by David Hamerslough
If you subscribe to the rule that one claim is an anomaly, two are a coincidence, and three are a trend, then you should read this article.
Within the last 45 days, I have worked on three claims involving tenant-occupied property transactions. In each claim, the C.A.R. RPA was used, but no Tenant Occupied Property Addendum (“TOPA”) was completed and attached by either buyer or seller. The first was the sale of a single-family dwelling inherited by several siblings. The daughter of one of those siblings had been living with the elderly family member who passed away. The second involved the sale of a single-family dwelling where an individual had been renting a room to help defray carrying costs. The third involved the sale of a duplex where the seller was occupying one unit and renting out the other unit to a third party. The unit occupied by the tenant had been remodeled and was in significantly better condition than the unit occupied by the seller. The buyer wanted to occupy that unit.
In the first transaction, the MLS information stated that the occupant was related to one of the beneficiaries of the trust and would vacate the property by close of escrow. In the second transaction, there was no written information regarding the occupancy of the property by the tenant and no statement about when the tenant would vacate the property. In the transaction involving the duplex, the MLS information stated that the unit occupied by the tenant had been significantly remodeled.
Paragraph 3(M)(3), 4A, and 7A of the current C.A.R. RPA are the starting points for this discussion. Paragraph 3(M)(3) indicates that Paragraphs 4A and 7A contain contract terms that apply to “Occupied units by tenants or anyone other than the Seller.” If applicable and known to the buyer, Paragraph 3(M)(3) contains a box that the buyer should check, indicating that the TOPA is attached to the offer. If unknown to the buyer, or the buyer fails to attach a TOPA, Paragraph 3(M)(3) states that that “Seller shall disclose to Buyer if occupied by tenants or persons other than the Seller and attach the TOPA in a counteroffer if not part of Buyer’s offer.” Paragraph 4A is to be checked if the TOPA is to be an addendum to the RPA. The parenthetical language adjacent to 4A states “should be checked whether current tenants will remain or not.” Finally, Paragraph 7A provides, among other things, that unless otherwise agreed in writing (e.g., in the TOPA), the unit that the buyer intends to occupy (assuming that is the case) shall be vacant at the time that possession is delivered. Paragraph 7A also provides, however, that if the property contains more than one unit, the buyer shall, within three (3) days after acceptance, notify the seller in writing which unit the buyer intends to occupy. This provision was involved in the claim concerning the duplex.
The default position of the TOPA (Paragraph 1) is that existing tenants will remain in the property on close of escrow. If a contrary intention exists, then Paragraph 1B of the TOPA needs to be checked. It provides, among other things, that if the seller is unable to deliver the property vacant at close, then the buyer has the option to cancel or close escrow and take the property with the tenant in possession. The default timeframe for the seller to remove the existing tenants is close of escrow unless a box is checked, in which case the timeframe for doing so is five (5) days prior to close. The seller must exercise good-faith attempts to remove the existing tenants, and his/her conduct will also be evaluated under …. “applicable law” (e.g., state law or local rent-control/landlord-tenant ordinances. Subject to these requirements, if the seller cannot remove the existing tenant within the designated timeframe, then the buyer’s sole remedy is to cancel the transaction or take the property subject to the existing tenant. If the buyer cancels the transaction, his/her sole remedy is a return of the deposit and reasonable out-of-pocket expenses for inspection reports and appraisal fees. (Please note that the TOPA contains a number of other terms and conditions germane to the sale and transfer of tenant-occupied property, but those were not germane to the outcome of the three claims discussed in this article.)
The following factual, legal, and equitable issues may impact the analysis and resolution of a claim involving the absence of a TOPA. This is not an exhaustive list. The specific facts and circumstances may involve a different analysis and lead to a different resolution.
- What disclosures/information were provided regarding tenant occupancy? When did the buyer receive it?
- Who had an obligation to attach the TOPA to the RPA?
- What was the timing of any communications in relationship to contract formation, any contingency removal, and the close of escrow?
- Is there an enforceable contract in the absence of a meeting of the minds on the issue of occupancy? The answer may depend on what information the buyer received and whether the property is a single-family dwelling (one unit) or a multi-unit property.
- If there is a ratified contract, what are the terms regarding occupancy at close of escrow if Paragraph 7A of the RPA applies versus the default position on this issue in the TOPA?
- Is a Notice To Perform required (it may not be where the buyer has no knowledge of tenant occupancy and the seller fails to deliver the TOPA)?
- What is the impact if a Notice To Perform is delivered by the buyer and the seller then delivers a TOPA?
- What are the buyer’s remedies if Paragraph 7A of the RPA applies versus the TOPA?
- Have the parties acted in good faith (e.g., to what extent, if any, is a party trying to use the absence of the TOPA to gain an unfair advantage?)?
- What are the motivations of the buyer and seller?
- Is it possible for the parties to negotiate other terms and conditions in order to overcome any differences they have on the issue of occupancy?
- To what extent do the concepts of waiver and estoppel impact these issues?
- To what extent do any of the facts and issues impact the application of time is of the essence?
- Based on all the facts and circumstances, should either the buyer or the seller be proposing an extension of close of escrow and, if so, under what terms and conditions? What is the impact on buyer’s financing?
- If estoppel certificates were provided, how did they impact these issues? Were there any communications with the tenant regarding whether they would vacate and, if so, when?
Claim #1 resolved because, among other things, the trustees were motivated to sell and paid money to the family member to vacate the property. While it took time beyond the original close of escrow for this to occur, the parties were fortunate that the buyer was also motivated to complete the purchase and had a rate lock that allowed the buyer to keep their financing during the extension to close.
Claim #2 also resolved with a delayed close of escrow and with the seller paying money to incentivize the tenant to vacate but also paying the buyer money for additional costs incurred by the buyer as the result of a delay in the close.
Finally, Claim #3 resolved with the buyer cancelling the transaction after issuing a Notice To Perform requesting the TOPA and the seller failing to provide that addendum. Again, the motivations of the buyer and seller in this third claim had a significant impact on the outcome.
Although these claims were resolved, it is very difficult to come up with a checklist or a set of rules or procedures one could follow in every circumstance where a TOPA has not been provided. Each of the three claims I handled involved some, if not all, of the issues that I have mentioned in this article. While all of these claims resolved, that required the expenditure of money and the loss of time and caused the parties stress and anxiety. In large part, all three claims might have been avoided, or the impact of them lessened, had the buyer and seller recognized and analyzed the impact of the factual, legal, and equitable issues discussed in this article.
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