Many clients across Texas are in limbo due to the recent extreme winter weather. And while every situation is different, here are sections in the TREC One to Four Family Residential Contract (Resale) and related addenda that might apply to these transactions. The Texas REALTORS® commercial contracts and other TREC contracts have similar provisions.
Please call the Texas REALTORS® Legal Hotline (800-873-9155) for additional help understanding how you and your clients can proceed.
Property Damage
If any part of the property is damaged or destroyed while under contract, Paragraph 14 deals with casualty loss. The Casualty Loss paragraph will require the seller to restore the property to its previous condition as soon as reasonably possible. Under the circumstances, that may not be feasible. If that is the case, this paragraph provides the buyer with three options:
- Terminate and receive a refund of the earnest money.
- Extend the time for performance up to 15 days, which extends the closing date.
- Accept the property in its damaged condition with an assignment of insurance proceeds, if permitted by the insurance carrier, and receive a credit from the seller at closing in the amount of the deductible.
Third-Party Financing
Keep in mind that the property will still need to meet the lender’s underwriting requirements for the loan if the contract is subject to the Third Party Financing Addendum. If so, the lender may require re-inspections, re-appraisals, or repairs.
Property Approval
Under the Third Party Financing Addendum, if the property approval is not obtained, the buyer may terminate the contract by providing notice to the seller not later than three days before closing and the buyer will receive a refund of the earnest money. If the closing is approaching, but the property has not yet met the lender’s underwriting requirements, the buyer will need to consider whether to terminate the contract or submit an amendment to delay the closing. The buyer is obligated to make every reasonable effort to communicate with their lender regarding the status of the loan.
Paragraph 12 of the One to Four Family Residential Contract (Resale) provides that appraisal fees, loan-related inspection fees, final compliance inspection, repair inspection, and expenses incident to any loan are expenses payable by the buyer. However, the parties may have agreed for the seller to pay up to a certain amount of the buyer’s expenses.
Lender Repairs
The lender may require certain repairs to be completed prior to approving the loan. Under Paragraph 7E of the One to Four Family Residential Contract (Resale), neither party is obligated to pay for these repairs unless they have agreed otherwise in writing. If that is the case, the contract will terminate and the buyer will receive a refund of the earnest money. In addition, if the cost of the lender required repairs exceeds 5% of the sales price, the buyer may terminate and receive a refund of the earnest money.
In most cases, delays with performance and closing may occur. It is important for the agents to communicate with all those involved in the transaction, including the other agent, the title company, the lender, and the parties’ attorneys.
If the parties are not using a TREC or Texas REALTORS® contract and the contract does not expressly provide for the rights and duties when all or a material part of the property is destroyed without fault of the parties, the Texas Vendor and Purchaser Risk Act will apply. The act protects the purchaser of real estate when there is a binding contract and the property is destroyed before the purchaser has taken legal title.
Temporary Leases
If clients are under a temporary lease agreement, review the following provisions regarding repairs:
- Paragraph 14, Repairs and Maintenance, provides that “Except as otherwise provided in this Lease, Tenant shall bear all expense of repairing and maintaining the Property…unless otherwise required by the Texas Property Code.” However, the Texas Property Code requires a landlord to make a diligent effort to repair and remedy a condition if the condition materially affects the physical health of safety of an ordinary tenant as long as other conditions are met.
- Under a Buyer’s Temporary Residential Lease,
Paragraph 18, Termination, the lease may terminate if the contract terminates prior to closing.
Other Resources
You can share with your clients that the State Bar of Texas legal hotline (800-504-7030) will answer their basic legal questions and connect them with local legal aid providers. And you, as members of Texas REALTORS®, can call the Legal Hotline (800-873-9155) for help understanding how you and your clients can proceed.
Paragraph 6 (D) is one of the most misunderstood sections in the TREC One to Four Family Residential Contract.
License holders use this section to “get out “of the agreement (for example, entering the clause “single-family residential use, or single-family use”). Unfortunately, this practice is not advised or necessary to add to the blank line.
The purpose of this article is to create a broader comprehension of this paragraph to help your business and assist your consumers.
OBJECTIONS: Buyer may object in writing to defects, exceptions, or encumbrances to title: disclosed on the survey other than items 6A(1) through (7) above; disclosed in the Commitment (title) other than items 6A(1) – (9) above, or which prohibit the following use or activity:
To fully understand Paragraph 6, we will need to dissect its meaning.
