What To Do When Your Apartment is Possessed
What happens when the Seller wants to stay in the apartment you're buying after the closing?
As a general rule, when someone purchases an apartment, he or she expects the seller to deliver possession of the apartment at closing. In other words, when you pay your money at closing you get an empty apartment that you can move into whenever you want. Because of the complexities of modern life, the seller may not be able to move out of "your" apartment for several days, weeks, or sometimes, even months after the closing date. What actually happens when the seller wants to stay in possession of your apartment after closing?
Possession is Given at Closing
To begin with, the seller can only stay in the apartment after closing with the consent of the buyer. If the seller simply refuses to leave or to remove seller's personal property from the apartment, in most cases, the closing will get adjourned until the seller gets it together. It's a whole other can of worms, however, if the seller just plain out refuses to close. I discuss this issue in "What Happens When A Party Defaults", elsewhere on the site. In short, when that happens, it’s an awful situation. For purposes of this discussion, I will just be looking at those friendly closings where the seller is permitted by the buyer to stay in occupancy of the apartment after the closing.
Post-closing possession is more common out in the burbs as a seller may need a day or two to pack up the house and kids and move on. It's only recently that possession agreements have popped up in residential apartment transactions in Manhattan and the other boroughs. In most cases, the seller's attorney will notify the buyer's attorney when the contract is being negotiated that the seller will need a little time after closing before possession can be given. This request can present a real problem if the buyer has nowhere to go after the closing date. In those situations, a seller's need to remain in possession can kill a deal. In other cases, the buyer may want more time before he or she moves in, so the seller's request can turn out to be a win-win for both parties. For example, if the buyer is also in the process of selling an apartment, having more time after the closing will be very helpful in defraying expenses (as explained a little later). Although possession arrangements should be avoided as much as possible, in the hectic and complicated world that most people operate in today, getting everyone to the closing table and the seller out on the same day is not always possible. Here's what's involved in a possession arrangement:
The License Agreement
In the old days, the seller remained in possession pursuant to the terms of a "possession agreement." This brief agreement (sometimes one page) would describe the seller's continued possession and would establish a monetary escrow (held by one of the attorneys) as security against the seller's failure to move out. If the seller was late in moving out, a daily penalty would be incurred (e.g., $100 per day) to reimburse the buyer's costs for seller's failure to timely vacate the apartment. The escrow fund would also be used to reimburse the buyer for any damage caused by seller or seller's agents (that is, anyone invited into the apartment with seller's consent). Today, the possession agreement is more involved and is often referred to as a "license agreement." Why?
Nature of the Seller's Occupancy
When you allow the seller to remain in possession, a certain relationship is created between you as the apartment owner and the seller who continues to occupy the apartment. It is of great importance to insure that a landlord-tenant relationship is not created between you, the buyer as the new owner and the seller as continuing occupant. If a landlord-tenant relationship does come into existence, then a buyer would have to go into landlord-tenant court to get the seller out of the apartment if the seller refuses to leave. That can be difficult and time consuming and the last thing a buyer wants to do. To avoid this problem, the buyer should only give seller a "license" to occupy the apartment, which is merely an occupancy right revocable by the party granting the license on the terms stated in the license agreement. The license agreement will also specifically state that no landlord-tenant relationship is being created between the buyer and the seller when seller remains in possession. Although it is technical, this concept is very important. New York courts can be very tenant friendly. Getting your seller out of possession in landlord-tenant court can take months and big bucks. Just to say it again: You don't want your seller who remains in possession after closing, to be deemed your tenant under any circumstances.
Reimbursement of Expenses
When the seller stays in possession, the buyer's carrying costs for the purchased apartment should be borne by the seller until the seller vacates the apartment. Here are the costs usually reimbursed by seller:
the per diem interest expense of the buyer's new mortgage loan;
the per diem maintenance or common charges for the apartment; and
- the per diem real estate tax charges, if it's a condo.
These costs represent the costs the buyer would incur as the owner of the apartment (except for home owner's insurance). In addition, all utility charges will be paid by the seller and the seller will remain the party who is billed for the utilities until seller moves out. If you happen to be a buyer who is also selling an apartment and the closing of the sale will not take place until after you purchase your new apartment, having the seller remain in possession can help defray the cost of carrying two apartments.
Longer Term Post-Possession Arrangements
In some cases, the parties will agree to allow the seller to remain in possession for a number of months. In those cases, a monthly occupancy fee is negotiated that is commensurate with the value of the apartment as a rental and the monthly costs can significantly exceed the basic carry costs of the buyer.
Basic Terms in the License Agreement
License agreements can vary, but here is a list of the provisions which should be included:
seller's promise to vacate the apartment and remove seller's property on the date agreed to by the parties;
seller's promise to make any repairs or fix any damage caused by seller or seller's agents during seller's possession;
seller's promise to reimburse buyer's carrying costs as described above;
an indemnity from seller that holds purchaser harmless from any loss, liability or damage (including attorneys fees and expenses) if seller or seller's agents cause damage to the apartment or if seller breaches the provisions of the license agreement, such as refusing to vacate the apartment when agreed;
where a longer term post-occupancy arrangement is agreed to, the monthly occupancy fee that will be paid by the seller for the privilege of remaining in the apartment;
a significant escrow to be held by the seller’s attorney to insure the seller’s performance under the agreement;
a significant daily penalty to be paid by the seller if the seller fails or refuses to vacate the apartment after the departure date that is agreed upon;
seller's consent to an entry of a judgment of eviction if the seller does not leave by the date agreed upon, so the buyer can get the seller out of the apartment expeditiously, if the seller refuses to go gently into the good night;
a specific statement that no landlord-tenant relationship exists between the parties; and
- a promise by seller to maintain adequate comprehensive liability and property insurance with appropriate coverage amounts while seller remains in possession.
What About Penalties if the Seller Refuses to Leave
How do you determine how much money to hold in escrow to insure that the seller will leave as promised? Obviously you have to take the purchase price into consideration. That being said, the buyer should try for the largest hold back possible. The more leverage the buyer has, the larger the escrow the buyer can ask for. Just to throw out numbers, it would be appropriate to hold one or two percent of the purchase price, but certainly no less than $5,000.00. Daily penalties can vary widely (as little as $100 a day, in some cases $1,000.00 a day or more). Here's a good rule of thumb, it should never be cheaper for the seller to stay in your apartment than it would be for the seller to check into a hotel in Manhattan. If you agree to a daily penalty of $150 or $200 a day, it will be cheaper for the seller to pay the penalty rather than go to a hotel. If the seller knows it will be very expensive to holdover (like staying at The Four Seasons), there is a greater likelihood that problems will be avoided. Although every negotiation is a little different, when the seller remains in possession, it's always in the buyer's best interest to hold as much money as possible in escrow and to collect the biggest daily penalty as possible if the seller refuses to leave.
Remember, An Exorcism Should Not Be Necessary
If the possession arrangement is worked out sensibly, the buyer will not have to go to extremes (and to court) to get the seller out of the buyer’s new apartment after closing. Each deal is a little different and each post-occupancy agreement should be tailored to fit the needs of the parties. There is no one size fits all, when it comes to these arrangements.
Residential Reality: Post Closing Possession is Sometimes Required
As long as the buyer and buyer's counsel are comfortable that the seller has somewhere to go after closing, and assuming that the license agreement is properly drafted, allowing the seller to remain in possession is sometimes necessary and appropriate to make a deal work.