Basic Legal Ideas

Lifetime right of occupancy agreements explained

Lifetime right of occupancy – what is it?

A lifetime right of occupancy agreement is designed to allow one or two people to live at a property until their death. After the death of the last occupant, the property is available for sale. The agreement is for the lifetime of the owner or co-owners and not for a specific period of time. Its purpose is to allow the owner to obtain immediate use from an asset that may not provide much value over the long term and is not needed as security for any loans. It can also provide a potential tax advantage if the taxpayer is over age 55. It is also an estate planning tool that keeps the probate process away from what was previously the most valuable asset in an estate . It differs from a life estate in that property held in a lifetime right of occupancy typically has more restrictions on its use than a life estate – the agreement is relatively short, consisting typically of a single paragraph, and it allows the owners to sell the property at any time during their lifetimes. Moreover, no one is responsible for the mortgage unless so indicated in the agreement, which is not the case with life estates. Finally, there is a specific provision terminating the right of occupancy upon the death of the last surviving owner. In a life estate, the measure is not the life of the owner but the life of some other person.

The key components of a right of occupancy agreement

The basic components of a lifetime right of occupancy agreement (LROA) include the following:
Parties to the Agreement. The parties to an LROA are the lessor (the ALF) and the lessee (the resident).
Rights Granted Under the Agreement. An LROA grants the lessee the right to live in the ALF until the lessee’s death or voluntary departure, subject to certain conditions and limitations as set forth in the LROA.
Limitations and Conditions on the Agreement. Every LROA contains certain limitations and conditions that may affect the granting of a lifetime right of occupancy. These limitations and conditions can be statutory, regulatory, and contractual. For example, a residential landlord is not allowed to make modifications to a residence occupied by a resident who is 62 years or older that would decrease the value of the residence without the resident’s written consent. The authority to enforce this provision of the law was delegated to the Department of Consumer Affairs.

Why have a lifetime right of occupancy?

A lifetime right to occupancy of a care facility unit by a care recipient has long been an accepted method of financing activities and services for the aged. A formal agreement between the parties is useful in giving clear expression to the arrangement the parties have agreed to and in providing them with the legal protection each of them needs. From the point of view of the care recipient, the principal advantages of having a lifetime right of occupancy agreement may be summarized as follows:

  • Stability and security They are assured of the basic security that their care will continue as long as they require it. This will continue even if the facility should at some future time cease to be operated by the current owner.
  • Predictable costs They are assured the predictable convenience of knowing precisely what their costs will be over the years.
  • No third party involvement They have the comfort of knowing that the property in which they reside is not subject to interest charges, mortgage fees or any other expenditure not expressly mentioned in the agreements.
  • Protects personal assets They thereby protect the personal assets they have available for their own use and for eventual distribution as they may see fit to their children or other beneficiaries.
  • Successor’s rights If the parties have considered the possibility that a new party may become involved in the future, steps can be taken at the time the agreement is drawn to give adequate protection to that new party.

Disadvantages and risks associated with a right of occupancy

Unfortunately the clause in a beneficiary’s Will or your estate planning does not always work out as anticipated.
The disadvantages to Lifetime Right of Occupancy agreements include the following:

  • Possibility of a sale of the property within your lifetime.
  • Considerations of alternate accommodation after the occupancy period has expired.
  • Changing legislation on notarial versus contractual wills.
  • Possible disputes.
  • Possible termination of the beneficiaries right of occupancy.
  • Debts not being paid or other expenses not settled.

Dispute scenarios
Disputes may arise with regard to the following:
o Financial issues: where a beneficiary defaults on payment of rates, levies, taxes or refuse and costs.
o The costs associated with the property: payment of municipal accounts or levies associated with the property or duties relating to the transfer of the property.
o Unfair exclusion from what the person feels is their property and unequal treatment from other family members and/or beneficiaries.
o Disagreement between the family members and/or heirs regarding sharing of the family home.
o Misinterpretation of asset splitting or diminishing the value of the asset in terms of a deceased estate.
o The property may be sold or rented out and the parties may feel that they have not received their fair share.
Termination or expiry scenarios
In which case the beneficiary would need to leave the affected property, (or alternatively, the beneficiary may terminate). These agreements do not confer ownership and do not confer full rights of occupation to a beneficiary. If the parties cannot agree on the sale or rental of the property, the beneficiaries right of occupancy might be terminated through an application to court in terms of section 14(4) of the Act.

