DAVID J. WILLIS ATTORNEY
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RESIDENTIAL SALES CONTRACTS
The TREC One to Four Family Residential Contracts
by David J. Willis, J.D., LL.M.
The most commonly used residential sales contract in Texas is the One to Four Family Residential Contract (Resale) promulgated by the Texas Real Estate Commission as form number 20-13. The blank form is available at www.trec.state.tx.us. I will refer to it as the "TREC 1-4 contract." All licensed brokers and agents are required to use this contract and other TREC promulgated forms when representing clients in the purchase and sale of real property. Non-licensees and attorneys may use any format they wish. Note that our comments in this chapter are not intended as comprehensive instructions on how to complete the TREC 1-4 contract or as a substitute for using the services of a broker, agent, or real estate attorney. We merely touch upon the highlights.
Real estate investors will find that they are almost always better off using the TREC 1-4 contract with appropriate addenda rather than anything simpler that is supposedly designed or streamlined for investor use—and that includes the modified contracts that emerge from the multitude of real estate "guru" seminars. Accordingly, an experienced investor will become familiar with the various options and boxes to be checked in TREC forms and learn how to tailor a contract to his or her advantage.
The truth is, even when amicably conducted, the sale and purchase of real estate is by definition an adversarial transaction. From a lawyer's perspective, producing a contract and closing documents that advance the client's best interests is the whole point of the exercise. Experienced negotiators, however, know that it is better not to demand changes that you yourself would not be willing to grant if you were on the other side of the transaction.
Strike-Outs versus an Addendum
Let's assume that you find the existing text and format of the TREC 1-4 contract to inadequate for an upcoming transaction. How should revision of the TREC 1-4 contract be accomplished? One way is to make changes on the form itself—strike, insert, and initial with pen. This is legally valid although it can get messy if there are lots of alterations. It is often cleaner to attach a special provisions addendum that supersedes any printed form provisions that may conflict. Only items to be altered are mentioned in the addendum. This method of modifying the contract has an obvious advantage in negotiations: it is immediately apparent, on a single page or two, which terms are being changed and which are not. Another advantage to the addendum method is that brokers and agents are more comfortable with it, since the actual body of their familiar TREC contract has not been changed.
Another possibility is to design an entirely custom contract suited to the specific circumstances, but this seldom happens since non-standard contracts tend to push agents and brokers out of their comfort zone, at least in the residential arena. Custom contracts are much more common in large commercial transactions.
If your choice is to add a special provisions addendum, the wording "See Special Provisions Addendum attached hereto and incorporated herein" should be inserted in paragraph 11 (Special Provisions) of the TREC 1-4 contract. Also, in paragraph 22 (Agreement of Parties), the box "other" should be checked and "Special Provisions Addendum" inserted in the line that follows.
A further note as to paragraph 11 (Special Provisions): it is a blank space available for inserting extra comments, but its permitted use by brokers and agents is limited to "factual statements and business details applicable to the sale"—i.e., not modification of text or addition of provisions that are primarily legal in nature. It is therefore not the appropriate place to insert provisions that have legal implications (unless this insertion is suggested by an attorney for one of the parties) nor is it usually an acceptable substitute for a special provisions addendum when dealing with a creative or complex transaction. For one thing, the blank space offered by the form has been reduced over the years and is now too small to include much additional text.
Caution: any if not all of the above customization methods are likely, at least in the case of substantive contract changes, to constitute the practice of law. While it is unlawful for anyone to practice law without a license, doing so is particularly problematic for real estate license holders, who may as a result incur both TREC sanctions and considerable liability to their clients. License holders should generally refer their clients to a real estate attorney if non-standard provisions or changes are contemplated.
