In most residential conveyancing transactions, the buyer will not expect to take up occupation of the property he is buying until the legal completion date.
There are however instances when the buyer and seller may agree to the buyer occupying the property before the completion date. This might occur where a buyer has already exchanged contracts on his existing property and is then unable to synchronise the sale and purchase completion dates or where a buyer is living in rented accommodation and his tenancy is due to expire before he is able to complete the purchase.
If the buyer and seller agree to the buyer entering into occupation of the property before the completion date, usually the parties will agree basic terms and then look to their respective solicitors to implement these terms. The advice given by a solicitor will invariably differ depending on whether the solicitor is advising a buyer or seller, however, the starting point will almost certainly be the Law Society’s Standard Conditions of Sale (5th Edition). Most residential conveyancing transactions proceed in accordance with the latest standard Conditions of Sale.
Standard Condition 5.2 provides that where the seller agrees to the buyer entering into occupation of the property before the completion date, the buyer is considered to be a Licensee and not a Tenant. The main terms of the Licence are set out in the Standard Conditions.
What are the risks of early occupation before completion date?
There are a number of risks which both parties should be aware of:
- the buyer’s occupation may invalidate the seller’s buildings insurance policy and therefore compromise the seller’s ability to make a claim under the policy in the event of any damage caused to the property during the buyer’s occupation, whether or not the damage was actually caused by the buyer.
- the buyer’s occupation is likely to breach the seller’s mortgage conditions unless the lender’s prior consent is obtained. This is unlikely to affect a seller who has an existing buy to let mortgage product.
- if the buyer fails to vacate the property or generally to abide by the terms of the agreed Licence, the seller will still need to obtain a Court Order in order to recover possession of the property. This could be expensive and significantly delay the actual completion date causing serious legal and financial implications, particularly if there is a long chain.
- as far as a buyer is concerned, early occupation of the property may be treated by HMRC as "substantial completion" for stamp duty land tax purposes and therefore stamp duty land tax may be payable from the point of occupation as opposed to the actual completion date.
- furthermore, the buyer’s occupation is not guaranteed until the completion date. The Standard Conditions provide that the buyer’s Licence may be terminated upon the seller giving five working days notice to the buyer. Where the parties have agreed a long completion date and the seller decides to terminate the Licence before completion, this may force the buyer into finding alternative temporary accommodation and incurring additional storage and other costs pending the completion date.
Early occupation under the terms of a Licence
In view of these potential risks, it is advisable that both parties avoid early occupation. Individual circumstances do not of course always permit this, particularly where there is pressure in a chain to exchange contracts or a requirement to complete within a specific time frame or on a particular date. If early occupation is required, it should be under the terms of a Licence with the parties considering any necessary variations to the Licence terms under the Standard Conditions in order to meet their respective requirements.
Chat to the Author, Lisa Frost
Senior Associate, Royston officeMeet Lisa