Beyond the TREC 1-4 Residential Sales Contract

Introduction

This article discusses clauses that can be added as special provisions to the TREC 1-4 Family Residential Contract in order to produce a more comprehensive agreement and better serve the interests of the parties. In times past, numerous special provisions were considered unnecessary for residential properties since they were less expensive than commercial ones. The idea was that cheaper transactions should be simpler. However, in an era of seven and eight-figure residential sales, that is no longer the case.

Higher prices are not the only reason to consider special provisions in the residential context. Non-standard transactions can also occur that do not correspond to TREC promulgated forms—wraparounds for example. The TREC 1-4 Contract plus the Seller Financing Addendum barely begin to cover the details involved in a wrap.

Even in standard transactions, the TREC contract can be significantly enhanced. What if the buyer wants to make sure the seller understands and commits to the legal obligation of full and ongoing disclosure? What if the seller wants to require an “as is” clause in the warranty deed delivered to the buyer at closing? A special provisions addendum drafted by an attorney at the contract stage is the solution.

This article is not an exhaustive list of all possible special provisions for residential real estate contracts. It focuses on several important ones that can significantly fortify the position of buyer or seller and easily be included in a special provisions contract addendum.

Negotiability of Standard Contracts

Even when amicably conducted, the sale and purchase of real estate is by definition an adversarial transaction. Either side can gain advantage over the other by negotiating better terms with reduced liability. All Texas real estate contracts are negotiable and that negotiability extends beyond the confines of the TREC forms.

Negotiating the best outcome for buyer or seller may require going beyond merely checking boxes on a standard form. Since drafting special provisions may constitute the practice of law (unless one is working on one’s own contract) a real estate attorney will likely need to be involved.

Should real estate investors use the TREC 1-4 Contract?

Yes, at least within the scope of most residential transactions. Investors in residential real estate will find they are almost always better off using the TREC 1-4 contract with appropriate addenda (including an attorney-prepared special provisions addendum when needed) rather than anything simpler that is designed or streamlined for investor use—and that includes contracts that emerge from the multitude of real estate investor seminars. Many seminar forms are not even specific to Texas.

Not only is the TREC 1-4 contract a good contract for the most part, its correct use gives a real estate investor both authority and credibility in the marketplace—so it is a good idea for an investor to be familiar with both the contract and the various standard addenda. It is, however, important to understand when promulgated forms do not adequately meet one’s needs, which is especially true in non-standard and creative transactions.

THE SPECIAL PROVISIONS ADDENDUM

Does the TREC contract accommodate special provisions?

Only to a very limited extent. The special provisions paragraph of the TREC 1-4 contract (paragraph 11) is a short space available for inserting extra comments, but its permitted use by brokers and agents is limited to informational items (factual statements and details) applicable to the sale—not substantive modification of the contract text or addition of legal provisions. Also, the space on the form is only two and a half lines long which is insufficient for any serious amount of text.

If a transaction is non-standard or if the parties have side agreements that are not fully addressed by the TREC 1-4 contract and addenda, can paragraph 11 be used to include these custom provisions? No, at least not by license holders. For everyone else, the space is just too short to be of much use. A custom special provisions addendum may be needed.

A special provisions addendum need not over-complicate a transaction. It can be brief; and when written correctly it is immediately apparent to all concerned which contract terms are being changed and which are not. Only items to be altered are mentioned in the addendum; and the familiar TREC contract has not been marked up in ways that can distress anyone who is accustomed to using it. A good special provisions addendum does not complicate the transaction, it clarifies it.

Brokers and Agents Must Use TREC Forms

Unless one is a real estate license holder, there is no required form for a residential real estate contract in Texas. The use of TREC promulgated forms is mandatory only for brokers and agents. For others—particularly those who have the assistance of a real estate attorney—rigid adherence to checking boxes on a limited standard form is entirely optional. For unlicensed buyers and sellers, standard TREC forms are suggested for widespread use. They are not required.

License holders should always refer their clients to a real estate attorney if non-standard provisions or creative changes to the TREC contract are contemplated. The attorney can draft a custom addendum that covers these modifications and leaves nothing that is assumed, implied, or deferred until later. Rather than resisting this, license holders should embrace it as an opportunity to keep the transaction on course while offloading liability for drafting non-standard provisions onto the attorney.

Custom and Creative Clauses

The TREC 1-4 contract and its addenda contemplate that transactions will be conducted within a narrow and prescribed lane. There are benefits to this approach but there is also a cost. Nearly all clauses and provisions that are (even slightly) creative are excluded.

This can be highly problematic. For example, if you are the seller and want an express “as is” clause to be included in the warranty deed (always an excellent idea for sellers), does the TREC contract facilitate this? No. If you are the buyer and would like to take title with your spouse as joint owners with rights of survivorship, does the TREC contract allow for this? No. The list goes on.

