What is a post-closing occupancy agreement?
For any uninitiated buyer, the world of real estate transactions can be a baffling place. In Ontario alone there are dozens of forms to choose from, all with complicated names like Form 801 and Form 100.
It’s almost enough to make someone think they might have misinterpreted the phrase "Welcome Home".
Some forms, like the Agreement of Purchase and Sale (which you will find yourself using almost every time you purchase property), are quite intuitive. In Ontario, the standard heat and air conditioning addendum is entitled "Schedule B: Heating & Air Conditioning Addendum" which is short, succinct, and effective in getting its point across.
Yet other forms are less effective at clearly conveying their purpose, such as the post-closing occupancy agreement. For that reason it merits its own article, so we may delve into the obscure.
Think of this form as something of a residual agreement to the Agreement of Purchase and Sale.
You see, from the date you agree to purchase property until the date when you actually pay for and receive the property is often a lengthy gap during which you might not be able to occupy the property. There are many reasons for this gap. It may be because you plan to undertake substantial renovations. Or perhaps possession is delayed while a lender completes its due diligence.
A post-closing occupancy agreement facilitates this scenario by allowing you to take possession of the property in advance of its legal transfer . This provides you the benefit of moving in early for whatever reason you choose – so long as you pay for the privilege, of course.
The post-closing occupancy agreement, as its name implies, is a form of Agreement of Purchase and Sale and is intended to form a binding contract between the occupant (usually the buyer) and the registrant (usually the seller). As with an Agreement of Purchase and Sale, the form is standard in Ontario but should be used together with a lawyer’s advice as certain clauses may be unnecessary or inappropriate for your situation.
A post-closing occupancy agreement differs from an Agreement of Purchase and Sale in that the page-devouring oh-so-luscious terms and conditions have already been agreed upon. What remains is deciding when the occupancy will commence.
The occupant must provide the registrant a deposit (the amount of which varies based on negotiated conditions) to reserve the right to move in; and then at the date of occupancy the registrant will be paid a fee by the occupant in exchange for the right to reside at the property. The fee is designed to cover the costs of registering the agreement against the property title as well as the normal housing costs inherent to the occupancy itself.
The registrant will need to provide the occupant with a copy of the registered form within 60 days of registration; and the occupant will be responsible for the upkeep of the property during the occupancy.
Augmented by a few section-specific notes, that’s the gist of it.
Conditions contained in a post-closing occupancy agreement
The terms and conditions in a post-closing occupancy agreement are generally more relaxed than the terms in a traditional lease. Typically, the occupancy period is for a predetermined shorter term such as 30, 60 or 90 days from the closing date. This is instead of the fixed one year term of a regular lease, for example. The rent to be paid during the occupancy period is also usually much greater than the normal market rent for a residential lease. While the one year term of a tenancy is covered by the provisions of the Residential Tenancies Act (RTA), an occupancy agreement is separate and short term and as such not specifically regulated by the RTA. An occupancy agreement does not enjoy the protection of a mandated minimum rent cap contained in the RTA that would limit rent increases to 1.5% for the year starting January 1, 2014. Without going into detail about the implications of the RTA, suffice it to say that occupancy agreements can be priced at market and there is no formula to calculate increases. Of course, if the same parties enter into another agreement after the occupancy period they may agree on rent increases at that time. The obligations regarding utilities and maintenance can vary. The occupant may be responsible for paying for utilities and maintenance and may not be provided with services and remedies available to a tenant under the RTA, such as those relating to heating and repairs. The obligations regarding property tax must be negotiated separately and specifically as the terms can vary. Whether there is a property tax rebate program for seniors or others may also affect the negotiations.
Pros and cons for buyers and sellers
Buyers and Sellers: The Good and the Bad
Benefits for Buyers
One of the major benefits of agreeing to an occupancy prior to closing is that you get to move into your new home sooner. Depending on how long you decide to give the seller after closing, you could save yourself months of rent on your new space. This is especially beneficial when you are selling your current home and buying a new one. Otherwise, you would have to find temporary space until closing. It allows the buyer to lower their carrying costs and live in their new home while they wait to sell their current home.
Benefits for Sellers
The most significant benefit is if you have already purchased your new home. If you have given a deposit on a new build, sold your existing home at a great price and are ready to move into your new home, post-closing occupancy allows you to do so without any negative impact on you. You don’t have to worry about finding temporary space as you can move into your new home and live without your things for weeks or even months. It may also allow you to continue to take advantage of housing prices in your current area while not having to worry about the cost of upgrading once you finally move.
