trec contracts- traps and gaps - res ipsa

2019 Texas Land Title Institute-L_TREC Contracts Traps and Gaps

TREC CONTRACTS-

TRAPS AND GAPS

Texas Land Title Institute

December 5-6, 2019

Brian J. Watts

Vice President

Texas Regional Underwriting Director

First American Title Insurance Company

Irving, Texas


Brian J. Watts

Vice President

Texas Regional Underwriting Director

First American Title Insurance Company

4795 Regent Blvd., Mail Code 2002

Irving, TX 75063

(972) 707-6933

Email: [email protected]

Brian is Vice President, Texas Regional Underwriting Director for First American. In this role, he acts as liaison

for First American’s underwriters across its various business channels.

Brian is also the lead underwriting attorney for First American’s Texas Direct Division, and works closely with

escrow officers, real estate agents, principals, and attorneys in providing legal support in underwriting and closing

real estate transactions.

Brian is one of six attorneys statewide, appointed by the State Bar of Texas, serving on the Texas Real Estate

Commission (TREC) Broker-Lawyer Committee, which is responsible for drafting the contract forms utilized by

Texas real estate professionals. A frequent speaker in the real estate community for real estate and title company

professionals, Brian is a TREC licensed Continuing Education (MCE) instructor. He is also an active member of

Texas Land Title Association, serving on its Legislative and Regulatory Committees.

Brian spent the first 11 years of his legal career with a major Dallas law firm, where he was a partner specializing

in commercial real estate transactions. In 1993, he joined Hexter-Fair Title Company, a title agency in the

Dallas/Fort Worth area that later became a part of the First American family. At Hexter-Fair, he served as its

President and General Counsel, and was Special Underwriting Counsel for First American. In 2016, he assumed

his new state-wide role with First American.

Brian received his undergraduate degree in Mathematics from The University of Southern California in 1979, and

his J.D. from Baylor Law School, graduating cum laude in 1982. He has been married to his bride Linda for 37

years, and they have been blessed with three daughters, an equal number of sons-in-law, and the world’s most

beautiful one-year old granddaughter.

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TREC CONTRACTS -TRAPS AND GAPS

Brian J. Watts

Disclaimers:

Any opinions, statements or interpretations in this paper or the TLTA Institute presentation are not the opinion of

TREC, the TREC Broker-Lawyer Committee, their respective members, or First American Title, and are neither

legal advice nor a recommendation as to how any contract or amendment should be negotiated or drafted.

A. INTRODUCTION.

The Texas Real Estate Commission (TREC) promulgated contracts, related addenda, and other forms are basic

tools of the trade for the real estate industry. It is crucial that title company professionals understand the forms

and the relationship the title company plays in the formation and performance of the contract.

The forms are public records that are available online at www.trec.texas.gov/agency-information/forms-and-

contracts. While the forms are intended for use primarily by licensed real estate brokers and agents, they may

be used by any person. The most commonly used form, the One to Four Family Residential Contract (Resale),

is attached as Appendix A.

Generally, the contract forms contain similar terms and numbering sequences. Unless otherwise noted to the

contrary, references in this paper are to paragraphs in the One to Four Family Residential Contract (Resale).

B. PURPOSE OF TREC FORMS.

TREC forms are designed for use by real estate agents and brokers, most of whom are not attorneys. As

explained below, their authority to draft contracts is limited. Objectives of the forms include:

• Simplicity. The forms are filled in on individual transactions by non-lawyers who are not allowed to give

their clients legal advice. Easy to understand provisions are key.

• Functionality. Agents are not allowed to draft contracts for their clients, so the forms should be flexible to

address a wide range of transactions and agreements. While all transactions are different, they typically

have common characteristics. Use of forms helps to standardize transactions.

• Guidance. Standard forms give parties to a transaction road maps for performance and their rights if deals

do not close. Forms should encourage parties to understand and document their agreement, and to

successfully consummate their intended deal (or to efficiently and properly terminate the deal if conditions

to performance are not satisfied).

http://www.trec.texas.gov/agency-information/forms-and-contracts

http://www.trec.texas.gov/agency-information/forms-and-contracts

https://www.trec.texas.gov/forms/one-four-family-residential-contract-resale-0

https://www.trec.texas.gov/forms/one-four-family-residential-contract-resale-0


C. STATUTORY AND REGULATORY FRAMEWORK

1. Statutes. Preparation of contracts for the sale of real property by real estate brokers and agents (referred to

in The Real Estate License Act as “license holders”) who are not licensed attorneys is restricted by Texas

statute.

(a) Texas Government Code Sec. 83.001 (see Appendix B) prohibits non-attorneys from directly or

indirectly charging or receiving compensation for preparation of a legal instrument affecting title to

real property. An important exception to that rule is a licensed real estate broker or salesperson

performing the acts of a real estate broker under The Real Estate License Act, Chapter 1101,

Occupations Code (RELA).

(b) Under RELA Section 1101.155 (see Appendix B), the Texas Real Estate Commission (TREC) may

adopt rules that require license holders to use contract forms prepared by the Texas Real Estate Broker-

Lawyer Committee and adopted by TREC.

(c) Under RELA Section 1101.654 (see Appendix B), a license holder can be suspended or a license

revoked for the unauthorized practice of law. The statute describes the practice of law as drafting “an

instrument that transfers or otherwise affects an interest in real property,” or advising someone

regarding “the validity or legal sufficiency of an instrument or the validity of title to real property.” The

statute goes on to state that it is not considered the unauthorized practice of law for a license holder to

complete a contract form:

• adopted by the commission for the type of transaction for which the form is used;

• prepared by an attorney licensed in this state and approved by the attorney for the type of

transaction for which the form is used; or

• prepared by the property owner or by an attorney and required by the property owner.”

