What is the Possession Clause?
We have noted before on this blog that real estate lawyers can be somewhat obsessed with the details when it comes to certain forms and documents. So if we spend more time than you would like on the minutiae of a Revised Agreement of Purchase and Sale, you’ll just have to humour us. We promise we’ll buy you lunch.
Today’s topic is the possession clause. As you might expect, the possession clause allows the purchaser to take possession of the property (subject to the vendors continuing right to maintain possession until completion of the transaction). As with any standard provision it can be easily overlooked, but like the rest of the Agreement of Purchase and Sale, it does have its own nuances and peculiarities.
One of these nuances, and one that we see quite often, is that the possession clause may not properly reflect other terms in the Agreement. For example, the possession clause may require that the purchaser make a payment for the keys to the home on the date specified for closing. However, if closing lands on a weekday, and the purchaser takes occupancy of the home before closing, the possession clause should allow payment for the keys upon taking possession. If it does not, this creates the opportunity for a disparity between the date upon which the purchaser actually delivers funds for the keys, and the date set out in the possession clause . This may cause problems if the Agreement contains a provision related to a penalty for failing to pay the balance of the purchase price on the closing date.
Additionally, possession versus closing may be defined differently in a re-sale agreement versus an agreement for the purchase and sale of a new build. In a new build, for example, the purchaser may take occupancy before closing. As a result the possession date for the purchaser could be quite different from closing and the payment date for the key, which requires careful drafting of the possession clause. For resale transactions, the definition of "closing" typically encompasses the idea of "going into possession." As such, a possession clause may be optional, and often omitted from a resale transaction. Purchasers taking possession the day before closing on a re-sale transaction are then holders of keys beforehand; in other words, they would not technically be receiving the keys, as there are none to receive at that point.
While it may be a standard provision, the possession clause sets out key details about the transaction. It should be viewed as a protection for the purchaser, rather than an inconvenience. Remember to pour a stout drink, sharpen your pencil, and read your way through that sale agreement. We promise it will all make sense in the end, and property transfers smoothly to the new homeowner.
Various Types of Possession Clauses
To start with, this blog post makes no distinction as to the type of property the sale agreement concerns. Possession issues arise in all kinds of sale transactions whether residential, commercial or rural.
Immediate possession clauses
The parties can agree to an exchange of money for possession with delivery of the agreement or to allow the buyer to come into immediate possession at the same time it does other things, like conveyancing title. In either case, the clauses give rise to the deed of bargain and sale or deed of grant where the buyer pays all purchase money to the seller before receiving title. The two clauses actually operate the same. The deed is not recorded until the first step after purchase money has been paid.
Delayed possession clauses
The parties can mutually decide to allow possession at some other time agreed to in the sale agreement. They can say the buyer shall be entitled to possession of the property on closing or at some other specified event. They could say the buyer is entitled to possession until a certain date, the occurrence of an event or the happening of some specified uncertainty.
Possession upon payment clauses
Some sale agreements say the buyer shall be entitled to possession of the property described at the time total purchase money for the property has been paid. It doesn’t matter when that occurs. The buyer is entitled to possession somehow upon paying all the purchase money.
Legal Repercussions of Possession Clauses
The sale agreement’s possession clause can, in certain instances, carry significant legal weight. A potential dispute will arise in an action for damages if the seller refuses to give possession of the property in circumstances where the law affords him or her no right to do so.
The seller is entitled to possession of the property as against all persons – including the buyer – until the purchase price has been paid (unless the property be the subject of a suspensive condition to be fulfilled) and the purchase price is the originating cause of ownership; for the seller retains ownership until the purchase price is paid. Once the purchase price is paid it is transferred to the buyer and the latter acquires ownership of the property and the seller no longer retains ownership. If the seller fails to give possession the buyer may sue for either specific performance in delivering possession or, alternatively, for payment of damages.
The buyer is entitled to take possession of the property immediately on the happening of the date on which possession is agreed to be given, as on this day he becomes owner. If he is unable to do so he may sue for damages. If he acquires possession before the purchase price is paid, he must account for what he has done with the property and all profits made in connection therewith.
As a general rule, the seller has no right of action against the buyer for rent or occupation, which the buyer has never agreed to pay: "if there are no special circumstances in a sale agreement, there is no relationship of landlord and tenant between the parties and accordingly no obligation on the purchaser to pay rent or occupation charges." The parties are merely co-owners in terms of section 57 of the Property Act until the date on which the purchaser becomes the owner and entitled to possession, at which time he has a personal right of ownership but no real right of possession. The seller has a real right of possession until the day of transfer of the property and is thus entitled to claim possession as against the purchaser.
On the basis that the parties are not in a landlord/tenant relationship after the date of possession, the seller may not legally institute eviction proceedings against the buyer with a view to his claiming possession in the latter’s absence, although cancelled transfers are outside the protective ambit of this rule.
Drafting a Possession Clause
A well-drafted possession clause or provision in a sale agreement (for the purchase and sale of real estate) not only paves the way for a smooth and orderly chain of events, it also illustrates to all parties involved how important you may consider the possession issue in the context of your real estate transaction. To that end, the following elements should be included in a possession clause: "Buyer," shall mean and include any individual or entity to whom Title is given . The Closing may be held with Buyer taking subject only to a mortgage or other financing lien or encumbrance. Seller shall deliver possession of the Property to Buyer at Closing free and clear of all occupants, and Seller shall provide Buyer with all keys and access codes for the Property. The foregoing examples of possession clauses provide several scenarios, options and variations to choose from. The possession clause can be written to accommodate the specific needs of each transaction.
