Residential Contracts in Texas: The Value of Special Provisions

This article discusses special provisions that can be added 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, special provisions were considered unnecessary for residential properties since they were less expensive than commercial ones. The idea was that cheaper residential transactions should be simpler (and never require a lawyer). However, in an era when both seven-figure sales and creative transactions are common, does that rationale still apply?

Negotiating a favorable outcome often involves going beyond merely checking boxes on a promulgated form. Since drafting special provisions may constitute the practice of law (unless one is working on one’s own contract) the services of real estate attorney may be needed.

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.

Standard and Nonstandard Transactions

The TREC and TXR contracts are good contracts for the most part. However, it is important to understand when a promulgated form does not adequately meet the needs of either party, which is especially true in non-standard and creative transactions. Wraparounds are an example. The TREC 1-4 contract plus the Seller Financing Addendum barely begin to cover the long list of details and agreements that are actually involved in closing and implementing a wraparound. A custom special provisions addendum addressing such points is an excellent idea.

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 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 before the contract is signed, is the solution.

TREC AND TXR CONTRACTS

Negotiability of Promulgated Contracts

All Texas real estate contracts (including TREC and Texas Realtors contracts) are negotiable, and that negotiability extends beyond the express confines of the form to include the addition of special provisions that may benefit the buyer or the seller. The sale and purchase of real estate (no matter how amicable on the surface) is by definition an adversarial transaction.

Only Brokers and Agents Must Use Promulgated 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 or TXR 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.

Should real estate investors use TREC contracts?

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 a special provisions addendum when needed) rather than anything simpler that is supposedly streamlined for investor use—and that includes contracts that emerge from the multitude of real estate investor seminars.

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 TREC contract and its various standard addenda. It is important, however, to understand when promulgated forms are insufficient to meet one’s needs.

USING A SPECIAL PROVISIONS ADDENDUM

TREC and TXR Contracts Limit Special Provisions

The special provisions paragraph of the TREC 1-4 contract (paragraph 11) is a short space available for inserting extra comments, but its use 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 can be brief. When written correctly it is immediately apparent which contract terms are being changed and which are not, and the familiar TREC contract remains unmarked. A good special provisions addendum does not complicate the transaction, it (1) clarifies it and (2) avoids misunderstandings later.

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 from promulgated contracts.

This can be 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. A formal contract amendment will be required to add it.

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). Neither party should count on being able to casually add a material term after the contract is signed.

View of Texas Courts

In interpreting contracts, Texas courts usually do not 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 provision you should have gotten it before we signed 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 will be 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 forms and outcomes.

Brokerage Commissions

A special provisions addendum is an opportunity to affect broker commissions and how they are paid. Resolution of the 2024 NAR litigation in 2024 changed the long-standing rules calling for an equal split of the total commission (usually 6%) between the two brokers. Now, sellers are not required to pay anything toward a buyer’s broker’s commission. If there is no express written agreement by the Seller and the Seller’s broker to pay a commission to the buyer’s agent then the buyer will be entirely responsible for compensating the buyer’s agent.

This can be changed by written agreement at the contract stage. Failure by a buyer to influence this issue early on, before the contract is signed, likely means that this opportunity will be lost.

A buyer may want to provide that their offer is contingent upon a certain commission split (i.e., an agreement by the seller’s broker to pay a percentage to the buyer’s broker). Doing this makes a lot of sense for the buyer. The problem is, such a contingency is not available as a box to check on the TREC or TXR forms. It must be included as a special provision.

BUYER-ORIENTED SPECIAL PROVISIONS

Affirming Seller’s Disclosure Obligations

Buyers have a strong interest in affirming the seller’s legal duty of full and ongoing disclosure. 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.

Many sellers (and their agents) operate under the mistaken belief that selling property “as is” relieves them of the duty to disclose material facts and adverse conditions. This is false. It is reasonable to ask a seller to expressly acknowledge an existing and ongoing obligation to disclose known material defects, faulty systems, needed repairs, and other adverse conditions that could reasonably affect the buyer’s decision to buy or not buy, notwithstanding that paragraph 7d(1) is checked.

