What is an Occupancy Contract?
Occupancy contracts are the agreements that set out the terms for residents or investors to rent a unit, room, bed or other space in residential or commercial properties such as hotels and trailer parks. Occupancy contracts are frequently used in commercial leasing and have become notably prevalent in new issues such as head-lease agreements governed by the underlying occupancy contracts of the property owners. Occupancy contracts for commercial multi-tenancy spaces often have very different terms and conditions than standard residential occupancy contracts typically found in hotels and motels.
While occupancy contracts are most commonly used in the context of renting out residential rooms, beds and space, there are many instances when an occupancy contract may be used in a commercial context. The right to use the premises is ultimately what is transferred by occupancy contracts, however the agreements differ from traditional leases in that the occupier has no right of exclusive use of the premises. An outright transfer of rights by lease agreement gives rise to obligations on the part of the lessor (at law) such as a duty to repair and exempting the lessor from being subject to the Residential Tenancies Act (Alberta). By contrast , the occupier usually has more limited obligations to the owner of the premises (such as a duty to maintain and repair, and sometimes a duty to indemnify).
In issuing occupancy contracts, owners cannot convert what would otherwise be leases and voraciously take advantage of their legal rights at law in circumstances that do not engage rights of ownership (or quasi-ownership) such as where the owner is a landlord and the occupier is a tenant. In Alberta, a court looks at the relationship established by the expressed words of the contracting parties and not their intention, but the intention of the parties, the nature of the relationship and the operation of the contract are all important factors in determining whether the occupancy contract is a lease or license. In many respects the distinction between occupancy contracts and leases is highly contextual and at times blurred. A court will look to the substance of the occupancy contract to determine whether it is a lease or different type of contract.
Essential Elements of Occupancy Contracts
When it comes to occupancy contracts like tenant leases, there are a number of key components that can affect the outcome of any legal matters that relate to their enforcement or challenge. The first element to identify in the document is the parties involved in the arrangement. A contract almost always involves at least two parties – the person being contracted with and the party that is the object of the contract.
Whether you are leasing an apartment or office space, it’s essential to note who exactly is leasing property to whom. An occupying party can be a resident, employee, tenant, contractor or customer at any facility, so it’s important that you know exactly who falls under the terms of the contract.
The next key element to look for in any occupancy contract is the terms and conditions, as this is where you will find most of what typically makes up a contract. For example, here are just some of the factors often included in occupancy contracts:
Some contracts will even go as far as to specify procedures that both tenants and landlords must follow to have funds held back by either side. Whether you need to go to small claims court, or whether these are forfeited as a result of legal actions, it’s important to understand these details in advance.
The language and structure of an occupancy contract is generally required by law to be understandable and organized. State laws about if an occupancy contract should be written by the landlord or even if there should be a lease agreement provided are often vague, but the practice is nonetheless common (and usually recommended).
However, landlords and property managers cannot discriminate – it is a violation of many state laws to reject a tenant because they belong to a certain class, which encompasses everything from minority status to disability to age. This is another key requirement in occupancy contracts.
Occupancy contracts can be legally binding if they meet a number of conditions about who is involved with the contract and the terms of the agreement. The various factors of occupancy contracts make them very similar to other types of contracts, such as real estate contracts, commercial leases and any other document that outlines the rights and responsibilities of those involved.
Different Types of Occupancy Contracts
There are various types of occupancy contracts that exist, primarily for residential and commercial use. In residential transactions, the lease agreement sets forth the rights and duties of the parties that govern their complex arrangement. Those rights and duties include what rent is due, various obligations of the landlord relating to habitability issues, and the tenant’s security deposit. In commercial transactions, a similar approach is taken and a lease agreement is entered into between the landlord and tenant of commercial space. Those agreements tend to be longer than a lease agreement used in the residential context.
For short-term rentals, a more simplified form of agreement can apply. Tenants who are looking to utilize their space as a short-term rental can enter into an occupancy contract that has the essential elements in contrast to the elements of a traditional lease that would exist for a substantial period of time.
Legal Aspects Concerning Occupancy Contracts
As is the case with almost every type of contract, there are a number of legal considerations that parties should be aware of when it comes to occupancy agreements.
Applicable Laws
Whether you are a tenant or landlord, it is important to stay apprised of the laws in your area. Generally, landlords of multi-family dwellings in Ontario (e.g. apartments) are required to provide tenants with a written tenancy agreement in the form of the "Standard Lease" as of April 30, 2018. However, with respect to those who occupy a residential unit that is part of the complex (e.g. in a single room with access to shared kitchen and bathroom facilities) a standard lease is not required.
