Defining a Post Closing Occupancy Agreement
Post Closing Occupancy Agreements, or PCOAs as they are called by the industry, are an indispensable tool in the arsenal of any realtor or real estate lawyer. They allow a transaction that might otherwise have fallen apart to close, while postponing the inevitable transfer of possession and key. Realtors involved in the negotiation of the transaction must be mindful of the unique term and price being negotiated, as well as other terms that could pose a risk to the success of the deal. The Buyer need not worry that they will wind up in an empty home with no recourse against the Seller. If, however, the Buyer is not represented by a lawyer, they are assuming the full risk that comes with the ambiguity of either wording in the agreement or collateral issues arising after the agreement was signed.
But first, what is a PCOA? It is a special form of an Agreement Of Purchase and Sale (APS) where the Seller remains in possession of the property long after the Client is required to pay for the property and take key. As the name suggests, the agreement occurs post-closing, meaning the parties have already exchanged their consideration and the Buyer has paid the Sale Price or at least posted a sizable deposit. The Seller is moving out and the Buyer is moving in , but over the span of days, weeks or months, the Seller has agreed to allow them to do so. Aside from the rent, which as set out in the PCOA, the key issue to keep in mind is that prior to closing, the Buyer and Seller are still considered Vendor and Purchaser in respect of the abode and the legal protections afforded to them. Any issues that arise post-closing, whether it is an accident, a leak, missing appliances or something else entirely, the Buyer cannot go after the Seller as the Buyer thinks the Seller is now a tenant. First, they were never a tenant, not in the way one is using the abode, as per the PPSA the Seller remains a Vendor. Second, even if we treat the Seller as a Tenancy, the Tenant cannot be held responsible for issues that arose prior to the start of the Tenancy. Third and finally, assuming the Seller was a Tenant, the Buyer is responsible for the acts of his guests, e.g. his dog, though the Rent is not a controlling factor in this situation because it will remain a Vendor/Purchaser relationship till the Tenant moves out and the lease receives the fixity of tenure.
Essential Elements of a Post Closing Occupancy Agreement
Post closing occupancy agreements are governed by the same principles that govern the intent of the parties. As such, the post closing occupancy agreement can take any form, as long as both the buyer and seller agree on details such as terms of occupancy, financial arrangements and responsibilities of the parties. The fundamental terms of any occupancy agreement include: a. Closing Date: The day that title to the property is transferred from the seller to the buyer. b. Possession Date: The day when the seller vacates the property and gives up possession to the buyer. c. The Nitty-Gritty: The agreement for the dates above must include the provision of all utilities associated with the property and who will pay those utilities until closing, as well as the continuing responsibility for items often overlooked such as the grass cutting, rubbish removal and taxes. While these are the basic components of any post closing occupancy agreement, it is suggested that the parties consider whether payment of the occupancy fee (if any) should be a fixed sum, or instead be equal to the pro rata portion of the monthly taxes, maintenance and common element fees.
Benefits for the Purchaser and the Vendor
Generally, buyers who present a smooth and seamless transaction to a seller may be viewed more favourably as it relates to closing dates and other removals of conditions which may not be as favourable to the seller. As well, sellers may be more inclined to allow the buyer to occupy if the moving date for the buyer is within a reasonable amount of time. Because the buyer will not be required to vacate the premises at closing, this may allow the buyer to negotiate an earlier occupancy date than what would otherwise be offered in the offer to purchase.
In some instances, a populated house can provide a buyer with a great deal of flexibility. If the buyer has capacity to move earlier they can, while still requiring the seller to close at the same time and not demand possession until a later date. Especially when buying a second home, it may be possible for a buyer to move furniture, pictures and other items of sentimental value on an earlier date to the benefit of everyone.