Typical Concerns of the Seller
The seller usually has the simpler side of the transaction, at least when it comes to modifying the contract. First and foremost, the seller wants to make sure that a buyer is serious and capable of following through. For this reason, the seller may want to require that the buyer submit a pre-approval letter with the contract. Also, a contract should arrive with sufficient earnest money and should show that the buyer will be making a substantial down payment. Other concerns of the seller include:
(1) "As Is." The seller usually wants to convey the property to the greatest extent possible "as is" without responsibility for repairs or any representations or warranties (other than warranties of title), particularly those that survive closing. This means checking the box at 7.D.(1). The latest TREC 1-4 contract includes a fairly good explanation of what it means to convey property "as is:" it "means the present condition of the Property with any and all defects and without warranty except for the warranties of title and the warranties in this contract." Not bad in a basic way, but a real estate attorney can add much more comprehensive language to bolster protection for the seller. The appropriate place for this would be a special provisions addendum to the contract.
Care should then be taken to assure that the warranty deed presented to the seller at closing does in fact include "as is" language and require the signature of grantee as well as grantor.
Note: if the seller performs any repairs and treatments prior to closing, as paragraph 7.D.(2) may require, then the "as is" clause should specifically include these within its scope, thereby preventing the buyer from later claiming that such repairs were warrantied by the seller.
(2) Buyer Due Diligence. The seller should make it clear that due diligence duties are the sole obligation of the buyer (including obtaining inspections, determination of square footage, an appraisal, a title commitment or policy, legal advice, and the like). Reliance on any statements by seller or seller's agents should be expressly disclaimed.
(3) Existing Survey. If an existing survey is supplied by seller to buyer, the survey should be supplied "as is" without warranties. If the buyer wants someone to hold liable for survey currency or accuracy, then the buyer should obtain a new one at the buyer's own expense. And there should be no automatic extension of the closing date for survey-related issues.
(4) Specific Performance. "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—although actual tender of the purchase price 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 in the seller's interest to avoid the possibility of being sued for specific performance since this might result in a lis pendens (public notice of the suit)that could as a practical matter prevent sale of the property to anyone else (see chapter 6). Accordingly, specific performance as a buyer remedy should be struck. And since specific performance is generally an ineffective remedy for the seller, there is no reason from the seller's point of view not to strike specific performance all around.
(5) Content of Legal Documents. The seller should exercise at least some control over the content of the warranty deed that conveys title to the buyer instead of merely accepting a basic assembly-line version supplied by title company attorneys. As previously noted, the seller may require inclusion of comprehensive "as is" language along with the buyer's signature indicating the buyer's assent to this provision. The seller may also want to expand that section of the deed entitled "Exceptions to Conveyance and Warranty" 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."
(6) Assumptions. In assumptions, the seller should assure that there will be a mutually acceptable deed of trust to secure assumption (with a due-on-sale clause) as well as an assumption agreement that specifies when and to whom the buyer will make payments, how casualty insurance will be handled, and so forth. The assumption agreement should also include disclosure of the potential future impact of any existing due-on-sale clause and provide a course of action in the event due-on-sale is invoked by the current lender. Drafting an assumption agreement should be handled only by a competent real estate attorney.
(7) Seller Financing. If there is seller-financing, it is in the seller's interest to control the terms and conditions of the note and deed of trust beyond what is provided in the TREC Seller Financing Addendum—and then, ideally, obtain early approval for all seller-financing documents. By early, we mean well before closing since last-minute disputes about the form and content of legal documents have ended more than one transaction. Many attorneys like to attach the form of these documents to the contract as approved exhibits—a great practice, although this more commonly occurs in commercial transactions.
(8) Wraparounds. In the event the transaction is a wrap, there should be a wrap addendum that addresses pertinent details. Since there is no TREC or Texas Association of Realtors promulgated addendum for this, a custom addendum drafted by an attorney is needed. As is the case with assumptions and seller financing, early approval of legal documents is preferred. Again, the best way to do this is to attach the preapproved legal documents to the sales contract itself, although this seldom occurs because the parties are usually in a rush and reluctant to pay an attorney to create documents at this early stage.
(9) "Sub 2" Transactions. In the case of a "subject to" transaction, precise language to this effect should be included in a custom addendum to the contract since there is no TREC or TAR addendum for a sub 2. As is the case with a special provisions addendum and a custom wrap addendum, drafting a custom sub 2 addendum constitutes the practice of law.
