There are many Canadians buying real estate in the US and anyone who has made a purchase south of the border can attest to how different the process can be. One of the main differences, which we have discussed in previous publications, is that the US does not require you to have your own legal representative. In fact, it is likely that your realtor has gone as far as saying that you do not need to have a lawyer review your contract or assist in the closing of the transaction. While that is technically true, it is not something we recommended. Having proper counsel over the course of your US purchase or sale can be the difference between a smooth or bumpy transaction.
Although many US real estate transactions close without intervening problematic issues, there are an equal number that have left the buyer or seller with horror stories that will continue to be told for generations thereafter. One specific situation that we see quite often is the scenario where the seller will be remaining in the property for a period of time after the closing occurs. This can happen for a number of reasons, all of which require the consent of both the buyer and seller. Some such scenarios are the following: a seller who needs to close the transaction for liquidity purposes, or a buyer who wants to close because of volatility in mortgage rates but, in both cases, the seller isn’t ready to move out. The solution is oftentimes a post-occupancy agreement.
Post occupancy agreements are formal documents that need to be drafted carefully. Simply stating in the Contract for Purchase and Sale that there will be a “post-occupancy by Seller” is not sufficient. Buyers in this situation can be in a very vulnerable position without an agreement that considers all of the post –occupancy issues.
Once the transaction closes, the buyer is the legal owner of the property, and with that comes all the responsibilities of ownership. The buyer is personally responsible for paying all upkeep and expenses for the property, including taxes and association fees if applicable. A properly drafted post occupancy agreement would deal with these costs and determine who is responsible for payment. Additionally, a proper rent could be established as compensation for the occupancy in additional to dealing with the costs discussed above. However, these issues are nominal when compared to some of the other considerations that need to be addressed when the seller maintains occupancy.
First is the issue of liability, which is something that we cannot take lightly, especially when dealing with the US. In the event that there is an accident and someone is injured as a result of the property, the owner is technically the one who bares that responsibility. This could leave you liable to compensate for the injury sustained in connection with your property. A properly drafted post occupancy agreement would deal with this issue and make it clear as to who is liable for such situations. A detailed clause holding the buyer harmless for any injuries and liabilities is necessary to provide proper protection. The same is true with respect to liability as a result of a partial or total loss to the property. As the buyer, it is always recommended that you carry liability,and damage insurance. Once again, a provision dealing with who is to pay the cost of the insurance can be dealt with in the agreement.
A final concern arises once you finally take possession of the property. Typically, in a real estate transaction where there is no post occupancy, a walk through of the property is conducted in advance of closing to ensure everything is in order. However, when the seller is maintaining possession, walk-throughs are not typically done. When the seller finally moves out and you take possession, what are your recourses should the property be left in a disastrous state or items that where supposed to be included are missing? Unfortunately your only recourse would be to take costly legal action against the seller.
One way to mitigate the risk inherent in this scenario is to address these potential problems in the post-occypany agreenemnt and strengthen your position by requiring the seller to hold back funds in escrow . For example, if you are purchasing a $500,000 US property, the agreement would state that $50,000 will remain in escrow until the end of the post occupancy and the buyer has inspected the property and provided authorization for the release of funds. Now the seller has incentive to ensure that the property is being left in proper order with all the items included in the property.
Our Firm has seen many deals that do not have a post occupancy agreement as a result of improper advice or clients not being represented by counsel at the time of their US purchase or sale. Remember, having a cross border lawyer who understands US real estate transactions is a huge asset and can help Canadians ensure that their transaction goes smoothly and that issues are dealt with before they arise.