2. TREC Rule 537.11 (see Appendix C). In transactions for sale, exchange, option, lease or rental, of real

property, license holders may use only contract forms promulgated by TREC for mandatory use for that

type of transaction, with the following exceptions:

(a) The license holder is acting as a principal and not as an agent.

(b) The US Government requires a different form.

(c) A form or addendum is prepared by the property owner or prepared by a lawyer and required by the

property owner.

(d) There is not an approved mandatory form or addendum, and the form is prepared by a lawyer and

contains required disclosures. ****Rule 537.11(a)(4)(A); See details below

(e) Forms approved by TREC for voluntary use

http://www.statutes.legis.state.tx.us/GetStatute.aspx?Code=OC&Value=1101


License holders may not:

• Practice law or directly or indirectly offer, give or attempt to give legal advice

• Give advice or opinions about the legal effect of a contract or legal instrument affecting title to real

property

• Give opinions about status or validity of title to real property

• “draft language defining or affecting the rights, obligations or remedies of the principals of a real

estate transaction, including escalation, appraisal or other contingency clauses;”

• Add factual statements or business details to a form if there is a TREC form for mandatory use for

that purpose.

• Attempt to prevent or discourage any principal from hiring a lawyer.

• Employ or pay for a lawyer, directly or indirectly, to represent a principal in a transaction in which

the license holder is acting as an agent.

License holders may:

• Disclose to their principal all pertinent facts within their knowledge (they have the fiduciary duty

to do so)

• Fill in the blanks in a contract form.

• Add factual statements and business details, or strike text, as directed in writing by the principals.

• Explain the meaning of alternative choices, factual statements and business details, so long as they

do not give legal advice.

• Hire and pay for a lawyer to represent only the license holder.

License holders must:

• Advise the principals to consult a lawyer of the principal's choice before executing an instrument

when a transaction involves unusual matters that should be reviewed by a lawyer before an

instrument is executed, or if the instrument must be acknowledged and filed of record.

• Advise the principals that the instrument they are about to execute is binding on them.

• Reproduce TREC forms only using approved sources.

• Reproduce forms on the same size paper with no changes or additions except for the business name

of the broker, organization or printer (outside the border), and the broker’s name may be inserted

in blanks for that purpose.

****Lawyer Drafted Special Addendums may be used if:

• No mandatory contract form or addendum has been approved by TREC for the transaction.

• The form is prepared by a Texas lawyer, or a trade association in consultation with one or more

Texas lawyers for the particular type of transaction involved.

• The form contains:

o the name of the lawyer or trade association who prepared the form;

o the name of the broker or trade association for whom the form was prepared;

o the type of transaction for which the lawyer or trade association has approved the use of the

form;

o any restrictions on the use of the form;

o if it is an addendum that changes the rights, obligations or remedies of a party under a contract

or addendum form approved by TREC for mandatory use, the form must also include:

➢ a statement about how the addendum changes the rights, obligations or remedies of a

party, with a reference to the relevant paragraph number in the mandatory use form;

➢ a statement that the form is not a mandatory Texas Real Estate Commission form; and


➢ a statement that Commission rules prohibit real estate license holders from giving legal

advice.

3. TREC and Broker Lawyer Committee. Contract forms are promulgated by TREC. The Broker-Lawyer

Committee regularly reviews promulgated forms, and suggests proposed revisions to existing forms and

the adoption of new forms for TREC’s consideration. Changes are most often made to adjust the forms to

address

• changes in laws,

• court opinions interpreting relevant issues, and

• practical revisions that are prudent based on market conditions.

The Committee consists of six Broker members, six Lawyer members appointed by the Texas Bar

Association, and one public member appointed by the governor's office. Members of the real estate

community, including brokers, agents, attorneys, and title company professionals, and the general public

are encouraged to submit their recommendations and concerns about the forms, which may be submitted

to the TREC General Counsel, [email protected].

D. THE ESCROW AGENT’S RELATIONSHIP AND ROLE WITH THE TREC CONTRACT

1. The contract makes a distinction between “escrow agent” (defined in paragraph 5) and “Title Company”

(defined in paragraph 6A). The escrow agent performs traditional settlement functions to close the

transaction, while the Title Company issues the commitment and policy.

2. The escrow agent does not have contractual duties under the contract. Paragraph 18A: “The escrow agent

is not (i) a party to this contract and does not have liability for the performance or nonperformance of any

party to this contract…”

3. Therefore, the escrow agent has no duty under the contract to do anything the seller or buyer must do,

including:

• payment of earnest money

• payment of option fee (note: TREC Broker Lawyer Committee is currently considering contract

form changes to eliminate the need to pay a separate option fee).

• delivery of commitment or policy

• title curative matters (both Schedule B and C)

• obtain the survey

• obtain HOA certificate

• make, order or coordinate inspections for the buyer

• perform closing obligations

• deliver possession (keys)

4. However, the escrow agent may have or assume duties outside the contract:

(a) The escrow agent has implied duties to act as a neutral party to the transaction and owes a fiduciary

duty to both parties consisting of the duty of loyalty, the duty to make full disclosure, and the duty

to exercise a high degree of care to conserve the money and pay it only to those persons entitled to

receive it. Fort Worth v. Pippen, 439 S.W.2d 660 (Tex. 1969); Trevino v. Brookhill Capital Res.,

Inc., 782 S.W.2d 279 (Tex. App.—Houston [1st Dist.] 1989, writ denied); Gonzales v. Am. Title

Co., 104 S.W.3d 588 (Tex. App.—Houston [1st Dist.] 2003, pet. denied).

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(b) The escrow agent may affirmatively assume a duty, outside the contract, by its actions. Colonial

Sav. Ass'n v. Taylor, 544 S.W.2d 116 (Tex. 1976) (“one who voluntarily undertakes an affirmative

course of action for the benefit of another has a duty to exercise reasonable care that the other's

person or property will not be injured thereby.”)