(10) Seller Representations. Paragraph 19 states "All covenants, representations, and warranties survive closing." This is clearly not in the seller's interest and should be struck and the change initialed. Just as the seller wants to convey the property "as is," at least to the maximum extent possible, a seller should also prefer to put a period on any ongoing liability. Note that the last sentence of this paragraph (allowing for back-up offers) should remain.
The foregoing is a partial list of seller concerns. There may be other items to consider based on the unique nature of a particular transaction. Each item can be effectively addressed by a customized special provisions addendum that is brief and to the point. It need not ramble on, page after page, with unnecessary legalese.
As an aside, be cautioned that the TREC 1-4 contract should never be used as a substitute for a contract for deed or other executory device. Given changes to section 5.061 et seq. of the Property Code, this practice, always dubious, is now out of the question.
If a condition could reasonably affect the decision by an ordinary buyer to buy or not buy, then it should be disclosed, even if the conveyance is to be made "as is." That may mean going beyond the Seller's Disclosure of Property Condition if that form does not provide sufficient scope or detail. Failure to do so could violate the Deceptive Trade Practices-Consumer Protection Act ("DTPA"). See Tex. Bus. & Com. Code §§ 17.41 et seq. and chapter 41 of this book. However tempting it may be for a seller to avoid disclosure of a material fact or condition, it is not worth risking a lawsuit that ends with a judgment for treble damages plus attorney's fees.
The Buyer´s Side of the Transaction
A buyer's concerns are more complex. Generally, the buyer should want to know everything there is to know about the property, whether that information is derived from due diligence, a title commitment, a survey, disclosure by the seller, information provided by a broker, or even gossip from neighbors. "Buyer beware" still has considerable meaning in the purchase and sale of real estate.
There is no excuse for a buyer (particularly an investor) failing to do his or her homework on a property or failing to read documents before signing them.We live in an information society. Not putting forth a minimum effort to obtain information about a property one is buying (not having it professionally inspected, for instance) looks more and more . . . well, stupid—and judges and jurors are likely to see it that way. Yet there continue to be suits by buyers who claim they were absolved from their duty to inspect or read documents because they were rushed or pressured by the seller. Such a claim will likely not stand up in court.
Specific items of concern to the buyer:
(1) Financing Contingency. A buyer should want the third-party financing contingency to be a truecontingency governed by specific parameters. The Third Party Financing Addendum states: "Buyer shall apply promptly for all financing described below and make every reasonable effort to obtain credit approval for the financing, including but not limited to furnishing all information and documents required by Buyer's lender." Is this sufficiently specific to protect a buyer from accusations by a seller who argues that the buyer failed to "apply promptly" or make "every reasonable effort" to get a loan? Does "promptly" mean two days or twenty? Does "every reasonable effort" require application to one lender or four? The text is silent on these specifics. Moreover, nowhere in the contract or in the TREC Financing Condition Addendum is it spelled out what constitutes adequate evidence of failure to get financing. Can the buyer be sure that the seller will take the buyer's word and agree to return the earnest money? These issues may not be so compelling if the earnest money is only $500 . . . but what if it is $5,000 or $15,000, amounts that are not uncommon in sales of higher-end properties? It is also to the buyer's benefit to specify that providing a "turn-down letter" shall be conclusive, indisputable evidence that financing was denied.
(2) Assumptions, Seller Financing, and Wraps. If the transaction involves an assumption, seller-financing, or wrap, there is always the issue of the specific content of legal documents that the buyer will be asked to sign at closing. We have discussed this from the seller's side, but in many cases it is just as important to the buyer. The TREC Loan Assumption Addendum and the TREC Seller Financing Addendum are reasonably detailed, but what if the seller's attorney includes unexpected or oppressive clauses in the note or deed of trust? Does the closing fail? Is there a breach? It is wise to anticipate and prepare for these issues well before closing. Again, a special provisions addendum may be useful. Even better, a careful buyer may want to see and approve the form of the warranty deed that the seller will deliver at closing.