From the seller’s perspective, a post closing occupancy agreement may allow for a seller to mitigate risk with the home being closed on winter months and demand for heating and maintenance on site to avoid freezing pipes, needed maintenance and additional utilities. In the summer, sellers have the benefit of having the home accessible allowing for continued maintenance and less need for the inconvenience of requesting access from a tenant, especially where there are serious repairs due (ie roof, electrical, plumbing).
Both buyers and sellers can benefit from post closing occupancy in many ways. Arguably the most important advantage is that this provides both parties with more flexibility and control with moving dates, to their respective advantages.
Typical Issues and Solutions
Fortunately, because post closing occupancy agreements are so common, many of these potential issues can be addressed completely in the agreement itself.
The most common problem in this scenario is adverse possession claims for the land. While an occupant may have physical possession of land, he or she usually does not have legal title to that land. But, somehow, the occupant must hold the land adversely to the owner for at least ten years. Because a post closing occupant satisfies the "continuous" requirement with respect to possession, it may be possible for a post closing occupant to claim some kind of adverse possession. Can the post closing occupant obtain title to a sliver of land right at the end of ten years? Yes, based on logical reasoning, there is no legal obstacle to that occurring. But does that actually happen? Not exactly.
Requiring a deed as a possible solution is a strange one because the parties’ agreement is condoning that type of operation in their transaction. The occupant already has the benefit of the "possession." Even if the occupant has the requisite domination of the land, is it right to say that the occupant has the requisite exclusivity of possession? That’s an issue that must be answered by looking into the intent between the parties in their unique context. And that is why serves as a warning. The existence of adverse possession will always be a possibility, even when you least expect it, and that possibility is exacerbated when it comes to post closing occupancy not expressly stating in its clause that the occupant will be paying for its benefit in the form of rent and not working as a belligerent title objector. The parties must agree to certain parameters if they want to address the potential adverse possession and, ultimately, confirm the occupant’s tenancy.
These incidents are almost always resolved with an amendment or some other forms of documentation that will clearly set out both parties’ intentions with respect to the property.
Another common problem that can arise from the operation of a post closing occupancy agreement is with respect to the occupant’s ability to recover expenditures that it has incurred. But again, the risks of an occupant having ongoing involvement with the property are acknowledged from the time the parties finalize their agreement to any kind of ongoing liability, and the parties usually attempt to resolve all of these problems while they are drafting their agreement.
What’s actually an issue is the timing of the cost recovery. The risk on the purchaser’s side is that the purchaser may not be able to recover his costs until the occupant vacates the property. But, in such a situation, the occupant often will need to expedite its right to possession of the property so as to be granted the necessary recovery. An occupant without all the facts may never find out that he lost that right. In other words, the parties are probably not going to have explicit negotiating power when addressing that issue.
But, again, these issues are not unique to post closing occupancy agreements and the parties are usually able to craft a special termination or an explicit approach in the agreement itself that makes the process easier to address, as needed.
Some corner cases occur when one party believes that a transaction is over and then realizes that there was some extra work that he or she had not finished yet. There is a very real risk that the occupant comes back, perhaps after a whole change of ownership of the building, and exercises its right to the property.
In many cases, an occupant will use a betterment of the property in order to reckon itself a contractual obligation. But the occupant can also be sued for any processing that has taken place after the transfer. And in a case where a post-closing occupant is claiming an enhanced right to the property, it is important to know the law about post-grant improvements from a risk-averse perspective. A good way to manage this risk is through an equity stipulation that gives an occupant a fair amount to offset its claims and gives the purchaser a certainty that no additional requests for consideration will be raised.
Legal Matters
When drafting and entering into a post closing occupancy agreement the following legal aspects should be considered:
1. Legal Process
Post closing occupancy agreements, fall under the general category of residential leases found in the Act. The Residential Tenancies Act (RTA) is the statute that governs most residential leases in Ontario. It sets out landlord and tenant rights and obligations, how to resolve disputes and the process for bringing an action before the Landlord and Tenant Board. Where a post closing occupancy agreement meets the definition of a residential lease it will be subject to the RTA including the commencement and termination dates as well as the legal obligations of both tenant and landlord. Certain provisions in the RTA however do not apply to a post closing occupancy agreement since they are unique to a residential lease. These provisions are set out in more detail below.
