What Is a Temporary Occupancy Agreement?
Temporary Occupancy Agreement is an agreement between a landlord and tenant to grant a short-term right of possession of real estate until a formal written lease is entered into. The practical purpose is to allow parties to complete the transaction while the final written lease terms are being negotiated.
A temporary occupancy agreement may be executed in existing or new construction leasing scenarios. It may be used to allow the tenant to occupy the premises where all of the lease terms except for the commencement date have been agreed to. While the tenant occupies the premises, the parties may continue to finalize the lease, the leasehold building may be built, and parties can have a chance to work out move in logistics and possibly address design issues.
A temporary occupancy agreement is simply a short-term right of possession , and is generally considered a license rather than a lease. It is important for the parties to avoid using the term "lease" within the T.O.A. to avoid it being construed as a lease. The parties should also be clear that the T.O.A. is immediately terminable by either party, and the tenant does not have any right to remain on the property after such termination.
Although the documents may not be referred to as a lease, in most states the general rules of landlord tenant law apply. For example, any action for wrongful ejectment would be based on the underlying rights of a tenant and a landlord. Because the right to possession is not created by lease language, no tenant holdover action would be possible. The landlord may only seek a temporary restraining order for wrongful interference with limited, enumerated rights under applicable state property law.
Components of a Temporary Occupancy Agreement
Similar to a long-term commercial lease, temporary occupancy agreements for commercial real estate typically contain the following essential elements:
Identification of the Parties and Property. The parties to these types of agreements are the landlord (or tenant) and the temporary tenant (or subtenant). These parties should be identified in the agreement, as well as the address of the property and any other applicable legal description.
Term of Agreement. The agreement should provide for the specific term of the temporary occupancy. It may last for several days, weeks, or months. In some instances, the business tenant may rent the property on a month-to-month basis. The parties can renew the agreement by mutual consent.
Rental Amount. If rent is required, the agreement should contemplate the rental amount, when and how the rent shall be paid, and what penalties, if any, apply to late payments.
Use of Premises. The parties should agree on the permitted use of the property during the term of the occupancy. The agreement should prohibit any excludable uses (e.g., for illegal purposes) as well as any change in the use of the premises that may be objectionable to the landlord.
Addressing Damages. The agreement should identify which party is responsible for repairing any damage to the property during the term of the occupancy. The agreement should also expressly address liability for injuries or damages to a third-party (such as a neighbor or visitor to the property) by the actions or omissions of the parties.
Advantages of Temporary Occupancy Agreements
‘Temporary Occupancy Agreements’ – Not all occupiers fall into to a particular category or need to reside at a property in a long term contract. The use of temporary license agreements allows both the owner of the property and the occupier to exercise a flexible arrangement to suit their needs.
Flexible – The terms of the temporary occupancy agreement may be written to suit either the owner of the property or the occupier (tenant). For example if the owner is unsure how long a relative will be living in a guest house, the owner is able to cover them with a short term license agreement for 1-6 months till the owner can find a long term solution.
Protection – As an occupancy agreement does not give the occupier any rights over the property, they can be removed from the property simply by the owner giving the occupier notice that it has ended.
Common Situations for Temporary Occupancy
Temporary Occupancy Agreements ("TOAs") are commonly entered into in the following scenarios:
Selling your house:
If you have a buyer but not yet a place to move, you will need the ability to stay in your home until the buyer is ready. It’s common to set the date for possession 1, 2 or even 3 weeks after closing to provide the seller time to find a suitable place.
Buying a new house:
Similarly, if you have found a new home, but cannot yet move in, a TOA allows you to sell your existing property, which you may have owned for some time, and take advantage of the current market, but not be forced to move until the new home is available.
Renovating:
A TOA can also be used when a homeowner wants to undertake significant renovations. If you have an older home that needs updating, and you want to avoid the hassle of moving, temporary occupancy of a secondary residence, such as a basement suite or an apartment, may be necessary.
In these situations, you may wish to negotiate a lower rate, and make it clear that there will be heating and utilities already in place for the duration.
Legal Implications and Best Practices
Temporary occupancy agreements involving the use of a portion of property by a person or a group of persons for an event or a temporary purpose are common in The Bahamas, particularly in connection with sporting events, parties and entertainment events. They may also be utilised for medical or care related purposes.
These agreements, often described as short term tenancy agreements, are not governed by the standard statutory provisions relating to residential tenancies in The Bahamas, including the Rent Control Act and the Rent Restrictions Act. Rather, they are treated as licences. The difference between a licence and a short term tenancy is not always clear in practice, and it is not unusual, particularly when a party is unfamiliar with the legal terminology, that the appropriate legal instrument is misunderstood.
For example, a licence is not a right of exclusive possession of land . Rather, it is much more akin to simply a right to be on land which is in the possession of another person, and which this person has the right to enter or exclude others from entering.
It is important that the parties are clear from the beginning as to whether they are creating a tenancy or a licence. Tenancies create an exclusive possessory right in the tenant, and are more difficult to expire as a result of a contractual provision; whereas licenses are not and are easier to terminate. If it can be established that a party has the right to exclusive possession of land, courts may be less inclined to allow an early termination of that right in the absence of a contractual provision allowing for expiration.