Defects to title – The defect on title refers to a lien (claim), mortgage or judgment. A title defect can create several issues which can result in the property not being able to legally transfer to someone else.
Exceptions to title – An exception is something that will not be covered in the title policy and Schedule B.
Examples: taxes, covenants, conditions, and restrictions (CC&Rs), easements, reservations, and deed restrictions.
Encumbrances (burdens) to title – An encumbrance is a claim or lien that limits the use of a property.
Examples: encroachment (intrusions), liens (mech liens), easements, and restrictive covenants.
Survey – A detailed description of a property. The survey reveals the land dimensions and the location of any improvements, driveways, easements, adjacent roads, and right -a-ways for utilities.
Items not for Objections (other than) 6A(1) through (7):(1) Restrictive covenants that are common to the platted subdivision in which the Property is located.
Examples: Residential dwellings, no detached garages, brick homes, size, materials.
(2) The standard printed exception for standby fees, taxes, and assessments.
(3) Liens created as part of the financing described in Paragraph 3.
(4) Utility easements created by the dedication deed or plat of the subdivision in which the Property is located.
(5) Reservations or exceptions otherwise permitted by this contract or as may be approved by Buyer in writing.
(6) The standard printed exception as to marital rights.
(7) The standard printed exception as to waters, tidelands, beaches, streams, and related matters.
(8) The standard printed exception as to discrepancies, conflicts, shortages in area or boundary lines, encroachments or protrusions, or overlapping improvements:
(i) will not be amended or deleted from the title policy; or (ii) will be amended to read, “shortages in area” at the expense of x Buyer x Seller.
(9) The exception or exclusion regarding minerals approved by the Texas Department of Insurance.
Title commitment schedules and meanings:SCHEDULE A
Schedule A of the commitment shows details of the transaction.
Section 1 of Schedule A lists the types of policies that are going to be issued (Owner’s Title Policy and/or Lender’s Title Policy). A real estate professional should review this to be sure that their buyer’s name and the sales price are shown accurately.
Section 2 of Schedule A shows the type of interest the buyer will receive i.e. “Fee Simple.”
Section 3 of Schedule A shows who the legal owner of the property is. This is especially important to both the listing and selling agent. They should make sure the names and owners match the contracts. There are several reasons why the names and owners will not be correct, such as death, divorce, bankruptcy, or marriages.
Section 4 of Schedule A shows the legal description, lot and block, metes and bounds, or rectangular government survey. Real property is described by the legal description and that controls the transaction, never the physical property address.
SCHEDULE B
Schedule B is directed to the buyer and lender that will receive a title policy. This schedule includes the EXCEPTIONS to the policy.
An exception is something that will not be covered in the title policy. A “standard exception” is one that includes promulgated language from the Texas Department of Insurance.
Specific exceptions include restrictions, easements, mineral severances, and setback requirements.
SCHEDULE C
Schedule C can be thought of as the “Clear to Close” because it is a list of items that must be addressed before or at closing so the policy can be issued.
These are called REQUIREMENTS. This section lists the items that may need to be cured. Such as mortgage liens, tax liens, abstracts of judgment, and special assessment liens.
Sellers should pay special attention to this schedule it can also be used as a checklist to guide them through the tasks. Many issues are easily resolved by the closers like a payoff statement on an existing lien or tracking down certified copies of documents. More difficult issues may require the seller and/or listing agent to assist.
SCHEDULE D
Schedule D is the discloser portion and outlines the parties who have a share in any part of the title premiums, including underwriters and title agents.
In conclusion, the purpose of this section is not used to state residential use or single-family dwelling. The title policy (commitment) or survey does not germinate the usage of the property. The proper use would be to identify issues in the survey or title commitment that could prevent the buyer from full usage of the property.
For example, the buyer wants to install a pool, however, the survey reveals a utility easement that could prevent the buyer from doing so. Another example, the title commitment shows a judgment on the property. The buyer would want that cleared before closing. Remember when in doubt consult legal counsel.
This article on Paragraph 6 of One to Four Family Residential Contract is intended for reference only, and should not be considered a substitute for legal or title underwriter advice that is based on specific facts of a transaction.