Make sure You have Vacant Possession on closing

So what happens on Closing Day”, that exciting day that you finally take possession of that house you bought three months ago?

You drive to the house, slip the key in the front door lock, push open the door and see another family living in your house?

Did your Realtor really address the issue of a tenant living in the house?

This is a VERY common scenario that must be dealt with when one purchases a home that is currently rented.

Vacant possession and the Agreement of Purchase and Sale

From the Ontario Real Estate Association

The concept of vacant possession is sometimes glossed over by real estate practitioners, but you ignore it at your peril.

Clause 2 of the Agreement of Purchase and Sale (APS) is a small but powerful item with huge ramifications if handled incorrectly. It deals with the completion date and the buyer’s right to take possession of a property.

In residential real estate, the presence of tenants affects all parties to the deal. Nancy Bloom, a Toronto broker and instructor for the Ontario Real Estate Association, says that consumers and REALTORS® should be aware of issues and potential pitfalls related to tenancy.

If a property sells, the tenants can’t just be thrown out,” she says. “There’s a process to be followed and all parties should know about it.

The listing salesperson should use due diligence from the beginning, says Bloom. “Some salespeople trust the seller’s statements without checking for themselves,” she says.

When you ask whether a tenant has been given proper notice or if a lease exists, don’t just take the seller’s word for it. Ask to see the documents -- do things properly from the start and you’ll prevent problems later.”

Real estate salespeople must verify facts, according to the Real Estate Business and Brokers Act (REBBA 2002). That means you should look at the property lease or rental documents and check that the tenant received legal notice, Bloom advises.

If a property houses a tenant who will be staying, appropriate clauses must be inserted into the APS to override vacant possession because the property will not actually be vacated. If vacant possession will not be given to the buyer on closing, this must be set out in the APS.

Since the buyer will assume the tenancy and become the landlord, all of those aspects must be covered in the APS.

“Some salespeople make the mistake of ignoring the vacant possession issue,” says Bloom. “It’s in a pre-printed clause so they gloss over it, not realizing that they must override this clause in the agreement if the tenant is staying.”

Brokers and salespeople should be aware that Ontario’s Residential Tenancies Act affects properties where renters are involved. Protection of tenants is at the heart of the act, Bloom notes.

Sometimes tenants are told to leave before they are legally obliged to do so. If the tenant has a year’s lease, the buyers may have to assume the tenant and wait for the lease to expire.

“If your sale closes in November but the lease runs until May, you can’t make the tenants to leave in November.” And even by May, there are only a few legal reasons that enable you to terminate a tenancy.

Not all tenants know their rights, and some end up moving sooner than required, which can have legal or financial consequences for those involved in real estate transactions.

“Some tenants don’t realize they can stay until the lease is up even if the house is sold,” she says. “Some go because they’re told to do so and don’t know any different, but they have recourse if that happens. Under the act they could come back to the owner to seek fines, moving or living expenses.”

Both sides must comply with the terms of the lease and the act. “Landlords should tell their tenants that the buyers will be the new owners, who in turn can give notice if they want to live there themselves,” says Bloom.

“Some tenants choose to leave sooner rather than later, and that’s fine provided the landlord agrees, but neither the seller nor the buyer can force them to leave until the term of the lease has ended.”

If no lease exists and the buyers want to live at the property themselves, the seller must give the tenant at least 60 days’ notice on behalf of the buyers to terminate the tenancy by the date of closing.

The termination date must be at least 60 days after the date that the tenant is given this notice, and that date must be the last day of the rental period. That means that if a tenant pays rent on the first of the month, but a property sells on June 5, the tenant has the right to stay not just until August 5, but until August 31.

Tenancy laws are complex, and a tenancy can only be terminated for specific reasons. At the end of a lease term, these reasons include: personal occupancy when the owners are moving in; the landlord is selling and the buyers are moving in; or the landlord is planning major repairs.

Even then, the lease term, appropriate notice period and correct form and delivery of notice are all essential elements of a proper transaction. For instance, a landlord can only give a notice of termination on behalf of a buyer if there are no more than three units in the building or the property is a condominium.

If the landlord wants to live in the unit himself, there is no similar restriction with respect to the number of units in the building.

Even if proper legal steps are taken to remove a tenant, the latter may refuse to go and further legal steps may be needed. If the APS states that vacant possession will be given on completion but the tenant does not leave, the sellers could be in breach of the agreement.

It is critical that buyers and sellers consult with their lawyers when transactions involve tenants. Lawyers can advise on the process of terminating a residential tenancy (or assuming a residential tenancy, if that was agreed to) and also ensure that the appropriate clauses are inserted in the APS to reflect the parties’ agreement on these matters.

Bloom recalls representing the buyer of a downtown Toronto house occupied by five tenants. The closing was set 90 days ahead to allow for a 60-day notice period to the tenants.

“Four days before closing, we went to the house for a scheduled visit. The tenants were still there and nobody seemed to be packing,” she says. “That caused some anxiety for my buyer.”

She called the listing salesperson to check whether vacant possession would be an issue. The seller asked to extend the closing by two days, which worried the buyer that the tenants might not leave.

Any delay causes problems of its own because the buyers in turn may have sold their previous house. “In this case, it all worked out. The tenants left on schedule and the seller wanted two more days to clean after they left.

The buyer agreed to the extension and appreciated the seller’s conscientiousness in cleaning up.”

If a property has no tenants, Clause 2 of the Standard Form APS gives a deadline for completion of the transaction and states that the buyer takes vacant possession on completion (unless otherwise provided for).

The default time is 6:00 p.m., although the transaction may close any time before. If the transaction is completed at 3:30 p.m., the buyer is entitled to vacant possession at that time, since that is “upon completion.” As a REALTOR® you should explain these details thoroughly to ensure a smooth move for your client.

Vacant possession requires logistics and planning at both ends. If the buyer’s moving van arrives and the sellers are obligated to vacate but are not ready, the sellers could be financially responsible.