Legal standards and drafting considerations for right of occupancy agreements

It is important to understand that even though a lifetime right of occupancy agreement is signed, it can be deemed a nullity, lacking in legal effect, if it does not comply with the legal requirements for enforceability. The most common pitfalls to enforceability, and other considerations, are as follows:

  • Binding on all parties- The contract must be binding on all parties. For example, if the parties to a lifetime right of occupancy agreement include a husband and wife, the life tenant and the remainderman, the document must be signed by both parties and must obligate both parties.
  • Contract renewed annually – At law, a contract expires at the end of a year (or whatever time period is agreed upon in the contract). Unless the lifetime right of occupancy agreement is renewed on an annual basis, the agreement terminates and the tenant must vacate the premises.
  • Agreement enforced against successors and assigns – The lifetime right of occupancy must be able to be enforced against all successors and assigns. This means that if the grantor sells the property during the term of the grant or transfers the remainder interest or the property to an heir, the grantee’s rights must trump the rights of the purchaser or heirs of the grantor.
  • Lifetime shall not exceed 21 years – At law, the statutory rule regarding the enforceability of a lifetime right of occupancy is that it shall not exceed a term of 21 years. For example, a lifetime right of occupancy agreement that grants the right to occupy a home "for the duration of the life of the tenant" will likely be considered a nullity, because the agreement does not state that the right will not exceed 21 years.
  • Grantor must own the property- In order to grant a lifetime right of occupancy, the grantor must actually own the property. Where the grantor’s ownership of the property is derived from an inheritance and the estate is still open , the grantor may only grant a right of occupancy if the estate has obtained a probate court order authorizing execution of the lifetime right of occupancy. In the event that the grantor sells the property in the future (which he or she will be permitted to do), the sale will be subject to the lifetime right of occupancy granted to the tenant.
  • Tenant must pay real property taxes – The tenant must pay all ad valorem taxes on the property after the grant of the lifetime right of occupancy. However, if the tenant fails to pay the taxes, the grantor will be able to procure a tax sale of the property free of the lifetime right of occupancy.
  • Power to compel the grantor to make repairs – The lifetime right of occupancy can compel the grantor of the right to make repairs by including a provision to that effect. Otherwise, there is no affirmative duty for the grantor to maintain or repair the property, except as required by law.
  • Grantor has a duty to make repairs – In the event that a lifetime right of occupancy is silent as to the grantor’s duty to make repairs, the grantor will have an implied duty to make repairs. This is particularly true when the property is furnished and the grantor’s failure to make repairs will result in damage to personal property. The implied duty, however, extends only to those repairs that the grantor is capable of making without incurring undue expense and inconvenience.
  • Contain a clear revocation clause – The instrument that creates the lifetime right of occupancy should clearly set out the circumstances under which the right can be revoked. For example, the right can be revoked where the tenant fails to pay property taxes or where the tenant rents the premises without the grantor’s consent.
  • Be witnessed (not required if self-proved) – The lifetime right of occupancy should be both witnessed and notarized, unless the instrument is self-proved, in which case the singing of the instrument by the witnesses is not necessary.

