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Pre-Possession is High Risk!

It is bound to happen to you, a home buyer and seller may wish to allow the buyer possession of the home prior to the closing date. However, a pre-possession agreement carries with it many risks which the parties should carefully consider.

First, they need to decide whether they want a “pre-possession agreement” or a “rental agreement” (Lease) which would be governed by the Arizona Residential Landlord and Tenant Act:

  • The Purchase Contract: once the buyer moves into the property, the seller is no longer obligated to maintain the property’s major systems in working condition.
  • Residential Lease: the seller would remain liable for problems with the heating and cooling systems in the property throughout the pre-possession period.

A rental agreement may be advisable in some circumstances, however, a properly drafted pre-possession agreement can be the better option. The following are some basic issues that should be addressed in a pre-possession agreement.

  • The parties must specify whether any contingencies remain in place, and what will happen if the contingencies are not met.
  • The parties should agree to a final walkthrough of the property prior to the buyer’s move-in.
  • The parties must agree who will be responsible for damages to the property during the pre-possession period.
  • The parties should spell out who will bear responsibility for the repair and maintenance of the property, and the payment of utilities during the pre-possession period.
  • Include some type of “security” just in case the buyer does not close on the house or damages the property. Have the buyer deposit additional non-refundable earnest money that is immediately released to the seller. The parties should make clear that the seller is entitled to retain this security deposit even if the Purchase Contract terminates because of a contingency.
  • The parties should state in the agreement who may occupy the property, and if there are any pets or smoking allowed.
  • The agreement should state when the seller is entitled to evict the buyer from the property upon the failure of a contingency or the day after failure to close. (The seller should be entitled to evict the buyer upon five days’ notice. (A.R.S. § 12-1171 seq.)

With the recent amendment to A.C.C. R4-28-1101, Arizona real estate licensees are now required to recommend that their clients seek “appropriate counsel” regarding the risks of pre-possession (and post-possession) agreement.