Real Estate Contracts in Texas

Sales of Residential Real Estate

by David J. Willis J.D., LL.M.

Introduction

There is no standard residential real estate contract in Texas, at least not in the sense that any particular form is required. Contract forms published by the Texas Real Estate Commission and Texas Realtors are commonly used; however, they are optional. The only persons required to use these forms are real estate agents and brokers. Individual buyers and sellers are free to disregard the TREC and TR forms. Attorneys can draft any form of contract they want on behalf of their clients.

Additionally, all Texas real estate contracts are negotiable. This includes each and every provision in the TREC and TR contracts. It is perfectly permissible to negotiate the printed language in these promulgated forms. Negotiability extends beyond merely filling in blanks and checking boxes. Buyers and sellers need to be aware of this and not be dissuaded by pressure from agents and brokers who say “just sign this standard form” and stop asking questions.

Why is the contract important?

Earnest money contracts in Texas control 90% of the rights and remedies of the parties. It is therefore vital to negotiate favorable terms before the contract is signed. Unless the contract or its addenda expressly provide for inclusion of a certain special 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. Accordingly, if one does not advocate for one’s best interest at the contract stage – before signing – then the opportunity to do so has likely been lost.

Do not count on being able to casually add a clause or provision after the contract is signed, and never rely on oral assurances from the other party or that party’s agent. Why? Because a valid contract for the conveyance of real property is subject to the statute of frauds and requires a signed writing as to all material terms (Bus. & Com. Code Sec. 26.01 and Prop. Code Sec. 5.021).

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

Consulting a Real Estate Attorney

Negotiating the best outcome for a buyer or seller may require involving a real estate attorney. Agents and brokers are strictly prohibited from going beyond the blanks and boxes in the TREC and TR forms. As license holders, they may not write in special provisions that have legal effect or give legal advice.

Unfortunately, heavy pressure is often applied by agents and brokers to steer clear of consulting a real estate attorney. This is a disservice to the client. The only solution is for a buyer or seller to relentlessly self-advocate in order maximize their position in the transaction.

Consulting a real estate attorney is the best way to get an unbiased opinion on the advantages and disadvantages of contract terms. The attorney has no vested interest in the outcome since he does not receive a commission. In fact, the attorney may be the only unbiased adviser in the entire contract-to-closing process. Nearly everyone else in the system has an agenda, usually the hope or expectation of getting paid when the transaction closes – regardless of whether the terms of closing favor the buyer or the seller.

Special Provisions

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 both TREC and TR forms.

Buyers or sellers seeking to negotiate or achieve even minor customization of the TREC 1-4 contract can expect a degree of resistance from agents, brokers, and title companies. For example, if a seller wants the warranty deed to the buyer to include a thorough “as is” clause in bold and all caps, the TREC contract does not easily accommodate this. Such a requirement must be added as a special provision, particularly if the seller wants to spell out the wording of the “as is” clause in advance (to avoid disagreements about that wording later).

Addition of a thorough “as is” clause in the deed to the buyer at closing is probably the single most important step a seller can take to avoid being sued. Anyone who spends time at the courthouse will confirm that the primary cause of litigation in residential real estate arises from suits against sellers who (allegedly) failed to disclose a defect or breached some oral representation. A thorough “as is” clause in the deed can eliminate this risk. Shouldn’t all sellers want to do this? Absolutely, but they often fear that asking for a special provision requiring an “as is” clause in the deed will make their realtor angry because it somehow deviates from the standard process.

It may be necessary for a buyer or seller to simply insist that the contract include certain favorable special provisions. 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 but sub-optimal outcomes.

It goes without saying that when a transaction is non-standard (a wraparound, for instance, or a “subject to”) a real estate lawyer should be consulted before signing the contract. A custom special provisions addendum will likely be needed in order to fully set forth the details of the parties’ agreement. Oral promises or assurances that details can be “worked out later” should never be relied upon.

Buyer-Oriented Special Provisions

Examples of buyer-oriented special provisions include:

(1) affirming the seller’s disclosure obligations under the Deceptive Trade Practices Act (Bus. & Com. Code Sec. 17.46 et seq.). Buyers have a strong interest in affirming the seller’s legal duty of full and ongoing disclosure by getting the seller’s express agreement. Why is this necessary if this is already the law in Texas? Because many sellers (and their agents) operate under the mistaken belief that selling property “as is” relieves them of the duty to disclose material facts. This is false. It can be very useful to ask a seller to acknowledge an ongoing obligation to disclose known material defects, faulty systems, needed repairs, and any other adverse conditions that could reasonably affect the buyer’s decision to buy or not buy. If a seller refuses to do so then that would certainly be a red flag.

