What is a post possession agreement?
A Post Possession Agreement is a contract that permits a party (the occupant, which could be the seller or sometimes a tenant) who has vacated the property to continue residing in the property after the possession date. The occupant agrees to pay rent and typically for a set duration of time. It is a tool that can be used to assist in the closing of a real estate transaction or to lease a residential property after all parties have vacated the premises.
So why use these agreements? Sometimes the sale of a property simply cannot close on the anticipated closing date. In those situations, Post Possession Agreements are used to incentivize the seller to vacate the property by a certain date or to provide incentive to the buyer to agree to hold off on their possession until a certain date. But there can be other reasons as well. For example , sellers may want to take advantage of the market being hot and perhaps rent a property in the meantime; or sometimes a seller just needs more time to find a place to stay before closing on the sale of their property. Separate from an actual sale of a property, a Post-Possession Agreement can also be used to lease a residential property where the tenant has already vacated the premises and there is a need to find a new tenant.
Because this Agreement allows the occupant to remain in the property (which can sometimes be up to a year or more), the Agreement must have specific language to be enforceable for any reason other than possession of a commercial property. RERA does not permit post possession agreements.
Key components of a post possession agreement
A post possession agreement should include critical clauses designed to protect the expectations of both the seller and the buyer. Here are some key elements that should be specified:
- Timeframes – While renting a property during the closing period may sound amicable, miscommunication between parties can lead to nasty conflicts. An example of this is simply agreeing to postpone the actual closing date but retaining the closing conditions (earnest money, title insurance, etc.).
- Liability – In addition to stating that post possession is at the risk of the buyer, protections should be in place for the seller to protect his or her interest in the property. For instance, what happens if the keys are lost or stolen? In the event the property is vacant, who will make repairs if something goes wrong?
- Landlord versus tenant issues – When a post possession agreement exists, it can mimic the landlord-tenant relationship according to Texas law. This means local laws governing landlords and tenants apply to the post-possession situation. Legal expert Matt Moore of the Moore Law Firm states that a post possession agreement should include a waiver for claims and defenses to the Texas Residential Landlord Tenant Act.
- Utilities – It is best to have the utilities switched over to the buyer’s account the day after the closing is supposed to take place. Even when the buyer and seller agree that the buyer will be liable for the utilities, these provisions should be included in writing in the post possession agreement.
- Fees and rent – The seller may be charged a daily fee and the buyer’s insurance may be voided if the seller doesn’t occupy the property until all contingencies are removed. If the home is damaged because of an errant action or damage from the seller, the seller may be responsible for covering some costs associated with bringing the home back up to market standards.
Advantages of a post possession agreement
While post possession agreements are not the most common clause in a real estate transaction, they do have their benefits for both buyers and sellers, depending on the specific terms of the agreement. For example, a post possession agreement gives sellers’ additional time to vacate the property. On the seller side of the transaction, the seller benefits from being able to add more time to their departure or to be able to stay on longer than their tenancies. A post possession agreement allows sellers to have additional time to plan a move. Since the possession of a house is one of the first steps in moving to a new area or completely relocating, people can often find themselves unprepared for how quick they must vacate and move elsewhere. Even when someone plans a move, things don’t always go as planned, so having a post possession agreement gives sellers a back up plan. On the other side of the transaction, a post possession agreement also provides additional protection for the seller. Without a post possession agreement, the seller would instantly be liable for the property if something goes wrong after the actual possession date. The post possession agreement also benefits the buyer by providing certainty. The buyer’s money is protected even during the period of post possession, because the agreement covers them in the event of any property damage. While there is a small risk that the buyer could develop an emotional attachment to the house before the seller vacates, there are counter measures to avoid the problem. Real estate is full of risks, but by having a post possession agreement in place, both buyers and sellers can feel more secure in their investment and transition to home ownership.
Potential drawbacks and concerns
The post possession agreement can be a pitfall for the unwary. After all, if the buyer is not going to move in immediately upon closing, there are few things more damaging to a sale and potentially more dangerous for a buyer than the buyer’s property being damaged (or even destroyed) when the buyer is not occupying it. What happens if the house is flooded and under water? Who takes care of that? What happens if a known termite infestation causes hidden damage in the property after closing? Is the seller responsible for fixing it? What if the buyer moves in on the post possession date and does not hear the tankless water heater constantly running? Spills some bleach on the hardwood floors? Fails to clean the air conditioning air filter? Electrocutes himself or herself from a frayed wire? Can the seller be sued over that? It’s worse than we have drawn out here. Even selecting the wrong indemnity language (for example, one that simply identifies the buyer and the seller), can leave the seller without appropriate recourse. Moreover, the fact that the parties sign the post possession agreement before closing does not prevent a court from holding that the agreement is part of the purchase contract and mandatorily requiring the buyer to comply with the terms as a buyer in breach.
To ameliorate the risk, post possession agreements are heavily negotiated on both sides. The buyer may wish to require the seller to conduct regular inspections of the property (perhaps weekly) to ensure that the property is being properly maintained. Also, the buyer may wish to require the seller to bring any issues to the buyer’s attention. Conversely, the seller may raise concerns regarding access to the property (especially in respect to regular inspections). Perhaps the seller simply wishes to hand over a set of keys and allow the buyer to move in rather than moving out of the property before closing.
Buyers should also consider whether they have adequate insurance to cover this situation, especially if the buyer will continue to occupy the premises after closing. It can be difficult to find coverage if an accident occurs after closing, so the buyer should check with the buyer’s insurance carrier before closing.
