Are you wondering what use and occupancy are and how they work?
It is not uncommon to encounter complications when buying or selling a home—unexpected or unpreventable circumstances that can stall the sale.
Complications are prevalent when the buyer is getting financing for the house, as the loan process involves an additional organization, the lender, that must be accommodated and give consent.
Things go wrong, roadblocks pop up, and sometimes, creative solutions are needed to move the sale forward.
One creative solution you may want to consider is the Use and Occupancy Agreement (U&O), also known as a rent-back agreement.
This type of agreement, which provides a framework for a buyer to use and occupy a property before closing, could come in handy if there are complications regarding financing and closing a home sale.
A U&O agreement is often implemented when a buyer needs to move into the house before the title can be transferred.
Over the years there have been several times where my clients have used a U&O in real estate transactions before the closing took place. These contracts were negotiated between the buyer’s and seller’s attorneys to the satisfaction of the parties. In the situations where needed they have been a blessing to the seller.
If you need a use and occupancy agreement, it is worthwhile to understand its benefits and complications.
How Do Use And Occupancy Agreements Work
A use and occupancy agreement is a legal contract allowing someone to use or occupy a property without complete ownership temporarily. They can be written in various ways to fit a specific situation.
The important thing is that the agreement is written to state that it is not a landlord-tenant agreement or a lease in the same way a regular rental agreement would be.
The Use and Occupancy Agreement is structured to allow easy removal of the party occupying the premises if needed. From a legal standpoint, lawyers often will inform the parties they represent of the differences between the two kinds of agreements.
Use and occupancy also benefit a buyer or a seller, like an escrow holdback.
The difference is that the escrow holdback allows the closing to continue unfettered, while the use and occupancy help alleviate a problem before closing.
Use and Occupancy vs. Rent
Understanding the differences between a U&O and a lease is essential. Under a lease, tenants are guaranteed fundamental rights, such as privacy and protection from being charged an excessive deposit.
Under a use and occupancy (U&O) agreement, the seller is not afforded the same rights as in a more traditional tenant-landlord relationship. This limited contract allows the seller to stay in the home for a fixed period at an agreed-upon rate.
A rent-back agreement can simplify the process of eviction by quickly removing individuals from a property if a situation arises. A critical part is that a U&O must explicitly state that it does not establish a tenancy. It only provides authorization for utilizing the premises.
The duration is a critical distinguishing factor between a use-and-occupancy agreement and a lease. A use-and-occupancy agreement typically has a much shorter duration and is often used only in cases of necessity.
A key takeaway is that use and occupancy vs. rental agreement are much different.Click To TweetSpecial Considerations for These Agreements
From experience with these agreements, I know it’s crucial to understand the nuances that can significantly impact both the buyer and seller. These agreements are not one-size-fits-all. They require careful consideration of several factors to ensure a fair and beneficial arrangement for everyone.
The duration of the agreement must be clearly defined, with a specific start and end date. Having clarity prevents any misunderstandings about the length of time the seller can remain in the property post-sale.
Second, the payment structure should be outlined in detail. You should include any daily rates or flat fees for using the property. This ensures the seller compensates the buyer fairly for the period they continue to occupy the home.
Another critical aspect is the responsibility for repairs and maintenance during the occupancy period. Typically, the seller would be responsible for keeping the property in good condition until they vacate. Additionally, insurance coverage during this period is an essential consideration.
The agreement should specify who is liable for the property. The seller usually will protect against any potential damages or losses.
Lastly, the termination conditions of the agreement provide a safeguard for both parties. It outlines the steps to be taken if either party breaches the agreement’s terms. This includes the process for extending the agreement if necessary. It will also typically cover the consequences of failing to vacate the property by the agreed-upon date.
Incorporating these considerations into a rent-back contract ensures a comprehensive and clear understanding between the buyer and seller. It minimizes potential disputes and fosters a smoother transition of property ownership.
Legal Implications and Requirements
Understanding the legal implications and requirements of a Use and Occupancy Agreement is paramount for buyers and sellers. In some areas, these agreements are subject to specific regulations that dictate how they must be structured and executed.
For instance, certain areas may require a formal inspection of the property to ensure it meets local housing codes and ordinances before an agreement can be finalized. This inspection, often called a resale inspection, is crucial for obtaining a U&O certificate or occupancy permit. Sometimes, it may only be valid for a limited time, such as 90 days.
The agreement should explicitly state that it does not establish a landlord-tenant relationship. Instead it grants a license to occupy the premises.
