Who is responsible for damage to the home or malfunction of systems during the post occupancy period? This is a common question for buyers, sellers, and their real estate agents, whenever a Post Settlement Occupancy Agreement (often referred to as a Rent Back Agreement) is made a part of the parties’ contract. To answer the question, we need to look at how this risk is allocated in the parties’ agreement.
If the parties have agreed upon the terms provided by the Northern Virginia Association of Realtors (NVAR) Seller’s Post-Settlement Occupancy Agreement (“NVAR’s Agreement”) this responsibility for maintenance and repair generally falls on the Seller. The relevant language from this form recently updated in July 2022 can be found in Part 3 of the Agreement which reads:
3. PROPERTY MAINTENANCE AND CONDITION. Seller shall maintain and repair Property, including electrical, plumbing, existing appliances, heating, air conditioning, equipment and fixtures, in substantially the same condition as of Settlement Date. Except as otherwise agreed in Paragraph 6 below, Seller will deliver Property in substantially the same physical condition as on Settlement Date and broom clean with all trash and debris removed and deliver to Buyer all keys, key fobs, codes and digital keys, if any.
In essence, it states that when the Seller vacates the property at the end of the post settlement occupancy period it must be in “substantially the same condition” as it was on the date of settlement. As such, it is the Seller’s duty to maintain and, to the extent necessary, repair any defects, damage, or malfunction of the property, its systems, or appliances. Paragraph 10 of the NVAR Residential Sales Contract (“Sales Contract”) provides a frame of reference for the required condition of the property on the date of settlement, and accordingly, at the end of the post settlement occupancy period. It reads, in relevant part:
10. PROPERTY MAINTENANCE AND CONDITIONS; INSPECTIONS. Except as otherwise specified herein, Seller will deliver Property free and clear of trash and debris, broom clean and in substantially the same physical condition to be determined as of Date of Offer OR Date of home inspection OR Other: ________________ (if no date is selected, the Date of Offer).
It is here that the parties identify the date by which “substantially the same physical condition” will be measured. Which of these options a Buyer should select – the date of the offer, the date of home inspection, or some other measure – when determining the required condition of the property on the date of settlement is outside the purview of this article. For that we recommend an earlier article we published exploring that exact issue (link here). However, we highlight these provisions to illustrate the importance of a final walk through for both buyers and sellers, particularly where a post-settlement occupancy is made a part of the transaction. The final walk through allows the parties to ascertain the condition of the property on the date of settlement. Where there is a post settlement occupancy agreement in place, the final walk through can help the parties better understand the Seller’s delivery obligations at the end of the occupancy period and determine whether or not those performance obligations have been met.
To illustrate, imagine that a Buyer and Seller have entered into a contract for the sale of real property. A home inspection is conducted on June 1st, and it finds that all major appliances are in good and working order. Settlement occurs on June 25th and the parties agree to a post settlement occupancy that allows
for the Seller to remain in the property until July 31st. On June 15th, the dishwasher stops functioning. What are the Seller’s obligations with respect to the broken dishwasher?
If the ratified contract calls for the Seller to deliver the property in substantially the same condition as of the date of the home inspection, then the Seller must deliver the home to the Buyer on June 25th with a functioning dishwasher. When the Seller vacates the home on July 31st in accordance with NVAR’s Agreement, the dishwasher must similarly be in working order, pursuant to the Seller’s contractual obligation to deliver the property in substantially the same condition as on the Settlement Date.
Let’s now assume that all other facts being the same the ratified contract calls for Seller to deliver the property in substantially the same condition as on the Settlement Date1. In this scenario, the Seller has no obligation to repair a dishwasher that is not functioning on June 25th since this is the date (Settlement Date) by which the required property condition is measured. Additionally, since the dishwasher was not functioning on the date of settlement, the Seller has no obligation to deliver the home to the Buyer with a functioning dishwasher at the end of the occupancy period (July 31st). However, if any of the other appliances that convey were working on the Settlement Date and then become inoperative during the period after the settlement date and during the occupancy period (June 25th thru July 31st), it becomes Seller’s responsibility to repair or replace those defective appliances, per the terms of NVAR’s Agreement. If nothing else, this reiterates how important it is for the parties to conduct a “walk-through” inspection to determine the functioning of the appliances and other conditions of the property at the time of settlement.
Note, the July 2022 modifications to NVAR’s Agreement creates one very important exception to the Seller’s obligations as discussed above. In relevant part, the updated language reads as follows:
6. RISK OF LOSS. During Seller’s post-settlement occupancy, Buyer bears the risk of damage or loss to Property resulting from fire, flooding, act(s) of God and/or other casualty loss not proximately caused by intentional or negligent act(s) or omission(s) of Seller…
This creates a carve-out to Paragraph 3 (Seller is responsible for delivering the property in substantially the same condition as on the Settlement Date) by clarifying that to the extent any damages or losses are caused by acts of God or nature, those losses are borne by Buyer during the occupancy period. By way of example, staying with our earlier fact pattern, let’s say that during the occupancy period (between June 25th and July 31st), a storm causes a tree to fall onto the home damaging the roof structure. Per the language of NVAR’s Agreement cited above, the Seller would not be obligated to repair or replace the damaged roof. Those losses would instead be borne by the Buyer.
In summary, if the parties are using NVAR’s Agreement to spell out their rights and obligations it is the Seller’s responsibility to deliver the property in substantially the same condition as on the date of settlement. Where repairs are required to fulfill this contractual obligation, that burden falls on the Sellers. An exception to the Seller’s obligation for repair and maintenance exists, per the July 2022 changes to the NVAR Agreement, if the damage or loss is caused fire, flood, acts of God, or other causes not intentionally or negligently created by the Seller. If the parties wish to allocate the responsibilities and risks for maintenance and repair of the property differently, they may do so by modifying the
contract language accordingly. When doing so we recommend consulting with a knowledgeable attorney to ensure the language is appropriately drafted and/or modified.
1 Warning: A Buyer who specifies Settlement Date as the measuring date of Sellers’ delivery obligation in the Sales Contract bears the risk that the condition of the property, they take title to on the Settlement Date differs substantially from the condition of the property as on the date of the offer or home inspection.