As noted, there is no promulgated addendum for a wrap, yet many pesky details need to be addressed. Is the buyer fully informed about the particulars of the wrapped debt? Has the buyer seen copies of the existing note and deed of trust? How can the buyer be sure the seller will pass monthly payments along to the first-lien lender? Will the buyer have the right to contact the lender or receive written evidence from the seller that payments are current? What happens if the lender exercises due-on-sale and accelerates the wrapped note? What about casualty insurance? Wrap issues should be addressed in a custom wrap addendum to the TREC 1-4 contract, followed by a detailed wraparound agreement signed at closing. Additionally, wrap deals may include extra seller financing in the form of a second or third lien. The down payment on a wrap may even be financed by means of a down payment note. What will the seller-financed note and deed of trust look like? The buyer's attorney should see all this coming and insist on reading and approving draft legal documents early on. Ideally, no buyer should be ambushed at closing with documents that the buyer has neither seen nor agreed to.
(3) Disclosure of Material Conditions and Defects. Disclosure is often the buyer's biggest concern. A "Seller's Notice of Property Condition" (TREC form OP-H) is required by Property Code section 5.008, which states that "[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.
The Seller's Disclosure has several problems from a buyer's point of view. First, the form states, right at the top, that "IT IS NOT A WARRANTY OF ANY KIND BY SELLER OR SELLER'S AGENTS." Why not? The form's utility as a disclosure tool is diminished by this statement. The buyer's attorney should consider using a special provisions addendum to convert the Seller's Disclosure into a set of express representations and warranties.
Second, disclosure of defects and conditions is limited to the seller's knowledge and awareness—not the highest standard. What the buyer is concerned with is not what the seller knows or says he knows, but with what is actually true about the property. It is just too easy for an unethical seller to later say, "Oh, I didn't know about that." Sometimes problems can be detected by inspections and other due diligence, sometimes not.Often, the truth is discovered only after subsequent conversations with neighbors—who may take perverse delight in reporting that not only did the seller know about water penetration behind that faux stucco, he personally patched and painted it to conceal the damage. The buyer should want to know about any such repairs and ask to see contractor paperwork to determine the extent of the work done, whether or not proper permits were obtained, and whether or not there is a transferable warranty. Broadly speaking, what a careful buyer wants is something stronger than what is offered by the Seller's Disclosure, namely an actual representation and warranty by the seller that certain defects and negative conditions do not exist.
Finally, at no point does the seller expressly state, swear, or affirm that the Seller's Disclosure is true and correct. Most everyone assumes that this is so since the seller signs the disclosure. But look closely—the form does not say that, merely stating that "This Notice is a disclosure of seller's knowledge. . . ." This is another disappointment for the buyer. From the buyer's point of view, there is no substitute for maximum, unconditional disclosure backed up by meaningful recourse against the seller that survives closing.
What about previous inspection reports? Neither the contract nor the Seller's Disclosure obligates the seller to provide them. The buyer should therefore always request copies of these.
(4) Joint Tenancy with Right of Survivorship. The buyer also has an interest in the wording of the warranty deed. For example, unless otherwise instructed, title company attorneys will list the grantee as "John Jones and wife, Mary Jones," creating tenancy in common. This form of co-ownership does not provide for the surviving spouse to automatically inherit the entire property when the other dies. Title to the property vests in the surviving spouse only if the property is community property and the deceased had no children or, if there are children, all of them are the result of the marriage between John and Mary. Accordingly, if it is the desire of the buyer to use the deed to do some basic estate planning, an entirely reasonable goal, then the grantee should be listed as "John Jones and wife, Mary Jones as joint tenants with rights of survivorship as provided by Texas Estates Code sec. 112.051 and not as tenants-in-common," and both grantees should sign the deed—which then constitutes a written agreement in compliance with the statute. This adds value for the buyer at no cost to the seller.