E. DISPUTES CONCERNING PERFORMANCE. Most often, an escrow agent gets involved in seller/buyer

disputes due to allocation or prorations of expenses, disbursement of earnest money, or ability of escrow agent

and title company to close and insure a transaction where the first contract has terminated and seller wishes to

sell.

1. Allocation and proration of expenses. Issues the escrow agent should consider include:

(a) Escrow fees. Paragraphs 12A (1)(a) and 12A (2) provide for seller and buyer to pay one-half of the

escrow fee. This could adversely affect the escrow agent’s right to waive unilaterally one party’s

escrow fee, unless the contract contains a special provision to the contrary.

(b) Seller payment of Buyer Expenses. 12A(1)(b) provides for the seller’s payment to pay “up to” a certain

amount of the Buyer’s Expenses. If actual Buyer Expenses are less than the amount specified, the seller

is not required to pay the remainder. As a result, a buyer may sometimes “create” fees to be paid, which

could result in a dispute.

• Buyer agents sometimes create agreements for the buyer to pay their agent an additional fee in

order to create a charge that the seller pays as a Buyer Expense under Paragraph 12A(1)(b), with

an implicit understanding that the agent will then refund the amount to their client after and outside

closing. However, this strategy is invalid since the broker’s fees are not included in the definition

of Seller Expenses or Buyer Expenses in Paragraph 12, and Paragraph 8 states obligations for

payment of broker’s fees are contained in separate written agreements.

(c) Prorations. Paragraph 13 provides for prorations of taxes and other fees and income through (i.e.,

including) the closing date.

• Title companies often prorate taxes based on prior year taxes. Courts have held the escrow agent

not to have liability for variance between actual taxes and estimates based on prior year taxes.

Factors that are relevant include where the title company made disclosure that the prorations were

based on prior year taxes, the prorated taxes were correct estimates for the current year, and notice

was given that the figures were estimates subject to change. Use of a tax proration agreement that

identifies the basis for prorations, provides an agreement of the seller and buyer to the prorations

made, and releases the escrow agent from any inaccuracies or re-prorations, was recognized as

being an important factor in absolving the escrow agent from liability. Title Agency of Tex., Inc. v.

Arellano, 835 S.W.2d 750 (Tex. App.—Houston [14th Dist.] 1992).

• However, with tax information now being available online before final tax bills are issued, the

escrow agent now may have updated information. To avoid possible claims, title companies should

consider obtaining clear instructions from the seller and buyer as to how those parties wish to

prorate, whether taxes should be prorated based solely on prior year taxes, or whether additional

information should be considered, such as changes in exemptions (which Paragraph 13 states may


be taken into consideration), changes in value (such as when there is new construction), and new

tax information posted on the tax office website.

(d) Special Assessments.

• Special assessment made by property owners associations are especially problematic and subject

to disputes. Sometime the association may impose assessment that may be paid immediately or

over time at the option of the owner.

o The TREC One to Four Family Contract does not address the issue except for Paragraph

9B(4), which generally provides that at closing “There will be no liens, assessments, or

security interests against the Property which will not be satisfied out of the sales proceeds

unless securing the payment of any loans assumed by Buyer and assumed loans will not be

in default.”

o The Residential Condominium Contract (Resale) does address the issue in paragraph 13,

stating: “Any special condominium assessment due and unpaid at closing will be the

obligation of Seller.”

• Seller and buyers frequently dispute whether a special assessment that has been assessed but may

be paid in future installments are “due”.

• TREC Broker Lawyer Committee is currently considering changing the contract forms to

address this issue.

(e) The Addendum for Property Subject to Mandatory Membership in a Property Owners Association does

not clearly establish which fees are covered by Paragraph C (“any and all Association fees or other

charges associated with the transfer of the Property”) for which the buyer is responsible up to a

specified cap, as opposed to “deposits for reserves required at closing by the Association” covered by

Paragraph D.

• Due to this ambiguity, the escrow agent should get the seller and buyer jointly to instruct it as to

how HOA fees are to be allocated.

• TREC Broker Lawyer Committee is currently considering changing this form to address the

issue.

2. Disbursement of earnest money.

(a) Escrow agent has the right to hold earnest money until released by the parties. Paragraph 18B provides:

“If no closing occurs, escrow agent may: (i) require a written release of liability of the escrow agent

from all parties, (ii) require payment of unpaid expenses incurred on behalf of a party, and (iii) only

deduct from the earnest money the amount of unpaid expenses incurred on behalf of the party receiving

the earnest money.” Thus, reliance on Paragraph 23, Paragraph 18C, or any other provision, without a

release from the seller and buyer, is within the discretion of the escrow agent.


(b) If a Contract terminates, the earnest money may be disbursed:

• as provided in written instructions signed by the seller and buyer (typically using the Texas Realtors

(TR) Release of Earnest Money form where both parties have signed);

• as provided in a final non-appealable judgment in a lawsuit between seller and buyer;

• to the buyer pursuant to Paragraph 23 of the standard TREC contract;

• to one of the parties under Paragraph 18C of the Standard TREC contract; or

• other contract provisions in the discretion of the escrow agent (for example, earnest money held

under a backup contract)

(c) Disbursement of earnest money under Paragraph 23. Although not required to do so, some title

companies will rely on Paragraph 23, the unrestricted right to terminate, and refund earnest money to

the buyer without execution of a release of earnest money by the seller, if certain conditions are

satisfied. Conditions to be considered may include:

• The contract is a TREC form contract and there are no special provisions that remove or amend

Paragraph 23.

• The Effective Date of the contract is stated on the face of the contract and the escrow agent is not

aware of any dispute as to whether this date is correct.

• Both blanks in Paragraph 23 (the amount of the Option Fee and the length of the Option Period)

have been filled in.

