In the past two years, our firm has represented eager homebuyers – many of them buying a home for the first time. It is an exciting, complex, and whirlwind time for a first-time homebuyer and for any buyer at that. The buyers must be in constant contact with their attorney, real estate agent, loan officer, and every other professional in between (home inspector, surveyor, insurance agent, etc.). To say it can feel like a full-time job in and of itself is an understatement! And then finally, it is closing day. This day has been visualized for months (perhaps several months or years, given the present real estate market). The buyers can see themselves tirelessly signing document after document at the closing table, and then, they are finally being handed the keys to their new home and a bottle of champagne to celebrate…
Record Scratch – but what happens when the Seller’s attorney reaches out to the Buyer’s attorney and says, “The Seller needs to stay in the property for 3 weeks post-closing. Will your client agree to a leaseback/U&O? If so, send me the per diem rate.”
Wait, what? As the buyers scratch their heads, they wonder, “How can the Sellers stay AFTER the closing? Are they squatters? Did I just become a landlord? Can we say NO??”
A use and occupancy agreement, also commonly referred to as a “leaseback” or “occupancy” or “U&O” agreement, is an agreement between the buyers and sellers of the property subject to the conveyance. (For the purposes of this article, we are assuming that the agreement shall govern the parties post-closing and with the sellers to remain for a period of time. Note that these agreements are also available in the circumstance where the buyers may need to move into their prospective new home before the closing as well.) By and through this agreement, the buyers agree to allow the sellers to remain in the property and continue to use the property as a single-family residence for the sellers’ immediate family.
So, to be clear, the closing has occurred, and the sellers are occupying the property as a licensee, not a tenant. A licensee is “one who has permission to enter or use another’s premises, but only for one’s own purpose and not for the occupier’s benefit.” (Black’s Law Dictionary, 3d. Pocket Ed.). The sellers do not enjoy the rights that a tenant would enjoy by operation of law, and instead, they are bound specifically by the terms of the U&O agreement.
The agreement will further define the term (the length) of the agreement, the per diem rate of occupancy, a holdover penalty and an escrow. Typically, the per diem rate of the occupancy will be calculated based on the buyer’s monthly principal and interest payment, taxes, and insurance. The sellers will also be responsible for the cost of all utilities used during the term. The holdover penalty is a greater amount than the per diem rate and shall serve as a penalty (and an incentive) in the event that the sellers do not vacate the property at the end of the term. The escrow is established to cover the occupancy costs as well as a buffer in the event there is damage or other charges to the property attributable to the sellers during the term. At the end of the term, and upon vacatur of the sellers, the buyers are permitted to inspect the property to determine if the property is in satisfactory condition. Finally, the sellers are required to carry insurance and to indemnify and hold the buyers harmless from any claims and expenses that may result from the sellers’ use or occupancy of the property.
Once the term expires, the buyers are free to move into their property. However, by agreeing to allow the sellers to remain in the property pursuant to this agreement, the buyers likewise cannot infringe upon the sellers’ use and occupancy of the property until the term expires, or the sellers vacate the property.
Given the dynamics and logistics of coordinating conveyances, a U&O is far from uncommon. Lately, we have seen these agreements employed by parties when a seller is also purchasing another property contemporaneously to their sale, and sometimes, coordinating multiple sellers and buyers at once can be difficult or impractical. Thus, a vehicle like a U&O agreement can provide a little breathing room to the parties, and the buyers will still be made whole in exchange for their agreement to allow the sellers to use the property.
No matter what the terms of the occupancy are, and no matter how well-intended and well-kept the parties are in their discussions, an agreement such as this should be prepared, reviewed, and explained by legal counsel. This way, there are no surprises, no misunderstandings of terms, and everyone can move out and move in happily!
Disclaimer: The information contained in this post is not, nor is it intended to be, legal advice. You should consult an attorney for advice regarding your individual situation. We invite you to contact us and welcome your calls and communications. Contacting us, however, does not create an attorney-client relationship.