(5) Sub 2 Transactions. Investor buyers will often want to take title "subject to" existing indebtedness. Express language (both in the buyer's addendum and in the deed) to the effect that the buyer will not be assuming the obligation to pay the existing debt—and therefore the seller will not be released from the loan until it is paid—is essential in forestalling subsequent claims by remorseful sellers who suddenly realize that they remain on the hook for their old loan with no control over whether or not the current owner makes monthly payments.
(6) Survey. It is usually in the buyer's best interest to delete the "survey exception" to title insurance coverage (and ask the seller to pay the fee for this service) by requiring that the standard printed exception as to discrepancies, conflicts, shortages in area or boundary lines, encroachments or protrusions, or overlapping improvements be amended, at seller's expense, to read, "shortages in area." The TREC 1-4 contract offers offer a box at 6.A.(8) to be checked for this purpose.
The buyer also wants flexibility as to whether or not to order a new survey if the seller does not have an existing survey or fails to deliver it to the buyer pursuant to paragraph C(1). The alternative offered in C(2) says the buyer "shall" order a new survey; but this mandatory language may not be necessary and the buyer should not be compelled by contract to order a new survey if he does not want one.
The buyer may want to specify that failure by the seller to supply the existing survey will, at buyer's election, be a default and cause for termination and return of the earnest money. It may be advantageous to have a clean "out" (i.e., exit from the contract) for the buyer rather than a mere seller default. The difference? The first supplies the buyer with an exit from the contract (along with return of earnest money), but the second only gives the buyer grounds for a lawsuit—an expensive and time-consuming remedy. As a rule, good contract draftsmen prefer the former rather than the latter.
(7) Seller's Representations. Because of concern with full disclosure, the buyer may not be satisfied with the language of paragraph 19 (Representations). This paragraph states that "If any representation of Seller in this contract is untrue on the Closing Date, Seller will be in default." Again, this merely provides grounds for a lawsuit; it does not facilitate the buyer's expedient termination of the contract and return of the earnest money plus out-of-pocket expenses, so a special provisions addendum should address this and other representations and warranties that may be desirable from the buyer's point of view.
For instance, what about asking the seller to declare that he or she has made full disclosure of any item that could materially affect the buyer's decision to buy or not buy? Or what about openly declaring that the Seller's Disclosure of Property Condition is true and correct? Any deal where a seller refuses to agree to such terms should be avoided as if the property were radioactive (it just might be). There are many such "reps and warranties" a buyer may want from a seller that are not on the TREC forms. Here is one of my favorites: As to the effects of moisture and mold: (i) The improvements on the Property have never been flooded or penetrated by water from any source, including roof leaks, wall leaks, or slab seepage. (ii) The lot or tract drains properly; no part of it experiences standing water after a rain. (iii) There is not, nor was there ever, any evidence of mold in any of the improvements.
(8) Restrictions. Applicable covenants and restrictions should not be overlooked as part of the buyer's due diligence. Title companies like to provide these at closing, if at all, but by then it may be too late for the buyer to back out. If a specific use of the property is vital to the buyer (for instance, a day-care center in a neighborhood that is transitioning out of exclusively residential use) then a request for a copy of the restrictions should be made during the option period. The specific use should also be expressly described in the blank at paragraph 6.D of the TREC 1-4 contract.
(9) Final Walk-Through. The buyer should have the unconditional right to do a final walk-through when the property is vacant and all furnishings removed. It is best to do this in the hours immediately prior to closing. If there is a material adverse change, the buyer should have the right to terminate and receive the earnest money as well as compensation for expenses.
(10) Seller Default. Just as the seller would prefer to eliminate specific performance (paragraph 15(a)), the buyer should want to retain the option to pursue this remedy if the seller decides not to close. Additionally, a buyer who invests a substantial amount in the due diligence process—reasonable and customary expenses such as inspection fees, appraisal fees, the cost of a survey, attorney's fees, travel expenses, and the like—may not be satisfied with simple a return of earnest money. A prudent buyer will want the contract to provide for reimbursement of these pursuit costs. Lastly, it is in the interest of the buyer to strike out paragraph 16 (requiring mediation) in its entirety. A mediation (which can take months to arrange) often provides time and cover for a seller to convey the property to someone else. It is far more effective for a buyer to go directly to court and obtain a TRO against the sale.
