Which form should I use when a buyer takes possession before closing?

QUESTION: The buyer in one of my transactions needs an additional 90 days to close, and my client, the seller, is willing to let the buyer take possession during that time. One of the warnings at the top of the Buyer Possession before Closing Agreement (Form 2A7-T) says this form “SHOULD ONLY BE USED FOR SHORT-TERM OCCUPANCY.” Is 90 days “short-term”? Can I use Form 2A7-T if my seller decides to allow possession by the buyer, or do I need to use the Residential Rental Contract (Form 410-T)?

ANSWER: Although there is no definition of “short-term occupancy” in Form 2A7-T, 90 days is not “short-term” in our view. That said, Form 2A7-T also warns that “THIS FORM MAY NOT BE USED FOR LONG-TERM OCCUPANCY,” and 90 days doesn’t seem to fit within the definition of “long-term” either. Since your fact pattern falls somewhere in between, we believe you could use either Form 2A7-T or Form 410-T in your transaction, subject to the following considerations.

First, if you have not already done so, you need to have a conversation with your client about the substantial risks associated with a buyer’s taking possession before closing. It is perfectly possible that this buyer may take possession, cause damage to the home, not close, and then leave your seller with a complete mess. We would strongly advise confirming this conversation in writing for your records, including your recommendation that the seller get legal counsel before agreeing to allow possession before closing.

Second, if the seller still wants to proceed, you should present them with both forms, and explain that they should consult with legal counsel to determine which form to use. You should at least be able to explain some of the major distinctions between the two forms. For instance, Form 2A7-T does not provide for a security deposit or allow the landlord access to the premises during the tenancy. However, because the choice between these two forms has significant legal implications, we do not believe that you should advise your client as to which form to use. Moreover, if the seller elects to use Form 410-T, it is important that an attorney add wording to ensure that the lease works properly with the purchase contract.

Finally, you need to advise your client to speak with their insurance agent to make sure they have the appropriate coverage in place. If your client does not update their insurer that their private residence has become a rental home, they may be denied coverage in the event of a claim.