• The escrow agent verifies that the Option Fee was paid timely, such as:

o the Option Fee Receipt is completed and is signed by the seller or seller’s agent, or there

is other written communication from the seller or seller’s agent confirming that the Option

Fee was paid, and

o the receipt or other written communication shows that the Option Fee was paid within 3

days after the Effective Date stated in the contract.

• A written termination notice is signed by all buyers that unequivocally states that the buyer

terminates the contract under Paragraph 23 (for example, the TREC form Notice of Buyer’s

Termination of Contract with the box checked that states that the buyer terminates the contract

pursuant to the unrestricted right of Buyer to terminate the contract under Paragraph 23 of the

contract). Question: Is the Texas Realtors® Release of Earnest Money form, which calls for both

parties to sign, a notice of termination if it is signed only by the buyer? Probably not.

• The escrow agent receives a copy of the termination notice signed by all buyers and dated before

the expiration of the Option Period.


• The escrow agent receives documentary evidence that the written termination notice was given to

the seller in the manner provided by Paragraph 21 of the contract before the end of the Option

Period. Note: As the Option Period ends at 5:00 p.m. on the last day of the Option Period, the

evidence provided must show that it was given before 5:00 p.m. if the notice is given on the last

day of the Option Period.

• The escrow agent is not aware of any potential disputes with the seller or seller’s agent about the

validity of the termination or making claim to any earnest money.

• If the amount of the earnest money exceeds a certain threshold (for example, $5,000.00)

• The escrow agent verifies that the buyer’s earnest money check has cleared, and it has good funds

in the escrow account.

• If buyer expenses have been incurred (e.g., for survey), the escrow agent may deduct the cost from

the buyer’s earnest money.

(d) Disbursement of earnest money under Paragraph 18C. Paragraph 18C of the standard TREC contract

provides a procedure by which the escrow agent may release earnest money if a party fails to respond

to a demand for the earnest money by the other party. However, the specific procedure must be

followed carefully before Paragraph 18C may be relied upon to release the earnest money. The

required procedure is as follows:

• First, the seller, buyer or escrow agent sends a release of earnest money to each party to the contract.

• If either party fails to execute the release, then either party may make a written demand to the

escrow agent for the earnest money.

• After these first two steps have been followed, and if only one party has made a demand for the

earnest money, then the escrow agent sends a copy of the demand to the other party.

• If the escrow agent does not receive a written objection to the demand from the other party within

15 days, then the escrow agent may release the earnest money to the party making the demand.

(e) Other considerations/Questions. The escrow agent should consider its company’s policy when

confronted with unclear or ambiguous circumstances. For example:

• If the parties have signed separate releases of earnest money that differ on how the earnest money

is to be disbursed, is that an objection to a demand for earnest money?

• If an objection to the demand is received before the earnest money is disbursed, can the escrow

agent rely on Paragraph 18C to disburse the earnest money, even if the objection is made after the

15-day period has expired?


• Reliance on Paragraph 18C is not mandatory. If the escrow agent has reason to believe that the

other party is making a claim to the earnest money, the escrow agent is not required to not rely on

Paragraph 18C.

• Paragraph 18E provides that the escrow agent's notices will be effective when sent in compliance

with Paragraph 21 and notice of objection to the demand will be deemed effective upon receipt by

escrow agent. Frequently, however, one or more parties fails to fill in its notice address in

Paragraph 21. If that occurs, does Paragraph 18C become inapplicable? Or, may the notice be sent

to the best-known address for that party and their agent?

• When releasing earnest money under Paragraph 18C, the escrow agent may deduct the amount of

unpaid expenses that were incurred on behalf of the party receiving the earnest money. For

example, if the seller was responsible for the cost of the survey, but the buyer is entitled to receive

the earnest money, then the survey cost should not be deducted from the earnest money.

3. Closing of a sale to a subsequent buyer without mutual cancellation of the first contract or release of earnest

money under the first contract.

Title companies are often confronted with a situation where (a) a buyer terminates or fails to close and claims

to be entitled to the earnest money, but (b) the seller disputes the validity of the buyer’s termination and

claims that the seller is entitled to receive the earnest money. The contract will not close, there is a dispute

as to whether the buyer’s termination is proper, and therefore a dispute as to who is entitled to receive the

earnest money.

Buyers or their agents sometimes believe they have the power to prevent a sale to a second buyer unless the

seller agrees to release the funds to the first buyer, and may use this as leverage to extract the seller’s

agreement to release earnest money even though the buyer defaulted.

Indeed, many title companies hold this to be long-standing dogma, even where the first buyer has

unequivocally claimed that the first contract has terminated. The reasoning seems to be that the first buyer

may have an equitable right to purchase that could ripen into a cloud on title and a policy claim if the title

company were to close and insure the sale to a second buyer.

And, some listing agents are under the equally curious impression that the solution to this perceived issue is

to take the second contract to another title company to close, notwithstanding the common practice of title

companies to include in their standard closing affidavit a statement under oath by the seller that there are not

any outstanding third party claims to the property.

However, where a buyer has given notice of termination, a compelling argument can be made that either (a)

the buyer properly terminated the contract, in which case the contract is at an end and the buyer has no right

to purchase, or (b) the buyer improperly repudiated the contract and the seller may treat the repudiation as a

breach, accept the repudiation, and terminate the contract.

