Avoid the Seller becoming a Tenant by Accident

Commercial Real Estate Agent with RE/MAX West Realty Inc., Brokerage (Toronto)

Avoid Having the Seller become a Tenant by Accident

Title Tip: How Does a Seller Lease Back Work?

This is a potential problem which arises frequently. The Seller needs a little longer to stay in the house before they can move on. The Buyer wants to close but, actually, they don’t need to move in right away. They may be planning extensive renovations.

So, effectively they are in agreement. The Seller can stay, the deal will close and the Seller will pay some money for the accommodation.

Consider the following situation. Bob the Buyer wanted to close before the end of the year since he had negotiated a preferential interest rate with his mortgagee. The rate will increase if he puts it over. Seller Sam just found out that the builder of his new house needs a little more time. Sam wants the closing to be 31 March 2021. The parties have already agreed to 31 December 2020. Sam will pay $10,000,00 for this privilege. Bob is agreeable since he is a little pressed for cash and can easily stay in his apartment until then.

What do we need to avoid?

Beyond anything else, we need to make sure that Sam doesn’t become a Tenant. Under the Residential Tenancies Act, Tenants have increased rights and they can become difficult to evict. There’s a process and 60 day’s notice is the absolute minimum, and if the Tenant is not agreeable, that means an application to the Landlord and Tenant Board for an “eviction”. With Covid, these applications are taking over 9 months to reach the Board for consideration.

Accordingly, Sam cannot become a Tenant in any way. He can’t be referred to as a “tenant”, the money he pays cannot be considered “rent”, and his contractual agreement cannot be considered a “lease”. So, let’s avoid all of those terms.

Overholding Seller

This is the arrangement which we need for Sam, He’s still the Seller of the real estate. He hasn’t parted with vacant possession at this point, so the deal is still pending. Sam will be referred to as the “overholding Seller” in the extension agreement. He will have one more step to take, namely the delivery of vacant possession before final completion of the terms of the Agreement of Purchase and Sale.

Amendment to Agreement of Purchase and Sale

We need to have some sort of clause spelling this out in the Amendment. Consider the following:

“The Parties to this Agreement hereby agree as follows:

  1. The closing of this transaction shall take place on 31 December 2020, save and except for the delivery of vacant possession,
  2. The Seller shall pay or provide a credit to the Buyer in the amount of $10,000.00 on account of the occupancy period I January 2021 to 31 March 2021,
  3. The Seller shall deliver vacant possession to the Buyer at 3:00 pm on 31 March 2021,
  4. The Seller shall have no rights whatsoever arising under the Residential Tenancies Act, and all rights related to occupancy shall be determined in accordance with the terms of this Agreement,
  5. The Seller shall pay to the Buyer the sum of $100.00 per hour for each hour or part thereof that he has not provided vacant possession to the Buyer, as agreed, to a maximum of $1,000.00 per calendar day until the Seller has delivered vacant possession,
  6. If vacant possession is not delivered by 3:00 pm on 31 March 2021, the Buyer shall have to right elect to treat such failure as a fundamental breach, thereby entitling the Buyer to seek rescission of the Agreement,
  7. The Buyer shall have the right to specific performance of this Agreement and the property shall be considered to be “unique”, for the purposes of any legal proceedings,
  8. In the event of an Application to the Ontario Superior Court of Justice, by way of motion or trial, the Buyer shall not be placed to his election as to specific performance and damages, or rescission and damages until the conclusion of the submissions made on his behalf to the Court.”

Certainty of Possession

If we include a clause like the one above, you can be sure that the Seller will be out “on time”. The daily rate of $1,000.00 naturally needs to be large enough to encourage compliance.

My assumption here is the property might rent for $2,500.00 to $3,000.00 per month. If this were a commercial property where the monthly rental were $100,000.00, then this would be a disincentive. The amount would have to be increased accordingly, in such circumstances.

Brian Madigan LL.B., Broker


Comments (1)

Kristin Johnston - REALTOR®
RE/MAX Platinum - Waukesha, WI
Giving Back With Each Home Sold!

Great information.  Thanks for sharing and make it a wonderful day!

Jun 25, 2021 07:31 AM