Charles J. Jacobus

TEXAS REAL ESTATE LAW 11E

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Chapter 9

Contracts for the Sale of Real Estate

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Contracts, Generally

A deliberate or voluntary agreement between competent parties, made on a sufficient legal consideration, to do or not to do a particular act or thing.

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Creation – Four Essential Elements

Competent Parties Legal Subject Matter

Consideration Mutual Assent

At least 18 (some exceptions)SaneSoberRead and understand contract

Contract for illegal purpose is voidAs if it never existedChange of law terminates offerContract to commit tort is void

Thing of value given for a promiseDoes not have to be moneyUnilateral–promise for performanceBilateral–promise for a promise

Offer and acceptanceMeeting of the mindsMost difficult elementMany factors involved

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Let’s Focus on Mutual Assent

• Meeting of the minds – parties agreed on all material items• Offer and acceptance – one party offers and the other party accepts• Offeror makes the offer and offeree receives the offer• Offer must be: (1) communicated to a specific offeree

(2) intended to be a serious offer (3) definite enough to be accepted by the offeree

• Offer creates the power of acceptance• Cannot merely be an invitation for offers• Cannot be made in jest, while drunk, or on a dare• Buyer often makes offer by submitting signed contract to seller• Offer is not a contract• Offer may be terminated by acts of the parties or operation of law• Without specific time specified an offer is open “for a reasonable time”• Offer may be revoked prior to acceptance• Offer may be rejected by the offeree• Offeree may make a counteroffer (a form of rejection)• Offer is terminated by death, insanity, or change in law• Acceptance must be unconditional and communicated• No fraud, mutual mistake, duress, menace, undue influence

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Rules for the Construction of Contracts

• Reasonable Time – usually a fact question for a jury to decide

• Validity – contracts are construed in favor of upholding the contract

• Four Corners Doctrine – the instrument must be read in its entirety

• Interlineations – stand on an equal footing with remainder of contract

• Against Maker – with an unclear provision court will rule against maker

• Parol Evidence Rule – oral evidence or additional writings not allowed

• Printed Versus Typed – typed over printed and hand written over all

• Effective Date – when both parties have signed or broker inserts date

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Legal Effect

Valid

UnenforceableVoid

Voidable

A contract that never was Has no legal effectLacks an essential elementRemedy is reversion and restore

May be made void by one partyMost invalid contracts are voidable Contracts by minors are voidableRemedy is reversion and restore

Cannot be enforced by either partyNot performed in statutory period (2 years for oral 4 years for written)Laches - unreasonable delayRemedy is cancellation

Enforceable by both partiesHas all essential elements Will be upheld by a court

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Statute of Frauds

Specifically provides that any agreement described in that statute is not enforceable unless the promise or agreement, or a memorandum of it, is:

(1) in writing and (2) signed by the person to be charged with the promise or agreement or by someone lawfully authorized to sign for him.

The contracts and agreements in the Texas Statute of Frauds that are specifically pertinent for real estate transactions are: (1)a contract for the sale of real estate. (2) a lease of real estate for a term longer than one year. (3) an agreement that is not to be performed within one year. (4) a promise to pay a commission for the sale or purchase of

(a) an oil or a gas mining lease to an oil or gas royalty. (b) minerals (c) a mineral interest

(5) a loan agreement in which the amount involved exceeds $50,000.

Applies to modification of contracts as well.

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Electronic Transactions

• A contract may not be denied legal effect solely because it is in electronic form or because an electronic signature was used.

• “Electronic signature” means an electronic sound, symbol, or process, attached to or logically associated with a contract or other record and executed or adopted by a person with the intent to sign the record.

• For instance, if you were sent an email that said: “I’ll buy your property at 450 W. Meyer in Dallas for $50,000, and you typed at the top of this message “OK” and hit “return,” you might have a binding contract!

• Texas Uniform Electronic Transaction Act (UETA) contracts to be written and signed electronically.

• Does not apply to notices of default, acceleration, repossession, foreclosure, eviction, wills, codicils, or leases of a primary residence.

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Texas Contracts for the Sale of Real Estate

Commonly called the earnest money contract.Most important instrument a real estate agent comes into contact with.

www.trec.texas.gov

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Use of Forms

• Drafting of these instruments is usually done by real estate agents and is seldom left to the expertise of attorneys.

• Attorneys are specifically trained in the field of drafting contracts, and there has been some objection to this practice as performed by agents.