When one party to an agreement has repudiated it, the other party may then accept the agreement as being

terminated or consider the repudiation as a breach of contract and bring suit for damages. Universal Life &

Accident Insurance Co. v. Sanders, 129 Tex. 344, 102 S.W.2d 405, 406 (1937); Pollack v. Pollack, 39 S.W.2d

853, 857 (Tex. Comm'n App. 1931, holding approved); Lufkin Nursing Home, Inc. v. Colonial Investment

Corp., 491 S.W.2d 459, 463 (Tex. Civ. App. -- Amarillo 1973, no writ)

An anticipatory breach occurs when a party absolutely repudiates the obligation, without just excuse, and the

other party is damaged by the repudiation. Valdina Farms, Inc. v. Brown, Beasley & Assoc., 733 S.W.2d 688,

https://advance.lexis.com/document/documentlink/?pdmfid=1000516&crid=778e55d9-323a-4969-8439-040ebd630421&pddocfullpath=%2Fshared%2Fdocument%2Fcases%2Furn%3AcontentItem%3A3S3K-2TH0-003C-2280-00000-00&pdpinpoint=PAGE_651_4952&pdcontentcomponentid=10618&pddoctitle=Hauglum+v.+Durst%2C+769+S.W.2d+646%2C+651+(Tex.+App.-Corpus+Christi+1989%2C+no+writ)&pdproductcontenttypeid=urn%3Apct%3A30&pdiskwicview=false&ecomp=1s39k&prid=5465f32a-2713-48d0-a954-64db0394ff20






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692 (Tex. App. -- San Antonio 1987, no writ); Taylor Publishing Co. v. Systems Marketing, Inc., 686 S.W.2d

213, 217 (Tex. App. -- Dallas 1984, writ ref'd n.r.e.). The anticipatory repudiation may consist of either words

or actions by a party that indicates an intention that he is not going to perform the contract according to its

terms in the future. Builder's Sand, Inc. v. Turtur, 678 S.W.2d 115, 120 (Tex. App. -- Houston [14th Dist.]

1984, no writ); Baytown State Bank v. Don Miller Leasing Co., 551 S.W.2d 771, 774 (Tex. Civ. App. --

Houston [14th Dist.] 1977, writ ref'd n.r.e.). The repudiation must be unconditional and an unequivocal refusal

to perform. Pollack v. Pollack, 39 S.W.2d at 857.

Thus, under the doctrine of anticipatory repudiation, the argument can be made that if the first buyer has

unequivocally declared in writing that the first contract has terminated or that they will not close, then:

• that repudiation of the first contract can be accepted by the seller, thereby terminating the first contract,

• the first buyer therefore has no right to purchase the property and the only dispute would be over the

earnest money and possible monetary damages,

• the seller should be free to sell the property to a second buyer (as the first buyer has no claim or right to

purchase the property), and

• the earnest money under the first contract would continue to be held pending resolution of the dispute.

Therefore, a title company may wish to consider, on a case by case basis and with prior approval by its

underwriter, a request to close the sale to a second buyer. Reasonable requirements may include:

• the first buyer has given a clear written statement that it has terminated the contract or will not close.

• the seller signs an affidavit at closing of the second contract to confirm the first buyer’s repudiation of

the first contract.

• The first buyer has not retracted their repudiation of the first contract.

F. OTHER CONTRACT ISSUES.

1. Property. Paragraph 2 of the Contract describes the “Property” as being the land, the improvements (built

in and attached items), and specific listed accessories such as the stove, keys, and drapes, but not including

refrigerators), but not including listed exclusions.

• A growing issue in the residential market concerns leased items that may otherwise be thought of as

being affixed items but are not owned by the seller, such as security systems, solar panels, water

softeners, and propane tanks.

• Sellers and their agents are often unaware of the importance of disclosing leased items. While the

Texas Realtors® Seller’s Disclosure Notice calls for disclosure of certain leased items, the statutory

form contained in Property Code Section 5.008 does not.

https://advance.lexis.com/document/documentlink/?pdmfid=1000516&crid=1a4095ed-a327-44c7-9b9f-a0b02007c91f&pddocfullpath=%2Fshared%2Fdocument%2Fcases%2Furn%3AcontentItem%3A3S3K-3D50-003C-244K-00000-00&pdpinpoint=PAGE_692_4952&pdcontentcomponentid=10618&pddoctitle=Valdina+Farms%2C+Inc.+v.+Brown%2C+Beasley+%26+Assoc.%2C+733+S.W.2d+688%2C+692&pdproductcontenttypeid=urn%3Apct%3A30&pdiskwicview=false&ecomp=1s39k&prid=778e55d9-323a-4969-8439-040ebd630421





https://advance.lexis.com/document/?pdmfid=1000516&crid=b5d434bc-5f24-436e-a1fc-e8f1530bf293&pddocfullpath=%2Fshared%2Fdocument%2Fcases%2Furn%3AcontentItem%3A3RRH-C2Y0-003C-52D3-00000-00&pddocid=urn%3AcontentItem%3A3RRH-C2Y0-003C-52D3-00000-00&pdcontentcomponentid=10618&pdshepid=urn%3AcontentItem%3A7XWR-3CT1-2NSD-P4V0-00000-00&pdteaserkey=sr4&pditab=allpods&ecomp=xpnqk&earg=sr4&prid=011038b8-9216-42de-88de-65bc1484d263

https://advance.lexis.com/document/?pdmfid=1000516&crid=b5d434bc-5f24-436e-a1fc-e8f1530bf293&pddocfullpath=%2Fshared%2Fdocument%2Fcases%2Furn%3AcontentItem%3A3RRH-C2Y0-003C-52D3-00000-00&pddocid=urn%3AcontentItem%3A3RRH-C2Y0-003C-52D3-00000-00&pdcontentcomponentid=10618&pdshepid=urn%3AcontentItem%3A7XWR-3CT1-2NSD-P4V0-00000-00&pdteaserkey=sr4&pditab=allpods&ecomp=xpnqk&earg=sr4&prid=011038b8-9216-42de-88de-65bc1484d263


• Solar panel leases are becoming an especially significant issue. Homeowners are frequently unaware

that their sale will trigger certain requirements such as:

o to move the panels to their new home (if they have one and at a significant cost),

o to induce the buyer to assume the lease (if they can qualify), but some buyers want the panels

removed and are unwilling to assume the lease, or

o pay a significant termination fee.

