People are always looking for ways to “hack” the system, which can be great, and we use hacks ourselves when we can. In this article we will explore the occupancy agreement form hack.
There are plenty of “hacks” that can help optimize performance and efficiency.
With your health, it may be supplements, or maybe a work out technique that burns more fat in a shorter amount of time.
In business, it may be new software, or using a set strategy put together by someone else.
When we started investing in real estate, we did a lot of research, talked to a lot of investors looking for secrets that could make our lives easier. We weren’t looking for a “get rich quick” scheme, but some sort of advantage that would smooth our process.
For us, flipping houses wasn’t going to give us the financial freedom we were looking for, so we started investing in long-term rental properties. But we still believed there was a way to invest smarter and that’s when we started using the investment property “hack” of rent-to-owns (more on this strategy in a bit).
But, at the end of the day, not all shortcuts are worth your time, money, and energy.
Sometimes you have to follow the system and put in the time and work to do things right. And that’s okay because if you’re willing to put in some time and effort, you’re already ahead of 90% of the population who will continue to wait until there’s magically no work involved.
We’ve had multiple investors approach us asking if we think an “occupancy agreement form” would be a good way to “hack” the rent-to-own system. While we’re always open to the idea of tweaking and perfecting our investing strategies, this is one “hack”, we’ll steer clear from. Here’s why…
What is an Occupancy Agreement Form?
Generally, an “occupancy agreement” is a short term agreement between the property owner and the person wishing to occupy the property. It’s most commonly used when a home buyer wants/needs to move into the property they’ve purchased before the property’s closing date. So, the seller is “renting” the home to the buyer for the set period of time prior to the closing of the home.
There’s also something called a post-occupancy agreement, which allows the seller to continue living in the property even after they’ve sold it. It’s similar to a lease-back. However, for the purpose of this “hack” we’re looking at someone occupying a property prior to owning the property (without using a standard lease).
How Would An Occupancy Agreement Form be Used in a Rent-to-Own?
There are 2 main rent-to-own agreements:
1) a binding purchase and sale agreement, with transfer of ownership at or before the end of a specified period of occupancy.
2) a lease, licence or similar arrangement with an option to purchase the unit at any time within or at the conclusion of the occupancy period.
Generally, when you see the term “occupancy agreement” it is referring to the first form of a rent-to-own. The purchase is made in advance, and there is an occupancy agreement in place, which lets the buyer live in the house prior to the transfer of ownership.
But the way we set up our rent-to-own programs require an option to purchase (the second option.
We use the standard lease it up through a lease, with an option agreement to buy the home by a set time, normally a 2-3 year period. (You can listen to our podcast episode all about rent-own-own investing at https://rockstarinnercircle.com/renttoown/)
But what if you used an occupancy agreement in the second rent-to-own agreement, the same way we’ve been using the standard lease?
Would An Occupancy Agreement Form Work?
There are a few key problems with this strategy.
The problem starts by treating an occupancy agreement like a lease without the same rule as a standard lease. They do similar things but in different situations. A lease is used to give a tenant rights to live in a home for a set period of time, with certain legal responsibilities both the tenant and the homeowner need to follow (set out in the standard lease agreement and regulated by the Landlord and Tenant Board).
An occupancy agreement doesn’t have the same set form as a lease in Ontario.
The investors who’ve asked about this agreement are, for the most part, intrigued by the fact that it is not a lease, thinking it doesn’t follow the same requirements as the standard lease…
The thinking behind their idea goes like this:
- With an occupancy agreement form, you won’t be bound by the Ontario Tenant Board and the regulations it has regarding the treatment of Tenants.
- So if a tenant is late on their rent you won’t have to go through the N4 process (which gives tenants 14 days to pay late rent) and the L1 process (which sets a date with the Tribunal to get a formal eviction notice).
- Instead, you can just request that the tenant leaves and if they don’t obey you can call the Police to remove the tenants quickly because they are technically trespassing on your property. Although we like the idea of having means to quickly deal with tenants who are not paying us we thought we should investigate this idea of using occupancy agreement form before we start using them ourselves. We decided to put on our detective hats and play Sherlock Holmes.
