The Spike in Use and Occupancy Agreements in Real Estate Transactions

What is a use and occupancy agreement (“U&O”)?

A U&O is a written agreement between the buyer and the seller of a piece of real property which allows for one of the parties to use and occupy the premises either following the closing or prior to the closing date. It is a temporary agreement that allows one party the right to use and occupy the premises and should not be confused with a lease agreement.

Why would someone need to use a U&O?

There are a couple reasons for the uptick in the use of this type of agreement. The most prominent reason being that sellers have been able to sell their home at an excellent price, but not able to find suitable housing to move into by the time the anticipated closing date arrives. The seller does not want to lose the buyer- especially in this market, and the buyer does not want to lose the opportunity to purchase – because who knows if they will find another property to purchase. So, the buyer allows the seller to remain in the property for a period of time until the seller finds suitable housing to move into following the closing.

In the above situation, the buyer becomes the owner of record as of the date of the closing and the seller is simply permitted the right to use and occupy the property but does not have any tenant rights. In fact, there is a clause in the use and occupancy agreement stating that this agreement shall not be construed as a lease agreement, nor shall the seller have any tenants’ rights to the property if they default on the agreement.

Another trend is that has been prevalent lately is the buyer moving into the property prior to the closing date. This is occurring when individuals or families are capitalizing on the higher sale prices and are unloading family homes or investment properties. These properties may already be vacant, so it allows for the buyer to move-in and occupy the property prior to their loan being cleared to close. Again, this does not create a landlord/tenant relationship, rather it solely provides the buyer with the right to use and occupy the property prior to becoming record owner.

Are there protection costs associated with a U&O?

In each situation, whether the seller is remaining in the property post-closing, or the buyer is occupying the property prior to the closing date, the record owner is protected by a security deposit held by an escrow agent, usually one of the closing attorney’s offices, until the date of vacancy or the date of closing. Additionally, depending on the length of occupancy, the parties may also agree to a per diem amount based on the owner’s carrying costs of the property until either the vacancy date or the closing date occurs.

While these agreements are useful for the parties in dire situations, they are not void of issues and natural hiccups of unforeseen circumstances. For that reason, it is vital that a real estate attorney prepare the agreement and review it in detail with all parties. If you have any questions about this topic, contact the real estate attorneys at BPS Lawyers.