Review of Real Estate Contracts in Texas

TREC and TXR Contracts

Both TREC and TXR contracts are commonly used in Texas real estate, but they are not legally required unless you happen to be an agent or broker—then you must use them. Pursuant to Texas’ heritage of freedom of contract, buyers and sellers who are not licensed by TREC can use any contract they chooseso long as the contract has a lawful purpose and basic legal minimums are met—i.e., conveyances generally (Prop. Code Sec. 5.001), the Statute of Frauds (Bus. & Com. Code Sec. 26.01) and the Statute of Conveyances (Prop. Code Sec. 5.021).

Review by a Real Estate Attorney

TREC and TXR forms are generally good contracts but can be significantly improved with even modest customization and the addition of a few special provisions.

The TREC contract (in paragraph 23) advises the parties to consult an attorney before signing and prohibits brokers and agents from giving legal advice. Brokers and agents should always refer their clients to a real estate attorney if non-standard provisions or creative changes to TREC and TXR forms are contemplated. However, consulting an attorney for a contract review is not a substitute for the expertise, market knowledge, and negotiating experience of a good Realtor. Legal advice and brokerage services are not the same.

Lawyers will often make contract suggestions that arise directly from the lawyer’s previous experience with failed transactions and frivolous lawsuits—so there is a solid legal basis for these comments. However, market factors are in a different category. These could affect the advisability of an attorney’s recommendations, so legal recommendations should always be considered in tandem with market considerations.

Five core questions need to be answered in a preliminary contract review:

(1) Has the contract been correctly completed on the latest published form? Are all appropriate addenda completed and attached? Is it still unsigned?

(2) Are the property and the parties (including marital status and corporate capacity) been correctly shown?

(3) Have the standard boxes and blanks been skillfully completed to the advantage ofthe buyer or seller?

(4) Does the final contract expressly cover all material and essential terms of the transaction without resort to assumptions or implied side agreements?

(5) Should custom special provisions be added in order to fully protect a party’s interests?

Negotiability of Contracts

TREC and TXR contracts are fully negotiable. This extends beyond checking boxes and filling in blanks; after all, you are not filling out an administrative form at the DMV. Do not be intimidated by an agent or broker who says “It’s a standard form, just sign it.” That is not true. All real estate contracts—even standardized ones—are meant to be negotiated, not merely filled in.

TREC and TXR contracts include only the minimum necessary terms to get the transaction from contract to closing. This is not the same as (1) maximizing one’s best interests with special provisions and (2) minimizing exposure to liability and financial loss. Never rely solely on a standard form to do this. No standard form can cover or anticipate every situation and circumstance.

DIFFERING INTERESTS OF BUYERS AND SELLERS

Buyer’s Interests

Buyers typically seek transparency and full disclosure by the seller of known defects, needed repairs, and adverse conditions—anything that could affect the buyer’s decision to buy or not buy the property. Buyers do not want to have to locate and file an expensive lawsuit against a non-disclosing seller after closing. Buyers also want full disclosure of debts, liens, and claims that affect or encumber the Property, whether of record or not and whether reflected in the title commitment or not.

Seller’s Interests

Sellers want to convey the property “as is,” without representations or warranties, with no obligation for repairs, and with minimalpost-closing liability risk. Sellers do not want ongoing liability. They do not want to receive a buyer lawsuit after closing, especially when that lawsuit could have been avoided by including a simple special provision in the contract.

Effective “as is” protection is key for sellers. A custom “as is” contract provision can expand “as is” protection by requiring that a strong “as is” clause also be included in the warranty deed to the buyer.

Sellers should also want a merger clause stating that contract terms (statements, agreements, representations, warranties, and the like) do not survive closing but are merged into and superseded by the final terms of the warranty deed.

When covenants, representations, and warranties in the contract are allowed to indefinitely survive closing, the seller’s liability is dangerously open-ended. The TREC contract actually works against sellers(in paragraph 19) by stating: “All covenants, representations and warranties in this contract survive closing.” This is not a desirable outcome for the seller. The seller wants the warranty deed to be the final agreement of the parties, the absolute end of the matter, thereby putting a period on the seller’s liability.

Brokers and agents, often in a rush to get signatures and lock in commissions, may have little patience with legal considerations. Accordingly, buyers and sellers must be prepared to affirmatively self-advocate if they want to protect themselves. Every real estate transaction is by nature adversarial even if it is conducted in a totally friendly manner. Pretending this is not the case can cause disappointment and financial loss.

