What is a post-closing possession agreement and what are the risks for buyers and sellers?
When you are buying in New York City, a good strategy for beating the competition is to find out what the seller wants and be the buyer who meets their needs. That might mean offering to accommodate a seller’s specific circumstances. For example, sometimes a seller might need to show proof of funds from the sale in order to buy their next place, and the seller’s attorney might suggest a post-closing possession agreement.
This is a contract allowing a seller to remain in the apartment beyond the closing date. During the height of the pandemic, attorney Daniel Gershburg, partner at Konner Gershburg Melnick Darouvar, says he sees dozens of these arrangements. They usually occur when the seller needs to qualify for their next purchase with funds from the sale.
A seller is typically “either getting rid of the debt of the first place and netting the profit to buy another place or just netting the profit of the first place to buy another place,” he says.
[Editor’s note: A previous version of this article was published in August 2021. We are presenting it again with updated information for August 2022.]
Flexibility with closing and moving schedules could result in a winning offer if it comes to a bidding war, but be aware that post-closing possession agreements come with risks and those risks fall mainly on the buyer. Instead of being delivered a vacant apartment, you rent the apartment back to the seller. Most agreements are fairly short, a week to 10 days, says Gershburg, although he has negotiated agreements of up to 45 days.
As a buyer, you are relying on the seller to get out by the arranged date and there will be penalties if they don’t. As a seller, introducing a post-closing possession agreement might scare off potential buyers who don’t want to take on these kinds of risks.
Set a move-out date
With a post-closing possession agreement, both sides need to show flexibility, says Elise Kessler, an attorney at Braverman Greenspun. “Normally the post-closing agreements have an outside date by which the seller must move out or pay a per diem amount for each day the seller does not vacate after the outside date,” she says.
The legal term for these per diem costs is liquidated damages or penalty provisions. Typically the amount can be “substantial in addition to the maintenance and interest payments being paid by the seller,” Kessler says. This might be a fine of $1,000 or more for every day the seller overstays beyond the date outlined in the contract.
It’s a license, not a lease
Although it seems as though the seller is renting back the apartment they’ve just sold, the contract you sign is actually a license, not a lease. This is important, Kessler says, because “the parties do not want their relationship to be deemed a landlord-tenant relationship, which gives the parties different rights.”
A lease agreement would put the buyer and seller on a path towards expensive and time consuming eviction proceedings if the seller refuses to move out. A license can be handled differently.
Co-ops may charge a sublet fee
Boards are not parties or signatories in post-closing agreements, but Kessler says it is possible they could require an escrow payment to cover cleaning fees or other costs. A co-op board will typically need to be notified and may make additional requirements, even charging a sublet fee.
Your agreement might also involve the seller putting funds in escrow if you are concerned the apartment won’t be delivered vacant and you will be left dealing with additional belongings that haven’t been removed. Additionally, an escrow term might protect you from damage to the place. The funds are released to the seller after they have moved out and fulfilled all the requirements outlined in the agreement.
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