premises in good, clean condition and shall not make nor suffer any strip or waste to the Premises, nor make nor suffer any unlawful or improper use of the Premises and Buyers agree to indemnify Sellers and save them harmless from all liability, loss or any damage arising from such additions, alterations, strip, waste or unlawful or improper use, any nuisance made or suffered on the Premises by Buyers, including their family, friends, relatives, invitees, visitors, agents, or servants, or from any carelessness, negligence or improper conduct of any person.”

Lastly, the buyers should do their pre-closing walk through before they move in under a Use and Occupancy, because once they move in, the home will be a mess for awhile. That way, everyone will be on the same page as far as the property condition goes on the date of move in.

Many attorneys advise clients never to agree to Use and Occupancy Agreements. I am not one of those attorneys. With any risk, it depends on the situation. The sellers need to be comfortable that any delays will be resolved favorably and quickly. Sellers also need to appreciate that despite any language in the agreement, it could take months to remove an occupant if things so south. As long as everyone understands the risks, a Use and Occupancy Agreement can be a life saver.

  • JessieM

    Thoughts on a similar scenario but the reason for the delay in closing is a costly repair discovered during inspection. Buyers have relocated and are living in a hotel…would like to move into the house. Seller’s have agreed to let Buyer’s live there (they have already moved out) and buyers living there won’t interfere with the work. What should the buyer look out for in this type of arrangement?

  • 2JorgeSchuldt

    Practical suggestions , I was fascinated by the details , Does someone know where my assistant would be able to find a blank OPM SF 86 document to use ?

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  • Bob

    Interested in your opinion on the other side of Use and Occupancy: Closing before the Sellers are ready to leave with an allowance that the sellers stay for 30 days post close. Thoughts on that one? Is it better to delay closing until they are out? Thanks!

    • I’ve done those. Same spectrum of risks, maybe even more for the buyers if they get stuck with a seller who turns into a squatter. I’ve had to evict a seller in that situation. Took 3 months and buyers were NOT happy.

      • Courtney

        I’m curious, in the instance where seller needs to stay on after closing, whose insurance covers any damage to the property during seller’s occupancy?

        • The buyer’s insurance would cover, but the agreement should also provide that the seller obtain a renter’s insurance policy.

  • “The agreement should specify that it creates a mere license to occupy the premises, not a tenancy or a landlord-tenant relationship. This will make it easier to remove/evict the occupants if something goes wrong.”

    But eviction is still required, so what’s actually easier, shorter notice periods?

    • Doug, with a use and occupancy, you don’t need to send a notice to quit — you can do directly to court to evict. Also, you can utilize a special TRO procedure to evict.

      • So what’s stopping all Massachusetts landlords from switching to licensing agreements?

        • Market forces. Tenants would never agree to such a thing and competition would prevent this. Plus, a long term rental disguised as a license agreement would likely be construed as a real tenancy regardless of what the agreement says.

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