For clarification, the only visible difference between the two agreements is that one says “Occupancy Agreement Form” at the top and the other says “Lease Agreement”. Also, instead of referring to the person moving into the property as “Tenant” they are referred to as “Occupant”.
However, we did some investigating, and we got pretty conclusive answers…
The first thing we did was call the Hamilton Police.
We spoke to several different departments within Hamilton Police asking them what they would do if we called them about someone living in a residential property that we owned.
We stated that they would be living there as part of an Occupancy Agreement Form we had with them, and asked if we could request that they come by and get the people out of our property if they stopped paying us under the Occupancy Agreement Form. The Hamilton Police responded that it would be outside of their jurisdiction to do that without some sort of “court order”. They would respond to any domestic incidents in the home but they couldn’t remove anyone from a property permanently without some sort of instruction and would refer to the matter to the Sherriff’s department of the local Court House.
We weren’t convinced that they knew exactly what we were trying to accomplish so we plowed forward.
Next, we called the Ontario Landlord & Tenant Board. We explained that we were planning to rent out a property using an Occupancy Agreement Form instead of Lease Agreement and wanted to know how that affected the relationship we had with the Landlord & Tenant Board.
They explained that:
- As long as money was being exchanged for use of the property the person/people in the property were considered Tenants and bound by the Landlord & Tenant Board no matter what the agreement between us was called.
- This applied even if they were living in our own property. If they used a separate bathroom and a separate kitchen from us then they were considered Tenants (even in our own home).
So we pressed on.
We reached out the Landlord Self Help Center (www.LandlordSelfHelp.com) which is an excellent free resource for you as an investor. Here’s how they describe themselves, “A non-profit community service staffed by Lawyers serving small-scale landlords exclusively.”
Over the years we used them many times for advice and they have been fantastic—we highly recommend them.
Knowing that they have a “landlord’s” interests in mind we thought they would be a good resource to reach out to uncover our occupancy agreement form inquiry.
We posed our question about using Occupancy agreement form instead of Lease agreements and here’s what we got back:
“Regardless of the name given to the contract, if there is an offer and acceptance, and a consideration (rent) is paid or given for the right to occupy a residential rental space, then that contract IS covered by the Residential Tenancies Act (RTA), 2006. Section 2 of the RTA has a very broad definition of “rent”. If a person is occupying such a space but NOT paying anything (e.g even utilities, mortgage or tax payments), NOR doing any work in lieu of rent, then it would not be a tenancy agreement. Typically this usually only happens with relatives. The Landlord and Tenant Board has the power to interpret such agreements and determine whether or not the RTA applies, regardless of the wording of the agreement.”
And there we have it.
For now, we have to conclude that if money is being exchanged for someone to occupy a property everyone is bound by the Residential Tenancies Act and under the jurisdiction of the Landlord & Tenant Board in Ontario.
So we’ll continue using Leases and referring to Tenants as Tenants! If you have any questions or concerns be sure to check this with your own real estate Lawyer.
Over the years we’ve actually found that following Ontario’s system hasn’t been very painful as we first imagined anyway. In fact, the entire process has been a pleasant surprise to us.
The N4 process and L1 process that the Landlord & Tenant Board uses is very straight forward and it gives us a well laid out plan for dealing with late rent.
We have used the process many times with great success.
In fact, one time, a Vice Chairman of the Landlord & Tenant Board reviewed our Lease and Option agreement during a hearing and found nothing wrong with them. The Tenant was deemed to be in fact a “tenant” and had to pay our rent as outlined or be evicted from the property.
So there’s even precedent set for these agreements in Ontario.
We’ll continue to explore different ways for managing our properties and if there are better ways to work agreements. We’ll be sure to keep all of us informed.
At the end of the day, you want to be fair to your tenants and give them their rights. If things go south and an eviction needs to happen, there are channels in place to do so. While they may not be the fastest, they are there to protect the rights of all parties involves.