Residential Contracts in Texas: The Value of Special Provisions

Topics Covered

Part One: TREC and TXR Contracts

Negotiability of TREC and TXR Contracts

Using a Special Provisions Addendum to the Contract

Part Two: Buyer-Oriented Special Provisions for the Contract

Assuring Full and Ongoing Seller Disclosure
Limiting Seller Remedies in Event of Buyer Default
Recovering Buyer’s Pursuit Costs
Other Buyer-Favorable Clauses for the Contract

Part Three: Buyer-Favorable Clauses for the Closing Documents

Part Four: Seller-Oriented Special Provisions

Part Five: Special Provisions of Concern to Both Parties

PART ONE:
TREC AND TXR CONTRACTS

Standard Versus 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 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.

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.

Special Provisions in Residential Transactions

This article discusses special provisions that can be added to the TREC and TXR residential contracts 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.

WHO MUST USE PROMULGATED CONTRACT FORMS

No Required Standard Contract Forms

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.

Non-Standard and Creative Provisions

Brokers and agents should always refer their clients to a real estate attorney if non-standard provisions or creative changes to the TREC Contract are contemplated. Adding such provisions is the practice of law. The attorney can draft a custom special provisions addendum that covers and clarifies non-standard provisions so that nothing that is assumed, implied, or deferred until later.

It is critical that non-standard and creative clauses be expressly agreed to in writing before the contract is signed. The proper format is a special provisions addendum to the contract that should be signed and included in the contract package just like any other addendum.

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.

Choice of Seller’s Disclosure Form

There is a choice of two Seller’s disclosure forms. Either TREC form OP-H or TXR 1406 may be used to satisfy the legal requirement:

Prop. Code Sec. 5.008 (a-d). 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. . . . [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 to the disclosure requirement, notably as to previously unoccupied new homes. Note that many real estate attorneys prefer TXR 1406.

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 an investor should be familiar with both the TREC contract and its various standard addenda.

NEGOTIABILITY OF TREC AND TXR CONTRACTS

Negotiability and Special Provisions

All Texas real estate contracts (including the TREC and TXR promulgated contracts) are fully negotiable, and that negotiability extends beyond the express confines of the form to include the addition of special provisions.

Everyone, including brokers and agents, should understand the limitations of the TREC and TXR forms. Nearly all clauses and provisions that are even slightly creative are excluded from these contracts. They are simply not listed as available boxes to check.

For example, if the seller wants an express “as is” clause included in the warranty deed (always a superb idea for sellers), does the TREC contract facilitate this? No, a special provision is required.

If the buyers want to take title as spousal joint owners with rights of survivorship, does the TREC contract allow for this? No, a special provision is required. The list goes on.

A customized special provisions addendum (prepared by an attorney) may be required in order for the contract to fully reflect a meeting of the minds on the terms of the transaction, especially in the case of non-standard and creative transactions.

Critical Deal Points Should Always 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 anything new to an already-signed contract.

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. This of course includes special provisions and custom agreements.

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

Brokerage Commissions are Negotiable

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.

Example: 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 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.

Failure by the parties to influence the commission issue early on, before the contract is signed, likely means that the opportunity is lost.

USING A SPECIAL PROVISIONS ADDENDUM
TO THE TREC OR TXR CONTRACT

TREC and TXR Contracts Limit Special Provisions

The special provisions paragraph of the TREC 1-4 contract (paragraph 11) offers only a short space for inserting extra comments. TREC directs that the use of this space is limited to informational items (factual statements and details) applicable to the sale—not substantive modification or addition of material legal provisions.

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 (and this happens often), can paragraph 11 be used to include these custom provisions? No, at least not by license holders.

For everyone else, the space at paragraph 11 is just too short to be of much practical use, so a custom special provisions addendum is needed.

Adding Clarity to the Parties’ Agreements

A special provisions addendum adds clarity and avoids misunderstandings. It has the further advantage of immediately indicating which contract terms are being changed and which are not. The familiar TREC contract to which the addendum is attached remains unmarked.