This distinction is vital for legal purposes. If the agreement’s terms are violated, it can affect the occupant’s eviction or removal. Without a clear delineation, removing an occupant could become significantly more complicated. It would resemble the eviction process of a formal tenant, which is not the intention of a Use and Occupancy Agreement.
I recommend consulting with a real estate attorney to ensure local laws and regulations compliance.
An attorney can also help write the contract to meet the specific needs of the buyer and seller. It will provide peace of mind and legal protection for both parties.
What Happens When an Eviction is Needed?
A use and occupancy or leaseback agreement avoids establishing a leasehold tenancy and its subsequent legal rights and obligations.
Unlike traditional leases, the eviction process under a Use and Occupancy Agreement is streamlined because there is no landlord-tenant relationship.
To reach its objectives, the agreement between the parties must generate a license for the utilization and occupancy of the premises, not any form of leasehold tenancy.
The distinction between possessing property and the right to use the premises must be acknowledged. A lease conveys an interest in property and transfers ownership and sole authority of habitation. At the same time, a license does not deliver possession but only the right to utilize the premises.
Suppose an occupant under the U&O license fails to leave the premises on the designated date. In that case, the property owner is not bound by landlord and tenant laws, which provide comprehensive tenant protection and a lengthy eviction process.
Consequently, if a genuine U&O license is in place, the property owner can pursue an emergency court order directing the occupant to leave the property immediately. They don’t need to follow complex eviction procedures through summary process action.
A Stalled Closing Can Trigger a Use and Occupancy Agreement
The easiest way to demonstrate why a seller might want to use this type of agreement is to describe a hypothetical situation. Say the seller has found a buyer, and everything appears to be going well.
The lender has given initial approval for a loan amount that will allow the buyer to purchase the home, and the buyer is in the process of getting the money from the lender.
Paperwork is completed, a typical closing date is established, and everyone prepares for the sale.
Because the buyer is confident that the loan will go through, she has sold her current house.
They have rented a temporary rental for a month and has everything lined up to move into the seller’s house immediately following the official closing date.
But then a problem arises. It’s an unforeseen complication that wasn’t expected.
The lender had trouble getting the necessary information, so the closing was pushed back a few weeks.
The buyer’s temporary rental will be filled with a new renter, leaving her scrambling to come up with another option for the two weeks before the new closing.
The U&O could help with the problem.
Problems Come up in a Real Estate Transaction
Another example is a buyer purchasing and selling a home at the same time. The closing of each property could have been set up in advance to occur on the same day.
In real estate, Murphy’s Law sometimes rears its ugly head. Any number of things can happen. Let’s assume the sale of the existing home takes place as scheduled, but the new home is not ready yet to be lived in.
Sometimes, a builder will allow the buyer to move their belongings into the property so that the buyer does not have to go through the expense of a “double move.”
This use and occupancy agreement happens more than you would think. The buyer does not live in the home because the builder has not yet procured their occupancy agreement from the town. The buyer, however, can access their property through a legal contract.
In this situation, there is a good chance the buyer will reach out to the seller to see about moving in a little early.
The seller may want to help the buyer but is worried about getting into a bad situation. When the seller talks to his Realtor or a real estate attorney, the first solution that will probably be brought up is a U&O Agreement.
However, lawyers often explain the legal risks of doing so to their clients. Creating a U&O permit is one of the things attorneys do for buyers and sellers.
The Seller Can’t Meet The Agreed-Upon Closing Date
A third example of use and occupancy is when someone is selling their home, and a buyer asks for a closing date that the owner, for whatever reason, can’t meet.
The buyer may have to close for financial reasons, like getting a great mortgage rate. To accommodate the seller, use, and occupancy are given to the current owner.
The new buyer now owns the house, but the previous owner has occupancy until a specific agreed-upon date.
Be Careful With These Agreements
If you are selling a house and find yourself in a similar situation as the one described above, remember that you must protect yourself as thoroughly as possible.
Allowing a buyer to move in early to facilitate a sale probably makes sense financially. Still, you should probably talk to a real estate attorney about helping you draft the agreement. You want to ensure that the agreement’s language is exact and complete.
As mentioned above, you want to avoid creating a tenancy agreement.
Establish Clear Terms With a U&O
The agreement must clearly state that you do not agree to the tenancy but only temporary occupancy. An explicit agreement will make it easier to remove the individual if necessary.
You may still need to go through legal proceedings – especially in Massachusetts, where the process can take months to remove an occupant.
However, you can also clarify in the agreement that the buyer must pay all legal fees in case of an eviction.
Agree on the Occupancy Fee
Another aspect that must be clarified is what the buyer will pay the seller for occupancy of the premises.