How to draft a post possession agreement
In most cases, the buyer is taking possession beyond the closing date. As such, the purchase agreement must be opened up for negotiation of the terms that are going to apply for the buyers continued possession. The timing of this can be sensitive, but it’s very important that it happens. There are buyer’s who just want to go under contract and close, assuming that everything will work out after closing that is why they are okay to sign an "As-Is" addendum. However, agents should try to discourage this practice because, at a minimum, you need an agreement to determine the expectation of the parties for the possession process and time frame. This should be created and signed off on by each party prior to the buyer’s possession and, if ordered by either party, can be made part of the closing documents .
The post possession agreement should specify but not be limited to: the initial term of the buyers continued possession, any amounts due to be paid by the buyers to the sellers, allocation of risk and responsibility, as well as limitations on liability, and back-up remedies in the event that either party breaches the agreement. This agreement also needs to be signed off on by each party and initialed on all pages to show they have read it. Buyers, who are buying with cash or sub financing, are generally willing to negotiate these agreements at this stage as long as the property is in good shape, but if they really want to get into the house, they may object to your negotiation so make sure to include them in the discussions so they are not taken by surprise.
Legal considerations and state-specific differences
The decision to grant a post possession agreement, and the rules set forth therein, can have a dramatic impact on the rights of the parties, or in some instances even the rights of third parties. The licensee should be able to discuss these issues with a real estate attorney, or even an attorney for their state’s real estate commission. Certainly the Realtor should understand the issues and concerns surrounding these agreements.
Every state has different rules regarding the use of post possession agreements or licensee advice on those agreements. While there will always be local law nuances to deal with, some key issues remain relatively constant throughout the U.S. Although one should never overlook the local law rules, as discussed below, I will give a brief overview of some general issues.
In many states, when one party gives another post possession to occupy property, they are actually granting a "license" to do so. And much like a hotel guest, the right of that party to occupy the premises is contingent on the wishes of the owner, and can be revoked. Many post possession agreements are drafted as "leases" instead of "licenses", which could create confusing results. A license is typically terminable at will, while a lease will usually have a stated period or limitations.
Perhaps one of the most important items to be considered, and not often discussed, is the impact of the financing and sale closing times. In many cases, the loan underwriting process requires for the lender to have paperwork closing as much as a week before the property actually sells. As typical buyers do not usually move for several weeks after the sale closes, the sellers (who may have already moved out) could be stuck without the home for a period of time. On the other side, the buyer may also want to transfer their utilities without having to worry, or be subject to, legal liability. These concerns and others can make it much easier and cost effective for both parties to agree to a post possession arrangement to cover one or both of these situations.
Once cleared with the clients, the Realtor should review any post possession agreement with the lender to make sure it is acceptable. Most lenders do not allow post possession agreements, but some do. Again, getting the lender clear early on, can save a lot of headaches.
As you can see, there are many issues to consider with post possession agreements that should absolutely be cleared with a real estate attorney. But especially when the agreement is being used to protect the parties or third parties, it is the duty of the real estate agent to obtain the legal advice that clients may not otherwise seek. Any attempt to do so without the appropriate legal representation could violate your state license law, and certainly put you at risk for a potential lawsuit.
Real-world examples and case law
In a recent transaction north of the city, my clients found a beautiful home that had sat on the market for several months. Although there were multiple offers in its early days on the market, the owners decided to take their house off the market in the dead of summer and relist in September when everyone returned from summer holidays. After much time making cosmetic updates and changes to get the home ready for market, it was burnt out. The owners wrote a letter to potential buyers stating they felt discouraged from listing their home earlier in the year due to the reverberations of the interest rate hike earlier that summer and preferred to list later in the year when the inventory dropped and people returned after vacations.
Arranging the financing for my clients was a challenge as their timeline to completion was short – they required an August closing instead of September. Their families helped them with the hefty down payment for the house, but my clients were still short for the closing and asked if they could arrange for a delayed possession. In return, the sellers agreed to delay their possession and I drafted a fairly straightforward post possession agreement. Although the sellers vacated the home at the end of August, the agreement stated that they would owe the buyers $XXX per day after August 31, 2016, as a form of compensation for charging the sellers’ principal mortgage account for the year, instead of the buyers. This was a simple and straightforward way for the parties to balance their needs and goals.
A similar example occurred recently with another transaction where the buyers were purchasing their first home. Wanting to take possession of the home immediately and move in , the sellers were basically unmovable so a post possession agreement was drafted. This agreement outlined the right to the property and included the obligation for the sellers to either remove the contents of the home and provide a receipt to the buyers for them to claim on their taxes or reimburse the buyers for the amount paid to the garbage hauler once estimated. The draw for the buyers was to avoid hoteling it with two dogs, all of their possessions and no place to go when moving.
While definitely not the norm, a couple of examples can be found of more complicated scenarios, including one where an offer was placed which included a very specific closing date to a few days. Upon acceptance, it became clear that the seller had to delay their closing a few days. Because the buyers’ agent had not read the fine print, it took a few hours to have the agreement amended to extend the closing, and the stress levels were running at a high point.
A strategic offer is critical for timing closings – rather than saying that the closing dates are flexible, the buyers must consider stipulating that if the seller cannot close on the specified date, the seller agrees to provide future rents (rather than a daily fee simple approach). In cases where access to the property is critical, surety bonds may also be required to mitigate the risk of a delayed possession or closing. Substantial deposits are also crucial for the further protection of the buyer.
The use of post possession agreements in real estate transactions is a strategy that can be used to prevent numerous issues from arising – however, it is a technique that is increasingly becoming common, and the issues that have arisen in the past are predictable. Title insurance is another tool that may be used in these scenarios, and that can be relied upon to mitigate many of the risks both sellers and buyers are exposed to.