PROTECTING THE BUYER

Custom Clauses Favoring the Buyer

Most TREC and TXR contracts can benefit from the addition of a few special provisions. No standard contract can cover every property or situation. Here are some buyer-favorable custom clauses:

clause affirming seller’sagreement to make full disclosure of known material facts
clause calling for automatic termination of the contract if the property fails to appraise
clause stating that any seller repairs must be inspected by and acceptable to buyer
clause stating seller must repair and maintain the property through closing
clause stating that seller must deliver major systems (e.g., HVAC) in working condition
clause stating that there is no history or evidence of mold
clause assigning lease and security deposit for property rented to a tenant
clause making a custom adjustment to payment of brokerage commissions
clause providing access to seller’s prior inspection reports, repair documents, etc.
clause relating to buyer’s escape if the property is catastrophically damaged
clause stating that title and survey defects must be cured to buyer’s satisfaction
clause stating the seller may not continue showing the property
clause permitting a pre-closing walk-throughinspection by buyer
clause stating that seller-financed or assumed notes will be non-recourse
clause permitting assignment of the contract to another buyer before closing
clause assigning warranties and maintenance contracts to buyer at closing
clause permitting buyer review of principal closing documents before closing
clauses favoring buyer in non-standard deals (wraps, subject to, unofficial assumptions)
clause stating that title will be taken as joint owners with survivorship (JTWROS)
clause stating that title will be taken into buyer’s living trust (qualifying trust language)
clause deleting specific performance(retention of earnest money is seller’s sole remedy
clause enabling the buyer to recover pursuit costs (e.g., inspections) if seller defaults
clause disclosing that buyer is a real estate investor or license holder
and many more.

None of these very legitimate custom clauses is included or even available in the boxes and blanks of the TREC contract.

A good example of a special provision important to the buyer is requiring that the buyer be allowed to review principal closing documents before closing. Only real estate amateurs show up at the closing table not knowing what they will be asked to sign.

If a party knows in advance that certain wording must be included in the warranty deed at closing then this must be planned for by adding special provisions at the contract stage. The earnest money contract must be customized to expressly provide in advance for custom clauses and provisions that are to be included in the closing documents. Otherwise, there will be no obligation on the part of anyone to include or accept such clauses. Waiting until closing to address these concerns is too late.

Sellers Dodging Disclosure

A custom special provision in which the seller expressly agrees to make full disclosure as to property condition is especially important to the buyer. The buyer should want to know whatever the seller knows when it comes to material facts—and know it before expiration of the option period.

Some sellers seek to dodge full disclosure by checking the “as is” box at paragraph 7.D(1). This is a common but legally ineffective tactic. Under the Deceptive Trade Practices Act (Bus. & Com. Code Sec. 17.46 et seq.) a residential buyer has the right to full disclosure of all known material facts that could reasonably affect the buyer’s decision to buy or not buy the property. This remains true even if the “as is” box is checked. Unfortunately, this legal obligation is not mentioned anywhere in the TREC and TXR contracts.

In fact, neither the TREC contract nor the Seller’s Disclosure actually states that a seller has an obligation to disclose known material facts—a serious defect in these printed forms. As a result, lawsuits against non-disclosing sellers dominate residential real estate litigation. So if an agent or broker says not to worry about the disclosure issue, or asserts that the seller is a “nice guy who would never deceive you,” caveat emptor. The courthouse is literally full of seller non-disclosure cases.

Example of Special Provisions Favorable to the Buyer

A buyer may want to expressly require that the seller, at closing, will deliver all major home systems (electrical, mechanical, plumbing, HVAC, foundation, and roof) as well as appliances (if any are included) in good and working condition with no known problems that are not disclosed to the buyer before the end of the option period. The TREC contract does not offer this option if the “as is” box is checked (which is nearly always the case nowdays).

Allowing the buyer to conduct a pre-closing walk-through inspection (say, the day before closing) is another important provision favoring the buyer. During the 2020 winter freeze, there was a case where the seller walked into closing as if everything were normal, signed the paperwork, 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 and never looked back. But the buyer was left with $150,000 in damages. His only choice at that point was to file an expensive lawsuit against a seller who had already left the state. A pre-closing walk-through would have avoided this disaster.

In another case,a seller stopped by the property on the way to closing with a truck and removed all the shrubbery so he could take it with him to his new house. The buyer did not do a pre-closing walk-through—so he had to purchase $25,000 in new landscaping.

