TREC Contract Changes - Mandatory April 1st, 2021
TREC CONTRACT CHANGES
What TREC forms changed? Changes have been made to all TREC residential forms, including one to four family, new home, farm and ranch and condominium contract forms. Minor revisions have also been made to the Buyer’s Termination of Contract form, and the Short Sale Addendum.
Are there any new TREC forms? Yes, TREC has adopted two new forms, the Addendum Regarding Residential Leases and the Addendum Regarding Fixture leases. More info on these forms appear below.
When will the new forms be available for use? The new forms will be officially published and available for use some time after February 16, and mandatory after April 1. Prior to February 16, Realtors MAY NOT USE THE NEW FORMS; therefore, there should be no change in the title company’s regular routine when dealing with earnest money and option fees, i.e. earnest money should be paid to and held by the title company, and option fee should be paid to and held by the seller.
PRACTICE NOTE: After the new forms are available, the title company must check to see which contract form is presented to us; if it is the new form, then we can accept option fee; however, if the old form is used for a transaction, we cannot accept option fee; it must go to seller as the old form requires, unless the parties replace the old contract with a new contract.
What is the biggest significant change? Earnest Money and Option Fee Procedures
Earnest Money and Option Fee
a.) Current Practice - The current TREC contracts require the Earnest Money to be delivered to Title Company within 3 days of Effective Date, with consideration being given to intervening weekends/holidays (Par. 5). However, Option Fees are to be delivered to the Seller within 3 days of Effective Date, with NO consideration given to intervening weekends/holidays (Par. 23). The separate destinations and time periods of these two payments proved difficult to facilitate, and often two different modes of payment (Zoccam for EM, check for Option Fee).
b.) New Practice - The new contract forms combine Par. 5 and 23 together into a New Par. 5. Both EM and Option Fee shall now be paid to the Title Company, and can be combined together or paid separate. The time for delivery is now the same for each, utilizing the current rule for Earnest Money.
Practice Note: Realtors will no doubt avail themselves more and more to combination payments made electronically through Zoccam, due to ongoing COVID issues and the fact that option fee no longer must be delivered separately to seller.
c.) Option Fee Release to Seller - The Seller can request the Title Company to release the Option Fee to Seller at any time after contract execution and deposit, without Buyer’s approval; however, Title Company is not REQUIRED to pay it to Seller until they are assured, in their reasonable business judgment, that funds are good (Par. 18A and Rule P-27). See Practice Note below.
Practice Note: If Seller requests the Option Fee, Title Company must still comply with P-27 of the Texas Department of Insurance; the fund must be “good funds” prior to disbursement and the Title company must make sure Buyer’s payment has cleared before disbursing funds. In order to assure compliance with TDI regulations, Rattikin Title will require that a closing team wait at least five (5) business days before releasing Option Fees (or Earnest Money, for that matter), to any party, whether the fees are paid by check or Zoccam. If a closing is set for a quick close (e.g. closing in five days or less from order entry), the parties need to pay all fees by wire transfer to assure that they can be applied to the Closing.
Practice Note: Since Option Fees are typically somewhat nominal ($100), most sellers won’t ask for its release during the pendency of the transaction, but rather will allow it to sit with title company and be applied at closing. We as a company will assume that we are to hold the Option Fee unless directed otherwise, and will gladly forward to seller if/when asked (subject to above). But we will typically refrain from proactively inquiring as to Seller’s intent for each and every transaction, necessitating more work for our Realtor clients; we will wait for their affirmative direction.
d.) Credit of Option Fee to Sales Price-Regardless of whether the Option Fee is delivered to the Seller or retained by Title Company, the Option Fee SHALL be automatically credited to the Sales Price at closing. There is no longer an option box to check as to whether it will be applied or not.
Practice Note: If the option fee is forwarded to Seller prior to closing (per Seller’s request), the CD should reflect a credit to Buyer and a debit to seller (since the option fee is applied to Sales Price and Seller has already received it). However, if Title Company remains in possession of the option fee, the CD should reflect a credit to buyer, but no corresponding debit to seller. It would be treated just like EM paid into escrow, and would not appear on the seller’s side of the CD.
e.) Receipt of Earnest Money and Option Fee- The new TREC forms have separate sections to receipt the contract, earnest money and the option fee.
