A Brief Introduction About the Rent Back Agreement
A rent-back agreement allows the sellers of a home to retain occupancy for a specific limited period after settlement, subject to an occupancy charge. The seller must also pay a security deposit that will be held by an escrow agent to be used in case the seller causes any damage to the property. The seller must vacate the property before the specified deadline, or will be liable to pay penalties as agreed upon in the agreement.
This agreement can be beneficial to both the seller and the buyer as it allows the sellers more time to relocate and helps the buyer regain some of the money they spent buying the property. It is especially useful when the buyer is looking to rent the property out immediately after acquiring it. It is also known as the post-closing occupancy or post-settlement occupancy agreement.
Who Takes the Rent Back Agreement: People Involved
You would need to enter into a post-settlement occupancy agreement if you are the seller of a property and need more time to relocate. The contracting parties here are the seller and the purchaser.
Purpose of the Rent Back Agreement: Why Do You Need It?
The purpose of a post-settlement occupancy agreement is to:
- Give the seller more time to relocate. This is one of the primary reasons a post-settlement occupancy agreement is entered into. It is commonly employed in cases where the seller is looking to relocate to another property but has not received possession of it yet.
- Help the buyer recoup some of his closing costs, such as attorney fees, brokerage, and other miscellaneous expenses that he might have incurred.
- It protects the interests of both contracting parties, making legal recourse an option in the event of a dispute.
Contents of the Rent Back Agreement: Inclusions
An effectively drafted rent back agreement must be detailed. It must include the following terms:
- Effective Date: This mentions the date on which the agreement will be effective.
- Parties to Contract: This clause identifies the parties to the contract, that is, the seller and purchaser. It must mention their names and addresses.
- Occupancy Charge: This clause states the exact amount that the sellers would have to pay for their extended occupancy. This charge can either amount to the carrying costs of the purchaser, a specific fee per day, or a flat fee.
- Occupancy Deadline: This defines the deadline by which the sellers must vacate the property and hand over possession to the purchasers. Ensure that this does not exceed a maximum period of 60 days from the date of closing, as this could lead to the mortgage lender considering the house as an investment property, which attracts higher interest rates on loans than the standard mortgage rate.
- Default and Holdover Fee: This clause should state that the seller will be charged an absolute premium per day if the seller stays on the property beyond the deadline. This deters the seller from visiting any longer than was agreed upon as per the agreement and can avoid a situation where eviction is required.
- Security Deposit: This clause requires the seller to pay a security deposit with a third party who will act as an escrow agent. The purchaser may lay claim to these funds if he finds that the seller has caused damage of any sort to the property during their extended occupancy.
- Governing Jurisdiction: This clause specifies the jurisdiction that will govern any disputes that may arise out of the agreement.
- State-specific Laws: This includes any clauses and terms that may be required for compliance with state-specific laws and legislation.
How to Draft the Rent Back Agreement?
The procedure to draft a rent back agreement:
- Mention the effective date.
- Identify the contracting parties- their names and addresses.
- Establish the relationship between the parties.
- Express that the seller intends to reside on the property for a specified period.
- Define the occupancy charges and deadlines. Also, decide who will be liable to pay for utilities during the post-settlement occupancy.
- Make provisions for the seller to deposit a security deposit with an escrow agent.
- Define the consequences of a default.
- Attribute the risk or loss of property that should be attributed to the seller.
- Provisions for termination of the contract must be made such that the circumstances under which the agreement may be terminated are clearly expressed.
- There must also be provisions for allowing the purchaser reasonable access to the property during the occupancy.
- The agreement must state the name of the jurisdiction that will govern the document and any such disputes that arise from it.
- Make the parties sign the contract to signify acceptance of terms.
The terms of the contract must be negotiated such that it is mutually beneficial and agreeable to both parties. The interests of both parties must be kept in mind while framing the document, and neither should be significantly disadvantaged or nourished at the expense of the other.
Benefits & Drawbacks of the Rent Back Agreement
The benefits of having a rent back agreement:
- Gives a clear overview of the terms and conditions involved, avoiding ambiguity and miscommunication.
- Offering to sign a post-settlement occupancy agreement may make the purchaser’s offer more attractive than others.
- Makes legal recourse an option, if a dispute arises.
The drawbacks of having a rent back agreement:
- One or both of the parties should carry the legal costs.
- Negotiations can take time.
- The insurance premium of homeowners could go up.
- Landlord-tenant laws do not apply.
- Purchaser bears all risk unless otherwise agreed upon.
Things to keep in mind:
- Buyers must consider the costs of alternate housing arrangements, insurance, utilities, mortgage, and other factors when deciding what the occupancy charge should be.
- Also, keep in mind that if you allow the seller to stay in the house for more than 60 days post-closing, the newly purchased property will be considered as an investment property by the mortgage lender, and interest rates on loans for investment properties can be higher than a mortgage rate. Keeping this in mind, the buyer must make sure that the arrangement is for fewer than 60 days.
- Charging a premium on the holdover fee will deter the seller from overstaying and will prevent a situation where you will need to evict them from the property, which is often a long and complicated process.
What Happens in the Case of Violation?
If the seller’s breach the terms of the agreement, the purchasers may impose penalties, levy extra charges, and/or claim damages as per the default clause in the agreement. If the seller overstays on the property beyond the deadline, the purchaser can charge the holdover fee as per the agreement.
This is typically a premium that is charged for every day that the seller stays on the property beyond the deadline and is an effective mechanism to avoid eviction. However, if the seller refuses to vacate or pay the holdover fee, legal proceedings for eviction must be initiated.
If the purchaser does not act by the terms of the agreement, the seller may choose to internally resolve disputes amicably or use alternative dispute resolution methods, such as arbitration. If no other method of dispute resolution works, the parties may choose the conventional legal recourse of taking the issue to court.
The agreement ensures that the parties perform their respective duties to each other and gives them the confidence that legal recourse will be available to them in case of a dispute.
Using a rent-back agreement is a great way for a seller to buy themselves extra time to relocate after settlement. The agreement allows the seller to pay an occupancy charge to the purchasers and ‘rent back’ the property. However, it’s worthwhile to note that landlord-tenant laws do not apply to such an arrangement.
Be cautious when framing the terms of the document, especially when dealing with risk clauses, as it is common for disputes to arise from the lack of common understanding of who bears the risk of damage to the property. The agreement, when used appropriately, can be an advantage to both parties. If you’re entering into a post-closing occupancy agreement(1) as a purchaser, make sure that the seller has made their intentions clear about vacating the property and accepts your terms and conditions.
The seller should also have renter’s insurance to cover for any damage to his belongings or injury to any persons while the seller resides there.