• Standard contract forms are promulgated and are now required by statute to be used when applicable by all licensees.

• Brokers using the commission-promulgated forms is clearly sanctioned, and such use is not a violation of the law.

• The commission may, however, revoke a license when a licensee fails to use a required form, or a form provided by the principal’s attorney.

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Computer Programs

1. Must not allow user to alter text but may permit user to fill in blanks.

2. Typefaces or fonts must be identical to those used by the commission.

3. Text and number of pages must be identical.

4. Spacing, length of blanks, borders, placement of text must be identical.

5. Name/address of software firm must be printed at bottom of each page.

6. Text of the form must be obtained from a commission proof.

7. Control number of each proof must appear on all forms.

8. Forms may be reproduced with the following changes only:

a. Name or logo of broker or organization above top border.

b. Broker’s name inserted in any blank provided for that purpose.

Computer-driven printers can produce the TREC forms but:

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Requirements of Texas Contracts

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Oral Contracts

All contracts affecting the transfer of real estate must be in writing to comply with the Statute of Frauds, but there are exceptions to every rule.

There are three requirements to enforce an oral earnest money contract, and these all must exist simultaneously:

1. There must be payment of the consideration; and2. Possession of the property must be taken by the purchaser; and3. The purchaser must have made payment and valuable improvements on the property with the seller’s consent.

No reasonable real estate agent, attorney, or well-informed client should ever rely on an oral earnest money contract, except as a last resort.

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Express Contracts

1. There must be a written instrument.

2. The instrument must be signed by the party to be charged.

3. There must be evidence of an intent to convey at some future time.

4. There must be an identifiable and competent seller and buyer.

5. The property to be conveyed must be identifiable (legal description).

Express contracts are written contracts. Texas courts have established specific requirements before such contracts are considered enforceable:

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Provisions of Contracts for Sale

Let’s assume we are using TREC promulgated forms.

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Legal Description

• Legal descriptions were discussed in detail in Chapter 4.

• Legal sufficiency of the description of the property is essential to any contract that relates to real estate.

• It must be described with reasonable certainty so that a person familiar with the locality can identify the property.

• Generally a metes-and-bounds description will be sufficient.

• A lot and block number in a specific, recorded, and identifiable subdivision will be sufficient.

• A street address, by itself, is not sufficiently specific to be enforceable.

• TREC forms provide for a lot and block description and street address.

• When filling in the blanks an agent should be careful the two references do not conflict.

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Financial Considerations

The TREC form provides three choices: (1) Third Party Financing, (2) Assumption, or (3) Seller Financing. Rather than including all of the financing provisions in the body of the contract, it now refers to the applicable addenda, which can be attached to the contract.

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Title Matters

• Contains required notice to buyer regarding abstract or title policy.

• “Title” means much more than a title policy or mere ownership.

• It encompasses all matters that affect the title and use of the property.

• Contract requires a title policy insuring the buyer against loss.

• All encumbrances (beyond exceptions) are subject to buyer approval.

• Requires the seller to cure all title defects prior to closing.

• If not, buyer may terminate contract or accept title in current condition.

• It is usually the purchaser’s prerogative to choose the title company. • Exception as to “discrepancies, conflicts, shortages in area for

boundary lines, encroachments or protrusions, or overlapping of improvements” can be amended to read only “shortages in area.”

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Property Condition

• 7.A. provides for the buyer to have inspections by an inspector “licensed by TREC or permitted by law to make such inspections.”

• 7.B. provides for the statutorily required seller’s disclosure, including instances where a seller is not required to furnish the form.

• 7.C. addresses the seller’s obligation to comply with the lead-based paint disclosure.

• 7.D. provides that the buyer accepts the property “in its present condition.” This has been interpreted as creating an “as is” provision.

• 7.E. provides for lender required repairs and buyer can terminate the contract if the repairs exceed five percent of the sales price.

• 7.F. provides for completion of repairs by persons who regularly provide such services.

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Earnest Money

• There is no legal requirement for earnest money in a contract.

• Failure to deposit the earnest money a default on the part of the buyer.

• Earnest money assures the seller that the purchaser is serious.

• In the event buyer defaults, the earnest money should go to the seller.

• The amount is always subject to negotiation between the parties.

• Title company normally serves as the escrow agent.

• If the seller defaults, the earnest money is returned to the purchaser.

• Escrow agents seldom release money without consent of both parties.

