In Massachusetts, where I practice real estate law, lenders and developers often do not live up to their promises. That Unit which, for sure, is going to be ready by the end of the month, still has requires major finish work. “On my God, your loan got stuck in underwriting, and even though we issued a commitment and knew that you needed to close by January 29th, we just are not ready.” How many times have we all heard this and cringed, because our clients have no place to live and a truckload of furniture and furnishings are driving around somewhere in a moving van or storage facility, accruing daily charges at an alarming pace?
The solution to these, and many other problems, can be a well-drafted Use and Occupancy (“U and O”) Agreement. There are some caveats here:
1. You cannot utilize a Use and Occupancy Agreement if an occupancy permit for the dwelling has not issued. Living in a dwelling under with a C of O poses insurance, and even legal risks.
2. A Seller should NOT enter into a U and O if there is any real doubt that the delay with the lender is ministerial and not substantive. In other words, even though a U and O states that it is only a license to inhabit, and not a Lease, if the Buyer’s mortgage loan does not come through, the Seller may have to evict the Buyer from the dwelling, notwithstanding the language in the U and O.
3. Make sure the title to the premises is clear. I have had clients enter into longer-term U and O agreements, and then run into title problems when they were ready to close on the purchase.
4. Do a Walk-through of the dwelling before the Buyer takes occupancy. Normally, this walk-through will be the final inspection called for in the Purchase and Sale Agreement. Therefore, this will be the time to note, and deal with, conditions in the dwelling which do not comply with the terms of the Purchase and Sale Agreement.
Assuming all of the hurdles set forth above are not problems, I often draft U and O Agreements, which permit occupancy prior to closing. Among other things, these are the items which must be considered and included in a well drafted U and O Agreement:
1 Financial Terms. Normally the U and O licensee pays the principal, interest, tax and insurance for the dwelling. The Seller should be able to present evidence of all these items so there is no confusion.
2. Term of the U and O. That varies from deal to deal. It is important ,however, to provide for a large payment due from the Buyer should the Buyer “hold-over” after the agreed upon term. For example, if the U and O fee is $100 a day, after the term is over, it increases to $250 a day. This protects a “squatter” situation by the Buyer.
3. Escrow Held by an Attorney. This needs to be substantial (at least $2,500) to protect the Seller from a “holding-over” Buyer or physical damage done by a Buyer who does not close.
4. Other Terms. Payment of utilities is usually a Buyer requirement. Other items like condominium common area charges are similarly treated. It is important to set forth what standard of cleanliness is required at the termination of the U and O, if a sale is not completed.
At Topkins & Bevans, we do Use and Occupancy Agreements on a regular basis. We will soon be including some standard types of Use and Occupancy Agreements on our website, www.topkinsandbevans.com. Those of you who are in the business of buying and selling real estate should know about Use and Occupancy Agreements. They may be the “secret weapon” you can use to hold a wobbly deal together.