Prepossession and Post Possession agreements carry inherent risks and raise a variety of issues. However, there are times that a buyer would like to move into the property before close of escrow (prepossession) or the seller would like to stay in the property following close of escrow (post possession). For instance, the buyer’s lease may be terminating before close of escrow, or the seller may not be able move into their new home until after close of escrow. While these are situations that seemingly warrant prepossession or post possession of a property, both parties should be aware of the many issues that can arise in a prepossession or post possession. For that reason, Commissioner’s Rule R4-28-1101(K) provides that “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.”
Because of the issues involved with prepossession or post possession of a property, a buyer and seller should enter into a written agreement so as to ensure the parties’ rights and obligations are documented. Numerous times in the past, the Arizona Association of REALTORS® Risk Management Committee has considered requests to develop a “standard” prepossession and post possession agreement. However the committee has never approved the development of such a form due to the inherent risk and liability. Consequently, some brokers have developed prepossession or post possession agreement forms but many advise against the agreements altogether.
Typically, the seller is responsible for any damage to the property prior to close of escrow. However, in the event a buyer prepossesses the property, the buyer is now responsible. More specifically, the Purchase Contract at the “Seller Warranties” and “Risk of Loss” provisions provides that the seller is responsible only until close of escrow or possession, whichever is earlier. Accordingly, once the buyer prepossesses the property, the seller is no longer responsible for seller warranties or damage to the property because those obligations are terminated under the terms of the Purchase Contract.
If the buyer and seller opt to enter into a lease agreement for the prepossession, the parties’ rights and obligations during the tenancy are now governed by the Arizona Residential Landlord and Tenant Act (“ARLTA”). This can be problematic as ARLTA provides that the landlord is responsible for maintaining fit premises. A.R.S. §33-1324. In other words, under ARLTA, the landlord/seller is responsible to ensure that the electrical, plumbing, and heating/cooling are in good and safe working condition during the tenant’s tenancy. Thus, if the parties enter into a lease agreement, the seller is again responsible for the property despite the fact the seller has moved out and the home is now exclusively occupied by the buyer.
Due to the inherent conflict between ARLTA and the Purchase Contract, the buyer and seller should probably opt to enter into a prepossession agreement by way of an addendum rather than a lease. Significantly, if the parties make the prepossession agreement an addendum to the parties’ Purchase Contract, ARLTA should not apply. See A.R.S. § 33-1308.
Items the buyer and seller may want to address in a prepossession agreement are:
- Insurance: Who is responsible in the case of damage to the property? What damage is insured? The seller of the home should review their homeowners policy and confirm with their insurer whether a tenant in the property changes any of the terms of their policy. Additionally, the buyer may want to purchase renter’s insurance until the buyer legally owns the home.
- Walkthrough: Did the parties agree on the condition of the premises prior to the buyer’s prepossession (e.g. walk through inspection)? What if the buyer claims the property is not in substantially the same condition and requests additional items for the seller to correct?
- Repairs and Maintenance: Who is responsible for repairs? The parties should address who is responsible for any repairs and maintenance of the property during the prepossession. The parties may want to consider purchasing a home warranty that will cover the property prior to close of escrow.
- Occupancy Rights: Who will occupy the property? Are animals allowed? Is smoking allowed?
- Rental Payments: How much rent will be charged for the prepossession? Who pays the utility bills during the prepossession?
- Security Deposit: Will there be an additional security deposit in case the sale falls through and the property is damaged?
- Buyer Contingencies: What if there are contingencies that have not been met prior to the buyer’s prepossession? Have the parties decided to waive the contingencies or are they still in place therefore allowing the buyer to cancel the Purchase Contract if a contingency is not met?
- Alterations: What if the buyer moves in and begins to alter the property and later finds out they cannot purchase the property?
- Buyer’s Remorse/Failed Transaction: What happens if the sale is not completed? When does the buyer/tenant have to move out? What happens if the buyer/tenant refuses to move out?
Because the obligations in the Purchase Contract are fulfilled following close of escrow, the parties can choose to either enter into a lease agreement (which would be governed by ARLTA) or a post possession agreement. The decision of which type of agreement is appropriate may include a discussion of whether the post possession is for 3 days or 30 days. Regardless of which avenue the parties decide, the parties should be aware that the obligations to repair and maintain the property are no longer the seller’s responsibility; they are the buyer’s responsibility. Accordingly, at a minimum, the parties should address the following:
- Insurance – homeowners and renters: The buyer will most likely have a homeowners policy. The seller should purchase a renters policy.
- Property Condition: The condition of the property prior to tenancy should be well documented and agreed on by both parties (e.g. move in/move out inspection). The parties may further want to consider purchasing a home warranty.
- Term: The tenancy period should be determined. The parties should further discuss what happens if the seller needs to stay in the property for a longer or shorter period of time than the agreement states.
- Security Deposit: Will there be a security deposit in case the seller damages anything in the property during seller’s tenancy? If using a lease agreement, ARLTA provides that a landlord cannot charge more than 1.5 times the amount of one month’s rent. SeeR.S. §33-1321.
- Rental Payments: How much is rent? Will rent be prorated?
- Occupancy Rights: Who will occupy the property? Are there any animals? Is smoking permitted?
- Utilities: Who pays the utility bills?
Due to the risk and liability involved with prepossession and post possession of a property, the best practice is for the parties to not enter into a prepossession or post possession agreement. However, if the parties insist on entering into such an agreement, the real estate agent should consult with their broker and advise their client to seek appropriate counsel from insurance, legal, tax, and accounting professionals regarding the risks.
About the Authors: Arizona Association of REALTORS® (“AAR”) Chief Executive Officer K. Michelle Lind is an attorney, a State Bar of Arizona board certified real estate specialist, and the author of Arizona Real Estate: A Professional’s Guide to Law and Practice. AAR is the largest professional trade association in the state comprised of 40,000 members involved in the real estate industry, allied industries and firms.
Nikki J. Salgat, Esq. is associate counsel to the Arizona Association of REALTORS®. This article is of a general nature and reflects only the opinion of the author at the time it was drafted. It is not intended as definitive legal advice, and you should not act upon it without seeking independent legal counsel.