Other applicable laws include the Residential Tenancies Act, which governs expenses, rent and services related to residential buildings, but also applicable by extension to occupancies or uses that do not fall under the definition of "tenancy". Tenants renting out or subletting rooms are similarly required to comply with the act, in addition to otherwise having corresponding rights and obligations. For example, tenants can assign or sublet their apartments to other tenants (or persons who act as a tenant), which means that you will find sub-tenants also subject to the act. Another example is the rent-freeze provision, which limits the annual increase of rent generally to the lesser of: 1) the rent increase guideline, or 2) any permitted annual increase. These provisions apply equally to tenant and occupier agreements, save for the exemption that landlords in certain circumstances can apply to the Landlord and Tenant Board for an above-guideline increase when they have incurred significant increases in property taxes or utilities.
Tenancy and occupancy contracts that do not comply with all applicable laws may be void.
Landlord and Tenant Board
The Landlord and Tenant Board is a quasi-judicial administrative tribunal created to resolve disputes between landlords and tenants. The board handles applications made by landlords and tenants who are regulated by the RTA. In addition to providing advice and guidance to parties who make applications to the board, it also has the authority to issue orders, including a requirement to pay monetary compensation, terminate the tenancy, and allow the landlord to enter the premises. The board does not hear applications in relation to occupancy agreements such as a hotel, motel or guest home.
Limits of Liabilities
General liabilities on terrorists, vandalism, burglaries and natural disasters are standard inclusions in occupancy agreements. However, it is recommended that the parties consider adding clauses relating to limit of liability. In the event that the landlord or tenant is found liable at trial, the agreed liability cap should be limited to the amount provided for by applicable law. Further, in certain cases, the liability on criminal acts can be disclaimed altogether.
For example, common disclaimers include:
The rationale for the commercial having a limit of liability is that they often have no ability to control events related to the incident, and it is often unforeseeable damages. It is also a commercially reasonable practice to provide for limits of liability, which thereby allocates risk to a person who is closest to the cause of the damage. The reason why the parties can contract out of indirect losses is that they are not reasonably foreseeable. For example, a person who was injured in a terrorist attack in a hotel was awarded only injuries that were directly inflicted by the terrorist.
How to Draft an Effective Occupancy Contract
In order to draft an occupancy contract that is clear and enforceable, the following rules and procedures should be followed:
- The contract should be written in a readable size font to accommodate the typical person who may be asked to sign it.
- The contract should be printed on paper of sufficient weight so as to be easily read and manipulated.
- The contract should identify the parties and address the specific unit in a manner that is clear and unambiguous.
- The dates within the contract must comply with the scheduling of registration, occupancy, commencement, rescission and rents.
- The payment amounts, including increases and relevant rent period , must not be vague, conditional or otherwise ambiguous.
- The contract must contain the rights and duties of each party. The contract should address such concerns as power outages, service interruptions, access to residential units for condo and co-op buildings, maintenance obligations, and all other factors that could drive a wedge between tenant and landlord.
- The contract should make clear the tenant’s and landlord’s responsibilities for utilities and services based on whether the unit is cooperative or condominium.
- The contract should reference the purchase agreement and any mandated disclosures required by law.
Pitfalls to Avoid in Drafting Occupancy Contracts
In the rush to execute an occupancy contract, your organization may overlook key provisions which may result in unintended commitments or unexpected conflict. Here are some common pitfalls we have encountered in our experience with various occupancy contracts, and how to avoid them:
- The occupancy agreement is entirely missing from the lease. If your organization is borrowing funds or securing financing, lenders and bondholders will want to know where they can find the material terms of the occupancy contracts associated with the project and the development pro forma it relies on. Failure to have the occupancy agreement cross-referenced in the lease could result in the landlord being deemed to be in default for failing to enforce the terms of the occupancy agreements. A lender or bondholder will want to know that the occupancy agreement is enforceable as part of its underwriting.
- The lease is not strong enough with respect to scope of landlord’s repair responsibilities. In some occupancy contracts, if the tenant association or other tenant group does not maintain the premises or repairs are not made within an arbitrary period of time, the landlord is deemed to have assumed full responsibility and perform the maintenance on the occupier’s behalf at the occupier’s cost. A motivated landlord may seek to recover those costs through rent increases or allegations of occupancy rate reductions or vacancy losses in order to recover its out-of-pocket expenses. While the occupier should certainly be responsible for all costs associated with maintaining and repairing the premises, the lease should be written such that the occupier performs these obligations itself without the landlord needing to perform on its behalf.
