A Brief Introduction About Early Occupancy Agreement
The agreement is an agreement wherein the seller of the property allows the buyer to occupy it or have its possession before the sale or escrow is officially or legally closed. In this type of agreement, the purchaser or buyer is willing to take possession of the property before its actual disbursement in return for the payment of rent during the pre-occupancy period.
The agreement is also known as a ‘Use and Occupy Agreement’ or a ‘Pre-Occupancy Agreement.’ In real-estate, early occupancy or pre-occupancy is considered as tricky and is usually avoided. However, in cases where the transaction is deemed necessary or fit, it is signed off with the help of a well-drafted and fully-vetted legal agreement signed by both parties i.e., the seller of the property and the buyer.
Who Takes the Early Occupancy Agreement- People Involved
The agreement involves the buyer or the purchaser of the property who is requesting early possession and a consenting seller as parties to it. The agreement is generally executed between the seller of the property and the buyer(s), as mentioned in the actual sale deed i.e., those involved in the property sale. Since the agreement is complex in nature, it may also involve seasoned real-estate attorneys from either side of the contract at the negotiation stage.
Purpose of an Early Occupancy Agreement
As the name suggests, the Agreement aims at allowing the buyer to take early possession of the property before the escrow is formally closed off. The purchasing party may request such possession owing to several reasons. For example, the buyer and his family may be staying in a hotel and may be unwilling to bear the heavy tariffs. Similarly, the property sale could be taking longer than expected owing to processing or transactional hiccups, thus causing inconvenience to the buyer. Regardless of the reason, the underlying purpose of the agreement is to provide the buyer with a hassle-free and temporary living place before the actual property sale is completed.
Contents of an Early Occupancy Agreement
The agreement should state the details of the occupancy in a well-structured manner. At the minimum, it should include the date and time when the occupancy begins and ends, the amount of rent or per diem to be paid by the buyer for the occupancy period, the buyer’s responsibility for utilities, and maintenance of the property and details on insurance coverage for both the seller and buyer. The agreement should also cover details around the reimbursements required to be paid by the buyer in case of damage or destruction to the property, and what happens in the event the sale transaction does not close on time, or at all.
How to Draft an Early Occupancy Agreement – Points to Consider While Preparing the Agreement
An Early Occupancy can be advantageous for both parties to the transaction as it allows the buyer early possession and grants the seller an opportunity to earn rent. However, pre-occupancies or interim occupancies could get tricky in some cases and hence need to be backed with a well-drafted agreement.
Typically, the interim occupancy agreement should be drafted such that it expires as soon as the sale is formally completed. This is to ensure that the seller retains no rights as a landlord and that the buyer has no obligations as a tenant. It is also important to cover in the agreement how and when the occupancy will be terminated in case the actual sale fails or cannot be performed. In most cases, the agreement is executed as an addendum to the purchase agreement. However, it can also be signed off as a standalone agreement that ties back to the main sale if the nature of the transaction so demands.
Negotiation Strategy
In extreme cases, buyers can work out an agreement as a condition of the purchase. This way, the seller is coaxed into allowing pre-occupancy without which the sale cannot be proceeded with or agreed upon. Similarly, sellers can charge a higher rent or premium as part of the early occupancy contract in order to benefit from it. It is advisable to involve an experienced attorney while drafting an early occupancy addendum or agreement.
Benefits and Drawbacks of an Early Occupancy Agreement
As mentioned earlier, an Early occupancy agreement carries certain advantages as well as risks. The agreement is beneficial for the buyer if he or she has no other place to put up during the intermix of sale or is required to bear the heavy tariffs of a hotel room. Similarly, a pre-occupancy saves the buyer from the expenses of moving in and out as they get to stay on the same premise, which they will eventually occupy after the closure of the sale. For the seller, an early occupancy is a boon as it provides him or her the opportunity to earn extra income in the interim of sale.
On the flip side, the transaction involves risks such as the buyer backing out from the sale transaction after having stayed in the property and experiences issues first hand. It could also mean an additional headache for the seller as he or she may have to deal with damages to the furniture or property or take responsibility for any accident caused thereon during the pre-occupancy period.
What Happens in Case of Violation of an Early Occupancy Agreement
Violation of the Agreement(1) could directly translate into the termination of the purchase agreement/property sale. In case the violation or breach is smaller in nature – as damage caused by the buyer to the property or furniture or default by the buyer in paying for the utilities, it can be settled by payment of a fine or otherwise.
The agreement is suitable in transactions when the buyer is trustworthy and requires a place to put up for a period not exceeding beyond 30 days. Similarly, it is more suitable in cases where the seller is not staying at the property and where the premise does not hold any furniture or other belongings of the seller. The Early Occupancy Agreement may be drafted as an addendum to the property purchase sale or as a standalone agreement that ties back to the main purchase agreement.