Resistance to Special Provisions

Buyers or sellers seeking even minor customization of the TREC contract can expect a degree of resistance from brokers, agents, and title companies—and even more resistance when involving a real estate attorney. Both push them out of their comfort zone.

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 against agent pushback.

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.”

Engaging a real estate attorney to prepare a special provisions addendum before the contract is signed is the best way to maximize one’s best interests and defy the institutional bias in favor of standardized residential forms and outcomes.

PART TWO:
BUYER-ORIENTED SPECIAL PROVISIONS
FOR THE CONTRACT

The Parol Evidence Rule

In interpreting contracts, Texas courts usually do not allow extrinsic evidence (from outside the four corners of the written document) in the interpretation of clearly-written contracts. This is particularly true when the extrinsic evidence is oral.

“The parol evidence rule [excludes oral statements and] bars consideration of evidence that contradicts, varies, or adds to the [plain meaning] 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 [plain meaning of the] contract’s agreed-to terms.” Barrow-Shaver Resources Company v. Carrizo Oil & Gas, Inc., 590 S.W.3d 471 (Tex. 2019).

ASSURING FULL AND ONGOING
SELLER DISCLOSURE

Affirming Seller’s Disclosure Obligations

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

Many sellers (and their agents) operate under the mistaken belief that selling property “as is” relieves them of the duty to fully disclose material facts and adverse conditions. This is false.

Buyers have a strong interest in affirming the seller’s legal duty of full and ongoing disclosure. It is perfectly reasonable to ask a seller to expressly acknowledge an existing and ongoing obligation and agreement 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 such a special provision may largely restate existing consumer law under the Deceptive Trade Practices Act (DTPA, Bus. & Com. Code Sec. 17.46 et seq.), it remains highly beneficial to the buyer to relentlessly hammer home both the seller’s duty and agreement to make full disclosure.

Non-Disclosing Sellers

Some sellers refuse to sign a special provision affirming their disclosure duty or stating an agreement to make 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), and will not consider an express agreement to disclose, a buyer should consider moving on.

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

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

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, receipts, photos, and permits.

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 concerning 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.

Is the Seller’s Disclosure True?

What about the truth of the disclosure itself? It is assumed that a seller is affirming its truth 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 contract.

Caution and prudence are in order for buyers. It is not sufficient to assume that the seller is honest, understands his legal obligations, and is agreeable when it comes to making full and ongoing disclosure.

OTHER BUYER-FAVORABLE CLAUSES
FOR THE CONTRACT

Functionality of Major Systems

This subject is hugely overlooked in the TREC contract. 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 “as is.”

A seller who refuses to commit to the functionality of major systems is waiving a large 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.

Must the buyer get a survey?

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 be undesirable. A buyer should not be compelled by a form contract to order a new survey if no lender requires one.

Contract “Out” Based on a Lender Turn-Down Letter

Disputes can arise as to whether or not a 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?

For a buyer, production of a turn-down letter from the 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 possibility of argument from the seller on any of those points.

LIMITING SELLER REMEDIES IN
EVENT OF BUYER’S DEFAULT

Contract Termination if No Earnest Money Deposited

Paragraph 5 of the TREC 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. A buyer should not want any part of this.

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 can provide for automatic termination of the contract if the buyer chooses not to make the deposit. Amounts previously deposited would be retained by the seller as the seller’s sole and exclusive remedy, and 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. A special provision is required.

Deleting Seller’s Specific Performance Remedy

In the event of dispute and termination, a buyer should want to make it perfectly clear that retention of the earnest money will be the seller’s sole and exclusive remedy for breach (no specific performance allowed).

If one looks at paragraph 15 of the TREC contract, there is really no satisfactory way to strike out or amend the existing language in order to achieve this. A special provision is required.

RECOVERING BUYER’S PURSUIT COSTS

Recovery of Pursuit Costs if Seller Defaults

Homes are expensive and pursuit costs (loan fees, inspections, surveys, and the like) can be substantial. 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) a 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 committing fraud, so it is not time to tiptoe around one’s remedies.

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.

