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Although it’s rare for a seller to allow a buyer to occupy a property before completion, it occasionally happens. For example, it might occur when you have already exchanged contracts, but you have then been unable to synchronise the completion date on your sale and purchase. Or perhaps the conveyancing process has taken longer than expected and the tenancy on the property you are renting is due to expire before the completion date.
Licence to occupy before completion
Almost all residential conveyancing transactions proceed under the terms of the Law Society’s Standard Conditions of Sale (5th Edition), and Standard Condition 5.2 covers a licence to occupy before completion. Thus, this will form the starting point for any discussion between the parties regarding early occupation. Most importantly, Standard Condition 5.2 provides that the buyer is a licensee and not a tenant. It states that the terms of this licence to occupy before completion are that the buyer:
- cannot transfer it
- may permit members of his household to occupy the property
- is to pay or indemnify the seller against all outgoings and other expenses in respect of the property
- is to pay the seller a fee calculated at the contract rate on a sum equal to the purchase price (less any deposit paid) for the period of the licence
- is entitled to any rents and profits from any part of the property which he does not occupy
- is to keep the property in as good a state of repair as it was when he went into occupation (except for fair wear and tear) and is not to alter it
- if the property is leasehold, is not to do anything which puts the seller in breach of his obligations in the lease, and
- is to quit the property when the licence ends.
Can I decorate before completion?
If the property is empty, a buyer may be keen to decorate or carry out other work to it before moving in. Standard Condition 5.2.3 says, “The buyer is not in occupation for the purposes of this condition if he merely exercises rights of access given solely to do work agreed by the seller.”
The main risk for the buyer is that any money, time and effort expended will be wasted if completion does not occur. In addition, the buyer will also be liable for any damage they cause to the property before completion.
What are the risks of early occupation?
Early occupation does come with risks. The main ones to be aware of are:
- Mortgage conditions: unless the seller obtains prior approval from their lender, the buyer’s occupation is likely to breach their mortgage conditions (unless it’s an existing buy-to-let mortgage).
- Buildings insurance: the buyer’s occupation is likely to invalidate the seller’s buildings insurance, compromising their ability to make a claim, whoever and whatever the cause of the damage.
- Failure to vacate: if the buyer fails to vacate the property when requested to do so, or does not abide by other licence terms, the seller will need to incur the time and expense of obtaining a court order for possession. In addition, this is likely to delay completion, with potential ramifications for the whole chain.
- Tax implications: HMRC may treat early occupation as ‘substantial completion’ for Stamp Duty (SDLT) purposes, meaning that the tax is payable from the date of occupation instead of the date of completion.
- Early termination by the seller: the Standard Conditions provide that either party may terminate the licence upon giving five working days’ notice. Therefore, the buyer runs the risk of finding themselves required to vacate before completion, which may incur additional accommodation and storage charges.
In light of the risks, early occupation should always be considered a last resort. If it cannot be avoided, the parties should consider any necessary variations to the licence terms under the Standard Conditions to meet their specific requirements.