(2) Buyers have an interest in seeing recent inspection reports; repair and renovation receipts along with relevant permits; and any documents relating to zoning or land-use restrictions. The TREC 1-4 contract does not specifically provide for giving this information to the buyer.

(3) 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) in good and working condition with no known material problems that are not fully disclosed to Buyer before the end of the option period. A seller who refuses to do this is waiving a red flag directly in the buyer’s face.

(4) There is nothing in the TREC contract or the Seller’s Disclosure assuring the buyer that the property has never been flooded or afflicted by mold. The seller can be required to warrant to the buyer that the improvements on the Property have never been flooded or penetrated by water from any source, nor has there ever been evidence of mold.

(5) The buyer may want to avoid any possibility of being sued for specific performance by the seller. If one looks at paragraph 15 of the TREC contract, there is no satisfactory way to strike out or amend the existing language to clarify that retention of the buyer’s earnest money will be the seller’s sole and exclusive remedy. The only feasible means of inserting this sole-and-exclusive-remedy language is by means of a special provision.

(6) Two buyers may want to take title as joint owners with rights of survivorship (JTWROS). This is a 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.

(7) A buyer may want to provide that he can recover pursuit costs (loan fees, inspections, surveys, and the like) if the seller defaults by failing to close as agreed. These costs are no longer trivial, especially when it comes to expensive properties. If the seller defaults, a mere return of earnest money can fall well short of making the buyer whole.

(8) A buyer may want to secure the assignment of contracts, warranties, and leases from the seller at closing. A deed transfers and warrants title and (usually) that is all. A separate assignment can be drafted that would also 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, all rights as landlord pursuant to the lease, all unpaid rents, and the tenant’s security deposit.

(9) A buyer may 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.

(10) Investor buyers may have special requirements – for example, that the contract will be sold and assigned to another investor. The TREC contract does not accommodate this.

There are many other possible buyer-oriented special provisions that are not available when simply filling in blanks and checking boxes on TREC or TR forms. Is there any good reason for a buyer not to want to add these? None at all.

Seller-Oriented Special Provisions

Examples of seller-oriented special provisions include:

(1) first and foremost, a deed clause conveying 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 contract is usually superseded by the deed pursuant to the doctrine of merger).

(2) A seller may want to limit potential liability by striking specific performance as a remedy for the buyer.

(3) 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 insurance proceeds that are available to cover the loss.

(4) As to curing buyer objections, a seller should want to make it clear that he may but shall not be required to cure objections, at his discretion, depending not just on cost but on time and effort involved. Also, a seller should not want failure to cure objections to be construed as a default that can result in a specific-performance lawsuit by the buyer. In this context, the seller should want the option to simply return the earnest money and unilaterally terminate the contract.

(5) Paragraph 19 of the TREC states: “All covenants, representations and warranties in this contract survive closing.” This is a problem for sellers. Indefinite duration of representations and warranties is clearly not in a seller’s interest. Why would a seller want his liability to persist forever? A seller should insist on a special provision striking this clause and capping his post-closing liability.

(6) 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.

There are, of course, many more possible special provisions that can favor the seller.

Control of Legal Document Preparation

Real estate transactions involve a number of legal documents—not just the warranty deed—that will be presented for signature at closing. This is especially true in the case of creative, non-standard transactions. In such cases, 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 these documents?

The party who is not drafting the closing documents may want to have the opportunity to review the principal legal documents (including the warranty deed, note, and deed of trust) prior to closing. Neither party should be required to close if the proposed closing documents differ in any material respect from the express terms of the contract or its addenda.

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

NAR Litigation

Recent settlement of litigation against the National Association of Realtors expands options for buyers to negotiate commissions and control how their offers are presented. A real estate lawyer can prepare a custom offer contract for a buyer to present to the seller, often for a flat fee. Unlike agents and brokers, a lawyer can include favorable special provisions like the ones described above.

DISCLAIMER

Information in this article is provided for general informational and educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. No attorney-client relationship is created by the offering of this article. This firm does not represent you unless and until it is expressly retained in writing to do so. 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.

Copyright © 2024 by David J. Willis. All rights reserved. Mr. 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 website, www.LoneStarLandLaw.com.