When drafting a temporary occupancy agreement, one would need to consider the following: Even though they are short term, the agreement must still be executed pursuant to all of the requirements for a binding agreement, including the requirements of being contained in a written instrument under seal where real property is involved.
Risks and Mitigation
Purchasing or leasing space without full occupancy permits can expose buyers, sellers, tenants, and landlords to risks that can be difficult to avoid and avoidably hazardous. Buyers often don’t discover, especially over long-term deals, that their ability to use space is capable of being easily frustrated by a municipal code enforcement officer whose sole purpose, however well intended, is to help ensure that new occupants conform to the building codes.
Standard real estate contracts allow for possession not later than the closing of escrow, that is, closing of the sale. This of course is consistent with the temporary occupation agreement under consideration here. The problem is that many buyers do not take possession at closing, or even soon thereafter, which then raises the question: when will the buyer be in possession and when may the space be used for its intended purpose.
Many sellers or landlords know that spaces offered for sale or lease may not have the certificates of occupancy needed for full occupancy. For example, an existing restaurant space with a health department permit may be fully stockable and ready for patrons, but no one can occupy the place unless the appropriate building permits and certificates of occupancy have been issued for the current use.
Not surprisingly, many sellers assume the risk included in their contracts, which permits them to offer space subject to "immediately correctable violations". Regardless of the language used in this contract provision, the concerns include the following: A temporary occupancy agreement should address each of these concerns.
Mitigation means eliminating the risk altogether or reducing the risk of it occurring to an acceptable level. When structuring temporary occupancy, it is best to do so with an eye towards avoiding deliverables that simply are not achievable. For example, if you generally can’t get a CO for a building in less than 30 days, don’t try to get a 15-day quickie.
Temporary occupancy agreements are intended to be short-term arrangements. If a tenant or purchaser needs more time than that to get the necessary permits, perhaps a temporary occupancy is not appropriate after all. Suggest that the parties sit down and renegotiate the applicable requirements.
Be cautious about allowing tenants or purchasers access to your space. You don’t know how reliable their contractors are. Sometimes they hire skilled people but they aren’t mindful about the remaining risks. But we return now to our previous discussion – the person who is getting paid for work done should be responsible for keeping that person, and anyone else, safe and secure while on your property.
Try not to make this a multi-party temporary occupancy agreement, that being an agreement that has more than two parties to it. Landlords and sellers already expose themselves to risk when they allow tenants or purchasers access to the space. If a third party were to enter the space then the risk becomes more complicated, with the potential for a domino effect. For example, if a landlord allows a tenant access to the space, and the tenant then allows its architect, engineer, contractors, etc., into the space, then the landlord may be liable for injuries caused by someone tripping in the debris created by the architect’s examination of the site.
As mentioned above, instead of entering into a temporary occupancy agreement, it might be simpler to have the respective parties return to the negotiating table, revise the required terms, and then start again.
Creating a Temporary Occupancy Agreement
There are three basic rules that apply to drafting temporary occupancy agreements.
Rule #1: Don’t wing it. The agreement has to reflect the actual deal made between the parties, not whatever you think they meant when they first started talking about it. So what does that mean? It means the parties (your clients, of course) have to talk to each other about what they want, then talk to you as their lawyer, then talk to each other again—to give you the details on size, type, location, number, rent, and all the other things we cover for you in our checklist for temporary occupancy agreements. It’s best to have a specific meeting to discuss before drafting the agreement so that you and your clients have all the best information and can work together to negotiate the best terms.
Rule #2: Include as many details as you need to, and don’t be afraid to add non-standard clauses if everyone agrees on them. Sometimes, a tenant will need extra time to get ready for the move-in date, so it’s perfectly reasonable to have a separate "moving in" and "occupying" date. Just make sure that the purpose and timing of each step is clear. In one case, a moving-in date was actually set for a week before the lease’s official starting date. Because New York law requires a lease to be for one year or longer, the unexpected extra week caused a problem for the lawyers—one that the clients were able to avoid only with great effort.
Rule #3: Include as many details as you want to, but don’t go overboard. What does that mean? Less is more, and we’d rather add to than remove from the lease when we’re negotiating. The occupant might wind up getting a lot of extra suites, so it makes no sense to list every single one in the agreement. Don’t worry—they’ll know where they are if they need them. If the agreement fails to address something that winds up becoming an issue, just like in any other negotiation, the landlord has the advantage in this situation. If you’re concerned that your clients aren’t thinking of something they might need later, advise them to put it in anyway, or suggest you draft a second document to cover it. Otherwise, you might find yourself coming back to revisit the deal once it becomes so complicated that everyone, including the landlord’s lawyers, has to sign a new one, costing client money and also perhaps causing some people to lose interest in the idea of a temporary occupancy.
Conclusion: Leveraging the Benefits of Temporary Occupancy Agreements
In a world where flexibility, cost-effectiveness, and transparency are increasingly important, temporary occupancy agreements provide a compelling option for those seeking the use of space for the briefest of time periods. The key considerations governing temporary occupancy agreements are all fairly straightforward and easily understood . As always, careful drafting can go a long way to clarifying reasonable expectations and eliminating any potential for misconceptions. Periodic review of your practices, agreements, and procedures to ensure that you are continuing to comply with both your insurance policies and local statutes and regulations is always prudent.