Q: We recently settled a post-close of escrow claim with our Buyer. The Seller’s Agent had said to me on the phone that the “Seller will agree to pay $500 for each day the Seller continues to reside in the house after escrow closes for up to five days,” so I wrote that exact phrase into our Offer. The Seller moved out of the Property the day escrow closed, but he left most of his possessions in the Property for three days. The Buyer was also upset that there was some minor damage to the property caused by the Seller’s movers, but they could not prove whether the scratches on the hardwood floor existed before or after escrow closed.
The Seller refused to pay the Buyer anything claiming that the language in the Offer said “resides” in the Property and nothing about the Seller paying for leaving possessions behind; the Seller also claimed that the scratches had been there when the Buyer made the Offer.
The Buyer went to a qualified California real estate attorney who said that the language I had inserted was ambiguous and would be construed against the Buyer (i.e., the Seller would win). Worse, that attorney pointed out that the CAR contract form required that the Parties use a separate agreement form (the “Seller in Possession” form) which was not done and would have properly handled the issue. The attorney felt that there was never a real “meeting of the minds” on several key issues. The Buyer’s attorney also said that I was at fault for writing the bad language into the Offer and I did not recommend that the Buyer conduct a final verification prior to the close and to take photographs of the Property condition at that time.
It would have been difficult, if not impossible, to prove that I had merely used the language suggested by the Listing Agent, so my Broker agreed to pay the Buyer $1,500.00.
I realize that I should have done a better job, but I need help in explaining the various issues to my clients, whether they are Buyers or Sellers. What should I be telling my clients about this topic? Can you provide me with an Advisory that explains why the Parties need to sign a separate agreement and the other issues that they need to consider?
A: The terminology that is often created by real estate Agents in an Offer or Counter Offer regarding Seller retaining possession is often not very precise and can lead to the types of problems such as what you have described above. More importantly, the standard contract forms require use of a separate agreement if the date that possession of the Property is to be delivered to the Buyer is later than the date the escrow closes. Failing to use the right, separate agreement can create liability exposure for the real estate licensees.
Buyers and Sellers need to be warned that the ultimate decision regarding the number of days that the Seller is to retain possession can have an impact on issues such as (1) whether or not a landlord-tenant relationship has been created; (2) whether the Buyer’s lender will agree to that amount of time with the type of loan that the Buyer is securing and (3) the availability of homeowner’s insurance coverage for both the Buyer and Seller during the period of time that the Seller retains possession. All of these issues should be investigated before the Parties agree to the specific terms of the post-close of escrow possession agreement.
The best practice is to have the Buyer conduct a verification of the final condition of the Property prior to the close of escrow (during the time specified in the purchase agreement) and the Buyer should be encouraged to repeat that process just before the Seller delivers possession of the Property to the Buyer.
One of the best ways to document the Property’s condition during these two property condition verifications is to carefully photograph all of the surfaces inside of the structure(s) and as much of the outside of the structure as possible.
PRACTICE TIPS:
- Buyers and Sellers need to be apprised of all of the relevant issues that they need to investigate prior to agreeing that the Seller is to retain possession beyond the date that escrow closes.
- Buyers should be encouraged, in writing, by their Agents to conduct the final verification of Property condition as specified in the Purchase Agreement prior to the close of escrow and again before the Seller delivers possession to the Buyer.
- The easiest and most effective way to document that the clients have been provided with all of the necessary warnings to investigate the relevant issues and to take the appropriate actions, is for Agents to provide their Clients with the Advisory which follows this Tip entitled:
SELLER AND BUYER ADVISORY REGARDING SELLER IN POSSESSION AFTER COE
- Seller’s Agents: The attached Advisory should be provided to Sellers before reviewing any offers to enable the Seller to discuss the concept of the Seller retaining possession with the Seller’s insurance broker as well as the Seller’s own attorney.
- Buyer’s Agents: The attached Advisory should be provided to Buyers before drafting any offers to enable the Buyer to discuss the concept of the Seller retaining possession with the Buyer’s lender, insurance broker as well as the Buyer’s own attorney.
ATTORNEY-CLIENT PRIVILEGED COMMUNICATION: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is for the exclusive use of clients of Broker Risk Management and their agents. It may not be reproduced or distributed without the express written consent of Broker Risk Management. The advice and recommendations contained herein are not necessarily indicative of standards of care in the industry, but rather are intended to suggest good risk management practices.
© Copyright Broker Risk Management 2021 10/29/21
SELLER AND BUYER ADVISORY REGARDING SELLER IN POSSESSION AFTER COE
This Advisory is intended for use by Sellers and Buyers if it is agreed that Seller will remain in possession of the Property after the Close of Escrow (“COE”). If Seller is to retain possession of the Property after the COE, the Parties need a written agreement specifying all of the details of that arrangement. A simple statement in the Purchase Agreement, such as “Seller shall remain in possession after COE for __ days” does not address all of the various issues that should be included in the Agreement between the Seller and Buyer. The following are some of the issues that Seller and Buyer should consider:
- SELLER RETAINING POSSESSION AGREEMENT FORMS: The CAR Purchase Agreement (Form “RPA”) provides that the “Seller License to Remain in Possession Addendum” (Form “SIP”) is to be used for a Seller remaining in possession for up to a maximum of 29 days after the COE. However, if the Seller is to remain in possession for a period of time longer than 29 days, the RPA specifies that the Residential Lease after Sale (Form “RLAS”) is to be used. See paragraph 2.B of the RLAS regarding Buyer’s potential lender issues.