Critical Deal Points Should be in Writing

Earnest money contracts in Texas control 90% of the rights and remedies of the parties. Unless the contract (and its addenda) expressly provide for inclusion of a custom provision, neither party can compel its addition later without a formal contract amendment. If a right, requirement, or condition is not expressly stated in the signed contract or its addenda then it probably does not exist.

Why? Because a valid contract for the conveyance of real property is subject to the statute of frauds and requires a signed writing as to all material terms (Bus. & Com. Code Sec. 26.01 and Prop. Code Sec. 5.021). Do not count on being able to casually add such a term later in the process.

In interpreting contracts, Texas courts do not usually allow extrinsic evidence (found outside the four corners of the written document) in the interpretation of clearly-written contracts. “The parol evidence rule [excludes oral statements and] bars consideration of evidence that contradicts, varies, or adds to the terms of an unambiguous written agreement . . . evidence of surrounding facts and circumstances, including evidence of industry custom and usage, cannot be used to add, alter, or change the contract’s agreed-to terms.” Barrow-Shaver Resources Company v. Carrizo Oil & Gas, Inc., 590 S.W.3d 471 (Tex. 2019).

Resistance to Special Provisions

Buyers or sellers seeking even minor customization of the TREC 1-4 contract can expect a degree of resistance from brokers, agents, and title companies. The only solution is to relentlessly self-advocate. If a seller wants the warranty deed to include a thorough “as is” clause in bold and all caps, it may be necessary to simply insist. The seller should not sign the contract unless and until this requirement is clearly stated in a signed document—not merely orally promised.

Signing a bare-bones standard contract with the assumption that special provisions can be worked out later is a faulty strategy. One may then hear the broker or agent say “Oh, if you wanted that you should have gotten it in the contract.”

If either buyer or seller wants to include a clause or provision that is not part of the TREC 1-4 contract or its addenda, a custom lawyer-prepared special provisions addendum is required. Engaging a real estate attorney for this purpose before the contract is signed is the best way to maximize one’s best interests and defy the institutional bias in favor of standardized outcomes.

BUYER-ORIENTED SPECIAL PROVISIONS

This section addresses a number of potential buyer-oriented clauses that can be included in a special provisions addendum. The most important area of buyer concern centers around full disclosure by the seller of all known material facts, conditions, and circumstances relating to the condition of the property.

Affirming Seller’s Disclosure Obligations

The buyer should want to know everything there is to know about property condition, whether that information is derived from the buyer’s own due diligence, a title commitment, a survey, disclosure by the seller, information provided by a broker, or even gossip among neighbors.

Cases involving alleged seller non-disclosure are the principal cause of litigation in residential real estate. Unjustified reliance by sellers on the TREC 1-4 Contract’s “as is” clause (paragraph 7.D.1) in order to avoid disclosure of defects is rampant. Brokers, agents, and others who do not believe this have not spent sufficient time watching trials at the courthouse.

Buyers have a strong interest in fighting back with inclusion of a special provision that affirms and re-states the seller’s legal duty of full and ongoing disclosure. The seller should acknowledge and affirm an obligation to promptly disclose known material defects, inoperative or faulty systems, needed repairs, and any negative facts, conditions, and circumstances that could reasonably affect the buyer’s decision to buy or not buy.

It should be made clear that: (1) the full disclosure requirement applies even if paragraph 7d(1) is checked and even if the sale is intended to be “as is;” and (2) the seller’s duty is not a one-time event limited to delivery of the Seller’s Disclosure. it is ongoing and continues through closing.

The foregoing merely summarizes existing consumer disclosure law under the Deceptive Trade Practices Act (DTPA, Bus. & Com. Code Sec. 17.46 et seq.). So why is a special provision a good idea? Because experience shows that it is necessary for a seller’s duty of disclosure to be relentlessly hammered home so that no one involved in the process has any doubt that it exists.

There is occasional pushback, of course. Some sellers refuse to sign a special provision affirming their duty of disclosure. This is a red flag. When faced with a seller who does not acknowledge or understand his legal obligations (and may have no intention of complying with them), a buyer should consider moving on to another property.

Copies of Repairs and Reports

Buyers have an interest in all aspects of property condition, past and present. If relevant documentation exists then the buyer should want to see it and the seller should be required to supply it. A partial list would include recent inspection reports and repair receipts; permits relating to improvements, substantial repairs, or current use; and any documents relating to zoning or land-use restrictions.

If the seller has done major repairs or renovations within the last several years, the seller should also agree to provide details (well before the end of the option period) as to the nature and extent of such repairs, including plans and permits.

Functionality of Major Property Systems

Why not get a commitment from the seller to deliver major systems in good and working condition? This is commonly overlooked because most brokers and agents now automatically check paragraph 7.D(1)—effectively making “as is” the norm for Texas residential transactions. This is unfortunate. Rather than being automatic, an agreement to convey property “as is” should be a major contract term that is consciously negotiated by the parties.