Litigation cases and case studies

The preneed world was rocked in the late 1990’s by the news that the estate of Victor Schwab and his family funeral business, McKenzie Schwab, had sold preneed contracts with a guaranty of lifetime services, but had never purchased the rights of occupancy for the arrangements. Not long thereafter, Schwab filed for bankruptcy, and his 2,000 former clients learned that they were now responsible for making arrangements for which they believed they had already paid in full.
In a similar, but lessor known case, Sunshine North America consolidated more than 100,000 preneed contracts under a single insurance carrier. Michael McCarty, the State Treasurer of the Commonwealth of Massachusetts, became the liquidator for the company. Faced with a slew of lawsuits, McCarty sought reinsurance from Guaranteed Funeral Home Services LLC, of Hudson, Florida. GFHS failed to provide the requested reinsurance, and McCarty filed a suit in 2003 seeking to collect damages for its refusal to honor a contract guarantee. Before the lawsuit could be resolved, GFHS filed for bankruptcy protection, thereby including the contract signed with Sunshine North America.
As a part of the bankruptcy proceedings, GFHS’s assets were transferred to a newly formed company, Guaranteed Funeral and Cemetery Alliance ("Alliance"). In the deal, the court ordered the sale of "all assets of [GFHS], including any rights, subordinated or otherwise, to the reinsurance revenues on the [Sunshine North America] policies."
Alliance immediately sought a court order specifically directing the Massachusetts Attorney General to accept "the consumers’ choice of where to seek the performance of their access to the funded trust assets established pursuant to the [Consent Judgment]." However, an obstacle was provided by the conditional rights of the preneed sellers. The Consent Judgment provides that "the existence or exercise of the rights of such [preneed sellers] shall not be impaired, interfered with or otherwise disregarded." In short, because of the preneed seller’s unqualified rights, Alliance would be required to prove privity before the Attorney General would be so directed.
The matter did not end there, as an ensuing battle over what constituted privity lasted for several years. Finally, in January 2010, the state agreed to allow Alliance to assume the contract. However, the Office of the Massachusetts Attorney General has insisted that privity was not the reason for its agreement, as it cannot force a consumer to accept what have become inconsistent contracts when such conduct is not in the consumer’s best interest.
While perhaps rare, these two cases demonstrate that the consumer needs to understand the difference between a contract for preneed with a right to lifetime services, and that which is essentially a financial gift that may ultimately need to be replaced.

How to terminate a lifetime right of occupancy

How to Terminate a Lifetime Right of Occupancy Agreement
There are a number of ways to get it out of a lifetime right of occupancy agreement.
Mutual Agreement
The most common method of termination of a lifetime right of occupancy is through mutual agreement of the resident and the community owner. The resident is going to be more willing to terminate if they are offered a reasonable cash settlement. The community owner should be careful though in how they go about negotiating this issue. The Texas Property Code disallows coercion of a resident who is thinking about vacating. So you shouldn’t offer to provide assistance to a resident vacate their home, such as helping them move their home out of the community, on the condition that they terminate the agreement.
Violation of Terms
A lifetime right of occupancy can be terminated for violation of the terms of the agreement. Either the resident or the homeowner can be found to have violated the agreement. This is going to typically be the fewest headaches situations for a community owner. The most common violations are through rent nonpayment or subleasing. The resident violates the agreement when they fail to pay rent or leave their home vacant for an extended period of time. Normally it’s not the resident who does the subleasing of a home, we usually see this from one homeowner selling their home and it’s the new homeowner who is the problem. A community owner can give the resident a nuisance notice , which is an informal notice given for minor violations of the agreement. The occupant will typically make the correction immediately upon receipt of this notice. The suit for possession, which is discussed below, is reserved for more severe violations of the agreement, such as failure to pay rent, continuing a violation after issuing a nuisance notice, or any other violations that need immediate attention.
Suit for Possession
The third way a community owner can terminate a lifetime right of occupancy is by suing the occupant in Justice Court for possession of their home. The reason the sale of a home by a resident is so problematic is because it often ends with the resident giving the buyer an invalid right of occupancy to the home. Then the buyer takes occupancy of the home and calculates that they do not have to pay rent because they don’t have a lifetime right of occupancy. Because the buyer does not have a lifetime right of occupancy, they need to pay for the home just like everyone else who buys a home in the community. If the buyer doesn’t start paying, then we need to go to Justice Court and get a suit for possession against the buyer. If they still refuse to leave, then we get a writ of possession from the Court and get the constable to put them out. The problem with selling a home before the lifetime right of occupancy agreement has been terminated is that the buyer may end up getting the right of occupancy after all—that is unless they willfully decide to disobey the terms of the agreement. But if they do that, then we sue them for possession and move forward with getting them evicted.