• The title company should consider whether known leased items should be excluded from the definition

of land or excepted to in Schedule B.

• TREC Broker Lawyer Committee is currently considering changing the contract forms to address

leased improvements, along with issues surrounding smart home devices and privacy rights.

2. Title and Survey.

• Paragraph 6A. The seller is obligated to furnish the title policy to the buyer at closing subject to the

specified permitted exceptions. Note that Paragraph 6A(9) now permits the policy to contain the

standard mineral exclusion or exception.

• Paragraph 6B. The seller is obligated to furnish to the buyer the Commitment and copies of exception

documents within 20 days after the Title Company receives a copy of the contract (not the Effective

Date), and delivery may be made to the Buyer’s address provided in Paragraph 21.

o Since delivery triggers the time for buyers to make objection, issues may arise as to when the items

were delivered. As stated earlier in this paper, this is a seller obligation, but a seller may be

expecting the title company to perform this function within the time specified by the contract.

• Paragraph 6C. The survey is to be obtained in one of three ways: Using the seller’s existing survey and

a T-47 Affidavit, the buyer obtains the survey, or the seller obtains the survey.

o Paragraph 6C(1) provides for a check the box option as to who will pay for a new survey if the

existing survey is not acceptable to the title company or lender, but makes it clear that if the seller

fails to provide both the existing survey and the T-47, then the seller pays for the survey, regardless

of which box is checked.

o It is a matter of underwriter discretion as to whether the title company will accept an existing survey

where there have been changes to the property since the date of the survey, such as addition of a

pool. Some title companies take a strict approach that any changes will result in a new survey being

required, while others will analyze the nature and character of the improvement and other known

facts. For example, if an existing survey of a typical residential property shows fences surrounding

the backyard along the boundary line, and there are not any easements or setbacks in the backyard,

is a new survey required if a pool has been put in the backyard?


o Paragraph 6C(2) provides “Buyer is deemed to receive the survey on the date of actual receipt or

the date specified in this paragraph, whichever is earlier.” Therefore, failure to obtain the survey

timely could adversely affect buyer’s right to make objections.

• Paragraph 6D. This paragraph was recently amended, and it is important that title companies

understand the new rules. Objections to title and survey matters may be made by the buyer, and the

buyer may terminate due to uncured objections, only in certain circumstances.

o The buyer may not object to survey matters listed in items 6A(1) through (7) of Paragraph 6A, or

to matters disclosed in the Commitment listed in items 6A(1) through (9) of Paragraph 6A, unless

the matter prohibits a use or activity listed in the blank on paragraph 6D.

o The objection period starts once the buyer has received all of the Commitment, Exception

Documents, and Survey.

o Objections must be made within the agreed time specified in Paragraph 6D; failure to object within

the time required is a waiver by buyer, except for Schedule C matters.

o The seller has 15 days to cure title objections. If the seller does not cure title objections within that

15 days, buyer has 5 days either (i) to terminate the contract and receive the earnest money, or (ii)to

waive the objections. Failure to terminate during the 5-day period constitutes a waiver of the

uncured objections.

o If the commitment or survey is revised or new exception documents are delivered, buyer will have

a new objection period as to the new matters, with the objection period being the same as the

original objection period, starting with the delivery of the new item(s).

3. Residential Service Contract. Paragraph 7H provides that the buyer may obtain a residential service

contract. The seller is responsible for paying for the cost up to the agreed amount, but the buyer determines

the company and coverages.

• Escrow agents often will handle this for the buyer. As discussed above with respect to assumed

obligations, if the escrow agent agrees to handle this process, it is strongly suggested that the escrow

agent has established processes to ensure and document that the payment has been made and received,

and that the coverages have been ordered as desired by the buyer.

4. Closing.

• Time for closing.

o The contract specifies many instances where time is of the essence (see, e.g., paragraphs 5 and 23)

but a time is of the essence clause is noticeably absent in both Paragraphs 9 and 15.

o Case law is clear that time is ordinarily not of the essence, and is of the essence only when failure

to timely perform is a material breach, and the mere statement of a date for performance does not

make time of the essence. “Instead, the contract must expressly make time of the essence or there

must be something in the nature or purpose of the contract and the circumstances surrounding it


making it apparent that the parties intended that time be of the essence.” Kennedy Ship & Repair,

L.P. v. Pham, 210 S.W.3d 11 (Tex. App.—Houston [14th Dist.] 2006, no pet.).

o However, recent case law interpreting the TREC form contracts have held that a non-defaulting

party may terminate a contract immediately if the other party fails to close by the designated date

specified in Paragraph 9, as a matter of law based on the wording of the contract without

consideration of other factors, given Paragraph 9A, which states in part: “If either party fails to

close the sale by the Closing Date, the nondefaulting party may exercise the remedies contained in

Paragraph 15.” Capcor at KirbyMain, L.L.C. v. Moody Nat'l Kirby Hous. S, L.L.C., 509 S.W.3d

379 (Tex. App.—Houston [1st Dist.] 2014, no pet.); Manor v. Manor, No. 02-18-00056-CV, 2019

Tex. App. LEXIS 9183 (Tex. App.—Fort Worth Oct. 17, 2019)

• Manner of performance. The Capcor case also held that the escrow agent had the right to require wired

funds instead of a cashier’s check and that the notice that a wire was required on the day before closing

was reasonable. In Capcor, the buyer argued that the escrow agent breached its fiduciary duty as

settlement agent by failing to disclose until just before closing its requirement that the buyer’s funds

must be wired. While the court ruled in favor of the escrow agent, the court analyzed this issue as a

fact issue for the jury to consider and it held there was evidence to support the jury’s finding that the

escrow agent acted properly in that case. As another jury might hold differently, escrow agents may

want to notify parties well ahead of closing (and document the notification) as to the type of funds that

will be required, as well as any other closing requirements the escrow agent may have.

