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Rental Agreement Issues in San Juan Island Real Estate Transactions

Rental Agreement Issues in San Juan Island Real Estate Transactions

It is not uncommon for a rental agreement to play a role in a real estate transaction. Timing can be everything and often the homes on the market are occupied by a tenant or sellers are unable to time the closing of their current home and the purchase of their next home. In some cases, homes are selling so fast, many of our sellers are unable to relocate within the contract period. In these situations, a short-term delayed possession agreement is in order.

When buying a property that is currently occupied by a long-term tenant (month-to month or lease) the following provisions should be included in the contract so that it is clear that either; 1. The buyer inherits the tenant and lives happily ever after, or 2. The tenant has vacated by the time that the buyer takes possession of the property.

I typically write something in the contracts similar to the language below. This language has been approved by my attorney for my use only and other agents may have their own approved language. This language is just for the purpose of this article and should not be relied upon.

Tenant Vacates

Seller shall have the premises vacated by the current tenant prior to closing. Seller to give written notice to tenant of rental termination within 5 days of Buyer removing all contingencies, or earlier at seller’s option. (Most notice periods are 20-30 days; however, the period is dictated by the rental agreement or law.) Seller to evidence written tenant notice to Buyer. Seller to conduct all landlord responsibilities prior to closing, including but not limited to, vacation of premises, final walk-thru, final cleaning, security and damage deposit refunds and refund of any unused rents.

Closing is within 10 days of tenant vacation; however, in no event no later than xx/xx.

Tenant Remains

Buyer is purchasing subject to tenant’s rights and will assume all land lord responsibilities at closing. At closing, the current month’s rent shall be prorated and security and damage deposits and last months rent, if any, shall be transferred to Buyer.

Seller to provide Buyer a copy of the rental agreement within 10 days of mutual acceptance, Buyer shall have 3 days to approved or reject the rental agreement terms.

Options for Tenant Situations

It is always an option for the seller to “buy out” the tenant early to vacate the premises to accommodate their sale to a buyer. This process might be difficult/costly in our market as rental homes are few and far between. The tenant must agree to the “buy out” as they have legal rights to stay until expiration of the rental agreement or notice period.

It is also an option for a buyer that has signed a long term lease but found a home to purchase to negotiate a “buy out” with their landlord. Legally, they are obligated to pay all remaining rents due until lease expiration; however, some landlords will accept a settlement payment knowing that they will rent to another tenant right away and view the settlement payment as a bonus.

VRBO or AirBnB

If the buyer is purchasing a home subject to a vacation rental permit with future reservations under the VRBO or AirBnB platform, I used the following approved language:

Buyer acknowledges that Property has an active Vacation Rental permit and that there are currently several existing reservations to rent Property on various dates in 2022.

Seller will provide a list of guest reservations and such contact information as VRBO and Airbnb have made available to Seller.

On closing, Seller will begin the process of canceling all existing reservations scheduled for occupancy after closing per the requirements of VRBO. Seller will notify guests scheduled for those dates that the reservations are being canceled due to change of ownership and each guest will be informed that Buyer intends to continue to make Property available for Vacation Rental via VRBO and Airbnb. Guests will further be informed that they must immediately re-book their reservations via VRBO or Airbnb or risk losing the actual booking dates desired.

Buyer is aware that some or all guests may choose not to re-book, and that Seller is not liable for any loss of guests. Seller will work with VRBO and Airbnb for one week after closing to assist with the transition.

Buyer acknowledges that to continue booking business they must have a hosting membership with Airbnb and VRBO. Further they understand that reservations may be canceled by the tenants at any time, there is no guarantee of rental income implied or offered.

Buyer acknowledges that if Buyer intends to continue the operation of a vacation rental during Buyer’s ownership, Buyer is aware of the requirement to submit to San Juan County a certification of compliance and updated management plan within 90 days of purchase, or risk losing the permit.

If a guest is staying in the home on the date of closing, rents shall be prorated as of the date of closing between Buyer and Seller.

Seller to transfer the right, title and interest in any marketing materials, name of home, website and past client lists to Buyer at closing.

Vacation Rental not on a Platform

If the property is not on the VRBO or Airbnb platforms, and seller has collected deposit funds, then the following should be added versus the VRBO and Airbnb language.

For all rental stays after closing, Seller will transfer all deposits paid by confirmed guests to Buyer at Closing and provide all tenant contact information. Seller to provide a list of all future vacation reservations, their contact information, and their scheduled deposits prior to Closing.

Delayed Possession

It is also very common in a strong seller’s favored market to allow for delayed possession. Sellers are often in the driver’s seat and take the position that they don’t have to move prior to closing or until after their money is in the bank. Further, it helps buyers when they propose delayed possession in their offer to be more competitive in a multiple-offer situation.