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Representations

• There are distinct differences between a representation and a warranty.

• A representation may hinder the closing or create certain adversities.

• A warranty generally gives the purchaser a certain damage claim.

• The number of representations or warranties in contracts are vast.

• Care should be taken to see that representations are clearly stated.

• There should be specific provisions made for remedies.• Representations are often omitted by granting purchaser a right of

inspection prior to closing, and agreeing to buy the property “as is.”

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Closing

Closing is the term normally given to the process of consummating the sale of real estate. The TREC form specifies the date of closing, an automatic extension if needed, and a provision that the contract becomes voidable at the option of either party if the other party fails to close.

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Option to Terminate

• It gives the Buyer (in consideration for the payment of an option fee) the right to terminate the contract within a specified number of days.

• If the blanks of this paragraph are not filled in, or the buyer has not paid the option fee, there is no right to terminate.

• If the seller does not receive the option money (or the check bounces) this is no right to terminate but the contract still binds both parties.

• The burden is on the buyer to give notice of the termination within the time specified. Buyer’s agents, mark your calendars!

• The size of the option fee is always negotiable.

• It is prudent to negotiate an option period long enough to allow for inspections and to obtain costs for repairs.

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Time Is of the Essence

• Unless a contract clearly indicates that time is of the essence, it will not be construed to be so.

• However, in an option contract, time is always of the essence, although the stipulated time limit may be extended by agreement of the parties.

• TREC forms do not provide that time is of the essence (except for Paragraph 23 and four addenda) and should not be added by a licensee.

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Assignment

Unless otherwise provided for, contracts for the sale of real property are assignable.

However, when the sale is to be made on credit or other condition of performance, the contract is normally not considered to be assignable unless made specifically assignable by its terms.

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Contingencies

• Purchasers often desire to tie up the seller’s property for a “free look” by putting unreasonable or frivolous contingencies in the contract.

• These contingencies may be solely at the purchaser’s option, such that the purchaser has no obligation at all.

• For instance, “contingent upon the approval of purchaser’s attorney.”

• This type of contingency contains no time for performance, does not name the attorney, and gives no rights at all to the seller.

• Such contingencies are not only vague and ambiguous, but they may also be complicated by unexpected legal problems.

• Law generally imposes a standard of reasonable diligence on the purchaser, regardless of the terms of the contract.

• If terms are too one-sided, the court may even refuse to enforce them.

• If one of the parties causes the default (intentionally causing the refusal of financing, for instance), the court will enforce the contract and not allow that party to benefit from his own default.

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Default and Remedies

• In the event of the purchaser’s default, the remedies are normally that the seller retain the earnest money and a suit for damages.

• If seller defaults because he cannot deliver title, the purchaser is normally limited to a suit for damages and a return of earnest money.

• Both parties may seek to enforce specific performance, although this provision is sometimes specifically deleted in a contract.

• The party seeking specific performance must have acted in good faith and not himself have committed a material breach of the contract.

• Specific performance is not an easy remedy to pursue because there are a number of requirements that must be met.

• Whenever a party signs a contract, he is deemed by law to have read and understood all the provisions, even if that party is illiterate.

• It is always wise to have a party’s attorney review his contract.

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Water District Disclosure

• Texas has a requirement to disclose to purchasers that the property is in a water district.

• This kept the purchaser from being surprised when water district taxes were levied.

• The law also requires the notice to disclose the bond amount so that the purchaser would be aware of the obligations of the water district.

• The notice to purchasers must be attached to any contract in which a party proposes to sell or convey the property.

• The information must be current as of January 1 of that year.

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Residential Lead-Based Paint Hazard Reduction Act of 1992

Before the buyer becomes obligated under the contract for sale sellers:1. Must disclose known lead-based paint and provide available reports.2. Must provide pamphlet “Protect Your Family from Lead in Your Home.”3. Home buyers will get a 10-day period for a lead-based paint inspection.4. Sales contracts must include language to ensure compliance.5. Owners and agents share responsibility for ensuring compliance.6. Proof of compliance must be retained for three years.

The rule does not require testing, removal, or abatement, nor does it invalidate leasing and sales contracts.

Applies to housing built prior to 1978.

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Tax Rollback

• Requires that contracts for the sale of vacant land include a statutory notice about the potential liability for rollback taxes if the property has a special tax classification, such as agricultural or open space use.