You can base your rental rate on similar homes in the area or use the mortgage as an essential starting point.
A qualified local real estate agent familiar with the rental market can also establish a fair rental rate. Typically, agreements are set on a 30-day per diem basis.
It would also help to thoroughly describe the buyer’s liability for any damage to the property.
It is also a good business practice for the owner to have indemnification language.
Some attorneys will draft a separate indemnification agreement that the buyer must sign.
You Will Want to Hold Harmless in Your Use and Occupancy Clause
The common language attorneys representing the seller will use is that the buyer shall indemnify and hold the seller harmless from all loss, liability, or damage arising from any alterations, additions, unlawful or improper use, or any nuisance made on the property by the buyers, including their family, friends, relatives, invitees, or visitors, from any carelessness, negligence, or improper conduct of any person.
This kind of language is vital to protect the seller’s interests.
Like with a regular rental agreement, you should walk through the home before moving in and establish its original conditions before occupying it.
You can take pictures for reference and use them to determine changes. A log of each room should be made, noting any defects already there.
Technically, You Will Be A Landlord
If you will protect yourself and your property when you employ this type of agreement, you must do all the due diligence of an actual landlord.
Even if the buyer is only supposed to be there for a week, you will still need to go through the process. Failing to do so puts you at unnecessary risk.
Is a Use and Occupancy Worth It?
Now that you know what a Use and Occupancy Agreement involves, you must ask yourself: Is it worth it? It is a question only you can answer. For some sellers, the temporary hassle and the risk are well worth getting the house sold.
If there is some concern that the buyer could want to get out of the real estate contract, it could certainly be worth it! For others, it may not be.
Some real estate attorneys will oppose granting a use and occupancy agreement. Others will carefully review the situation and balance the risk vs. reward.
Additional Helpful Home Buying and Selling Articles
- What are the top reasons why closings get delayed? Find out via The Rochester Real Estate Blog. See the most common reasons for closing date changes.
- The best tips for buying a new construction home via Cincinnati and Northern Kentucky Real Estate Blog.
- What to do when selling your home and the buyer cancels via The Las Vegas Luxury Home Pro.
Use these additional articles to help make intelligent decisions in the buying and selling process. Remember that a use and occupancy agreement can be a great way to bridge a time gap when things do not go as planned in a real estate transaction.
About the Author: Bill Gassett, a nationally recognized leader in his field, provided the above real estate information on using a use and occupancy agreement. Bill has expertise in mortgages, financing, moving, home improvement, and general real estate.
Learn more about Bill Gassett and the publications in which he has been featured. Bill can be reached via email at billgassett@remaxexec.com or by phone at 508-625-0191. For the past 38+ years, Bill has helped people move in and out of Metrowest towns.
Are you thinking of selling your home? I am passionate about real estate and love sharing my marketing expertise!
I service Real Estate Sales in the following Metrowest MA towns: Ashland, Bellingham, Douglas, Framingham, Franklin, Grafton, Holliston, Hopkinton, Hopedale, Medway, Mendon, Milford, Millbury, Millville, Natick, Northborough, Northbridge, Shrewsbury, Southborough, Sutton, Wayland, Westborough, Whitinsville, Worcester, Upton, and Uxbridge Massachusetts.
So thorough Bill! Excellent examples of when and why that are easily understood. Great article.
As usual, your article on use and occupancy was valuable information explained in a clear way.
Thank you Bill!!
Great article. Perfect timing as well, as I have a buyer waiting to close on a short sale and may need to move in prior to closing. I have felt with this before but the article spells out things pretty simply. Use and occupancy agreements can be pretty helpful.
Good explanation of the use and occupancy agreement!
Thanks Tina. Over the years a use and occupancy agreement has come in handy to keep everyone happy.
Set to close on our first home purchase. The sellers assured us that the home they were purchasing was set to close way before my loan was so they would be out of the house and I could move in day of closing. With the closing date only being 5 days away, the sellers are still in “my house” and informed me that they had delays so will not be able to move out til their loan closes which is now not for another 3 weeks. Is it too late in the process to have a delay of occupancy drawn up to charge old home owners daily rate for everyday they are in my house after closing date? Or can I still do this? Thank you so much in advance for your help on this, as it is a home for sale by owner with no real estate agent. I fear I made huge rookie mistake by not making sure my home would be “my home” after closing.
Lynn – there is a bigger issues here than a use and occupancy agreement. Legally the seller needs to close and be out of the home if this is what was agreed to in the contract. If they do not they would be in breech of the contract and you could sue them for performance. Do you have an attorney representing you? If not I would get one!