March 8, 2020
Frequently we encounter situations in which a buyer under a purchase contract, be it commercial or residential, desires to take occupancy of real estate before the closing (i.e, the tender of the purchase price).
A buyer may want early occupancy for a host of reasons. For both commercial and residential buyers, they many times desire occupancy before their financing can be formally approved. This might be because a commercial buyer desires to move or “rig” his manufacturing equipment into a property by a certain date. Many times commercial and residential buyers want to modify the property in some signifiant way such as moving walls, re-doing a kitchen or changing the electrical panel.
It also may be because the seller can’t close because of a title problem, or some other seller performance issue.
Does it legally make sense to allow for early occupancy? Is this a good idea?
From the buyer’s perspective
From the buyer’s perspective, it’s sort of a no-risk proposition, in that it gets the use and occupancy of the property without paying for it. And, as is discussed below, it gives the buyer the full chance to the the property for a “test drive,” before buying.
However, if the buyer is making a costly move or expensive improvements to the property, it should consider the “what if” if the seller can’t or won’t ultimately close.
From the seller’s perspective
But many of the reasons it makes sense for a buyer to take early occupancy are the precise reasons why it might be a bad idea for the seller to permit it.
First, by giving the buyer the right to a “test drive,” he invariably finds things with the property that are either defective or less than optimal, and then the buyer demands repairs or modifications before agreeing to close.
The reality is that a buyer needs a place to operate his business; he needs a place to live. Depriving a buyer of possession until he tenders the purchase price is strong leverage to force a closing.
But if the closing can’t occur because the seller can’t perform, such as a title problem, it may be a way to “keep the buyer”under contract for a later closing once the seller’s performance problem is resolved.
Removing a buyer from the property if he doesn’t close
Then, after early occupancy is granted, there is the problem if some exigency arises that prevents the buyer from closing: The financing is never approved, the buyer dies, a divorce, the business goes bankrupt, or a dispute among business partners arises. Any of these things can result in the buyer not closing pursuant to the contract, whether there is a contractual obligation to close or not. So then what?
If that happens, the seller will have to legally remove a buyer from the property.
In the case of a residential occupant, regardless of the lack of justification of a tenant staying in the property, the owner must go through a judicial “forcible entry and detainer,” or eviction action. This can last from two to six months to judicially recover possession (and extreme circumstances, longer). In the case of a commercial occupant, they can be removed unilaterally (i.e., without court involvement) by the owner under certain circumstances. This article addresses non-judicial commercial set outs.
In addition to fighting to get property back from an occupant, there are circumstances in which an occupant does so much damage to a property it is a nightmare for the seller: Property modifications and property damage such as to carpeting, doors, walls, and the like. Simply recovering possession can be only half the “cost” of a bad choice of allowing early occupancy. And as a landlord I can tell you: You simply can’t imagine the way some tenants live: Pet damage, holes in walls and doors, and destroyed carpet, all occurring in relatively short periods of time.
Unpermitted early occupancy
We also have encountered a situation in which buyer have just taken it upon themselves to “move into” a property with no permission forth seller. As unimaginable as it seems, it has happened. We once had an out-of-state manufacturing client with a factory north of Dayton. They had moved out of the property to their home plant in Minnesota. They had no more personnel on the ground in Ohio. The buyer was a local gun manufacturer. Their equipment was huge milling and drilling machines that took hundreds of thousands of dollars for “rigging” to move. Thus buyer not only had the audacity to move into the property before closing, and commenced his manufacturing and shipping operations, all without the seller’s permission, they actually posted photos of their new facility on their company web site!
Our seller client, asked us for options, and we advised them to just “lock out” the tenant and let them suffer the consequences. Boy, did that get their attention. Within hours of them finding the doors locked, they quickly found a way to get the transaction closed, and paid our client rent for the early occupancy, but also a penalty and our attorneys fees.
Even allowing a buyer to “move his stuff into the garage” before closing can cause these “early occupancy” problems. But one scenario to consider is that once a tenant occupies a property, it is no longer “owner occupied” and the property and casualty protection that exists on homes and businesses may not cover tenant incidents and tenant property. In one fact pattern with which I am familiar, the house burned to the ground after the tenant moved his furniture into the garage. In such scenario, the personal property of the tenant simply was not insured. Who is going to cover those losses?
In any event, if a buyer is going to take early occupancy, the parties should memorialize their agreement in writing: (i) What happens if the closing is further delayed? (ii) Is the tenant allowed to modify the property? (iii) is there a security deposit against damage? (iv) Who is responsible for insuring against personal injury, wrongful death, damage to the property itself and damage to the buyer’s personal property during the period of early occupancy? These are just some of the issues the early occupancy agreement should address.
In short, early occupancy is one of those things that might seem like a good idea a the time, but in retrospect it was unwise or even a nightmare. It should be undertaken only with open eyes and great caution by both parties, considering the “what if” if the closing never occurs, considering the insurance issues, considering potential property damages, and getting all aspects of the agreement in writing.