Practice Note: Title company should receipt the Earnest Money, Option Fee and Contract all separately. If any of these items are slipped under the door at night or weekend, we must date our receipt as of the day we discover the delivery unless the delivering party can PROVE it was delivered on a prior day. Now that title company is responsible for the Option Fee, date of delivery will often be critical to Buyer’s right to terminate during option period.
Other Significant Contract Changes:
a.) Leases - a new Paragraph 4 had been inserted into the contract forms, dealing with three types of leases:
Fixture Leases (improvements on the property but leased, not owned, by seller), such as security systems, solar panels, water softeners and propane tanks;
Residential Leases between seller as landlord and a third party tenant;
Natural Resources Leases, including oil and gas, water and wind leases
The old Par. 4, where a party must disclose if they are a licensed broker or agent, was moved to par. 8A.
b.) New Addendums - The new Par. 4 includes a checkbox if any of the three lease types affect the property in question. If a fixture or residential lease is in effect, then the new addendums must be attached. IMPORTANT: THESE ADDENDUMS CONTAIN EVEN MORE OPPORTUNITIES FOR BUYERS TO TERMINATE FOR ANY REASON!!
The Fixture Addendum requires Seller to deliver a copy of the leases before contract signing, or within 5 days after contract signing, and Buyer has 7 days to terminate the contract after receiving a copy of the lease. This is an absolute right to terminate for any reason separate and apart from the Option Period, similar to the 7 day period after receiving the Seller’s Disclosure Notice if not supplied prior to contract. Since solar panel leases are so convoluted, the parties are encouraged to review the leases in advance so they have time to figure out how to deal with the harsh requirements by contract.
The Residential Lease Addendum will include two checkboxes; either the existing lease will be terminated prior to closing (with a note suggesting that seller consult with an attorney to determine whether the lease CAN be terminated prior to closing) or that the buyer will assume seller’s role as landlord under the lease. If a residential lease is in effect, Seller must deliver a copy of it before contract signing, or within 3 days after contract is signed, and Buyer has ___ days to terminate the contract after receiving a copy of the lease. This is an absolute right to terminate for any reason separate and apart from the Option Period, similar to the 7 day period after receiving the Seller’s Disclosure Notice if not supplied prior to contract. Seller must keep buyer updated if the lease status changes during contract time, and must transfer all security deposits at closing. One problem is that the Addendum contains certain representations of Seller as to the status of lease, but does not require TENANT to certify that status (a “Tenant Estoppel Certificate”, as is usually required in commercial transactions). Buyers may want to check the veracity of lease status with existing tenants.
The new Par. 4 adds that if a Natural Resource Lease (oil and gas) is in effect, Seller must deliver a copy of it before contract signing, or within 3 days after contract signing, and Buyer has ___ days to terminate the contract after receiving a copy of the lease. This is an absolute right to terminate for any reason separate and apart from the Option Period, similar to the 7 day period after receiving the Seller’s Disclosure Notice if not supplied prior to contract. Seller must only provide copies of mineral leases SELLER has signed, not previous leases.
PRACTICE NOTE: I foresee panicked sellers/agents scrambling to find a copy of their oil and gas leases, and will ask Title Company to find a copy for them. Typically, we will not have access to them, as most of the time only a Memorandum of Lease is filed, which is not enough. The Seller needs to obtain copies of all mineral leases at time of listing, prior to any contract.
c.) Smart Apps - In Par. 2, there is a clarification of the fact that software, hardware and apps used to control certain improvements and accessories are included in the sale and must be transferred, such as pool heating/lighting controls/apps, water sprinkler controls/apps, Ring or Nest-type security systems, automatic window shades, fan controls, etc. Sometimes these controls are separate remotes, and other times they are wall-mounted screen systems. Either way, they must be transferred; however, only the hardware that is used exclusively to control improvements and accessories must be transferred, not an iPhone, iPad or Alexa, for example. Further, Par. 10 C., requires all passwords to such devices to be transferred at time of possession, along with Seller’s responsibility to remove such codes and connections from their personal devices.
Author’s Note: Although somewhat unclear, since televisions, stereos and other audio video equipment are not automatically included in a sale (except for brackets and built-in speakers), I do not believe AV control systems such as a “Control4” box, Apple TV device or remote controls are to be transferred unless the AV equipment is included in a Non-Realty Addendum. - Jeff Rattikin, Attorney At Law
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.