Q: I am representing a Seller of a single-family home that is tenant occupied; the tenant has been on a month-to-month tenancy. The Buyer’s offer specified that the Seller had to deliver the Property vacant at Close of Escrow and the Seller accepted that offer believing that the tenant would be out in time. The Seller knows the tenant very well; he trusted her when she said that she would be out long before escrow was scheduled to close because she was leaving California for a job transfer. The Seller did not even bother to give the tenant notice to vacate. Two weeks before the scheduled close, the tenant told the Seller that her job transfer had fallen through and she would not be moving out.
In a panic, Seller asked me to contact the Buyers’ Agent to see if the Buyer would agree to cancel the Purchase Agreement for a fee paid by Seller. The Buyer flatly refused stating that they wanted THIS home. I then advised my Seller to contact his qualified California real estate attorney who advised that she did not see a way for my Seller to cancel. The Seller is mad at me for allowing this to happen. What could I have done differently?
A: As your story demonstrates, it is exceedingly dangerous for a Seller to agree to deliver a tenant-occupied property vacant at COE. A tenant’s statement that they will vacate is not binding and, given the various Federal, state and local limitations (especially those related to COVID), it is very difficult, to evict a tenant. Even when there is a legitimate basis to evict a tenant, the amount of time that it takes to get the tenant out is generally longer than the amount of time that the Parties agree to close escrow.
See, for example, Weekly Practice Tip: “Notices to Tenants” dated July 24, 2020
When a property is sold, the Buyer takes the home subject to tenant’s rights. Then, at the Close of Escrow, the Tenant’s lease/rental status does not change except who is to receive the rent payments.
PURCHASE AGREEMENTS AND RELATED FORMS:
CAR FORMS: The default position on all residential purchase agreement forms is that the Property is to be delivered vacant at COE. For example, the CAR RPA provides for possession delivered vacant unless the “Tenant Occupied” property is checked and the Tenant in Possession form (“TIP”) is attached.
However, when the 2021 revision of the RPA is released for use in December 2021, there will be a new “Tenant Occupied Property Addendum” form (“TOPA”) which, when it is available, will specify that tenant-occupied properties may not be able to be vacant and details the ability of either Buyer or Seller to cancel. Paragraph 1.B(2) states:
“If Seller, after exercise of good faith attempts and subject to applicable Law, is unable to remove existing Tenant(s) by Close of Escrow (or □ 5 Days Before COE): (i) either Buyer or Seller may cancel this Agreement; (ii) Buyer’s sole remedy shall be return of deposit(s) and Buyer’s reasonable out-of-pocket expenses; and (iii) Buyer waives any claim for other damages or compensation.”
In addition, the new TOPA form in paragraph 2 entitled “Tenant Remaining in Possession Additional Terms” contains extensive additional terms regarding how the Buyer and Seller will handle various issues, including unearned rent and delinquencies if the Tenant is remaining in the Property after COE.
The CAR “Residential Income Purchase Agreement” (form RIPA on zipForms) has similar language regarding the tenants in possession.
PRACTICE TIPS
Buyer’s Agents:
- If the Buyer intends to occupy the property at Close of Escrow, especially property currently tenant occupied, be sure that the Purchase Agreement is prepared to clearly state that possession is to be delivered to Buyer at COE, or an alternative specified time as specified on the proper form.
Seller’s Agents:
- If listing Property that is tenant occupied and an offer is received from a Buyer requiring Seller to deliver the Property vacant at COE, advise Seller of the risks in agreeing to such a term even if the Tenants have advised Seller that they intend to vacate prior to COE. Point out that if, for any reason, the Tenants do not vacate by COE, Seller may be in breach of their contractual obligations and could suffer financial damages to Buyer depending upon all of the agreed-upon terms. Recommend that Seller consider issuing a Counter Offer making possession at COE subject to Tenant’s Rights and preferably use the new TOPA form when it is available.
- If Seller decides to agree to deliver the property vacant at the close of escrow, contrary to your recommendation, document your file that the Seller has chosen to proceed against your advice.
See Weekly Practice Tip: “How to Handle Clients Who Will Not Follow Advice” 11/16/2018
All Agents:
- Agents who are listing or selling tenant-occupied Property should have their clients (whether the Seller or the Buyer) review all transaction documents with their own local Landlord-Tenant Attorney before signing a real estate purchase agreement that includes a provision the Property must be vacant at any time, either on or after the Close of Escrow.
- Because of complex landlord-tenant legal issues, the ONLY advice an Agent should give to any Landlord, Seller or Buyer regarding any landlord-tenant issue, including whether the Tenant can be evicted, is that the client should immediately consult with their own local Landlord-Tenant 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 05/28/21