Selling and buying a home can be both exciting and intimidating due to the extensive amount of paperwork and tasks that each of the parties must complete before the transaction can close. In today’s real estate market with tight inventory, the buyer may have to agree to allow the seller to remain in the property after the close of escrow. There are two ways that this possession can be achieved and each carry risks to the buyer and to the seller.
Irrespective of which type of possession is given to the seller, the buyer now owns the property and is responsible for anything that happens at the property after close of escrow. To share in some of that responsibility, it is important the buyer have a written agreement with the seller for seller’s occupancy after close of escrow.
The Seller in Possession (“SIP”) is used for seller occupancy not to exceed 29 days after close of escrow.. This type of occupancy allows a seller to remain in the property for up to 29 days after close of escrow. It does not create a tenancy; however, the seller is entitled to uninterrupted exclusive possession of the property during the SIP timeframe. As the buyer you should confirm whether the seller will be paying any compensation for the SIP referred to as a licensing fee. The SIP also confirms who will be paying for the utilities and other maintenance at the property.
The Residential Lease After Sale (“RLAS”) creates a landlord tenant relationship between buyer and seller for a term of 30 days or more. If the buyer obtained a loan to purchase the property, the RLAS generally cannot exceed 60 days and some lenders shorten that timeframe to 45 days. Buyer should check with their lender prior to entering into the RLAS. The RLAS specifies the term of the lease, the amount of rent to be paid, and who is responsible for utilities and maintenance of the property. If the parties have agreed that no rent will be paid, the buyer should still request a security deposit to assure that the property is returned in the same condition as when escrow closed.
The parties should fully understand that this is a lease and is governed by all the laws in place for tenancies including the Tenant Protection Act (“TPA”) and any local city ordinances . All residential rental properties are subject to rent control and just cause eviction rules unless they are exempt. Exemptions include housing for less than 3 months, lodgers in your own home, homes where the certificate of occupancy was issued in the last 15 years and those homes where the landlord is not a real estate investment trust, a limited partnership, corporation, or an LLC with a corporation as the member. In order to claim an exemption, the landlord must provide the tenant with notice that the property is exempt. The TPA and local ordinances can control the amount that rent can be increased as well how a lease can be terminated or not renewed. A tenant can be evicted if the tenant has breached the terms of the lease (i.e. nonpayment of rent); however, terminating a lease when the tenant is not at fault is limited to three reasons-selling the property, moving a family member into the property, or substantially remodeling the property. Selling the property alone is not sufficient, rather, the property must be sold to a buyer who is going to reside in the property as their primary residence. Moving in a family member is limited to spouses, children, parents, grandparents, and grandchildren. Substantial remodel goes beyond paint and carpet and must be significant such a remodeling a kitchen.
Before entering into either agreement, the parties should negotiate all terms related to the occupancy/tenancy being very specific so as to avoid disputes during and after the seller vacates the property. The legal costs of removing the seller at expiration of the agreement can be expensive and time consuming so it is important that the parties are well informed and seek out a real estate attorney to fully advise them on the issues that can arise with occupancy and/or tenancy.
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