BROKER RISK MANAGEMENT
WEEKLY PRACTICE TIP
Broker Risk Management (“BRM”) has recently received a number of inquiries and requests for releases of liability regarding early occupation of a property by a buyer prior to the close of escrow. The occupation can range from moving items into the property to actual occupation by a buyer. There are significant risks to early occupation as explained herein. BRM discourages any form of early occupation of a property prior to the close of escrow. Please note the following examples.
SCENARIO NO. 1: I am a listing agent. A buyer asked if the buyer could move a refrigerator and other items into the property. The seller agreed. Subsequently, while moving items into the property, the buyer accidentally turned on the gas stove, igniting some of the buyer’s personal property. This caused a significant fire in the kitchen. The property is now uninhabitable. The buyers have declined to close the escrow. How should we proceed?
RESPONSE: The seller now has a significant issue. The seller will likely need to contact the seller’s insurance company to submit a claim. The insurance company may or may not cover the seller’s claim given that the cause of the damage was by a prospective buyer who has not closed escrow and does not have insurance. There is another issue regarding the treatment of the purchase agreement. Standard purchase agreement forms state that the seller must transfer title to the property in the same condition the property was in upon the execution of the purchase agreement, and the seller is no longer able to do that. However, the seller’s inability to transfer the property is due to the buyer’s negligence. Therefore, although the buyer cannot be compelled to purchase the property, the seller could sue the buyer for negligence. Whether the real estate agents have any liability will depend on the drafting of the early occupation agreement and whether the agents advised the parties of the risks of early occupation.
SCENARIO NO. 2: I am a listing agent. The sellers allowed the buyer to move some items into the property. Unfortunately, there was a robbery at the property and some of the items were stolen. How do we proceed?
RESPONSE: It is unlikely that the buyer has applicable insurance. While the seller can submit an insurance claim, it is uncertain whether the insurance company will cover given that the stolen items do not belong to the seller. The insurance company could take the position that the items belong to a “tenant” even though there is no lease agreement. Given that the seller’s insurance policy is likely an owner’s policy and not a landlord policy, it is unlikely that there is coverage. If the seller acted negligently, the seller could be liable to the buyer for the loss of property. For example, if the seller left the doors unlocked. Nevertheless, a legal dispute has now arisen between the buyer and the seller.
SCENARIO 3: I am the listing agent and the seller allowed the buyer to move in and occupy the property prior to the close of escrow. Buyer moved in and decided to have some friends over to celebrate their “new home” even though escrow had not close. One of the guests fell off the elevated deck and was injured. The guest’s attorney is alleging that the deck railing was defective and sues the seller and buyer. The seller is looking to me for advice. What should I do?
RESPONSE: First, you should immediately advise your broker, since your brokerage will likely be brought into any claim or litigation. Any claim for bodily injury is not covered by E&O insurance, so the broker should advise their civil general liability insurer of the claim. Then, advise the seller that you cannot give them legal advice and that seller must consult with their own qualified California real estate attorney. The seller should also contact the seller’s insurance company. Do not get involved in attempting to settle or resolve the issue.
Broker Risk Management strongly discourages any type of occupation by a buyer of the Property prior to the close of escrow, including the buyer storing personal property at the Property. Nevertheless, if a situation arises and the parties insist on some type of early occupation, agents should strongly recommend against it and advise their clients of the risks.
If the clients persist, agents can use one of the following CAR forms:
- Interim Occupancy Agreement (form OIA on zipForms) – For intended possession of 30 days or more
- Buyer Early Occupancy Addendum (form BOA on zipForms) – For intended occupancy of 29 days or less
- Buyer Pre-Occupation Storage Addendum (form POSA on zipForms) – For storage of buyer’s personal property possessions at the property prior to COE
PRACTICE TIPS:
- BRM strongly discourages early occupation of a property by a buyer prior to the close of escrow. If parties are insistent on an early occupation, agents should consult with their manager.
- After advising clients of the risk of a buyer’s early occupation and documenting the file regarding such advice, if the parties insist on moving forward, one of the above CAR forms can be used.
- Agents representing sellers and buyers should advise their client to consult with their insurance advisor regarding obtaining insurance coverage for the intended occupancy by the buyer, or storage of their possessions, at the property.
- If any party has questions about potential liability in these situations, that client should be referred to a qualified California real estate attorney for advice.
WEEKLY PRACTICE TIP: DO NOT FORWARD TO CLIENTS. This Weekly Practice Tip is an attorney-client privileged communication 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 LLP. 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 practice.