What Is a Use and Occupancy Clause?

Use and Occupancy Clauses Explained in Less Than 5 Minutes

A parent and child stand in front of their new home.

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A use and occupancy clause is an agreement between two parties in a real estate transaction. It is specifically used to provide either the buyer or the seller with occupancy in the property outside of a standard timeframe.

Let’s take a look at use and occupancy clauses, how they work, and whether it’s worth using for you.

Definition and Examples of Use and Occupancy Clauses

Use and occupancy clauses can be used by either the buyer or the seller in a real estate transaction. The use and occupancy clause gives the intended party the right to move into or remain on the property.

  • Alternate names: occupancy agreement, interim occupancy agreement, seller possession after closing agreement, lease back, seller rent-back

As a seller, you may wish to stay on the property past the closing date. A signed use and occupancy clause can afford you the ability to keep living there for a period of time.

As a buyer, you may need to move into the house prior to the close date. Similarly, the use and occupancy clause can grant you this ability. The use and occupancy clause is an addendum to an existing sales agreement between the buyer and seller.

Generally speaking, you’ll want to keep a use and occupancy clause tied to a specified end date.

How Use and Occupancy Clauses Work

Let’s say you bought a condo three years ago in the city. At the time, it fit your lifestyle; there was plenty to do within walking distance and the dog had a dedicated space under the stairs. However, now your significant other’s elderly father has come to live with the family. Things are crowded and you’ve all decided it’s time to find more space.

The market is booming, which means the equity in the condo has grown substantially. This is great news—except you’re also experiencing trouble finding a suitable home. With multiple bids on every property and an unwillingness to waive all your contingencies, sellers aren’t accepting your offers.

As the close date looms, you begin to worry. Where will you go once the condo has been sold? You start to dig around online and come across use and occupancy clauses, which can allow you to remain in the property while you find somewhere else to live.

The buyer is amenable to this; the lease on their apartment has another few months before it expires, so they can tolerate staying put for a little bit longer.

The two of you draw up the use and occupancy agreement, detailing how long you’ll stay in the property after closing, how much rent, utilities, and/or security deposit you’ll pay while you’re there, and a deal to keep the condo in the condition in which the buyer purchased it.

As part of the contract, you’ve agreed to a holdback. This means that some of the money from the sale will remain in the escrow account until you’ve moved out of the property.

The typical holdback amount is in the range of $5,000.

Now let’s flip to a buyer’s perspective. There are also circumstances in which a buyer may need a use and occupancy clause. Let’s say that as a buyer, the closing has been delayed due to issues with financing. Everything is still on track to close, but it’s going to take an extra 15 days before the transaction finishes.

Unfortunately, you have no flexibility when it comes to occupying the property. You’ve already sold your existing home and the buyers are set to move in on the day it closes.

In this case, you may be able to execute a use and occupancy clause that allows you to move into the new property before you have full possession. You’ll need to pay rent, as well as agree to other conditions dictated by that seller.

Is a Use and Occupancy Clause Worth It?

There are certainly situations in which a use and occupancy clause may be beneficial for you. We’ve detailed these above, and there are numerous other examples where you may want to engage in such a clause.

When deciding whether or not a use and occupancy clause is worth it for you, consider all your other options. Is there somewhere else you can stay? How much trouble will it be to move at another time?

As a buyer, you may be faced with a tough decision if the seller refuses to vacate the property once the agreement has ended. As a seller, ensuring that the property remains in prime condition while you live there may be a difficult feat.

Key Takeaways

  • Use and occupancy clauses give a party the right to occupy a property outside the standard timeframe; they are addendums to existing purchase contracts.
  • Either the buyer or the seller can utilize a use and occupancy clause.
  • A use and occupancy clause isn’t free; you’ll be liable for rent and/or security deposits, among other things.