What Exactly is an Early Occupancy Agreement?
An early occupancy agreement is a lease addendum that permits a tenant to occupy a rental property prior to the beginning date of the lease. This allows the tenant to move in and begin living in the rental home while the paperwork is being finalized, without the hassle of having to maintain two residences . The benefit to the tenant is that instead of paying rent on one place and possibly having to pay for a hotel or another temporary situation while closing on the house, the tenant can pay rent on the new home while waiting for the closing to finalize. The benefit to the landlord is that he or she knows that the home is likely going to be rented (and rent is just about certain to be paid as long as the closing goes through).
Essential Features of a Lease Addendum
The lease addendum should address a variety of key subjects so that the landlord and tenant have a clear understanding of their respective responsibilities. Importantly, the addendum should identify the landlord and tenant by name along with a physical description of the leased space. The addendum should also be specific about the rent for the new lease term, including when the rent will be paid and how it should be delivered to the landlord. Any security deposit must be clearly defined by amount and terms, and the disposition of the deposit (either refunding it or using it) at the end of the early occupancy must be detailed. The factors that must be taken into consideration when drafting a lease addendum include the amount of the rent, the period of occupancy, payment terms, statutory requirements in the jurisdiction where the property is located, expectations of the respective parties and the condition to be delivered.
Advantages of Early Occupancy Addendums
The benefits of early occupancy agreement lease addendums are numerous. For starters, both the landlord and tenant have peace of mind in knowing what their responsibilities are before the tenant even occupies the premises. This mutual understanding prevents future disagreements, and provides a strong starting point for a successful landlord-tenant relationship.
Lessor perspective: For landlords, the addendum allows them to collect rent from the tenant before they actually move in, when a lease may not allow a landlord to start collecting rent for an empty property. This gives landlords some added income while they continue to look for tenants for other vacant properties. It also avoids them having to lower the rent for the current with no new tenant in sight, as most tenants will not want to pay full rent for a unit they can’t occupy yet.
Lessee perspective: Tenants, on the other hand, get the benefit of legally binding themselves to the terms of the lease and unit prior to actually moving in. This way, they can’t back out of the lease after having already moved in with all their furniture and possessions. Often, tenants try to back out of leases if they get a bad feeling about the unit or landlord after moving in. By making the lease binding, they can’t.
Typical Provisions in Early Occupancy Agreements
Most early occupancy agreements will include clauses addressing matters such as the duration of the term of the agreement, provisions that waive the liability of the landlord if there is damage to the property or theft of tenant’s property, repair and maintenance responsibilities, provisions stating the methods for determining rent adjustments, and most likely, a statement; "Notwithstanding anything in this Addendum to the contrary the landlord shall not be required to permit the tenant to take possession of the apartment until the tenant has deposited with the landlord or its agent the entire rental payment set forth in paragraph 2 hereof in cash, certified cheque, and/or bank draft containing a term or terms of not less than [12] months, at the rate of [$100] per month plus Goods & Services Tax and the Tenant acknowledges and agrees that in the event it fails or refuses to pay such rental promptly on any due date, the Landlord may immediately terminate this Addendum and require the Tenant to vacate the Apartment without notice to the Tenant, all payments made by the Tenant hereunder up to the date of default shall be forfeited and retained as liquidated damages by the Landlord, in addition to its other rights to damages for breach of contract."
Legal Issues and Considerations
The legal enforceability of an early occupancy agreement may vary based on state and local laws. In some jurisdictions, certain types of early occupancy leases may not be permitted at all or may need to be structured as rental agreements rather than as traditional leases. To avoid future headaches, any proposed lease addendum involving early occupancy should be reviewed by real estate attorneys with knowledge in the applicable jurisdiction prior to being executed by buyer and seller.
Several common pitfalls exist when entering into an early occupancy agreement . For instance, frequently encountered problems include failure to record the due diligence timeline, provide notice of and address special assessments on the property, and delay the transfer of utilities, warranties, keys and codes, janitorial services and other property-related matters. Addressing these problems in an addendum can help avoid potential disputes and litigation after the transaction has closed.
Many state laws also require a seller to provide a lead-based paint disclosure to the buyer if the house was built prior to 1978. An early occupancy addendum cannot be executed until after the buyer has received this disclosure and signed the lead-based paint booklet. Failing to follow lead-based paint laws may subject sellers and their agents to liability.
How to Draft A Good Early Occupancy Lease Addendum
Effective drafting of an early occupancy lease addendum is all about detail. Everyone is familiar with the promise found in fine print, but the truth is that the more distance you have from specific details to protect the interests of all parties the more likely one of those parties is to feel let down after the fine print comes to light in a way that isn’t favorable to them. The less detail you have in your paperwork the more chance you have to end up in court for one reason or another.
The first stage of drafting an effective early occupancy lease addendum surrounds when best to sit down and discuss its contents. Ideally, you want to broach the subject of a lease addendum long before you understand the day by day details of your specific lease.
Just like negotiating a lease on a basic level, you want to have guiding details to fall back on when drafting an effective early occupancy amendment. For example, if your lease is net of expenses, you need to have details about the specific process of calculating those expenses or you risk not having a lease amendment that meets the needs of both parties. The more info you can provide, the better off everyone will be long term.
Examples of Early Occupancy Scenarios
Although a Seller/Owner has the right to rent the Property out at any time, it is not permissible to enter into a lease with a tenant without the Owner’s consent. However, all parties to the Contract can agree to allow a tenant to take possession of a property early and for a time certain based on the material terms of the sale of the property. This is not uncommon, especially in the commercial real estate context. Additionally, it is not unusual for a buyer to request that they be permitted to occupy the property prior to closing so that they can begin making their improvements to the Property or otherwise use the Property prior to closing. To ensure confirm that all parties are protected, a separate document, an addendum to the lease subject to the sale, should be prepared by the Buyer/Seller Concordance in advance, and should be signed on behalf of all parties and executed on or before the anticipated date of occupancy. The addendum will request the Seller’s consent and outline the terms of the tenancy.
An example of this type of situation is as follows: A buyer has a lease to buy a grocery store whose lease expires in six months. The lease has been on month-to-month holdover . The buyer wants to close at some earlier date but cannot under the current lease. The parties consult counsel and in light of the fact that the buyer has advanced thousands of dollars to improve the facility and has opened for business, counsel draft an Early Occupancy Agreement Addendum. The buyer agrees to assume the existing licensee’s obligation to pay their rent until the closing and the seller agrees to let the buyer occupy the property in exchange for creating a certain access way to other retail establishments. The matter is negotiated and settled. The lease is surrendered and the buyer will be able to use the space for the next six months. An escrow account is created for the all repairs to the unit. There is a closing. A mutual release is agreed to with the leasehold tenant. Etc.
Another example: A buyer has an outstanding agreement of sale to acquire a restaurant facility. The buyer operates restaurants in other locations and wants to acquire the property 2 months prior to the lease expiration so that they can begin making extensive renovations to prepare to take over the facility. The buyer shares its plans with the seller and allows the seller to inspect the premises to determine the repairs and improvements that will be undertaken.