Other Seller Retaining Possession Agreement forms exist, such as:
A. The San Francisco Association of REALTORS® has its own “Seller License to Use the Property after COE – Addendum” for use for “29 or ___Days” thus indicating acceptable use for a period of time that is either less than or greater than 29 days.
B. PRDS also has its “PRDS Seller Occupancy After Sale Addendum” which does not have a specific limitation on the number of days that the Seller can retain possession after the COE and leaves it up to the Seller and Buyer to negotiate the specific length of time.
- TIMING ISSUES:
A. Number of Days: The written agreement should be clear as to the number of days that the Seller will remain in possession after COE. If that time frame is not specific, there may be confusion as to the rights of Seller and Buyer. Buyer and Seller should understand the following:
(1) 30 Days or More: If Seller is going to retain possession for 30 days or more, both Buyer and Seller should consult with a local landlord-tenant attorney for advice; it may be argued that a periodic tenancy (i.e., month-to-month) has been created, whereby a landlord-tenant relationship may be created. This is particularly important in rent-controlled communities.
(2) “Up To:” If the proposal is for an “up to” timeframe (e.g., “up to 21 days”), this may indicate that the Seller may terminate Seller’s possession prior to the maximum date. Buyer should consider whether Seller must provide some form of advance notice if Seller terminates the agreed-upon possession period earlier and whether or not the early termination of the Seller’s possession changes the agreed-upon consideration for that possession.
B. Buyer’s Lender: Buyers should be aware that many lenders who provide owner-occupant loans have limitations on how long a Seller can remain in possession after COE; if the lenders’ limit is exceeded, the lender may consider it to be a non-owner-occupant loan, with less favorable terms. A common limitation imposed by Buyers’ lender is 60 days after COE, but Buyers are urged to discuss this potential limitation with their own lender prior to entering into a Seller in Possession agreement.
- DEPOSIT: Buyers often want to have some form of a “security deposit” in the event that Seller damages the property after COE or fails to vacate the premises as agreed. However, obtaining a deposit may create a landlord-tenant relationship and most escrow holders will not hold a deposit after COE. Therefore, the amount of any deposit, how it will be held post-COE and the propriety of even having a deposit should be discussed with Buyer’s local landlord-tenant attorney before agreeing to anything in writing.
- FINAL VERIFICATION OF CONDITION: The Final Verification of Condition provision in the CAR Residential Purchase Agreement (“RPA”) — often referred to as the “Final Walkthrough” — states that the Buyer has “the right,” but not the obligation, to “make a final verification of the Property” prior to the COE. It is “NOT” a contingency. The sole purpose of the final verification is for the Buyer to confirm that the Seller has complied with three specific contractual obligations:
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- The Property is maintained pursuant to the Condition of the Property paragraph;
- Repairs have been completed as agreed; and
- Seller has complied with Seller’s other obligations under the Agreement.
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Other standard residential purchase agreement forms (PRDS and SFAR) have comparable provisions.
When a Seller is remaining in possession after the COE, Buyer should conduct this final walkthrough just prior to the COE to determine the three items specified above as of that date. The Buyer should repeat that process when the Seller moves out. It is recommended that both Seller and Buyer photograph or video the Property to confirm its condition at both times.
IT IS THE RESONSIBILITY OF THE BUYER TO CONDUCT BOTH OF THE FINAL VERIFICATION INSPECTIONS. BUYER’S AGENTS ARE NOT PROPERTY MANAGERS AND ARE NOT AUTHORIZED TO MAKE THOSE INSPECTIONS ON BEHALF OF BUYER.
- INVESTIGATING INSURANCE COVERAGE AND OTHER ISSUES:
A. Seller: Seller should consult with Seller’s insurance broker regarding obtaining renter’s insurance and any other coverage that Seller may desire, with respect to: (a) loss or damage to Seller’s personal property and vehicles located on the premises; and (b) Seller’s liability for injury or damage to the person or property of guests or third parties while Seller retains possession of the Property.
B. Buyer: Buyer should consult with Buyer’s insurance broker to discuss obtaining adequate insurance coverage for the Property at COE and to confirm that the duration and other terms of the Agreement to allow the Seller to retain in possession will not trigger exclusions or other insurability consequences adverse to Buyer. Buyer is further advised to investigate with appropriate professionals any possible effect on taxes and/or mortgage as a result of Seller’s possessions of the Property after COE.
The undersigned acknowledge receipt of this 2-page Advisory:
Seller/Buyer: ____________________________________ Date: __________________
Seller/Buyer: ____________________________________ Date: __________________