Typical Problems and Solutions
Common issues regarding the manner of possession in sale agreements arise in relation to issues such as when in time physical possession of the subject matter of the sale must pass, what should happen if the seller is unable to deliver possession within the specified time, and who bears the risk in the subject matter between signature of the agreement and handover of the subject matter of the sale.
In negotiating the sale agreement, the parties should address risk between signature of the sale agreement and delivery of the subject matter of the sale as this will largely relate to the question of when in time possession must be given. As an initial position the position may well be that the seller bears the risk until the purchaser gets control of the physical object in question, i.e. delivery has taken place. This is, however, dependent on the circumstances and terms of the parties’ agreement.
Where a possession clause allows for delivery to take place after signature of the sale agreement, but no time period is specified in the agreement, the position then becomes somewhat murky. The question is whether possession of the subject matter of the sale passes upon signature of the agreement or delivery. Delivery means actual physical delivery of the object in question. Once possession is delivered, it is no longer possible for the seller to require delivery of the goods back in the event that the purchaser breaches its obligations under the agreement. In deciding this question, it is suggested that this should be contextualized with reference to the other rights and obligations of the parties in the sale agreement, which may be considered holistically. The transfer of any such right is also deemed to be delivery of the physical object.
In the event that the seller is unable to comply with its obligations under the sale agreement by the specified date (e.g. handover of the motor vehicle in question), the seller should be prepared for, and expect, the purchaser to bring a claim for specific performance and judgement in terms of the possession clause. One such way to avoid this scenario could be to ask for a deposit from the purchaser in order to secure the contract. The parties should negotiate the possession clause at the outset of the transaction and prior to signing the agreement. It is possible that a long delay in the passing of possession would entitle the purchaser to cancel the sale agreement as being prejudicial to the purchaser’s interest. This will depend on the type of contract, however and the parties’ agreement.
This may also be provided in the contract, that non-timeous delivery will be remedied by a payment by the seller of a pre-agreed amount of money, either as a reduction in the purchase price or an increase in the seller’s costs of delivery. Such provision is in effect a general penalty clause to ensure performance, it is suggested. Alternatively, the parties could agree to liquidated damages to be paid, in the form of a percentage of the sale price, or a daily penalty for late delivery.
In the event that the subject matter of sale is lost or damaged in the interim period in question, the risk passes to the purchaser from signature of the sale agreement or upon delivery of the possession of the subject matter of the sale. This is in circumstances where the object remains in the seller’s possession or control, unless the possession clause in the sale agreement states otherwise. The in medio possession clause could be agreed to if the party who bears the risk wishes to limit its exposure in this regard. In these circumstances, it would be wise for the purchaser to take out insurance on the subject matter of the sale.
The parties could obviate the need for the intervention of the courts in this situation if they provide in the sale agreement that there is a multi-stage schedule for delivering possession of the subject matter. There is a precedent for such multi-staged possession clauses in respect of objects other than vehicles. The parties should specifically make provision for what would happen in the event that the seller is unable to hand over possession of the subject matter by the specified date.
Authentic Cases of Possession Clause
The possession clause was at the center of a 2007 case of the High Court where the vendor sought specific performance by a purchaser who failed to pay the full purchase price before taking possession of the property. The purchaser was facing possession proceedings in respect of his own home and wanted to get into the property bought subject to the mortgage as soon as possible. "Specific performance" is an order of the court requiring a party to perform what they have promised to do in a contract. ‘Title’ to the property will not pass until the very last moment of the completion process. However, the purchaser was in breach of his contract with the vendor by taking possession before paying the full purchase price. This meant that the vendor was entitled to ask for an extra payment from the purchaser for taking possession early, or could refuse to let him in and seek an order for specific performance (requiring the purchaser to honour his deal).
The vendor’s conduct gives the court every reason to grant an order for possession. However, in this case, the judge decided that the vendor had already made a gain from the purchaser’s mistake of moving in early. He had already been compensated by the purchaser for moving in and – if an order for specific performance was granted – he would get a further payment. The judge refused to order possession because it would allow the vendor to get an improvement on his bargain where the purchaser had mistakenly thought he was getting possession if he paid the vendor some money.
In a 1992 appeal case the vendor had already handed over the keys , and title deeds, to the purchaser and the purchaser could keep possession until the full payment was made. The purchaser took possession of the land and built various structures without the vendor’s permission. He then sold the land but the purchaser under the second contract fairly swiftly decided he didn’t want the land. In the meantime the vendor had died. The land in question had not yet been properly registered with the Land Registry, but the vendor had taken action to complete the process of registering the land as his. The new purchaser under the second contract was still able to get relief from the courts for the original purchaser’s failures (but he was not able to sell the land for a profit).
The cases above highlight why it is important to seek professional property advice before drafting sale contracts, and then to stick to the details. Even if the vendor and purchaser have an ongoing relationship (perhaps they are family members) or there is an informal agreement that the parties have done business before, or the purchaser is keen to get moved into the property, the sale contract is more important than any ongoing relationship between the parties.