Even though a special provision may only restate existing consumer law under the Deceptive Trade Practices Act (DTPA, Bus. & Com. Code Sec. 17.46 et seq.), it is useful for a seller’s disclosure duty to be relentlessly hammered home so that no one involved in the process has any doubt that it exists.

Some sellers refuse to sign a special provision affirming their duty of full and ongoing 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.

Cases involving alleged seller non-disclosure are the principal cause of litigation in residential real estate. Brokers, agents, and others who do not believe this have not spent sufficient time watching trials at the courthouse.

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. The TREC 1-4 contract does not specifically provide for turning this information over to the buyer.

Recent major repairs or renovations are of particular interest. 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

Instead of just reflexively checking the “as is” provision in paragraph 7.D(1), a buyer may want to expressly require 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 are included) in good and working condition with no known material problems that are not fully disclosed to the buyer before the end of the option period. This special provision would apply notwithstanding that paragraph 7.D.(1) is checked and the sale is otherwise “as is.”

A seller who refuses is waiving a red flag directly in the buyer’s face. 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.

It is unfortunate that “as is” has become the norm for Texas residential transactions. Rather than being automatic, an agreement to convey property “as is” should be a contract term that is consciously negotiated by the parties.

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

Although the Seller’s Disclosure asks about “previous water penetration into a structure on the property due to a natural flood event,” there is nothing in the TREC contract or the Seller’s Disclosure assuring the buyer that there has never been mold. The seller can be required to provide written assurances to the buyer that the improvements have never been flooded or penetrated by water from any source (natural or otherwise), nor has there ever been evidence of mold. Here is a sample special provision:

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 but not limited to roof leaks, wall leaks, or slab seepage; (2) the lot or tract drains properly (no part of it experiences standing water after a rain); and (3) there is not, nor was there ever, any evidence of mold in any of the improvements.

Unfortunately, there is no easy way to accommodate such a provision in the TREC contract, so a special provisions addendum will be required.

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 Section 5.008: “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 [disclosure] . . . 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 perhaps a better form and buyers should request it.

Is the Disclosure True?

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? Or simply pretends not to know about an adverse condition? 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 Termination if No Earnest Money is 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. A buyer should want 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 language is by means of a special provisions addendum.

Joint Ownership with Rights of Survivorship

Suppose two buyers may want to take title as joint owners with rights of survivorship (JTWROS); does the TREC contract provide for this? No, even though JTWROS is an absolutely legitimate way to own property and accomplish a modest degree of estate planning at the same time. Even though JTWROS is permitted by the Estates Code for both spouses and non-spouses, the TREC 1-4 contract offers no opportunity for buyers to choose this option.

A special provision requiring JTWROS must be included at the contract stage before the contract is signed. JTWROS is a non-standard creative add-on provision and likely will not happen unless it is expressly included in the contract.

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 a form contract to order a new survey if no lender 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.

If either event occurs then the seller has been caught red-handed at misrepresentation or fraud—so it is not time to tiptoe around one’s remedies. The buyer should be able to immediately terminate the contract and receive not just the earnest money but also reimbursement for reasonable out-of-pocket expenses such 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.

Contract “Out” for a Lender Turn-Down Letter

There can occasionally be a 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?

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.

Assignments by Seller at Closing

A deed transfers and warrants title and usually that is all. It does not transfer warranties pertaining to the foundation, roof, HVAC system, appliances, and pest control; property management contracts and any other agreements relating to upkeep, repair, maintenance, and operation of the property; and, if the property is leased, any rights of the landlord pursuant to the lease including unpaid rents and the tenant’s security deposit.

It is clearly in the best interest of the buyer to secure an assignment of contracts, warranties, and leases. The actual assignment may be included as a clause in the deed or be accomplished by means of a separate assignment instrument.

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 an existing note.

Non-Recourse Clause

It is a fact that not all 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.

Wholesaling Clauses: Assigning the Earnest Money Contract

Wholesaling is a common form of real estate investing. 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. 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 by itself 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 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 paragraph 11 of the TREC contract is far too short for these important points, a custom special provisions addendum will be needed.

Pre-Closing Walk-Through

A buyer should want to have the opportunity to do a walk-through of the property immediately before closing and funding in order to be sure that everything is as it is supposed to be. There are many horror stories on this subject including one where the seller removed all shrubbery from the property the morning of closing.

