Buying a home is a major life event, and the process can sometimes be filled with unexpected complexities and uncertainties. In New Jersey, one aspect of the home buying process that can arise and which deserves careful attention is the Post-Closing Use and Occupancy Agreement, or “U&O” for short.

What’s a Use & Occupancy Agreement?

A U&O is an agreement between the Buyer and Seller of a property that either (1) permits the Seller to remain in the home for a specified amount of time after the closing, when the Buyer has become the new legal owner, or (2) allows the Buyer to occupy the home before the closing, while the Seller is still the legal owner.

With regard to the latter option (option #2), there are a variety of reasons why a Buyer may need early access to the property. There could be a gap in time between the sale of the Buyer’s current home and the closing of the new home, a conflict between the closing date and the time in which Buyer is able to schedule their move, or other circumstances such as the need to re-locate due to new employment or the start of the school year, etc.

Generally speaking, however, this second type of U&O is exceptionally rare, as Sellers are extremely loathe to allow Buyers to occupy properties before the transfer of title, for obvious reasons. For example, if permitted to actually occupy the home before closing on it, the Buyer might suddenly get cold feet and refuse to close; or might refuse to close while simultaneously refusing to vacate the property; or might nit-pick their way through the house raising every minor defect in the property, despite having already concluded the Inspections Phase of the closing process.

Instead, far more common is U&O option #1, in which the Seller remains in the property after the closing has occurred, for a finite amount of time and under terms specifically outlined in a U&O Agreement negotiated between the parties (by their attorneys).

The most common scenario for this type of U&O is a Seller who needs extra time in the property after selling it in order to finalize their move into their next home, such as when the closing for their purchase of that next house is delayed, or their next house is simply not yet ready for them to move into yet.

Typically, such a Seller would inform prospective Buyers during the Offer Phase that the Seller needs a post-closing U&O, and the Buyers would then include the granting of a U&O in their offers to purchase the property. Once the Seller has accepted an offer from a Buyer and the parties have begun the Attorney Review Phase, the attorneys for the parties will oftentimes negotiate and finalize the terms of the U&O alongside their negotiation of the Contract of Sale.

Key Terms to Out Look For

Buyers should NEVER make a verbal agreement to allow a Seller to remain in the property for any period after the closing without a well-drafted written U&O in place.

Instead, the U&O must be outlined in a legal document specifying the terms under which the occupancy takes place, and signed by both parties. For Buyers, understanding the nuances is crucial to avoid potential pitfalls and to ensure a smooth transition into their new home. Here are some key terms that Buyers in New Jersey should pay attention to:

Duration of Occupancy: The agreement should specify the start date and end date of the occupancy period and provide clarity on what happens if the closing is delayed for any reason. For example, will the Seller’s occupancy of the property after the closing end after a specific number of days (i.e., 30 days after the closing), or will it end on a specific date (i.e., June 30th).

There should also be a provision that addresses “holding over,” which occurs when a party remains past the end date of the agreed-upon occupancy period. More specifically, the U&O might stipulate a daily “penalty” fee to be charged to the Seller for each day that they remain in the property past the end date.

Occupancy Fees: In most cases, the Buyer will charge the Seller a per diem fee for occupying the property after the closing. The fee will typically be calculated to cover the Buyer’s carrying costs for the occupancy period — in other words, the mortgage principal, mortgage interest, property taxes, homeowner’s insurance, and, if applicable, condominium or homeowners association fees being paid by the Buyer per day as the new owner of the property.

The per diem fee is standard, but additional compensation may be negotiated between the parties…and on the flipside it’s not altogether uncommon for a Buyer to “sweeten” their offer when bidding on the house by offering the Seller a free or heavily discounted post-closing Use & Occupancy of the property for a certain number of days.

Security Deposit and Escrow: Most U&O’s require that the Seller put down a refundable security deposit to protect against damage to the property or other unforeseen events. The deposit should be held in escrow (typically by the attorney for either party) and released back to the Seller only after the Seller has properly vacated the property in accordance with the terms of the U&O.

Responsibility for Maintenance and Repairs: It is critical that the parties each understand who is responsible for maintaining the property during the occupancy period. Typically, the Seller is required to deliver the property back to the Buyer at the end of the U&O in the same condition as it was in at closing, excluding ordinary wear and tear. In other words, the Seller assumes responsibility for all damage during the U&O except for ordinary wear and tear. Seller should also expect to cover the cost of utilities for the duration of the U&O, such as gas, electric, water, etc.

Insurance Coverage: Buyers should verify that their homeowner’s insurance policy covers them during this type of occupancy period where the Seller is staying in the home temporarily after closing. Many U&O’s stipulate that the Seller must obtain the equivalent of a “renter’s insurance policy,” which would cover their personal belongings and provide liability coverage during the duration of the U&O period.

Termination and Default: A clear termination clause that outlines the conditions under which
either party can terminate the agreement is crucial, as well as clearly stated remedies in the
event either party fails to fulfill their obligations under the agreement.

It’s important that your U&O not take the form of a lease agreement or inadvertently create a landlord-tenant relationship between the parties. New Jersey law offers special protections to tenants, which can be problematic in situations where a U&O occupant (the Seller) does not vacate in a timely manner. Your attorney will know to avoid referring to the parties as “landlord” and “tenant” or to the agreement as a “lease.”

Takeaways

A Use and Occupancy Agreement can be a valuable tool for both Buyers and Sellers in New Jersey.

While extremely rare, pre-closing U&O’s allow Buyers to gain early access to their new home.

More commonly, Sellers will seek a post-closing U&O to give them more flexibility with their plans for their next home.

Being willing to grant the Seller of a property a post-closing U&O, and with particularly favorable terms (such as a lower or no per diem, an extended duration of occupancy, etc.), can make a Buyer stand out among a crowd of other bidders in a Seller’s market.

It’s essential to have a well-drafted U&O agreement in place to avoid problems down the road. Given the complexities involved, Buyers in New Jersey are strongly advised to seek legal guidance when contemplating any Use and Occupancy. An experienced real estate attorney can draft and negotiate the agreement, explain its implications, and work to ensure your
interests are protected.