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 from one side to the other. A U&O provides some security if and when complications arise due to financing problems or when there are 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 to be paid upon transfer of real property, which is used to pay for a home inspection. 

How Use and Occupancy (U&O) Works

Real estate transactions usually go smoothly—for the most part. But in some cases, the parties involved may experience various problems. For instance, the buyer in a transaction may have problems securing or finalizing mortgage financing, or there may be a delay in the closing if there is a problem for the seller clearing title to the property. So when one party requires the use of the property before the transfer of ownership is complete, they may do so by drawing up a use and occupancy agreement.

As noted above, there are certain jurisdictions that require a formal agreement before a buyer or seller is able to occupy a property. These are legally binding contracts that set limits on the length of time that the party can stay on the property before any action can be taken. For instance, an agreement may allow a seller to remain in the home for a month until the closing process is complete before ownership is transferred to the buyer.

U&O regulations usually require the seller of a property to pay a fee of around $100 and allow a government official to inspect the property. The inspection ensures that the property complies with local housing codes and ordinances and that all the necessary permits have been filed. The inspection—also referred to as a resale inspection—must be completed within a limited timeframe. A U&O certificate or occupancy permit is then issued and may only be valid for a limited time such as 90 days.

In areas that don't have a U&O requirement, buyers and sellers can make their own determinations about the condition in which they are willing to buy and sell real estate, allowing the transaction to proceed quickly and smoothly. 

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 from the other party.
  • U&O permits ensure that everything is up to local code, ordinance, and all related permits have been filed.
  • 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 In areas with no 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, to negotiate for the buyer to perform a portion of the repairs, or to walk away from the transaction. When the local government is involved, the seller is forced to spend time and money to fix 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, whereas sellers where with properties in areas that have no U&O requirements may refuse to pay for any upgrades.

Advantages and Disadvantages of Use and Occupancy Agreements 

U&O agreements between buyers and sellers of property can be used to cover unexpected changes to the move-in date and use of real estate. A U&O agreement could have terms that grant the buyer of a property early access to move furniture and belongings to the premises. The buyer would still have to wait until the official occupancy date before they could take full possession of the property. This may be necessary if the buyer has already closed on the sale of their prior property and must move.

The seller of a property might also run into issues closing the transaction and moving on to their new property. They could be left between the two properties without a place they could full occupy as an owner. A use and occupancy agreement could allow the new owner who purchased the property the right to give permission to the seller to remain on the premises for some additional time 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 might use or temporarily take up occupancy on the property. The agreement could also set guidelines that would allow the current owner to remove a temporary occupant if necessary.