Instead of just reflexively checking paragraph 7.D(1), a custom special provision could be added requiring that the seller, at closing, deliver all major systems on the property (electrical, mechanical, plumbing, HVAC, foundation, and roof) as well as appliances (if any) in good and working condition with no known material problems that are not fully disclosed to Buyer before the end of the option period. This requirement would apply notwithstanding that paragraph 7.D.(1) is checked and the sale is otherwise “as is.”

There is no good reason not to give this approach a try. (A reluctant realtor who is spooked by the concept of special provisions is not a good reason.)

What if the seller does not agree? That is a red flag indeed, as well as the starting point for a series of hard questions about property condition. At minimum, the buyer will know to be cautious and thorough in doing inspections and perhaps secure a longer option period in which to do so.

Experience suggests that it is better to walk away from non-disclosing sellers unless the property is being purchased for dirt value only.

Water Penetration and Mold

There is nothing in the TREC contract or the Seller’s Disclosure assuring the buyer that the property has never been flooded or afflicted by mold. Here is a sample solution:

Seller represents and warrants to Buyer that: (1) the improvements on the Property have never been flooded or penetrated by water from any source, including roof leaks, wall leaks, or slab seepage; (2) the lot or tract drains properly—no part of it experiences standing water after a rain; (3) the Property is not with an area designated by H.U.D., the Army Corps of Engineers, or any governmental agency as having an increased likelihood of flooding; and (4) there is not, nor was there ever, any evidence of mold in any of the improvements.

There is no easy way to accommodate such a provision in the TREC 1-4 Contract or its addenda. A special provisions addendum is needed to add this or any other custom reps and warranties.

Choice of Seller’s Disclosure Form

A Seller’s Disclosure Notice (TREC form OP-H or TXR 1406) is required in residential transactions by the Property Code:

Prop. Code Sec. 5.008. Seller’s Disclosure of Property Condition

A seller of residential real property comprising not more than one dwelling unit located in this state shall give to the purchaser of the property a written notice as prescribed by this section or a written notice substantially similar to the notice prescribed by this section which contains, at a minimum, all of the items in the notice prescribed by this section.

Section 5.008(d) goes on to say that the “notice shall be completed to the best of seller’s belief and knowledge as of the date the notice is completed and signed by the seller.” There are exceptions, notably as to previously unoccupied new homes.

There are two available Seller Disclosure Notices – TREC form OP-H or TXR 1406. The latter is a better form and buyers should request it.

What about the truth of the disclosure itself? It is widely assumed that a seller is affirming the truth of the Seller’s Disclosure when the seller signs it—but it does not say that anywhere on the TREC form. What if the seller lies on the Seller’s Disclosure? This happens every day. Does the buyer have an expedient remedy short of filing an expensive lawsuit? No, not under the TREC 1-4 contract.

Contract Terminates if No Earnest Money Deposited

Paragraph 5 of the TREC 1-4 contract provides that a buyer must deposit earnest money within 3 days of the contract’s effective date. Is this always desirable for a buyer?

The contract provides that the buyer’s failure to deposit earnest money does not terminate the contract; instead, it is a default that gives the seller an opportunity to exercise remedies against the buyer. This creates the potential for much legal wrangling including a lawsuit.

If a buyer wants the ability to choose not to deposit the earnest money (or additional earnest money if divided into two parts) without further legal involvement or repercussions, a special provision should provide for automatic termination of the contract if the buyer chooses not to timely deposit the full earnest money. Any amounts previously deposited would be retained by the seller as the seller’s sole and exclusive remedy. The seller would have no specific performance remedy against the buyer.

There is no box to check on the TREC contract for this buyer-oriented approach. If a buyer wants the ability to proceed this way (and why not?) a special provision is required.

Deleting Seller’s Specific Performance Remedy

There are many valid reasons why a buyer would want to avoid a seller’s remedy for specific performance. If one looks at paragraph 15 of the TREC contract, there is really no satisfactory way to strike out or amend the existing language in order to make it clear that retention of the buyer’s earnest money will be the seller’s sole and exclusive remedy. The only feasible means of inserting this sole-and-exclusive-remedy language is by means of a special provisions addendum.

Joint Ownership with Rights of Survivorship

The term joint tenancy (ownership) with rights of survival is traditionally abbreviated as JTWROS. It is an entirely reasonable and legitimate way to own property and accomplish a modest degree of estate planning at the same time. Even though JTWROS is permitted in Texas for both spouses and non-spouses, the TREC 1-4 contract offers no opportunity for buyers to choose this option.

A special provision calling for JTWROS should require that two steps be taken, both of which relate to the content of the deed:

(1) Clearly State JTWROS in the Grantee Clause. In the deed, the buyer should be identified in the grantee clause as (for example): “Jim Jones and spouse, Jane Jones as co-owners with rights of survivorship pursuant to Texas Estates Code Section 112.051 et seq. and not as tenants-in-common.” [Note: this is the formulation for spouses, not non-spouses.]