(11) Earnest Money Installments. Brokers and agents typically encourage the buyer to put down substantial earnest money to demonstrate that he or she is serious. This is of course self-serving from the broker's point of view, because if the buyer is financially committed in a significant way, it is more likely that there will be a closing and a commission. However, rather than depositing say, $10,000, with the title company, a careful buyer may want to consider dividing the earnest money into two $5,000 installments, with the second installment being due at the title company upon expiration of the option period specified in paragraph 23. The earnest money paragraph (paragraph 5) easily provides for this.
(12) Assignability. It is entirely possible that an investor buyer will want to assign the contract, so the language of the "parties" paragraph should clearly state that the contract is assignable without seller consent.
Disclosure by Investors and License Holders
Whether in the capacity of buyer or seller, investors and real estate licensees should always disclose their status in the contract. They should also disclose if they are acting on behalf of a relative, a personal company, or a trust in which they have an interest. The appropriate place to do this is the Special Provisions paragraph (or in a special provisions addendum) by using language similar to the following: "Buyer is a real estate investor [and/or license holder] engaging in this transaction for a profit. Buyer has not given Seller real estate advice. Seller should obtain professional advice." This disclosure mitigates any subsequent claim by lay persons that their relative innocence was exploited by a predatory professional. As discussed later, judges and juries do not favor investors if the transaction contains any hint of unfairness.
Do you have a contract? What about electronic communications?
Since negotiations can become fast-paced and complex, utilizing multiple media, it is useful to know when you actually have a contract. Generally speaking, the Statute of Frauds set out in Business & Commerce Code section 26.01 and 26.02(b) (explained in detail in chapter 12) requires a signed writing in order to have a valid contract for the conveyance of real property. Beyond that, however, there must be offer and acceptance that is clearly communicated—i.e., a meeting of the minds on material terms. For instance, if an offer is made containing specific terms and conditions, and the other party counters with a slightly different set of terms and conditions, then as a matter of law the original offer has been rejected. Why? No meeting of the minds on material terms, so the original offer is now effectively irrelevant. A counter-offer is now on the table, awaiting action. G.D. Holdings, Inc. v. H.D.H. Land & Timber, L.P., 407 S.W.3d 856 (Tex.App.—Tyler 2013, no pet.)
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," adopted in Texas in 2001) 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, 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.
Needless to say, an electronic contract that is intended to be signed and binding—such as one transmitted by DocuSign—is in fact no different in its legal effect than one that is on paper and executed by hand. By the way, lawyers generally hate internet services such as DocuSign, and for good reason. The document is typically presented for signature with no opportunity for changes, even minor ones that parties meeting in person could make easily by means of strike/insert/and initial.
Online electronic notarization is permitted in Texas effective July 1, 2018. The Secretary of State is tasked with developing rules and standards for online notaries, who have the same authority as traditional notaries.
The trend continues. Electronic signatures on real estate contracts and lender disclosures are common now, and electronic closing documents (including promissory notes) are next. Property owners may appear at appraisal board hearings and offer evidence electronically (see Tax Code sec. 41.45). Clearly, future business transactions and agreements will dispense with the required presence of your biological organism—which is as it should be. A legal agreement is nothing more than information, consent to which is verifiable. Nothing personal, as they say.
