January 21, 2015
By Michael Denious
In the issue before last, I posted an article regarding pre-possession occupancy agreements, which are agreements between a seller and buyer of property allowing the buyer to occupy the property prior to closing. I noted that one of the Department of Real Estate’s “Commissioner’s Rules” expressly requires real estate licensees not to allow occupancy of a property by a non-owner without obtaining the express authorization or instruction from the owner, and in addition, advises his/her client to seek advice regarding the risks involved. See A.A.C. R4-28-1101(J – K). Not addressed in that article, but also contemplated under the Rule R4-28-1101, are post-possession occupancy agreements.
The post-possession occupancy agreement is essentially the flip-side of a pre-possession occupancy agreement. It is an agreement between the buyer and seller where the seller remains in the property after closing, and title has passed to the buyer. Stated generally, the post-possession agreement does not carry the same risks as a pre-possession agreement. Unlike the pre-possession agreement, the post-possession agreement does not depend on closing of the sale, but rather becomes effective upon successful closing. If the sale does not close, the seller stays in the property as before. Whether the parties get into a dispute, extend the closing date, or simply walk, the issue of post-possession occupancy never comes to bear. If the sale does close, then the buyer and seller become landlord and tenant, period. There isn’t the problem of a future closing, or the buyer getting cold feet during the tenancy and backing out, or the seller being left to find another buyer while dealing with the ex-buyer tenant.
Nevertheless, as the new Commissioner’s Rule contemplates, a post-possession agreement does involve certain risks that must be considered. As with the pre-possession scenario, the agreement should be put in writing, and can be a standard residential lease with due attention to the provisions of the Arizona Residential Landlord Tenant Act (“ARLTA”), A.R.S. §§ 33-1301 et seq., which applies broadly to all residential leases. Following is a summary of many of the risks and matters to be addressed in the agreement.
Lease term. Oftentimes the seller is seeking to remain in the property until he or she can close on the purchase of another property and then move. Assuming this is the case, the seller will want to specify a tenancy term that approximates the estimated time to close on the new house, with an automatic right of renewal for successive specified periods. The buyer will probably prefer a non-renewable lease term for a relatively short period of time, assuming the buyer plans to move in when the seller leaves and wants to be able to plan ahead. The buyer should ask that the agreement state that any extensions shall require buyer’s written approval, that no notice of termination shall be required, and that the buyer has the right to the termination date shall not be extended except upon the buyer’s written approval, and that the Buyer is not obligated to send any notice of termination. If the buyer has purchased the property as an investment, however, the buyer will have much greater flexibility on the lease term and may be delighted to have a tenant immediately upon closing.
Rent and Security. The buyer should ask for rent and a security deposit to be paid upon closing, and if possible, as a credit against the purchase price. The amount of the security deposit and advance rent required, however, should not exceed one and one-half months’ rent. See A.R.S. § 33-1321. In determining the amount of rent, the parties should consider not only the debt service if any, but also matters such as homeowner association fees and property taxes. In addition, the parties should specifically provide in the agreement who will be responsible for utilities.
Risk of Loss or Damages. As in the pre-possession scenario, the owner (now the buyer) should try to shift the risk of loss or damages to the tenant (the seller). Of course, and again as in the pre-possession scenario, insurance is the key. The buyer should obtain casualty and liability insurance on the property at closing, just as if she were taking possession. The buyer may seek to have the seller pay the insurance premium during the occupancy period, certainly if the premium is higher than it would otherwise be if the buyer were taking possession. The buyer should also require the seller to purchase a home warranty policy to cover appliances and other items that the seller will continue to use during her occupancy.
The seller, conversely, should be mindful that her homeowner’s policy is no longer in effect, and the contents of the home will not be covered by the policy purchased by the buyer (and new owner). The seller should consider purchasing a renter’s policy to insure any of the contents that she owns and is keeping in the house during the tenancy period.
Condition of the Premises. It is very important that the buyer and seller address any issues concerning the condition of the premises prior to closing, just as if the buyer were immediately moving in. The buyer should not neglect to perform an inspection, and prior to closing, a final walkthrough, to ensure that everything is as it should be and that any potential problems are addressed and resolved. The fact that the seller is remaining in the property does not alter the fact that the buyer is taking ownership of the property and all that ownership entails. Leaving things to be done by the seller during the ensuing tenancy will leave them less likely to be addressed. It is also in the seller’s interest to avoid making any commitments to do further repairs or work on the property during the tenancy, and ensure that the buyer commits to take the property as is at the time of closing.
Moreover, matters that arise after closing, such as leaky pipes or the air conditioner breaking down, will be the buyer’s obligation to repair and maintain as the landlord.1 The buyer arguably can protect herself by requiring the seller to warrant that the condition of the property at termination of the tenancy will be the same as at closing. Suffice to say, however, any troubleshooting should be done before the buyer becomes the owner and landlord. The final walkthrough is also as good a time as any for the buyer to have the seller do her prospective tenancy inspection and complete a checklist concerning the condition of the property.