(2) Include a Signed Survivorship Agreement within the Deed. The deed should be drafted to comply with Estates Code Section 112.051 which requires that JTWROS be established by a signed written agreement. This is accomplished by including language in the deed stating that the instrument is intended to be a written agreement in compliance with the statute. Both parties should then sign and acknowledge the deed. The result, if correctly done, is that the deed becomes a contract as well as a conveyance.

Title company attorneys may not be willing to draft a deed of this type so the buyer’s attorney should be prepared to supply the necessary wording. Actually, the better option is to provide that the buyer’s attorney will prepare the deed.

Special provisions requiring JTWROS must be included at the contract stage before the contract is signed. JTWROS is a non-standard creative add-on and will not happen unless there is a contract special provision that requires it.

Must the buyer get a survey?

While a new survey is almost always a good thing, a cash buyer may want flexibility as to whether or not to order a new survey if the seller does not have an existing survey or fails to deliver one pursuant to paragraph 6.C(1). The alternative offered in 6.C(2) states that the buyer shall order a new survey; but this mandatory language may not be necessary, and the buyer should not be compelled by the contract to order a new survey if there is no lender that requires one.

Recovery of Pursuit Costs if Seller Defaults

Homes are expensive and pursuit costs (loan fees, inspections, surveys, and the like) are not trivial. Buyers today invest significant time and funds that go well beyond the amount of earnest money. A mere return of earnest money upon seller default cannot be expected to make the buyer whole.

A buyer should be given an expedient remedy if: (1) any representation or warranty made by the seller is found to be untrue or if (2) a known but undisclosed adverse material fact, condition, or circumstance is discovered by the buyer—whether that discovery occurs within the option period or not. (A variation on this imposes a monetary minimum to insure that the undisclosed item is material.)

If either event occurs then the seller has been caught red-handed at misrepresentation or fraud—so it is not time to tiptoe around the buyer’s remedies. The buyer should be able to immediately terminate the contract and receive not just the earnest money but also reimbursement from the non-disclosing seller for out-of-pocket expenses (inspection fees, appraisal fees, survey, attorney’s fees, and the like).

And what if a seller under contract simply decides not to sell? That is, of course, a blatant breach. Can pursuit costs be recovered under the TREC 1-4 contract? No, not in the absence of a lawsuit. A special provision is required in order to make this a feasible remedy.

If the seller breaches the contract, wrongfully terminates, or otherwise fails to close, the buyer should have a couple of choices: (1) to pursue all remedies including specific performance (and do so without first engaging in mediation); or (2) choose to accept termination of the contract and receive (a) the return of all earnest money as well as (b) other reasonable and customary pre-closing expenses including inspection fees, appraisal fees, survey, attorney’s fees, and the like. If these are reimbursed then both parties would be released from the contract.

Contract “Out” for a Lender Turn-Down Letter

There can occasionally be dispute as to whether or not the buyer has made a bona fide effort to obtain financing. The TREC Third Party Financing Addendum states:

Buyer shall apply promptly for all financing . . . and make every reasonable effort to obtain approval for the financing, including but not limited to furnishing all information and documents required by Buyer’s lender. . . . If Buyer cannot obtain Buyer Approval, Buyer may give written notice to Seller within ________ days after the effective date of this contract and this contract will terminate and the earnest money will be refunded to Buyer.

There are a number of highly subjective (and arguable) terms in this language. Does promptly mean two days or twenty? Does every reasonable effort require application to one lender or four? What constitutes sufficient evidence of failure to get financing? On these points and more, the TREC text is silent.

A buyer who needs third-party financing should consider adding a special provision that avoids ambiguity and disputes over phraseology. This issue may not be so compelling if the earnest money at stake is only $500 . . . but what if it is $25,000 or $50,000—amounts that are common in sales of higher-end homes? Is it worth it for a buyer to add a special provision to protect those larger amounts? Of course it is.

From the buyer’s perspective, production of a turn-down letter from a lender should be stipulated to be conclusive evidence of the buyer’s prompt and reasonable efforts to obtain financing as well as the failure of those efforts—with no argument from the seller on any of those points.

Pre-Closing Walk-Through

Why should a buyer be interested in a pre-closing walk-through? Why not just trust the seller to leave the property in the condition expected?

During the 2020 freeze in Texas, we learned of a case where the seller walked into closing as if everything were normal, signed the documents, accepted the wired sales price, and walked out. During that exact time, the house was in the process of flooding due to burst pipes. The seller took the money and ran. Everyone including the realtors got paid but the buyer was left with over $30,000 in damages and doubtful insurance coverage.

No good reason exists for a buyer (or buyer’s agent) not to secure a special provision allowing for a pre-closing walk-through in the hours before closing.

