TREC Contract Changes: Steps in the Right Direction

Published on: 05.20.2018
TREC Contract Changes: Steps in the Right Direction

As of May 15, 2018, the new TREC residential contract forms are mandatory for use in Realtor-negotiated residential contracts in Texas. While these forms are designed for use by licensed real estate professionals, many consumers (and attorneys, for that matter) rely on the forms as a well-balanced, comprehensive document to facilitate the sale and purchase of homes and other forms of residential and farm and ranch property.

This article shall summarize the recent changes to the forms, focusing on the TREC One-to-Four Family Residential Contract. Other TREC forms contain the same changes. There are a few changes of relative inconsequence; as a result, those revisions will not be highlighted here.

1. The Effective Date box above the parties’ signature has been modified to make clear that the date placed in the box, which should correspond to the last date both parties have signed and initialed all pages and changes thereto, is a defined term (“Effective Date”) for purposes of calculating time deadlines throughout the Contract.

2. Paragraph 2 of the Contract adds a section, 2E, making clear that if the Seller desires to retain minerals, he or she must use the mineral reservation addendum rather than just adding the word “minerals” to the Exclusions section (2D). The reason? An agreement to reserve minerals needs to include many more details (as found in the addendum) than just one word.

3. MAJOR CHANGE: Prior to these new forms, the TREC contract was silent as to how many days a buyer had to deliver Earnest Money to the Escrow Agent. Such omission has led to many disagreements, as Sellers sought to terminate contracts prior to the Earnest Money being deposited in order to accept later, more attractive offers. Under the new changes, the Buyer is allowed three days to deliver the Earnest Money to the Escrow Agent (typically the title company). Please note that the time period is not three BUSINESS DAYS; just three calendar days. HOWEVER, if the LAST day to deliver Earnest Money is a Saturday, Sunday or legal holiday, the deadline is extended to the next day that is not a Saturday, Sunday or legal holiday. Some pointers:

a. Unless otherwise agreed, a Buyer would have until 11:59 PM to deliver the Earnest Money on the last day of the period; however, because delivery after-hours to a closed title company is both difficult and hard to prove, Buyers are encouraged to deliver the Earnest Money during the normal business hours of the title company.

b. Buyers should ask that a title company not only date the receipt of Earnest Money on the receipt page following signatures, but add the time of day the Earnest Money was received. The new Receipt language has been modified to include a place for date and time, and title companies should routinely include both bits of information when receipting Earnest Money.

c. What is a legal holiday? The safest guideline would be to consider legal holidays to be days that banks and post office are closed; however, it is highly suggested that if the title company is open for business on one of those days, such as Columbus Day or President’s Day the Earnest Money should be delivered on that day.

4. Paragraph 6A, dealing with exceptions to any title insurance policy issued as part of a transaction, has been expanded to include 6A(9), providing that every title policy can (and will) include a Dept. of Insurance-approved exception to minerals. With this addition, Buyers can no longer successfully object to the regulatory exclusion; however, if the title commitment contains other exceptions specifically describing certain mineral issues, a Buyer should still be able to object to those.

5. Paragraph 6D was modified to clarify the procedures and time deadlines Sellers face in attempting to cure any title/survey objections made by Buyer. One item of note: if objections are made and Seller is unable/unwilling to cure, the former contract called for an automatic termination of the contract. The new changes do not allow for an automatic termination; rather the Buyer is given an election of whether or not to terminate. And a practice pointer: Make sure Buyer is given enough time to review, digest and seek legal assistance on a title commitment; a short deadline inserted in 6D may effectively cause title issues to be inadvertently waived by not timely objecting.

6. Two new Addendums (highlighted below) have been promulgated for use, and are now included in the list of potential addendums in Par. 22.

7. Since presumably the Earnest Money may often be delivered to the title company separately from the contract (due to the three day allowance), the Receipt section has been divided into two separate boxes. Title companies are encouraged to “time stamp” their receipt of Earnest Money to reflect the time of actual delivery.

8. TREC Farm and Ranch contracts are now constructed to provide for the use of the normal TREC mineral reservation addendum when appropriate; that addendum has heretofore been discouraged in farm and ranch transactions.

9. A new Addendum has been promulgated, the Addendum for Authorizing Hydrostatic Testing. This addendum (along with language in Par. 7A of the Contract) requires the Seller to consent before any hydrostatic testing is performed on behalf of Buyer during an inspection. Such testing is feared to potentially cause damage to the plumbing system, so the Seller needs to agree to such testing. The Addendum contains a choice as to who is responsible for damages to the system. The suggestion would be for Buyer to be responsible for all damages occurring during its inspection.

10. MAJOR ADDITION: Due to recent market competition, Buyers have often submitted contract offers above listing price in order to sway the Seller into accepting their offer. However, if Buyers are willing to pay a price over and above a listing price, there is often a chance that the property will not appraise for that inflated price. In addition, Sellers have long wrestled with the problem that many appraisers retained by non-local lenders undervalue many properties due to an unfamiliarity with local market nuances. Licensed real estate agents have struggled to draft wording to deal with the inevitable low appraisals, so TREC has finally offered up an Addendum to cover the issue, including three different options depending on the parties’ needs. Of particular note is that none of these options require a modification of the sales price based on the appraisal; rather, the parties adjust (raise) the cash down payment a buyer pays in order to satisfy the lender’s loan -to-value ration requirements. The first option calls for the Buyer to agree to pay any amount necessary to convince a lender to fund a loan at the agreed Sales Price; the second option limits how much extra a Buyer may be required to pay; and the third option allows a Buyer to unilaterally terminate the transaction if the property doesn’t appraise for a certain value, regardless of what the lender is willing to do.

11. Two new TREC forms are on the way as well: The TREC Buyer’s Termination form adds sections dealing with Buyer’s right to terminate based on the Appraisal Addendum (discussed above), and the right to terminate due to an uncured title objection. Lastly, TREC is in the process of unveiling its first ever form for Seller’s use in terminating a contract due to Buyer’s default. In the past, TREC refrained to issue such a form, since it requires a legal determination that a Buyer is in default before a Seller can exercise the right to terminate. The new form includes two options: the first allows a Seller to terminate due to Buyer failing to timely deliver Earnest Money, and the second allows Seller to terminate for any other specified reason. Sellers are encouraged to specify with particularity the alleged default, rather than just listing a paragraph number.

All in all, the newest TREC revisions continue to refine the contract forms into one of the better sets of promulgated forms available in the industry, and are recommended for use in most customary residential transactions.

Jeffrey A. Rattikin is an AV Pre-eminent rated attorney, Board -Certified in Residential Real Estate Law by the Texas Board of Legal Specialization. Mr. Rattikin has provided transactional legal services to clients across the State of Texas for over 28 years, emphasizing real estate, business and title law. Mr. Rattikin continues to define new legal frontiers through his incorporation of technology to enhance the attorney-client experience, as evidenced by his firm’s innovative websites www.rattikinlaw.com and www.texaslegaldocs.com.

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