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Post-Closing Tenancies: Understanding Seller’s Contractual Obligations to Avoid a Broken Deal

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A common issue that may cause a closing to fall apart is a tenant(s) residing on the property post-closing. The FR/BAR contracts impose specific and time-sensitive disclosure requirements on the Seller. These requirements focus on disclosure and transparency of the obligations the Buyer would undertake upon closing. Understanding them and the associated periods is crucial to ensuring your deal stays on track and closes without delays, upset parties, or the agreement falling apart. 

How do the “AS-IS” and “Standard” Contracts Address Post-Closing Tenancies

Section 6 of the FR/BAR contracts requires the Seller to inform the Buyer whether the property is subject to a lease(s) or any occupancy agreement(s) after closing. The Seller must physically check the box on Paragraph 6(b) if the property is subject to a lease or occupancy agreement after the closing date. Failure to disclose such information may breach the contract as the Seller will have to deliver occupancy and possession of the property free of tenants, occupants, and future tenancies. Ideally, Sellers want to report post-closing tenancies upon entering the contract as the contracts impose further time-sensitive requirements and may collapse the deal if disclosed too close to the closing date.

I checked the box. What happens next?

After the Seller discloses the post-closing tenancies, the contract requires the Seller to reveal the facts and terms of the residence in writing and provide the Buyer with copies of all the written leases within five days after the Effective Date. As the Seller, or a realtor representing a Seller, it is essential to provide the written notice of the facts and terms of the tenancy AND the written leases within the five days. Failure to do so may result in the Buyer claiming a breach and terminating the contract. 

Can the Buyer terminate the contract after reviewing the documents provided by the Seller?

Yes! The contract grants the Buyer sole discretion in determining whether the leases and terms of the tenancy are acceptable. Suppose the Buyer decides that the lease terms are not permitted. In that case, the contract grants the Buyer five calendar days from receiving the documents and the ability to terminate the agreement and receive their deposit back. Failure on the Buyer’s part to terminate in writing within the five days can be a waiver of such right to end a lease. 

Are there any further requirements imposed on the Seller?

Yes, Standard D of the contract requires the Seller to provide Estoppel Letters from the tenants at least ten days before closing. The Estoppel Letters will specify the nature and duration of the tenant’s occupancy, rental rates, advanced rent, and security deposit made by the tenants. If the Seller cannot obtain the Estoppel Letters from the tenants, the Seller must provide a Seller’s Affidavit to the Buyer at least ten days before closing. The Seller’s Affidavit must specify the exact information required in the estoppel letters. Failure to provide the Estoppel Letter or the Seller’s Affidavit with the required information can result in a breach by the Seller and allow the Buyer to terminate the contract.

What if the Estoppel Letters/Seller’s Affidavit is different from the Seller’s initial representation or the lease terms?

The contract grants the Buyer the ability to terminate and receive their deposit back if the Estoppel Letters or Seller’s Affidavit differs materially from its prior representations and leases. Additionally, if the tenant(s) fail or refuse to confirm the accuracy of the Seller’s Affidavit, the Buyer can also terminate the contract. 

To terminate under these reasons, the Buyer must deliver written notice of termination within five days from receiving the Estoppel Letter/Seller’s Affidavit but no later than five days before the Closing Date. As a Buyer or an agent representing the Buyer, it is essential to receive the Estoppel Letters/Seller’s Affidavit early on in the closing process to ensure you reserve your right to terminate. 

As you can see, the requirements imposed and rights granted to the parties under Section 6 of the contract are specific and time-sensitive. Failure to abide by each requirement may give the other side the ability to walk away from the deal. Consult your local real estate attorney if you have any questions regarding Section 6 and Standard D requirements.

Staff Writer

Staff Writer

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