Assignments by Seller at Closing

A deed transfers title and (usually) that is all. However, it may also be critically important that existing warranties, contracts, and leases be properly assigned to the buyer by the seller, particularly if the property is investment property occupied by a tenant. What items might be assigned? This is a partial list:

(1) warranties and guaranties pertaining to the foundation, roof, HVAC system, appliances, and pest control;

(2) property management contracts and any other agreements relating to upkeep, repair, maintenance, and operation of the property;

(3) if the property is leased, all rights of landlord pursuant to the lease;

(4) all uncollected and unpaid rents (past, present, and future); and

(5) the security deposit, for a which a tangible cashier’s check should be collected at closing from the seller.

Including a special provision in order to obtain such an assignment at closing is an obvious and solid benefit to the buyer. The TREC contract offers no option for selecting this.

Creative Transactions Clauses

Notice Regarding Due on Sale. Certain creative transactions (e.g., wraparounds and “subject to” deals) involve the transfer of title without consent of the lender. If the buyer is an investor dealing with an unsophisticated seller, the buyer-investor should want to ensure that the seller understands the nature of the due-on-sale clause and other potential consequences—including the fact that a title transfer does not relieve the seller from liability on the existing note.

Non-Recourse Clause. It is a fact that not all such transactions go well, so an investor-buyer should act in advance to limit asset exposure arising from a post-closing lawsuit. A non-recourse clause accomplishes this by narrowing the buyer’s exposure to the subject property only. A non-recourse clause is an intelligent and prudent form of asset protection that is easily achieved with a special provisions addendum. Reasons for a buyer not to do this in an appropriate scenario? None at all.

Right to Review and Approve Closing Documents. Creative transactions typically involve (sometimes very) non-standard documents that are most often prepared by the seller. Will the buyer have the right to review and approve these documents before closing? Will the buyer be compelled to close if the proposed documents do not accurately reflect the parties’ agreement?

There are other creative transactions clauses that may be relevant depending on the situation.

Wholesaling Clauses: Assigning the Contract

Many buyers are real estate investors engaged in wholesaling. An earnest money contract that is destined to be sold and assigned (wholesaled) by one real estate investor to another should expressly state that it is assignable by the buyer. A common way to do this is to show the buyer as (for example) “ABC LLC and/or its assigns.” This formulation is, however, inadequate to fully cover all the different details inherent in wholesaling.

There should be a comprehensive and express written wholesaling agreement between the originally-shown buyer-investor on the contract and the owner-seller of the property. This goes beyond stating “and/or his assigns.” It also goes well beyond anything offered by the TREC 1-4 Contract or its addenda.

The owner-seller should be required to agree:

(1) that the contract is assignable to a new buyer without notice or consent;

(2) that the executed assignment releases the original buyer-investor of further contract obligations;

(3) to accept the contract assignee as the new buyer; and

(4) to cooperate in execution and delivery of a deed to the new buyer at closing.

Since the special provision section of the TREC contract is far too short for these important points, a custom special provisions addendum is needed.

SELLER-ORIENTED SPECIAL PROVISIONS

As is the case with buyers, the TREC 1-4 Contract can be less than adequate for purposes of maximizing the seller’s interests and limiting liability after closing. The following are a few suggestions to remedy these shortcomings.

“As Is” Clauses in the Contract and Deed

Sellers of real property have certain common key concerns. These center around limiting liability before closing and eliminating liability after closing. The latter is accomplished primarily by ensuring that the “as is” aspect of the transaction is ironclad.

For an effective “as is” conveyance of real property to occur, two “as is” clauses are usually required: one in the contract and one in the deed at closing.

The contract clause states that parties agree that the property will be conveyed by seller to buyer “as is.” The deed clause states that the property is being conveyed by grantor and accepted by grantee “as is.” The wording and legal effect of these two “as is” clauses are not the same. One is executory and prospective (to be accomplished in the future) and the other is executed and delivered (completed contemporaneously). A special provisions addendum must therefore provide for inclusion of both of these “as is” clauses in order to best protect the seller.

Another point: the special provisions addendum should expressly set out the “as is” clause that will be included in the deed at closing—word for word. This eliminates last-minute arguments about the “as is” language. Such arguments occur all the time and have been known to cause closings to fail.

If the seller performs any repairs and treatments prior to closing (as paragraph 7.D.(2) may require) then the “as is” clause in the deed should also include these repairs within its scope, preventing the buyer from later claiming that such repairs were warrantied by the seller. The promulgated forms offer no easy way to do this.

The seller should also want a special provision to the effect that any survey supplied to buyer is “as is” with all faults and without representations or warranties. Why should the seller allow post-closing liability to arise regarding an existing survey that was supplied to the buyer for free?

As is the case with all “as is” notices in Texas, the wording should be in bold and all caps as well as clear and unequivocal.