2. Right to Quiet Enjoyment
The right to quiet enjoyment is a tenant’s basic legal right to enjoy their rental premises free from unreasonable interference from the landlord or other persons. This right occurs regardless of whether there is a specific provision in the lease granting a right to quiet enjoyment and regardless of how long the tenancy is intended to last. If a landlord or other tenant interferes with the tenant’s enjoyment then the tenant may be entitled to reduce his/her rent or even terminate the lease. For example, if the landlord enters an occupant’s property without proper notice to the occupant this could be interpreted as an interference with the tenant’s right to peaceful enjoyment of the premises. Where an occupant applies to the LTB requesting that the landlord cease his conduct the LTB may order that the landlord cease and refrain from interfering.
3. Tenant Notice of Termination
Under the RTA a residential tenancy has a fixed term , such as one year from the date the lease was entered into, unless it is specifically written to be a periodic tenancy where the expiry date is not predetermined. The lease can specify a longer fixed term or it can be set for the life of the purchaser (occupant).
If there is no termination date specified in the lease this means that the tenant may stay for an indefinite time provided that he/she continues to pay the rent. The occupant is not required to give notice to terminate the contract. He/she may simply remain in the property indefinitely until the occupant dies. In such a case, the transfer of title to the purchaser creates a less than desirable outcome because the purchaser cannot get possession of the unit until the occupant dies.
4. Unsolicited Payments By the Tenant
The RTA states that if an occupant pays rent to a landlord who is not entitled to collect the rent the landlord must return any money paid and the occupant is entitled to any benefit resulting from payment of money.
It is necessary then for the occupant to know who is entitled to collect rent for the premises. In most cases, the occupancy agreement will set out the person or entity collecting rent, however, some regulations may not be clear on this. For example, a purchaser who is entitled to receive rent but does not collect it contrary to the terms of the post closing occupancy agreement may be in breach of the agreement. Therefore, it is advisable that the agreement identify the person who is entitled to collect rent for the unit so as to avoid disputes.
Crafting a Post Closing Occupancy Agreement
When drafting a post closing occupancy agreement, consider the specific situation of both the vendor and the purchaser. For example, if the purchaser is planning on continued use of the property for commercial purposes, the occupancy agreement should accommodate this. The parties may also want to reword or replace sections of the standard Real Estate Council of Ontario Residential Purchase and Sale Agreement (the "Agreement") to suit their needs.
In addition to completing the fillable blanks in the Agreement, the parties may wish to replace certain definitions in Schedule "A". For instance, the Agreement defines the closing date as being the day on which vacant possession must be given. In the case of a residential home, this is typically midday so that the vendor’s interest in the home will cease by the time the purchaser takes possession. If, however, the property was last used as a commercial retail space and the purchaser wants to take over the management of the store at 9:00 AM on the closing date, the timing in the Agreement should be amended to reflect this.
It is also important to reflect in writing the intention of the parties in respect to the duration of the occupancy. A standard schedule provides that a purchaser is entitled to occupy the home for 60 days if the closing date is in the months of December to February; for 90 days in the months of March to May; and for 120 days in all other months. It is common practice for this schedule provision to be included in the draft of a real estate purchase agreement or in an amendment to the Agreement once it’s been initially reviewed and agreed upon by the vendor and purchaser. Depending on the circumstances, the time between the parties’ use of the Agreement and its final approval by both sides could be several weeks, or even months.
The parties will also want to negotiate and consider the payment of outstanding taxes. The draft should explicitly mention who is responsible for determining whether property taxes have already been paid, and the amount that remains outstanding at the time of occupancy. The Agreement should also be explicit about when the final payment is due, for example 15 days after the written closing date.