PROTECTING THE SELLER

Custom Clauses Favoring the Seller

clause expanding the scope and power of the minimalist TREC “as is” clause
clause affirming buyer’s duty of due diligence in inspections and investigations
clause stating that all property information (e.g., survey) is supplied to buyer “as is”
clause limiting seller’s obligation to cure very expensive title or survey objections
clause limiting property restoration after casualty loss to available insurance proceeds
clause making a custom adjustment to payment of brokerage commissions
clause permitting seller review of principal closing documents before closing
clause prohibiting automatic extensions of the closing date (by agreement only)
clause requiring that the contract statements and representations do not survive
clause stating that contract covenants, reps, and warranties do not survive closing
clause stating that the deed to the buyer will also include a thorough “as is” clause
clause specifying the exact “as is” clause language to be included in the deed
clauses favoring seller in non-standard wraps, subject to, and unofficial assumptions
clause limiting reliance on any oral statements by seller and seller’s agents
clause requiring all agreements to be contained in the final signed contract
clause prohibiting oral, electronic, implied, or assumed side agreements
clause deleting specific performance as a remedy against the seller
clause stating that return of the earnest money is buyer’s sole and exclusive remedy
clause disclosing that an existing deed of trust contains a due-on-sale clause
clause disclosing that seller is a real estate investor or license holder
clause stating that no assignment (wholesaling) of the contract is permitted
clause striking jury trial and limiting recovery to actual (not punitive) damages
and many more.

None of these very legitimate custom clauses is included or even available in the boxes and blanks of the TREC contract.

The most important item for the seller is assuring that the conveyance to the buyer is entirely “as is” and without representation or warranty, express or implied. Inclusion of thorough “as is” clauses in both the contract and the warranty deed (in bold and in all caps) should be an essential precaution for all prudent sellers of real estate. It is the most important thing a seller can do to reduce post-closing liability and lawsuits.

Adding Special Provisions to the Contract

Special provisions can serve to clarify the agreements of the parties and avoid vague assumptions.In real estate contracts, plain-spoken clarity is your friend. Oral assurances, naïve assumptions, blind faith, and putting off important details until later (after the contract is signed) are all enemies of a successful closing.

The space allowed for special provisions in the TREC contract (paragraph 11) is very limited—about 2 ½ lines—which is far less than in previous versions of the contract. This abbreviated space is entirely inadequate to include all potentially beneficial provisions that are missing from the TREC contract. Accordingly, if one is determined that the contract thoroughly protect one’s interests, a buyer or seller is literally forced into adding a separate special provisions addendum.

No major deal points should ever be assumed, implied, or deferred until after the contract is signed. The contract stage is the time to deal with all material terms and get them in writing. Ambiguity, incompleteness, and uncertainty encourage lawsuits. After signing, changes to the contract will occur only by means of a formal contract amendment.

Attempting to add special provisions at the last minute without a clear written agreement can easily disrupt a closing or cause the transaction to fail. An experienced buyer or seller of real estate prefers to take the lead on writing special provisions, knowing that controlling the preparation of legal documents is always an advantage.

Special provisions added to a Texas contract must comply with the usual Statute of Frauds requirements. Oral agreements in real estate are not enforceable. Texts and emails are of dubious enforceability and should never be relied upon.

For special provisions to be legally binding, there must be a meeting of the minds on material terms that is reflected in a signed writing—meaning the contract, one of the standard addenda, a special provisions addendum, or a signed contract amendment. If a right or remedy is not expressly included in one of these four documents then it likely does not exist.

Realtor Pushback

Adding special provisions can result in pushback from brokers and agents who are not familiar with using a custom addendum in residential transactions (custom addenda are common in commercial deals). Special provisions may be outside their comfort zone and can cause anxiety about losing their commissions. This anxiety is enhanced when an attorney is involved.

Many residential real estate agents are paranoid about attorneys and will do almost anything to prevent their clients from consulting one. This is a mistake on their part. They should welcome the opportunity to offload liability for non-standard custom clauses onto the attorney.

In response to pushback, a determined buyer or seller must simply insist that their interests be fully protected. The TREC contract specifically advises buyers and sellers to consult an attorney—in paragraph 23 in all caps. It is up to the individual parties if they choose to follow this advice. Unfortunately, most buyers and sellers do not even read the contract before they sign it.

Conclusion

A real estate transaction has several key events that occur between contract and closing. These include the title commitment, survey, and preparation of closing documents. Accordingly, legal representation in the entire transaction is usually the best and most professional approach.

Real estate lawyers often hear the following from clients who fear negotiating or changing the standard TREC or TXR contract:

“I just want to fill out the standard form like everyone else.”
“I don’t want to make my Realtor mad at me.”
“I don’t want to offend the other party.”

Residential real estate is expensive now. Getting a good contract and looking after one’s own best interests should be a priority. After all, it is guaranteed that everyone else involved in the transaction (including the brokers) will be doing just that.