Additional Deed Clauses

A seller may want to include additional custom clauses in the deed beyond the “as is” clause. For example, the portion of the deed entitled Exceptions to Conveyance and Warranty can be expanded to include “all matters of which Grantee has actual or constructive notice and all matters excepted from coverage in any owner’s title insurance policy issued to Grantee in connection with this conveyance.” The buyer’s actual notice of an existing fact or condition can mitigate the risk of a lawsuit later. This is clearly in the seller’s interest.

The seller generally pays for the warranty deed so there is no good reason why the seller should not have input into what it contains. At the very least, a special provision should require that the seller have the opportunity to review and approve a proposed deed prior to closing.

When it comes to closing documents, there should be no surprises at the closing table. Only amateurs show up at closing with no idea about what they will be asked to sign.

Obligation to Cure Buyer Objections

The TREC 1-4 contract allows the buyer to submit objections to the survey or title commitment which the seller “shall cure” so long as the seller does not have to incur any expense in doing so. This language is less than ideal for the seller. The seller should want to make it clear that seller may but shall not have the obligation to cure objections; further, in the course of attempting to do so, seller will not be bound to expend undue time and effort—not just expense.

The seller should want the obligation to cure to be entirely at seller’s discretion. Also, the seller should not want failure to cure objections (or failure to even try) to be construed as a default that provides the basis for a specific-performance lawsuit. Provisions clarifying the obligation of the seller to cure objections are almost always perceived as reasonable and can easily be covered in a special provisions addendum.

Striking Specific Performance

It is in the seller’s interest to avoid being sued for specific performance—not just because a lawsuit is inconvenient and expensive but because it may involve recording of a lis pendens (public notice of the suit) that could cloud title and prevent sale of the property to anyone else.

Specific performance is an equitable remedy available to a buyer who pleads and proves that he was ready, willing, and able to perform according to the contract but the seller failed to close and deliver a deed. The old requirement that the buyer show up at closing in order to “make tender” of the purchase price no longer exists. Actual tender by the buyer is excused if it would be a useless exercise given the obvious default of the seller. DiGiuseppe v. Lawler, 269 S.W.3d 588, 593-594 (Tex. 2008).

It is nearly always in the seller’s best interest to strike the buyer’s remedy of specific performance. Since specific performance is generally an ineffective remedy against residential buyers there is usually no reason not to strike specific performance all around. This is a common contract modification.

Major Casualty Loss

In the event of significant property damage before closing (due to flooding, an ice storm, or the like), the seller may want flexibility as to how such a situation is handled. Paragraph 14 of the TREC 1-4 contract makes full restoration of the property mandatory, offering the seller a way out only “due to factors beyond Seller’s control.” What if insurance proceeds are insufficient to cover the loss—and as a result the seller is unable to restore the property to its previous condition? Is that a factor beyond the seller’s control?

This level of ambiguity is unacceptable. A seller’s obligation to restore the property should be limited to payable insurance proceeds that are available to cover the loss. If insurance proceeds are insufficient for full restoration, the seller should be able to give notice of termination, sign a release of earnest money, and end the obligations of both parties.

Notice to Buyer Concerning Due-on-Sale Clause

As previously mentioned, some creative transactions involve transferring title to a buyer without prior lender approval. A seller proposing such a transaction should want to insure that the buyer is fully informed (in writing and in advance) as to potential consequences of the due-on-sale clause.

A careful investor-seller should want a special provision notifying the buyer that: (1) the seller’s deed of trust contains a due-on-sale clause that permits the lienholder to accelerate the existing loan if title is transferred without consent; and (2) in the event of acceleration there may be only a short time in which to pay the accelerated note before the property is foreclosed. These advisories would be in addition to statutory seven-day notice requirements contained in Property Code Section 5.016.

Protecting the Seller’s Confidential Information

Although more common in commercial transactions, concerns about confidential information can arise in the residential context as well. A seller may have entirely legitimate reasons for keeping certain information about a residence and who lives there out of the public eye. A special provisions addendum can include a covenant on by the buyer not to reveal confidential information about the property, whether or not the transaction ever closes.

Limiting Survival of Contract Provisions

Absent an express survival clause, and according to the doctrine of merger, the contract is replaced and superseded by the signed closing documents—especially the warranty deed. The contract is considered to be merged into the deed and other closing documents. For most purposes and in most cases, merger extinguishes the contract. Smith v. Harrison County, 824 S.W.2d 788, 793 (Tex.App.—Texarkana 1992, no writ).

An exception to merger are contract clauses that (in legal terms) survive. Clauses that expressly provide for the ongoing validity of contract provisions after closing are called survival clauses. Paragraph 19 of the TREC contract contains such a clause: “All covenants, representations and warranties in this contract survive closing.”

This creates a problem for the seller. Indefinite duration of representations and warranties is clearly not in the seller’s interest. The seller should insist on a special provision striking this clause and caping his post-closing liability. A seller does not want liability to endure forever just because a voluntary standard form says so.

No Representation and No Reliance Clauses

No representation/no reliance clauses appear routinely in business contracts. It is a mystery why they are not seen more often in real estate transactions.

