As discussed in our recent post regarding pre-possession agreements, key provisions of the Dodd Frank Act (“Dodd Frank”) took effect in 2015. Dodd Frank aims to revamp the United States regulatory system, especially in regard to mortgage lending. To that end, Dodd Frank created material changes to the residential real estate mortgage closing process. For example, the Truth in Lending and Good Faith Estimate document has been replaced with the new Loan Estate (“LE”) and the HUD-1 Settlement Statement has been replaced with the Closing Disclosure (“CD”). The mortgage industry has spent billions of dollars to adapt to these changes. For instance, Quicken Loans reportedly hired 350 employees for 18 months just to implement the Dodd Frank changes.
On average, these new changes are adding an extra week to the beginning of the closing process. In addition, the new changes are adding an extra week on the tail end of the closing. As a result, whereas for recent history most residential closings typically closed in about 30 days, many closings after Dodd Frank are now taking around 45 days.
Due to the longer and less predictable closing periods, buyers and sellers are encountering occupancy challenges and requesting pre or post-possession agreements until their pending transaction can close escrow. (This column previously addressed pre-possession agreements – the situation where the buyer requests that the seller allow the buyer to take possession prior to the close of escrow. We not turn our attention to post-possession agreements – where the seller asks the buyer for permission to remain in the home for a short period after the close of escrow.)
Post-possession agreements present unique and interesting legal issues. They also present substantial risk to the buyer. In fact, Commissioner’s Rule R4-28-1101(k) warns: “A salesperson or broker shall recommend to a client that the client seek appropriate counsel from insurance, legal, tax, and accounting professionals regarding the risks of pre-possession or post-possession of a property.”
Arizona’s statute of frauds requires that any agreement for the sale or interest in real estate must be in writing. A.R.S. §44-101(6). But one key exception to the rule concerns a lease for less than one year. So technically a verbal post-possession agreement is legal. Under no circumstance, however, should a buyer (or his agent) ever agree to a verbal post-possession agreement.
Although post-possession agreements create certain risks for the buyer, those risks may be minimized with the proper insurance policies and with a thoughtful and thorough post-closing occupancy agreement. Also, the buyer can request an “escrow holdback” to protect his or her interests. For example, the buyer can request that the escrow company withhold $50,000 from the purchase price in escrow which shall not be released to the seller until:  the seller peacefully surrenders possession of the premises by the agreed-upon date;  the seller transfers possession in the same condition as it was during the final walk-through inspection;  the seller pays any agreed upon rental charges in the post-occupancy closing agreement; and  any other reasonable terms the parties agree to. The escrow hold back strategy provides the buyer with sufficient protection to essentially offset the risks associated with post-possession agreements.
Below are common pitfalls common to post-possession agreements (many of these risks are also common to pre-possession agreements):
- Risk of Loss – who has the risk of loss during the post-closing occupancy period?
- Insurance – does the seller have valid insurance coverage during the post-closing occupancy period? Does the buyer have valid insurance coverage?
- Repairs and Maintenance – who is responsible for repairs and maintenance?
- Occupancy Rights – who has the right to occupy the property (the buyer should require the seller to expressly identify the names of everyone who will be occupying the property and consider obtaining background check on all occupants)
- Rental Amount – what is fair rent for the term?
- Security Deposit – what is a fair security deposit? Is the security deposit limited to 1.5 times the monthly rent pursuant to the Arizona Residential Landlord Tenant Act? Probably not (see below).
- Buyer’s Remedies– the buyer should expressly identify what remedies are available if the seller fails to move out when agreed, including liquidated damages paid from the escrow holdback discussed above. Also, the buyer should request that the seller agree to immediately voluntarily surrender possession and that the seller may perform a non-judicial lockout in the event of a breach. To that end, the parties should expressly represent and warrant in the post-possession agreement that the property is not the seller’s residence or domicile and that the parties’ relationship is governed by the Inn Keeper’s Statements and not the Landlord Tenant Act.
If you or someone you know has questions regarding pre or post-possession agreements or any other real estate matter, please call or email today.