• If the seller fails to include the required notice, the seller is liable to the purchaser for any rollback tax liability.

• This requirement does not apply if the sales contract separately allocates responsibility between seller and purchaser for any future rollback tax liability.

• The TREC Farm and Ranch Contract, New Home Contract, and Unimproved Property contracts provide for this new disclosure.

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Pipelines

• A seller of unimproved land to be used for residential property must disclose in writing to the location of any pipelines.

• The notice must state the information to the best of the seller’s belief.

• If the seller does not know that pipelines exist, that fact must be stated.

• Notice must be delivered to the buyer on or before the effective date.

• If not delivered, the purchaser may terminate it for any reason not later than the seventh day after the effective date of the contract.

• This notice doesn’t need to be given if the seller is obligated to deliver a title commitment and if the purchaser has a right to terminate the contract if objections to title are not cured.

• TREC forms already provide for this approval, but the exception does not apply if the seller is going to supply an abstract of title.

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Seller’s Disclosure – Potential Annexation

• A seller is required to give the buyer a written notice if the property is subject to annexation by the city.

• The seller must deliver the notice to the purchaser before the date of the execution of the contract for sale.

• This notice is already contained in the TREC contract form.

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Seller’s Notice of Obligations to Membership in Property Owners’ Association.

• Seller must give buyer a written statement that the purchaser is obligated to be a member of a property owners’ association.

• The seller must deliver the notice to the purchaser before the date of this contract is executed. The TREC forms include this provision.

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Property Owners’ Association Disclosures

• Not later than the 10th day after the written request for subdivision information is received from an owner, owner’s agent, or title insurance company or its agent acting on behalf of the owner, a property owners’ association must deliver current copies of the restrictions, bylaws and rules of the property owners’ association and a resale certificate.

• The association may charge a reasonable fee for this service.

• If the property owner’s association fails to deliver the resale certificate after two requests, the owner can seek a court order and judgment against the property owners’ association for up to $500.00, plus attorney’s fees and costs.

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The Merger Doctrine

• It is a well-understood point of law that the earnest money contract is a contract for sale and performs precisely that function.

• Most contracts contain a provision that the contract must embody the entire agreement and that there is no other oral or written agreements.

• This provision is commonly called a merger provision.

• Once the sale has been closed and the deed has been transferred, the earnest money contract has no force or effect whatsoever.

• Upon closing the earnest money contract is merged into the deed and any cause of action for representation or warranties must be on the basis of the deed, rather than on the earnest money contract.

• The doctrine of merger cannot be used to defeat a cause of action under the Deceptive Trade Practices Act.

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Option Contracts

• The owner gives another the right to purchase his property at a fixed price, on specified terms, within the time specified within the option.

• It requires consideration before the contract can be binding.

• If the contract states “Ten Dollars,” it doesn’t need to be delivered, since it is only “nominal” consideration.

• The option is a unilateral contract, normally only signed by the seller (optionor) because he is the only party to be charged in performance.

• Since the purchaser has no obligation to perform, she gets no title of any kind to the property (neither equitable nor legal), and time is always of the essence in an option contract.

• The only effective remedy is the buyer’s right to force the seller to perform. The seller has no right to force the buyer to perform.

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Right of First Refusal

• A right of first refusal is a preemptive right to purchase in event the landowners should decide to sell.

• It requires the owner to offer the property first to the person entitled to the preemptive right at the stipulated price.

• A right of first refusal ripens into an option when owner decides to sell.

• The holder of the right of first refusal is to be notified that the sale is taking place and that the holder has the right to exercise this right.

• The owner is required to make a reasonable disclosure of the terms of the proposed sale.

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Installment Land Contracts

• An installment land contract is a contract for the sale of real estate that extends over a long period of time.

• It is a contract entered into between the buyer and seller to deliver a deed at some future date.

• The seller retains legal title, and the purchaser gets an equitable title to the property.

• Notices are required to the buyer both before the contract is signed and during the period of the contract.

• Failure to provide the notices provides grounds for buyer to rescind the contract and receive a refund.

• This type of contract is very complicated in Texas law and requires the assistance of an attorney to draw properly.

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Questions for Discussion

1. Discuss the four essential elements of a contract.

2. Identify the three elements of acceptance.

3. What does the Texas Statute of Frauds tell us?

4. When may computer-driven printers be used to produce Texas Real Estate Commission (TREC) promulgated forms?

5. Match the following contract-related terms with the proper statement.