Sellers should want to avoid post-closing claims by a disgruntled buyer that oral representations or promises were made and breached. In particular, “he said/she said” allegations should be pre-empted by a special provision along the following lines:

(1) Seller has made no representations or warranties that are not clearly stated in writing within the four corners of the contract or its addenda;

(2) Buyer is not relying on any other alleged representations or warranties made by the Seller or Seller’s representatives;

(3) oral statements and electronic communications are entirely excluded and disclaimed; and

(4) Buyer accepts the duty to perform thorough due diligence before closing and may rely solely on the Buyer’s own observations, investigations, evaluations, and inspections. This special provision shall survive closing.

SPECIAL PROVISIONS
OF CONCERN TO BOTH PARTIES

There are a range of issues and considerations that are in the best interest of both parties to clarify and resolve in advance. Again, the TREC contract does not easily allow for these.

Control of Legal Document Preparation

Creative transactions (seller financing, wraparounds, sub2 transactions, etc.) involve a number of creative legal documents—not just the warranty deed—that will be presented for signature at closing. What documents will be prepared? Who will prepare them? Who will control their content? Will the non-drafting party have an opportunity to review, negotiate, and approve? A creative transaction can easily fail at the closing table when legal documents are presented that one of the parties considers onerous or unacceptable. Attorneys who do closings see this happen regularly.

It is the responsibility of professional advisors (brokers, agents, and attorneys) to anticipate and avoid this outcome. A sample special provision in the case of a wraparound might read:

Wraparound Document Preparation. Wraparound legal documents will be prepared by Seller (containing such terms and conditions as Seller may prescribe) and will include (but may not be limited to) a General Warranty Deed with Vendor’s Lien conveying title to Buyer, a Wraparound Note, a Wraparound Deed of Trust securing payment of the Wraparound Note, and a Wraparound Agreement addressing additional agreements and details of the wrap.

Another approach is to prepare legal documents in advance and attach them as approved exhibits to the earnest money contract. This technique is more common in commercial transactions, but in a complex, creative, and high-dollar residential transaction this practice is equally beneficial.

Review of Legal Documents by the Non-Drafting Party

The TREC 1-4 contract does not make it clear who will be preparing custom closing documents. This problem has two aspects: just as it may be important for one party to control the content of closing documents, it may be vital for the other party to have an opportunity to review, negotiate, and approve them before closing.

Pre-approval is especially important in transactions involving seller financing, wraparounds, “subject to” transfers, and the like. In such cases, an express special provision is needed to grant the non-drafting party the right to review and approve. Otherwise, that right does not exist.

This is an example a buyer-oriented clause in the case of a seller-financed transaction:

Buyer’s Right to Review and Approve. Buyer shall have the opportunity to review the principal seller-financing legal documents (including the warranty deed, note, and deed of trust) no less than three days prior to the scheduled closing date. Buyer shall not be required to close if the proposed closing documents differ in any material respect from the express terms of the contract and its addenda.

Adding such a special provision avoids being ambushed at closing with unfair or oppressive legal documents.

A familiar human cognitive bias is to assume that everything will work out and that tomorrow will be like today (with everyone being pleased with the contract and reasonable to deal with). Learn to think like a lawyer. Anticipate and avoid potential failure points in the process.

Special Covenants and Agreements

Well-drafted business contracts of all types have certain main sections in common. We have already discussed representations and warranties and remedies for default. Another critical section of the contract contains the respective covenants and agreements of the parties.

Covenants and agreements are different from representations and warranties. A representation or warranty states that such-and-such is true, either about the party making the statement or about the subject property; a covenant or agreement, on the other hand, states an affirmative promise by the seller or buyer to do or perform an act or thing. There is also a difference in how these two categories of obligation are enforced in the event of default.

As with representations and warranties, covenants and agreements are especially important in non-standard and customized transactions. Suppose, for instance, that in a “subject to” transaction an investor-buyer agrees to make payments on the existing loan for six months or whenever the property is re-sold, whichever occurs first. This is definitely a non-standard covenant that needs to be expressly laid out in a special provisions addendum.

No assumptions, no implied terms, no oral assurances, no deferring difficult provisions until later. True professionals are never guilty of these things. Spell it out, all of it. If the other side does not agree then it is better to know now rather than at the closing table.

1031 Exchanges

The occasional need for a special provision in the area of 1031 exchanges is self-evident. Here is a sample clause:

1031 Exchange. Buyer acknowledges that Seller has the option to qualify this transaction as part of a tax deferred exchange under section 1031 of the Internal Revenue Code. Buyer agrees that Seller may assign its rights and obligations under this agreement to 1031 Exchange Specialists Inc. as necessary to facilitate the exchange. Buyer agrees to cooperate with the Seller and 1031 Exchange Experts Company in order to complete the exchange, which will neither delay the closing nor cause additional expense or liability to the Buyer.

