The Risky Facts of Real Estate Life – Pre and Post Possession Agreements

 Buyers and sellers who want to enter into pre-possession and post possession agreements are a risky fact of real estate life.  There are times when a buyer wants to move into the property before close of escrow (pre-possession) or the seller wants to stay in the property following close of escrow (post possession).  

 

The first thing that a real estate agent absolutely needs to know and follow is their broker’s policy on these types of agreements.  Also, be aware that the Arizona Department of Real Estate Commissioner’s Rule requires that a salesperson or broker recommend “that the client seek appropriate counsel from insurance, legal, tax, and accounting professionals regarding the risks of pre-possession or post possession of a property” – and this recommendation should be done in writing. 

 

So why are these agreements risky?  They are risky because in both pre and post possession agreements, the people occupying the property are not the owners, which sounds a lot like a rental.  If the Arizona Residential Landlord Tenant Act applies (and there is a strong argument that it does) there are statutory rights and obligations applicable to these agreements.  As a result, the risk of a dispute increases, especially if all the parties’ rights and obligations are not addressed in a well-drafted written agreement. 

 

Post Possession by the Seller

Because the obligations in the purchase contract are fulfilled at close of escrow, the obligations to repair and maintain the property are no longer the seller’s responsibility; they are the buyer’s responsibility – but the seller is still occupying the property.  Therefore, post possession issues include:

 

·         Who is responsible for repairs?

·         What if there is a fire, monsoon or other damage?  Do the parties have the appropriate insurance policies (homeowners’/rental) in place and whose insurance policy will cover any damage? 

• Will a security deposit be required in case the seller damages anything in the property? If so, how much?  (The amount of a security deposit in a rental is limited to 1.5 times the amount of one month’s rent).

And other matters to be addressed are:

• How much is payment/rent? Will the payment/rent be prorated?

• Who pays the utility bills? Will the utilities be transferred into the buyers’ name?

• Who will occupy the property? Are pets allowed? Is smoking permitted?

 

Information about these and other issues are discussed in the Post Possession Agreement Checklist here:  https://www.aaronline.com/wp-content/uploads/2015/12/Post-possession-checklist-11-19-15.pdf

 

Pre-possession by the Buyer

Typically, the seller is responsible for any damage to the property prior to close of escrow.  However, in the event a buyer prepossesses the property, the buyer is now responsible. 

The same issues as discussed above regarding post possession agreements apply to pre-possessions.  But there are additional pre-possession risks, such as: 

 

• What if there are buyer contingencies that have not been met prior to the buyer’s pre-possession? Have the parties decided to waive the contingencies or are they still in place allowing the buyer to cancel the purchase contract if a contingency fails?

• What if the buyer moves in and begins to remodel the property, then thereafter either cannot or will not close escrow? 
• If the sale is not completed, when does the buyer have to move out? What happens if the buyer refuses to move out?

 

Information about these and other issues are discussed in the Pre-Possession Agreement Checklist here:  https://www.aaronline.com/wp-content/uploads/2015/12/Pre-possession-checklist-11-19-15.pdf

 

A written agreement and decision of which type of agreement is appropriate should be addressed regardless of whether a pre or post possession is for 3 days or 30 days or more. The Arizona REALTORS® has some additional resources to assist:

 

·         A sample Arizona REALTORS® Residential Lease Agreement at:  https://www.aaronline.com/wp-content/uploads/2022/02/04/Residential_Lease_Agreement_October_201-9-SAMPLE.pdf 

·         A sample Post Possession Agreement (not an Arizona REALTORS® form) at:  https://www.aaronline.com/wp-content/uploads/2021/05/03/Post-Possession-Agreement-SAMPLE.pdf

·         A sample Pre-Possession Agreement (not an Arizona REALTORS® form) at:  https://www.aaronline.com/wp-content/uploads/2021/05/03/Pre-Possession-SAMPLE.pdf

 

Due to the risk and liability involved with pre-possession and post possession of a property, the best practice is for the parties to not enter into such an agreement. However, if the parties insist, the real estate agent should consult with their broker and advise the parties in writing to seek appropriate counsel from insurance, legal, tax, and accounting professionals regarding the risks.

 

 

Michelle Lind is Of Counsel to the Arizona REALTORS® and the author of Arizona Real Estate: A Professional’s Guide to Law and Practice.  This article is of a general nature and may not be updated or revised for accuracy as statutory or case law changes following the date of first publication. Further, this article reflects only the opinion of the author, is not intended as definitive legal advice and you should not act upon it without seeking independent legal counsel.