Use and Occupancy (U&O): What it is, How it Works, Pros and Cons

Lea Uradu, J.D. is a Maryland State Registered Tax Preparer, State Certified Notary Public, Certified VITA Tax Preparer, IRS Annual Filing Season Program Participant, and Tax Writer.

What Is Use and Occupancy (U&O)?

The term use and occupancy (U&O) refers to a real estate agreement between two parties that allows one party to use and/or occupy a property before ownership is transferred. A U&O provides security if complications arise due to financing problems or delays in the closing process. Some governments require U&Os whenever properties are sold to secure the rights of all parties involved.

Use & Occupancy permits require a fee upon transfer of real property, used to pay for a home inspection.

How Use and Occupancy (U&O) Works

Real estate transactions usually go smoothly, but complications can occur. For instance, the buyer may have problems securing or finalizing mortgage financing, or the seller may have difficulty clearing title to the property. In such cases, a use and occupancy agreement can be drawn up to allow one party to use the property before ownership is complete.

In jurisdictions that require a formal agreement, limits are set on the length of time a party can stay on the property. For example, an agreement may allow the seller to remain in the home for a month until the closing process is complete.

U&O regulations usually require the seller to pay a fee and allow a government official to inspect the property. The inspection ensures compliance with local housing codes and ordinances. A U&O certificate or occupancy permit is then issued and may be valid for 90 days.

In areas without a U&O requirement, buyers and sellers can make their own determinations about the condition of the property.

Key Takeaways

• Use and occupancy is a real estate agreement that allows one party to use and/or occupy a property before ownership is transferred.
• U&O permits ensure compliance with local codes and ordinances.
• U&O inspections must be completed within a certain timeframe and are only valid for a specified amount of time.
• Buyers and sellers specify the terms of the agreement in areas without U&O requirements.

Special Considerations

The buyer may purchase a private home inspection and may ask the seller to make repairs as a condition of closing the deal. The seller is free to agree to make the repairs, negotiate for the buyer to perform a portion of the repairs, or walk away from the transaction. When the local government is involved, the seller is forced to spend time and money fixing anything the government deems necessary without regard to the prospective buyer’s requirements.

Sellers must complete any repairs outlined by their local government in jurisdictions that require U&O agreements, while sellers with properties in areas without U&O requirements may refuse to pay for upgrades.

Advantages and Disadvantages of Use and Occupancy Agreements

U&O agreements can be used to cover unexpected changes to the move-in date and use of real estate. They could grant the buyer early access to move furniture and belongings to the premises before the official occupancy date. This may be necessary if the buyer has already closed on the sale of their prior property.

Sellers might also run into issues closing the transaction and moving to their new property. A use and occupancy agreement could allow the new owner to give the seller permission to remain on the premises while the issues are resolved.

The terms of a U&O agreement will likely set strict time limits on how long the buyer or seller can use or temporarily occupy the property. The agreement could also set guidelines for the current owner to remove a temporary occupant if necessary.