When this occurs, the transaction may include a 1-30 day delayed possession agreement after closing for the seller to arrange for their movers and pack their personal property. These short-term delayed possessions are fairly safe, as you know the seller will relocate after their tenancy with all their personal property. Often no rent is charged to the seller during this period, or the rent applies after a date certain, such as after the 15th through the 30 day as an incentive to relocate prior to the 15th day.

Your agent will investigate if the seller has plans to move to their new home or buy an RV and take off or are undecided. If they are undecided, the risk of default in the delayed possession agreement is much higher. If the seller hasn’t found the replacement home or the delayed possession is a long-term agreement, a buyer should seriously consider the terms. If the seller has yet to find their replacement home or rental, and refuses to relocate at expiration, this will force the buyer to hire their favorite attorney and start the unlawful detainer action.

If you are a buyer, before you agree to delayed possession, just make sure that the seller has a place to go and this delayed possession is merely for their convenience.

Early Possession

On occasion, the opposite situation can occur, the buyer needs early possession. During a transaction, the loan process or other requirements can be delayed and now the moving van is sitting out front. Early possession is not advised by the Washington State Realtor attorney but sometimes, it is what keeps the transaction from falling apart. All parties must understand the issue prior to making the decision. The risk posed to the seller is if the buyers move in, then their loan is rejected or the buyer finds a problem with the home that wasn’t addressed and refuses to vacate the property or close on the purchase contract, then the seller is in the same situation as above, they must hire their favorite attorney to process the unlawful detainer.

Contract Provisions

Regardless, early or delayed possession can be stressful events and take time and money to resolve. Make sure the issues are addressed properly during the contract drafting and all agreements are in written form. Verbal agreements are not binding in real estate transactions.

The parties must be obligated to retain and initiate their homeowner’s insurance, the seller may need to switch theirs to a rental policy as they no longer own the home or at least notify their insurance firm of the delayed possession and have the firm write the appropriate coverage. The buyer should notify their insurance firm that they have a short-term tenant.

The parties need to identify who pays the utilities, consider requiring a security/damage deposit and whether to charge rent. The parties need to be clear on who is responsible for damage? The purchase contract reads that the seller is to maintain the home in its present condition until buyer is given possession; however, now the Seller is a tenant, and the landlord or buyer is responsible to maintain the home. Determine the responsible party and place the agreement in written form.

The buyer should check with their lender, many lenders won’t accept leaseback agreements that are longer than 60 days if the loan was based on an owner occupancy program.

Buyers may ask that the seller waive their rights as tenants under current COVID-19 protections. Buyers may also ask that a portion of the home proceeds be held in escrow and released to the sellers once they finally move out.

Bottom line, the longer the agreement, the more risk for both parties to consider.

Washington State recently clarified the Landlord Tenant Act to provide that delayed possession or early possession agreements between Buyers and Sellers are subject to the provisions of the Unlawful Detainer Statute, RCW 59.12 or RCW 59.12.040, depending on the situation. The North West Multiple Listing Service has revised the rental agreement forms accordingly.

Rental Agreement Buyer Occupancy Prior to Closing (Form 65A). This form gives Seller notice if buyer defaults under the purchase and sale agreement; fails to close, and fails to vacate the property, seller may have limited rights to remove the buyer from the property. A default under the Purchase and Sale Agreement would also constitute a default under the rental agreement, and Landlord would be entitled to all remedies provided for in the Unlawful Detainer Statute, RCW 59.12.

Seller Occupancy After Closing (Form 65 B) This form gives Buyer notice that there are many associated risks with giving a seller the right to occupy a property as a tenant after closing. If a seller fails to vacate the property upon the termination of the rental agreement, a buyer may have limited rights to remove the seller from the property. Further, Form 65B states that Tenant hereby acknowledges and agrees that pursuant to Paragraph 3 of Form 65 B, Landlord has provided to Tenant the requisite advance written notice that: (i) the tenancy granted hereunder shall automatically expire and/or terminate upon the Termination Date without further notice to Tenant, (ii) Tenant is not entitled to any rights to extend the Termination Date or to continue to occupy or use the Property beyond the Termination Date, (iii) Tenant must immediately vacate and surrender the Property to Landlord on the Termination Date as further provided in this Agreement, and (iv) this notice to Tenant shall constitute personal delivery to Tenant consistent with RCW 59.12.040.

Both forms stress, as with the Purchase and Sale agreement, seller or buyer should consult with an attorney before entering into an agreement that provides a buyer with occupancy prior to closing or a seller with delayed possession.

I will say in my 27 years of real estate, I have not had any issues around delayed possession, all parties followed the contract and acted in good faith. Trust among the parties is important for a successful real estate transaction. In this market, we are processing numerous delayed possession agreements.

As always, this article is for informational purposes only and should not be relied upon in the decision process of rental agreements. The sample language I have cited in this article should not be used in contracts without your attorneys review and approval.

Written By:

Merri Ann Simonson

Coldwell Banker San Juan Islands

simonson@sanjuanislands.com

360-317-8668