Structuring Rent-Back Agreements for Exemption from Washington State’s Residential Landlord-Tenant Act: How Not to Get Trapped

Introduction

It is not uncommon for closing dates for the purchase and sale of residential property to present practical inconveniences for sellers.  They may have children in school, may still be looking for replacement housing, or may have closing dates on a new home that do not align with the sale.  One solution in such situations is to use a “rent-back” agreement.  A rent-back agreement allows the seller to continue to live in the home they are selling, typically for some short number of months, after closing has occurred.  

Aside from certain enumerated exceptions, the Washington State Residential Landlord-Tenant Act RCW 59.18 et seq. (“RLTA”) applies to all residential leases in the state of Washington and provides several non-waivable rights to tenants, and obligations to the landlord.  Needless to say, these rights and obligations do not align with the interests of buyers and sellers in a rent-back agreement situation.  Until recently, this was an extremely gray area since there was not express exemption to the RLTA for rent-back agreements.  Now, as of July 23, 2023, the RLTA contains provisions that, if followed, allow rent-back agreements to be exempt from the RLTA.  

It is important that these rent-back arrangements be exempt from the RLTA because if they are subject to the RLTA, the seller-occupier is entitled to the same protections as a residential tenant. Hypothetically, this could mean that in the event that the seller-occupier fails to move out, it will be more difficult to evict the seller-occupier, and buyers as landlords might have obligations they did not anticipate, nor ask for, in buying the home.  Clearly, this scenario does not make sense in rent-back situations.

In this post, we shed light on how to exempt these tenancies from the RLTA.

Compliance with RCW 59.18.040(3)

RCW 59.18.040(3) outlines specific requirements for rent-back agreements to qualify for RLTA exemption.  Sellers and buyers must be mindful of these three (3) stipulations to ensure legal compliance and a smooth transition:

(1) The rental agreement must permit the seller to remain in the dwelling unit for no more than three months after closing, and the buyer must not accept any rent payments from the seller after three months from closing;

(2) At the time of closing of the sale, the dwelling unit must not be a distressed home as defined in chapter 61.34 RCW.  A “distressed home” is defined under RCW 61.34.020 as either: (a) a dwelling that is in danger of foreclosure or at risk of loss due to nonpayment of taxes; or (b) a dwelling that is in danger of foreclosure or that is in the process of being foreclosed due to a default under the terms of a mortgage; and

(3) During negotiation of the purchase agreement or at the time of closing of the sale, the seller must be represented by an attorney licensed to practice law in this state or by a real estate broker or managing broker licensed under chapter 18.85 RCW.

Seller Rent Back: Protecting the Interests of Both Parties

A well-drafted rent-back agreement should address the rights and responsibilities of both the seller and the buyer during the post-closing occupancy period.  This includes specifying any rent amounts, deposits, maintenance responsibilities, and potential liabilities.  By clearly outlining these terms, parties can avoid misunderstandings and potential disputes.

Real estate associations have developed forms for rent-back agreements.  The Northwest Multiple Listing Service (NWMLS) has created Form 65B titled the “Sellers’ Occupancy After Closing Form.”  If your real estate agent is using that form to memorialize the rent-back agreement, buyers, sellers, and their agents should be sure that all statements in the Form 65B comply with the three requirements of RCW 59.18.040(3). 

Conclusion

In conclusion, if you are using rent-back agreements in Washington State you need to comply with the new RLTA exemption rules so that the rent-back agreement is not subject to the requirements of the RLTA.  Adhering to the specific requirements outlined in RCW 59.18.040(3) is essential for ensuring legal compliance and a seamless transition for both buyers and sellers in the dynamic real estate sales landscape.  If you have questions about this article or your rent back agreement, attorneys at Holmquist & Gardiner may be able to help. Contact us here.