5. Foreign persons. Paragraph 20 provides that if the seller is a “foreign person” as defined by Internal

Revenue Code and its regulations, or fails to deliver a certificate of nonforeign status to Buyer that Seller

is not a "foreign person,” then the buyer shall withhold from the sales proceeds an amount sufficient to

comply with applicable tax law and deliver the same to the Internal Revenue Service together with

appropriate tax forms.

• The contract does not require the escrow agent to handle this process and some escrow agents may

disclaim responsibility to do so.

o This paper does not address whether an escrow agent or title company may disclaim

responsibility for IRS withholding in this situation.

o As discussed above with respect to assumed obligations, if the escrow agent agrees to handle

this process, it is strongly suggested that the escrow agent has established processes to ensure

and document that the payment has been made and appropriate forms timely filed with IRS.

6. Commissions. The BROKER INFORMATION page attached after the signature page is not signed by any

party and is not a part of the contract. The notation at the bottom that identifies the commission to be paid

by the listing broker to the other broker is a helpful tool to use in preparation for closing but is not binding

in the event of a dispute between brokers. TREC Broker Lawyer Committee is currently considering

changes to the contract forms to address this issue.


APPENDIX A


APPENDIX B

Government Code Sec. 83.001. PROHIBITED ACTS.

(a) A person, other than a person described in Subsection (b), may not charge or receive, either directly or

indirectly, any compensation for all or any part of the preparation of a legal instrument affecting title to real

property, including a deed, deed of trust, note, mortgage, and transfer or release of lien.

(b) This section does not apply to:

(1) an attorney licensed in this state;

(2) a licensed real estate broker or salesperson performing the acts of a real estate broker pursuant to

Chapter 1101, Occupations Code; or

(3) a person performing acts relating to a transaction for the lease, sale, or transfer of any mineral or

mining interest in real property.

(c) This section does not prevent a person from seeking reimbursement for costs incurred by the person to retain

a licensed attorney to prepare an instrument.

_________________________________________________

Occupations Code Sec. 1101.155. RULES RELATING TO CONTRACT FORMS.

(a) The commission may adopt rules in the public's best interest that require license holders to use contract forms

prepared by the Texas Real Estate Broker-Lawyer Committee and adopted by the commission.

(b) The commission may not prohibit a license holder from using for the sale, exchange, option, or lease of an

interest in real property a contract form that is:

(1) prepared by the property owner; or

(2) prepared by an attorney and required by the property owner.

(c) A listing contract form adopted by the commission that relates to the contractual obligations between a seller

of real estate and a license holder acting as an agent for the seller must include:

(1) a provision informing the parties to the contract that real estate commissions are negotiable; and

(2) a provision explaining the availability of Texas coastal natural hazards information important to

coastal residents, if that information is appropriate.

http://www.statutes.legis.state.tx.us/GetStatute.aspx?Code=OC&Value=1101


_________________________________________________

Occupations Code Sec. 1101.654. SUSPENSION OR REVOCATION OF LICENSE OR CERTIFICATE FOR

UNAUTHORIZED PRACTICE OF LAW.

(a) The commission shall suspend or revoke the license or certificate of registration of a license or certificate

holder who is not a licensed attorney in this state and who, for consideration, a reward, or a pecuniary benefit,

present or anticipated, direct or indirect, or in connection with the person's employment, agency, or fiduciary

relationship as a license or certificate holder:

(1) drafts an instrument, other than a form described by Section 1101.155, that transfers or otherwise

affects an interest in real property; or

(2) advises a person regarding the validity or legal sufficiency of an instrument or the validity of title to

real property.

(b) Notwithstanding any other law, a license or certificate holder who completes a contract form for the sale,

exchange, option, or lease of an interest in real property incidental to acting as a broker is not engaged in the

unauthorized or illegal practice of law in this state if the form was:

(1) adopted by the commission for the type of transaction for which the form is used;

(2) prepared by an attorney licensed in this state and approved by the attorney for the type of transaction

for which the form is used; or

(3) prepared by the property owner or by an attorney and required by the property owner.

http://www.statutes.legis.state.tx.us/GetStatute.aspx?Code=OC&Value=1101.155


APPENDIX C

Texas Administrative Code

TITLE 22 EXAMINING BOARDS

PART 23 TEXAS REAL ESTATE COMMISSION

CHAPTER 537 PROFESSIONAL AGREEMENTS AND STANDARD CONTRACTS

RULE §537.11 Use of Standard Contract Forms

(a) When negotiating contracts binding the sale, exchange, option, lease or rental of any interest in real property,

a real estate license holder shall use only those contract forms approved for mandatory use by the Texas Real

Estate Commission (the Commission) for that type of transaction with the following exceptions:

(1) transactions in which the license holder is functioning solely as a principal, not as an agent;

(2) transactions in which an agency of the United States government requires a different form to be used;

(3) transactions for which a contract form, or addendum to a contract form, has been prepared by a property

owner or prepared by a lawyer and required by a property owner; or

(4) transactions for which no mandatory contract form or addendum has been approved by the

Commission, and the license holder uses a form:

(A) prepared by a lawyer licensed by this state, or a trade association in consultation with one or

more lawyers licensed by this state, for the particular type of transactions involved that contains:

(i) the name of the lawyer or trade association who prepared the form;

(ii) the name of the broker or trade association for whom the form was prepared;

(iii) the type of transaction for which the lawyer or trade association has approved the use

of the form;

(iv) any restrictions on the use of the form; and

(v) if it is an addendum that changes the rights, obligations or remedies of a party under a

contract or addendum form approved by the Commission for mandatory use, the form

must also include:

(I) a statement about how the addendum changes the rights, obligations or

remedies of a party, with a reference to the relevant paragraph number in the

mandatory use form;

(II) a statement that the form is not a mandatory Texas Real Estate Commission

form; and

(III) a statement that Commission rules prohibit real estate license holders from

giving legal advice; or

(B) prepared by the Texas Real Estate Broker-Lawyer Committee (the committee) and approved

by the Commission for voluntary use by license holders.