- The occupancy agreement includes excessive or highly subjective requirements. For example, occupancy agreements often include requirements for grocery stores, clothing stores or child care facilities to remain open for specified hours, such as a minimum of forty hours per week. However, the occupancy contract does not typically provide for any market analysis to ensure that the openness requirement is feasible, particularly in light of the fact that many tenants pay rent based upon the formula of a percentage of gross sales. In a virtual Retail Market Study, Goodman Schenk P.A. has completed analysis of similar projects that warrant deviations for unusual circumstances, such as a grocery store or day care center that is open twenty-four hours a day, seven days per week. Without this flexibility, tenants may become economically unviable. We recommend including provisions that allow for flexibility in meeting the terms of the Occupancy Agreement, to the extent that the Tenant can demonstrate good faith in assessing and responding to changing market conditions.
- The occupancy contract requires the tenant to make capital improvements or repairs of a landlord’s building system without compensating the tenant. Landlords frequently require occupiers to make substantial capital improvements and upgrades to building systems and fixtures that are not integral to the occupier’s business use. For instance, a landlord may obligate a tenant occupying only the lower two floors of a twenty-story building to upgrade the elevator system for the entire building. Alternatively, a landlord may require a grocery store to install electrical panel upgrades that benefit all tenants in a shopping center by being tied into a central security system. Such legal obligations may be triggered in perpetuity if the tenant wishes to renew its occupancy contract. A tenant should be compensated for such improvements through the direct payment of rent or through a rent reduction schedule over time. Additionally, a tenant should insist on obtaining ownership of such upgrades and improvements in the event that the tenant is required to make facilities upgrades in order to meet requirements for complying with federal, state, and local regulatory requirements. These improvements are highly desirable and should not be able to be used as leverage against a tenant’s occupancy at a later date.
- The occupancy agreement uses terms that are vague, ambiguous, or undefined such as "costs", "pursuant to the Lease", "to the tenant’s satisfaction", and "best efforts to." These types of terms can lead to confusion in interpreting key provisions or, worse yet, competing interpretations. Having a legal advisor with extensive experience drafting and negotiating occupancy contracts help with the amendments to the lease will help to alleviate this issue.
Common Questions on Occupancy Contracts
How many people need to sign the occupancy contract?
All persons who are living in the unit, including dependent children, should be named on the occupancy contract. In some states, it is permissible for children under the age of 18 to live in the unit without being named on the lease, though it typically is a bad idea to do so.
What happens if I have a difficult roommate who refuses to leave?
Failure to vacate is a breach of the occupancy contract, and you are free to file an eviction action against your difficult roommate. If you have designated only one person to reside in the property, filing on behalf of the other roommate (or both) is permissible and appropriate.
Who is responsible for paying rent on the occupancy contract?
Each named resident is jointly and individually liable on the contract, but it is up to the two individuals to sort out who pays what and when. With a roommate agreement, you could split the rent even with uncompleting payee names on the contract. Joints and several liability go hand-in-hand with roommate agreements.
When does the residency start and stop?
Most occupancy contracts begin on the first day of the month. They typically end at midnight on that last day of the month. But there is no law requiring this. It is up to you and your roommate to negotiate what that "permanent" date means.
Are occupants allowed to "couch surf , " or do they need to be on the occupancy contract?
Their presence at the property has to be temporary and limited to only the amount that would constitute a person simply visiting the premises, and cannot be for the purpose of establishing residency. Couch surfing implies that the person eventually will return to their home, so if that person is only occasionally spending the night at any given apartment, they do not need to be included on the occupancy contract. However, it is good practice to include the individual on the occupancy contract and have them pay a small amount of rent each month for their temporary residency.
Do cats count as people, or do I have to pay extra for them?
The person who is leasing the apartment likely is not the only who who lives there. As a result, the landlord may treat cats (or dogs) as additional residents of the property, and charge everyone a per-pet fee that is above and beyond the market rent rate.
Where can I get additional information about occupancy contracts?
Local laws may vary. Check with your local housing authority or consult an experienced landlord and tenant attorney. This blog post is not intended for, nor does it constitute, legal advice.