Drawbacks for Buyers
Sometimes life has other plans. Unfortunately, if the buyer is taking on an occupancy period prior to closing that is longer than expected and has not made arrangements for extending their Current housing beyond the original closing date, there can be costly delays when the time to vacate the property gets pushed back. That means finding temporary space and unpacking and repacking your boxes more than once. Even though the agreement should hold interests at heart and the seller should pay the buyers incremental amount of rent, the cost to unmove and remove items may exceed what the seller is willing to pay.
The buyer can be stuck squeezing out a few extra dollars through the legal system, which takes even more time. As well, those who have purchased a new house and have already moved, could find that they have to move back into their current house while the buyer takes occupancy causing confusion and stress for all parties involved.
Drawbacks for Sellers
Unfortunately, there are some drawbacks for a Seller in agreeing to a post-closing occupancy. One of the key drawbacks is that you are giving the buyer full access to your home once the deal closes. When viewing the property, the buyer may have decided that the patio set should stay. If they do not like it when they’re moving it or using it afterwards, there could be a costly civil dispute for the retention of it.
Legal implications and risks
Post-closing occupancies carry risks, but they can be identified and mitigated. Buyers should consider such issues as breach of contract, the ability to evict, or variations on the standard form usury. These and other issues have been considered in various reported decisions.
Breach of contract
The residential tenancy agreement is not a standard form of agreement. The purchaser has become a landlord without knowing how to deal with damage, misconduct or conflict. Both the Residential Tenancies Act and the common law provide protection to tenants, which works to the detriment of the landlord. The validity of the standard lease is also an issue. The "no-term" tenancy is subject to judicial interpretation and is not always upheld. Ongoing disputes are limited to the terms of the standard form lease, which may not be sufficient.
Eviction
The new landlord must apply to the Landlord and Tenant Board to recover possession of the unit when the occupancy period ends, unless the tenant misbehaves . Mistreatment is adjudged largely by the standard of care of the reasonable landlord it is deemed the offending tenant to possess. Although the current owner has been victimized, the RTA protects the tenant and the rental unit from eviction and damage. The protection from eviction and damage extends even after the landlord regains possession of the unit because of enforcement issues, such as costs and access to the rental unit.
Usury
The standard form lease provides for ongoing monthly payments in place of an up-front purchase price. This is interpreted to be an interest rate that exceeds the statutory maximum. Pursuant to the Courts of Justice Act, the court is empowered to convert the excess payment to a shorter term repayment schedule in order to avoid usury. There is also the possibility that the lease will be deemed void and that the landlord will be unable to recover any amounts from the tenant.
Conclusion
Parties to a post-closing occupancy should be prepared by having a carefully crafted agreement in place, and to follow-up on compliance with it.
How to successfully write a post-closing occupancy agreement
When it comes to post-closing occupancy agreements in Alberta, their use is very common when real property is sold "subject to fiduciary rights" by a seller that is a trust. In these instances, the purchase price is typically held in trust for the benefit of the beneficiaries until they reach the age of majority which may occur four or five months after closing. As a result, the purchaser under a post-closing purchase/sale agreement would offer to lease the property to the seller for the same period of time as set out in the trust agreement. Post-closing occupancy agreements are not leases. They are a new type of contract. It is important for purchasers to understand that a post-closing occupancy agreement remains an agreement at law and not a lease. It should have clear language to confirm this. It is also important that the duration of such an agreement be no more than the duration that can be properly attributed to the sale process under the rules of the Real Estate Council of Alberta and the requirement under the legislation to provide a buyer with a homeowner’s association document. This document must be provided to a buyer by a seller within 10 days of its completion at which point the buyer has 10 days to terminate the purchase/sale of the property. If a seller requests a buyer to pay out the proceeds of a transaction within the 10 day (and later the 5 day) timeline , this will likely have an adverse impact on a court’s view as to whether or not the parties intended a true post-closing occupancy situation.
To set out all parties’ rights, obligations and responsibilities, it is important for a good post-closing occupancy agreement to include the following:
• clear language expressing the relationship intended by the parties,
• a description sufficient to identify the property subject to the agreement,
• clear commencement and termination (or renewable termination) dates,
• restrictions on alterations to the property, if the landlord of the property is to afford any right to do so,
• clear language confirming that the parties are responsible for the payment of the utility costs as specified in laws applicable to Alberta properties,
• reference to any governing body for the property [i.e. a condominium corporation of an unregistered condominium, cooperative housing associations],
• clear language in respect of agents and employees of the landlord respecting access including the method and time of access so such people can exercise their rights under the agreement,
• clear, independent rights of leasing by the purchaser and the seller,
• clear insurance language to cover the landlord’s and the tenant’s rights respecting repairs and maintenance of the property,
• conditions upon the event that the landlord fails to satisfy all of its obligations under the agreement.
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