During the 2020 freeze in Texas, there was 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 massive damages and doubtful insurance coverage.

There is no good reason not to secure a special provision allowing for the buyer to do a pre-closing walk-through in the hours before closing.

Right to Review and Approve Closing Documents

Creative transactions often involve non-standard documents. 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? Will the buyer be in default if he refuses to sign such documents?

Recording a Memorandum of Contract

In certain circumstances, it may be useful for a buyer to give notice of a pending residential contract by recording a memorandum of contract in the real property records. “A unilateral memorandum of contract is an instrument signed] only by a person who is not an owner of the residential property and asserts that the person has entered into a contract with an owner of residential property for the purchase of an interest in the property.” Prop. Code Sec. 12.020

SELLER-ORIENTED SPECIAL PROVISIONS

“As Is” Clauses in the Contract and Deed

A seller should want to assure that the warranty deed at closing will convey the property “as is” to the greatest possible extent in order to avoid post-closing liability and lawsuits. Relying on checking 7.D(1) in the contract is not sufficient to maximize this since the terms of the contract are usually superseded by the deed pursuant to the doctrine of merger.

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

“As Is” Repairs and Survey

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 the buyer is provided “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?

The wording of any “as is” clause in Texas should be in bold and all caps as well as clear, conspicuous, and unequivocal.

Curing Buyer Objections

As to curing buyer objections, a seller should want to make it clear that the seller may but shall not be required to cure objections, at his discretion. Also, a seller should not want refusal to cure objections to be construed as a default that can result in a specific performance lawsuit by the buyer. Instead, the seller should want the ability to simply return the earnest money and unilaterally terminate the contract with no consequences.

A special provision clarifying the obligation of the seller to cure objections is almost always perceived as reasonable and can easily be covered in a special provisions addendum.

Striking Specific Performance

Clearly, 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 public notice of the suit (a recorded lis pendens) 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 (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 for everyone.

Major Casualty Loss

If the property is catastrophically damaged before closing, and if insurance proceeds are insufficient to cover the loss, a seller should want to limit the obligation to restore the property to payable and available insurance proceeds.

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

Some creative transactions involve transferring title to a lien-encumbered property 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-to-buyer requirements contained in Property Code Section 5.016.

Limiting Survival of Contract Provisions

Paragraph 19 of the TREC states: “All covenants, representations and warranties in this contract survive closing.” This survival clause is in contrast to the usual doctrine of merger which states that the contract is considered to be merged into the deed and other closing documents, thus extinguishing the contract. Chicago Title Insurance Company v. Cochran Investments, Inc., 602 S.W.3d 895 (Tex. 2020).

Survival of covenants, representations, and warranties is a real legal problem for the seller. Why would a seller want his liabilities under the contract to persist forever? A seller should aggressively seek a special provision striking this clause in order to limit his post-closing liability.

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 residential 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 must rely solely on the Buyer’s own observations, investigations, evaluations, and inspections.

Preserving 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 legitimate reasons for keeping certain information about a residence and who lives there out of the public eye. A special provision can be included that prohibits the buyer from revealing confidential information about the property or its residents, whether or not the transaction ever closes.

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.

Controlling Legal Document Preparation

Creative transactions (seller financing, wraparounds, sub2 transactions, etc.) involve 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 attend 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 can be 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. When it comes to closing documents, there should be no surprises at the closing table. Only amateurs show up with no idea about what they will be asked to sign.

Special Covenants and Agreements

Well-drafted contracts of all types have certain main sections in common. A critical section of any 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.

There should be no assumptions, no implied terms, no oral assurances, no deferring difficult provisions until later. True professionals are never guilty of these things. 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 can satisfy 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).

The parties may send emails, texts, and meet in person. All of this warrants a significant level of caution. 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. 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 that anticipates future events. All duties and obligations of the parties should be expressly stated. Nothing should be assumed or implied. No one should rely on anything unless it is expressly stated in writing within the four corners of the contract. Oral statements should be disclaimed. Nothing of importance 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.

Resistance to a Special Provisions Addendum

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) the client wishes 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!”