Finally, as is true of all agreements, a post closing occupancy agreement is enforceable so long as it follows a valid offer and acceptance. The agreement is the result of a mutual intention to enter into a post closing occupancy agreement. The vendor and the purchaser, though they do sometimes require assistance, are under no obligation to use a real estate agent, meaning they can agree to the terms of the agreement themselves. They must simply be careful to document the four elements of a contract: offer, acceptance, consideration, and capacity.
Examples and Case Law
In this section, we present case studies and real world examples of the successful use of post closing occupancy agreements. These vignettes aim to illustrate situations where such agreements were used to beneficial effect for both the vendor and purchaser and highlight the lessons gleaned and best practices.
Case Study 1 – Residential Resale
The largest undertaking of any individual in their lifetime is likely the purchase of their family home. For virtually all home buyers, that daunting task involves arranging for a mortgage, insurance, the sale of an existing home if necessary and other arrangements such as children’s school enrollment. The listing agent for the property intended to vacate on closing date scheduled appointments. A day of appointments was agreed to by both agents. Despite everything apparently going well, it was discovered by the listing agent from one of the appointments, that the property was still occupied by the vendors although they had received a prior assurance that the property was vacant. The listing agent advised the purchaser’s agent who in turn contacted the seller’s agent who assured the purchaser’s agent that the possession date would be adhered to. The purchaser obtained a mortgage for the closing date and arranged for all of the insurance. The purchaser’s children had appointments to be enrolled in school that day. All of the commitments made to the purchaser were subject to the assumption that the property would be vacant as of the closing date. The property closure was scheduled for the final day of the month so that the purchasers would be required to pay one more month of rent on their existing apartment creating a mental picture of the difficulty of moving if the new property was not vacant. Arrangements were immediately made to have the occupant vacate the property as quickly as possible but there was a significant personal impediment for the occupant. The lesson learned: never accept an alleged vacancy without proof. If an existing tenant or another occupant was not providing proof of vacation, then the purchaser should be prepared to take legal action against the builder, builder’s sales representative, lawyer and/or listing and/or re-listing brokerage for damages/costs arising from the occupancy. From the very beginning it should be made clear to all real estate practitioners involved , including those representing the developer and the listing agency, that the property is being sold on a vacant possession basis. They should then clearly advertise it on all listings, MLS and other marketing that it is vacant on closing unless otherwise stated, so that no one will advise that there was no intent to guarantee that it would be vacant. If necessary, include a penalty by way of liquidated damages should it not be vacant on closing.
Case Study 2 – New Home Purchaser
Without going into the details of the transaction, a large family needed to secure a new home on a reasonable purchase price with a specific closing date to allow for the old home to close. Without any idea of where to turn, they went to the local builder’s sales office and produced a builder’s purchase agreement for a new home. The timing for the new home was tight; the builder agreed to accommodate the family’s closing date. However, the builder’s lawyer (the same one involved in the new transaction) insisted on a small deposit increase to cover interest costs on a short term construction loan. Being a reasonable requirement, the family was forced to increase their cash outlay to the price level. It was not understood at the time that the vacant land was being packaged as a pre-construction residential development and exempt from Harmonized Sales Tax. The builder’s lawyer did not catch this and simply charged the sales tax onto the tab. Suffice it to say, that without prior tax advice, the purchaser family entered into the new home occupancy awaiting the sales tax assessment only to find out that it would come due two weeks before Christmas, four months after the closing date and the youngest child’s birthday during a traditional vacation week. The lesson learned: always insist on a complete review of the binder agreements to assure that it is truly vacant land and, where necessary, obtain independent legal and tax advice that incorporates full consideration of HST. As with case study 2, at the builder’s sales office involvement, ask detailed questions, in writing if possible, and request documentation of how the land is zoned to be compliant including references to any exemption provided by its HST application.