Indemnity Provisions

The desire for indemnification can arise on the part of either buyer or seller. Buyers typically seek indemnification as to liabilities that initially arose during the seller’s period of ownership. No buyer wants to pay the cost of defending against claims and lawsuits that arise from already-existing circumstances and conditions.

A seller’s goal, on the other hand, should be no comebacks after closing. This may require more than a high-quality “as is” clause. An indemnity clause may also be advisable.

What if there is a pending lawsuit filed by a tenant on the property? Or an Airbnb guest who simply will not leave? Or some sort of environmental issue? An indemnity clause can be drafted to clearly delineate the liability of both buyer and seller going forward from the date of closing. In such cases, ambiguity about who is liable for what (and when that liability starts and ends) is completely unacceptable.

Exclusion of Electronic Communications

Can emails or a sequence of emails taken together constitute a binding contract? Yes, if by reading all the emails together the intent of the parties to enter into a contract is clear. Dittman v. Cerone, No. 13—11—00196—CV, Court of Appeals of Texas, Corpus Christi—Edinburg, March 7, 2013. The principal statute affecting electronic communications is the Uniform Electronic Transactions Act (UETA) which clearly states that a contract may be valid and enforceable even though it is in electronic form.

Electronic signatures are a related issue. Is a sender’s name in the from line of an email the same as a signature? Can a person’s standardized signature block at the end of an email have the same effect as a custom signature on a written contract? Yes to both questions according to the 1st Court of Appeals in Houston: “A signature block from an email performs the same authenticity function as a ‘from’ field. Accordingly, it satisfies the requirement of a signature under the UETA” as well as the Statute of Frauds. Khoury v. Prentis Tomlinson Jr., No. 01-16-00006-CV (Tex.App.—Houston [1st Dist.] March 30, 2017). Although the 2nd Court of Appeals in Fort Worth reached a contrary result in a similar case, it is likely that Khoury charts the future direction of Texas law in this area.

All of this warrants a significant level of caution. The parties may send emails, texts, and meet in person. A special provision excluding emails and texts can be a good idea for both buyer and seller. The final agreement of the parties should be contained in a single written contract and its associated addenda. Period. All electronic communications leading up to execution of the contract should be expressly excluded (along with oral statements, of course).

A Note on Executory Contracts

The TREC 1-4 contract should never be used as a substitute for a contract for deed, lease-option, lease-purchase, or other executory device, regardless of whether a special provisions addendum is employed or not. Property Code Section 5.061 et seq. sets out extensive rules and procedures that must be followed if an executory contract is to be valid. The TREC 1-4 contract is not suitable for this purpose.

CONCLUSION

General Drafting Considerations

A well-drafted contract should be a comprehensive document. All duties and obligations of the parties should be expressly stated. Nothing should be assumed or implied. No one should be allowed to rely on anything unless expressly stated in writing within the four corners of the contract. Oral statements should be disclaimed. Nothing should be left to be resolved later.

A contract that fails to thoroughly address all key points of agreement, involves unwritten assumptions, or relies on oral statements can easily form the basis for litigation. The courthouse is full of such cases.

When utilizing a standard form such as the TREC 1-4 contract, a custom special provisions addendum drafted by an attorney may be the most effective way to insure that all critical points are thoroughly addressed. And—just as importantly—all extraneous and incidental communications are entirely excluded.

Guidance of Legal Counsel

Resistance to a special provisions addendum can arise not just from third parties but from the attorney’s own client. Top reasons for not wanting to include such an addendum are: (1) the client’s desire not to offend their realtor and (2) a wish to conform to the way everyone else is doing things since residential transactions are perceived as standardized. The lawyer’s task is to attempt to educate clients out of these naive positions and into a willingness to proactively seek best-interest outcomes.

From Our Case Files

A buyer goes to closing without doing a last-minute walk-through. When the buyer arrives at her new home, she finds that the seller removed all the shrubbery and rose bushes—that very morning—and took them with him.

Moreover, the buyer discovers that the seller had, when showing the house, strategically positioned his artwork and oriental rugs to conceal sheet rock and slab cracks. The foundation will cost $30,000 to repair. The seller has moved to Missouri. The inspector has no E&O insurance.

Although the seller indicated on the Seller’s Disclosure that the house itself had never been flooded, he neglected to mention that during heavy rains the entire lot is 18 inches underwater, all the way up to the weepholes. And weep the buyer does.

The buyer decides to re-paper the bathroom and discovers black mold under the old wallpaper. Astonishingly, the Seller’s Disclosure did not ask specifically about mold—only about “water penetration” or “any condition that materially affects the physical health or safety of an individual.” When confronted by phone, the seller replies, “That mold never bothered my health.”

Even after all these challenges, the buyer settles in. Suddenly, the front door opens and in walks the seller’s estranged common-law wife (whose existence was not disclosed by the seller) and shouts “Honey, I’m home!”