In event of seller fraud, wrongful failure to disclose, or refusal to convey title at closing, the buyer should have the ability to terminate the contract and receive not just the earnest money but also reimbursement from the seller for reasonable out-of-pocket expenses such as inspection fees, appraisal fees, survey, attorney’s fees, and the like.

PART THREE:
BUYER-FAVORABLE CLAUSES FOR
THE CLOSING DOCUMENTS

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.

JTWROS is a non-standard creative add-on provision and likely will not happen unless it is expressly included as a special provision in the contract before the contract is signed.

Assignments of Contracts and Warranties

The purpose of a deed is transfer and warrant title. It does not transfer non-title warranties on 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 in the interest of most buyers to secure an assignment of contracts, warranties, and (if applicable) leases at closing. 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 Clause

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 end 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: 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 owner-seller of the property and the wholesaler.

This goes well beyond stating “and/or his assigns.” It also goes beyond anything offered by the TREC contract or its addenda.

In a special provision, 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.

Recording a Memorandum of Contract

In certain circumstances, it may be useful for a buyer to give public 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.

AS THE BUYER APPROACHES CLOSING

Buyer’s 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.

Buyer’s Right to Review and Approve Closing Documents

The content of the principal closing documents (deed, note, and deed of trust) is of importance to the buyer even if there are no custom or non-standard agreements between the parties. Will the buyer have the right to review and approve these documents before closing? Will the buyer be compelled to close if the proposed closing documents do not accurately reflect the parties’ agreement? Will the buyer be in default if he refuses to sign such documents?

PART FOUR:
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 “as is” conveyance of real property to be ironclad, two “as is” clauses are required: one in the contract and one in the deed at closing. A special provisions addendum should therefore provide for both of these “as is” clauses in order to fully protect the seller.

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).

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.

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

“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 TREC and TXR 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?

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 Buyer’s Specific Performance Remedy

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 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 before Closing

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 custom 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 usual Texas practice which states that a contract is considered to be merged into the deed and other closing documents, thus extinguishing the contract (known as the doctrine of merger). Chicago Title Insurance Company v. Cochran Investments, Inc., 602 S.W.3d 895 (Tex. 2020).

For sellers, the doctrine of merger is a good thing. Survival of covenants, representations, and warranties from the contract can be a real legal problem. 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 post-closing liability.

No Representation and No Reliance Clauses

No representation/no reliance clauses are useful provisions that appear routinely in Texas 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.

PART FIVE:
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, neither TREC nor TXR contracts 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 the terms?

A creative transaction can easily fail at the closing table when legal documents are presented that one of the parties considers onerous or unacceptable.

It is the responsibility of professional advisors (brokers, agents, and attorneys) to anticipate and avoid this outcome. Closing should be ministerial signing event, not an ambush.

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 well 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 Adding such a special provision avoids being presented with unfair or oppressive legal documents at closing. When it comes to closing documents, there should be no surprises at the closing table.

Without a special provision, the right of the non-drafting party to review and approve closing documents does not exist.

Special Covenants and Agreements

These are special, custom agreements that the parties have reached regarding the transaction. They 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, and no deferring of difficult provisions or agreements until later. All custom agreements of the parties should be in writing and included in the earnest money contract or its addenda before the contract is signed.

1031 Exchanges

The buyer should be asked to acknowledge that the seller may be doing a 1031 exchange and agree to extend such reasonable cooperation as may be necessary.

Indemnity Provisions

Buyers may 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.

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 unacceptable.

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

Exclusion of Electronic Communications

The Uniform Electronic Transactions Act (UETA) clearly states that a contract may be valid and enforceable even though it is in electronic form.

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.

What about electronic signatures? 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? The 1st Court of Appeals in Houston answered yes to both questions: “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).

A special provision excluding emails and texts can be a good idea for both buyer and seller. All electronic communications leading up to execution of the contract should be expressly excluded (along with oral statements, of course).

The final agreement of the parties should be contained within the four corners of a single written contract and its associated addenda. Everything else should be expressly excluded.

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: (1) a comprehensive document that (2) anticipates future events and (3) clearly incorporates in writing any custom non-standard agreements of the parties.

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.