Amendments and Extensions
TREC form number 39-8 is customarily used to amend or extend contracts. Filling out the form is straightforward enough. But what about consideration? Say, for instance, the parties want to extend the closing date for 30 days. Does the buyer have to pay an extension fee for this to be legal? The answer is no, not unless the parties clearly intend that payment and receipt of a fee is required as a condition precedent. "The words the parties [choose] are the best indicators of an intent to create a condition precedent. To make performance specifically conditional, a term such as 'if,' 'provided that,' 'on condition that,' or some similar phrase of conditional language normally must be used." KIT Projects, LLC v. PLT Partnership, 479 S.W. 3d 519 (Tex.App.—Houston [14th Dist.] 2015, no pet.). In the KIT case, the court ruled that an extension agreement was valid even though the buyer's check for the extension fee bounced! Why? The required magic words were not used in the contract amendment.
Interpretation of Contracts
Texas law generally favors enforcement of express contract terms if they are clear and unambiguous, disallowing any "parol evidence" (oral comments by the parties) that would purport to change these express terms. However, contracts are occasionally ambiguous. Terms and conditions may even contradict one another. In such event, the court may look to extrinsic evidence (including oral statements) to clarify an ambiguity. There are also certain rules of construction that apply: for example, typewritten (or word processed) terms prevail over any items that are hand written, and words prevail over numbers. In one case a promissory note stated in words that the amount of the debt was "one million seven thousand." The printed numbers, however, were "$1,700,000." The lender lost, since words prevail over numbers. Charles R. Tips Family Trust v. PB Commercial LLC, 459 S.W.3d 147 (Tex.App.—Houston [1st Dist.] 2015, no pet.).
Closing Documents and the Doctrine of Merger
Prospective changes in an earnest money contract should be considered in light of the doctrine of merger, which provides that the closing documents (most especially the deed) supersede the provisions of the contract. "After delivery and acceptance, deeds are generally regarded as the final expression of the agreement of the parties and the sole repository of the terms on which they have agreed." Smith v. Harrison County, 824 S.W.2d 788, 793 (Tex.App.—Texarkana 1992, no writ). This is the reason, for instance, that (from the seller's point of view) an "as is" clause should be included in the deed as well as in the earnest money contract. It also impacts the survival of any representations and warranties made by the parties.
The Role of the Real Estate Attorney
Negotiating a real estate transaction presents multiple opportunities to favor one side or another, and not just on price. This is where it may be advantageous to consult a real estate lawyer. A real estate investor should always have (at least) three professionals on call: a CPA, an insurance agent, and a real estate attorney.
Why, might one ask, involve an attorney in preparing or advising on a TREC form that is available online and which is often completed by agents and brokers who are trained and licensed to do the job? Because lawyers can (1) modify the actual language of the form and, if needed, (2) customize a Special Provisions Addendum to favor a client. Brokers and agents cannot do either one. License holders are limited to checking appropriate boxes, filling in blanks, and attaching required promulgated addenda. They are not permitted to materially alter or supplement the contract text, or write custom addenda, which is considered the practice of law.
Another logical question: why alter these contracts at all, since they were prepared by a broker-lawyer committee composed of experienced, practicing professionals? The answer is that no standard form can anticipate every condition or circumstance; and while many transactions are similar, no two are ever identical. Goals of sellers and buyers vary. Every transaction is unique. While some may say, "It's just a standard form, it's OK to sign it," no investor, and certainly no attorney, should ever be satisfied with any standard form. Neutrality is not good enough. The goal is negotiate and draft a contract that is in the investor's best interest.
Unfortunately, there is a common fear that bringing in an attorney will kill the deal. This is almost never the case with an experienced real estate lawyer, since lawyers know the difference between changes that are reasonable and those that are not—and they could not stay in business with a reputation for killing deals. Likewise, meticulous and ethical investors and realtors should see the wisdom of suggesting that an inexperienced person obtain legal advice, particularly when a transaction has non-standard aspects. This not only benefits the individual involved but shifts liability away.
A Buyer´s Nightmare
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 sheetrock and slab cracks. The foundation will cost $15,000 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 repaper 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!"
Information in this article is provided for general educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well since we do not offer tax advice. This firm does not represent you unless and until it is retained and expressly retained in writing to do so.
Copyright ©2018 by David J. Willis. All rights reserved worldwide. David J. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his web site, http://www.LoneStarLandLaw.com.