(b) A license holder may not:

(1) practice law;

(2) directly or indirectly offer, give or attempt to give legal advice;

(3) give advice or opinions as to the legal effect of any contracts or other such instruments which may

affect the title to real estate;

(4) give opinions concerning the status or validity of title to real estate;

(5) draft language defining or affecting the rights, obligations or remedies of the principals of a real estate

transaction, including escalation, appraisal or other contingency clauses;

(6) add factual statements or business details to a form approved by the Commission if the Commission

has approved a form or addendum for mandatory use for that purpose;

(7) attempt to prevent or in any manner whatsoever discourage any principal to a real estate transaction

from employing a lawyer; or

(8) employ or pay for the services of a lawyer, directly or indirectly, to represent a principal to a real

estate transaction in which the license holder is acting as an agent.

https://texreg.sos.state.tx.us/public/readtac$ext.ViewTAC?tac_view=2&ti=22

https://texreg.sos.state.tx.us/public/readtac$ext.ViewTAC?tac_view=3&ti=22&pt=23

https://texreg.sos.state.tx.us/public/readtac$ext.ViewTAC?tac_view=4&ti=22&pt=23&ch=537


(c) This section does not limit a license holder's fiduciary obligation to disclose to the license holder's principals

all pertinent facts that are within the knowledge of the license holder, including such facts which might affect the

status of or title to real estate.

(d) It is not the practice of law for a license holder to fill in the blanks in a contract form authorized for use by this

section. A license holder shall only add factual statements and business details or shall strike text as directed in

writing by the principals.

(e) This section does not prevent the license holder from explaining to the principals the meaning of the alternative

choices, factual statements and business details contained in an instrument so long as the license holder does not

offer or give legal advice.

(f) When a transaction involves unusual matters that should be reviewed by a lawyer before an instrument is

executed, or if the instrument must be acknowledged and filed of record, the license holder shall advise the

principals that each should consult a lawyer of the principal's choice before executing the instrument.

(g) A license holder may employ and pay for the services of a lawyer to represent only the license holder in a real

estate transaction.

(h) A license holder shall advise the principals that the instrument they are about to execute is binding on them.

(i) Forms approved by the Commission may be reproduced only from the following sources:

(1) electronically reproduced from the files available on the Commission's website;

(2) printed copies made from copies obtained from the Commission;

(3) legible photocopies made from such copies; or

(4) computer-driven printers following these guidelines:

(A) The computer file or program containing the form text must not allow the end user direct

access to the text of the form and may only permit the user to insert language in blanks in the

forms. Blanks may be scalable to accommodate the inserted language. The Commission may

approve the use of a computer file or program that permits a principal of a license holder to strike

through language of the form text. The program must be:

(i) limited to use only by a principal of a transaction; and

(ii) in a format and authenticated in manner acceptable to the Commission.

(B) Typefaces or fonts must appear to be identical to those used by the Commission in printed

copies of the particular form.

(C) The text and order of the text must be identical to that used by the Commission in printed

copies of the particular form.

(D) The name and address of the person or firm responsible for developing the software program

must be legibly printed below the border at the bottom of each page in no less than six point type

and in no larger than 10 point type.

(j) Forms approved or promulgated by the Commission must be reproduced on the same size of paper used by the

Commission with the following changes or additions only:

(1) The business name or logo of a broker, organization or printer may appear at the top of a form outside

the border.

(2) The broker's name may be inserted in any blank provided for that purpose.

(k) Standard Contract Forms adopted by the Commission are published by and available from the Commission at

P.O. Box 12188, Austin, Texas 78711-2188 or www.trec.texas.gov.


Source Note: The provisions of this §537.11 adopted to be effective January 1, 1976; amended to be effective

January 4, 1983, 7 TexReg 4462; amended to be effective October 20, 1983, 8 TexReg 3999; amended to be

effective May 16, 1985, 10 TexReg 1419; amended to be effective August 1, 1985, 10 TexReg 1075; amended to

be effective May 19, 1986, 11 TexReg 2093; amended to be effective February 12, 1987, 12 TexReg 346; amended

to be effective October 5, 1990, 15 TexReg 5483; amended to be effective September 1, 1992, 17 TexReg 2394;

amended to be effective February 1, 1994, 18 TexReg 8200; amended to be effective September 1, 1994, 19

TexReg 3576; amended to be effective March 1, 1995, 19 TexReg 9996; amended to be effective January 3, 1996,

20 TexReg 11016; amended to be effective January 1, 1998, 22 TexReg 10133; amended to be effective September

1, 1998, 23 TexReg 6956; amended to be effective March 1, 1999, 23 TexReg 13075; amended to be effective

January 1, 2000, 24 TexReg 9001; amended to be effective April 19, 2000, 25 TexReg 3270; amended to be

effective September 1, 2000, 25 TexReg 6700; amended to be effective April 1, 2001, 26 TexReg 978; amended

to be effective February 1, 2002, 26 TexReg 9383; amended to be effective April 1, 2003, 28 TexReg 677; amended

to be effective April 1, 2004, 29 TexReg 2013; amended to be effective September 1, 2004, 29 TexReg 8301;

amended to be effective May 1, 2006, 31 TexReg 1445; amended to be effective December 27, 2006, 31 TexReg

10299; amended to be effective September 1, 2010, 35 TexReg7800;amended to be effective December 10, 2014,

39 TexReg 9530; amended to be effective May 15, 2018, 42 TexReg 6805