When The Seller Remains In a Property, Is It a Rental?

In a residential real estate transaction, it is not unusual for the seller to want to remain in the property for a few days to a couple of weeks after the closing occurs. This is in no small part due to the fact that savvy sellers (or their savvy agents) know that closing dates are frequently delayed, and that sellers who schedule the movers and the next possession on the basis of a projected closing date, do so at their own peril.

The situation is common enough that, for some years, the California Association of REALTORS® (CAR) has produced a form (Seller in Possession Addendum) to facilitate the arrangement. (Writing up such an agreement is not something you would want to leave to an agent.) The form is intended for a short-term occupancy (i.e. less than thirty days). For any longer period, CAR has a more elaborate agreement called Residential Lease After Sale.

7c6c0bb2f997985cfa776a541051fb04_XL

The short-term occupancy agreement specifies its term either as a number of calendar days or until a specific date. It also indicates the amount to be charged and provides for a late charge if an outside-of-escrow payment is not timely.

It is specified who shall pay for utilities and the maintenance responsibilities of the occupant. No assignment of the agreement or subletting is permitted. The new owner is to be allowed entry for a variety of purposes, as is typical of most lease/rental agreement. 24 hour notice is stipulated, unless there is an emergency. A security deposit is called for, and the seller/occupant is advised to obtain insurance for personal property.

In all, this one-page agreement might be called a Rental Agreement Lite. It is not as thorough as most lease/rental agreements (the CAR standard lease/rental agreement is 6 pages), but it covers the major issues.

Recently (December, 2016), CAR published a revision of the Seller in Possession form. Most notably, it is titled SellerLicense To Remain in Possession Addendum (my emphasis).It begins, “This Addendum is intended to grant Seller a license to remain in possession of, and use, the Property after the Close of Escrow.” In the section specifying the length of term it says, “Seller is granted a license to remain in possession of Property for ___ calendar days After Close of Escrow (or  to ____ (date) until _____ AM /  PM.”

In the Consideration (formerly, Compensation) section, instead of the seller agreeing to pay for the term, “Seller agrees to pay Buyer (i) a non-refundable License Fee for the term…” There is no longer a security deposit, but there is a “delivery of Possession Fee” which is to be returned to the seller if the property is maintained as agreed — just like a security deposit.

Aside from the differences just noted, the former and revised versions are the same. It would seem, then, that the differences are more semantic than they are substantive.

But, if there really is no substantive difference, why introduce licensing language — which is relatively unfamiliar — into a document that everyone had found to be quite understandable?

The purpose is to (attempt to) make it clear that allowing the seller to remain for a short period is not creating a tenancy. A person who occupies a location by virtue of being granted a license to do so is not a tenant. (Think of having a ticket to a football game.) They may have the right to use a certain space under certain conditions, but they do not have an interest in that space. They can be removed for violating the terms of the license, but they are not evicted.

Now, as a matter of probable fact (different from a made-up one) it seems most likely that a court would treat the new Seller in Possession form as a rental agreement just like the old one. It walks like a duck, sounds like a duck … etc. A court would probably treat the seller/occupant like a tenant who has the rights of a tenant. To remove him would require a standard eviction.

But there is another “audience” who, hopefully, might find that the new license agreement makes a significant difference: mortgage underwriters.

Many residential lenders have strict guidelines (or, guidelines that are interpreted strictly) that require that the property be occupied by the borrower and that it not be rented to another party. Reportedly, more than a few loan problems have occurred because a seller-in-possession agreement was deemed to violate such a no-rental provision.

The new Seller in Possession agreement may be the way to avoid violating a lender’s no-rental provision. After all, words matter, don’t they?

Article and image provided by: realtytimes.com
Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s