Category Archives: Contracts

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.

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

Contracts, Deeds, Legal Documents, Real Estate Law, Wills

Life Estate, Rights of Survivorship and Transfer on Death Deeds: Which is Right for You?

May 1, 2018 Jeff Rattikin

Current warranty deeds are not necessarily the best choice to avoid probate.
Dying without a will, while holding real estate, leads to much complexity and unintended consequences.
A life estate deed allows owner to maintain possession, but the transaction is final and cannot be reversed without consent.
A Right of Survivorship can avoid probate, but cannot be reversed without consent and may lead to loss of valuable tax exemptions.
A Transfer on Death Deed allows for the execution of a present document whereby an owner can maintain possession and tax exemptions, avoid future probate, and retain the right to rescind at any time before death.

In today’s world of online searches for quick and economical legal solutions, consumers are often faced with a daunting task of attempting to decipher what document may best fit their specific situation and needs. Online computerized providers of generic legal forms are simply incapable of asking all the pertinent questions needed to accurately assess a situation. As a result, consumers often select, fill out and file legal documents that not only fail to meet their objectives, but cause more harm than good.

Such is the case in deciding what document may be best to transfer title to real estate when an owner’s death is on the horizon. Certainly there is no “one-size fits all” solution, as the parties’ actual intent in desiring a conveyance must be evaluated to narrow the choices. A key example: If a party’s intent in transferring ownership of real estate is driven not by the current need or desire to sell to another, but more the desire to avoid the perceived cost and expense of a future probate of the current owner’s estate after death, then a common warranty deed or quitclaim deed is probably not the best choice of documents. Rather, the parties should consider several options:

No conveyance – If a property owner dies while still holding title to the real estate, then title will pass either to the beneficiaries of the last will and testament, if there is one, or by operation of Texas law (intestate succession). While the probate process in Texas is not relatively expensive, many parties mistakenly assume probate should be avoided, and search for other mechanisms. Moreover, passing away without naming beneficiaries in a valid will leads to all kinds of complexities and unforeseen/unintended future ownership consequences.

Present Conveyance – The present conveyance by warranty deed would serve to immediately transfer title to the grantee; the property would no longer be owned by the grantor. As such, the property may lose certain valuable tax exemptions (such as homestead and over-65 exemptions), and the grantor could no longer legally control the future of the property. Since the deal is done, the grantor cannot later change his or her mind and leave the property to some other loved one or beneficiary.

Life Estate Deed, or a Deed Reserving a Life Estate – Under this type of instrument, a property owner may presently convey the property to his/her intended beneficiaries, but reserve the right to continue living on the property until death. This option serves to avoid future probate upon death (at least as to the real estate), give the intended beneficiary some peace of mind that they have secured title to the property, but allows the grantor to retain possession, along with any tax exemptions they may qualify for in most counties. The drawback is that in conveying title now, the grantor cannot change their mind and “undo” the transaction later without the consent of the beneficiaries.

Joint Tenancy with Right of Survivorship – Under this mechanism, an owner may add another person to the title, and allow the survivor of either owner to take full title upon death of the other without the need for probate. But not all title companies will insure properties subject to these type deeds without involvement of the probate court, and again, the grantor cannot change their mind and “undo” the transaction later without the consent of the grantee. Further, the amount of tax exemptions may be reduced due to the addition of another owner, who may not qualify for the same exemptions.

Which leads now to a new option, known as the Texas Transfer on Death Deed – This new type of deed allows a present property owner to convey an interest now to an intended beneficiary and thereby avoid probate upon their death; but in the meantime, the grantor can continue to occupy the property, qualify for present tax exemptions, and even change their mind and rescind (cancel) the deed at any time prior to death. The grantor may also sell their property and keep the proceeds without the joinder of the grantee. Because of the increased flexibility this instrument affords, the Transfer on Death Deed should prove to be a very popular instrument in Texas, one that families should consider as part of their overall estate planning efforts.

Contracts, Deeds, Legal Documents, Mortgage/Finance, Real Estate Law

Warranty Deed or Quitclaim Deed? Not Even Close

April 15, 2018 Jeff Rattikin

Quitclaim Deeds are not acceptable conveyances in most instances; they merely “release” claim of title
Warranty Deeds are the preferred instrument to convey title to real estate.
General warranty deeds contain expansive warranties of title.
Special warranty deeds are limited in nature, providing lesser protection from claims.
Special warranty deeds should be accepted only if backed by adequate title insurance protection.

How do Texans effectively transfer real estate ownership from one to another? While mid-century Hollywood would lead you to believe that signatures on the back of a cocktail napkin, or better yet, the good ole handshake, serve as acceptable and perfectly enforceable forms of agreement, today’s consumers must be much more careful, especially with the myriads of legal forms swamping the internet.
When conveying property title in Texas, the content and structure of a proper written, signed and notarized agreement is of utmost importance. But what form of agreement is needed? If the goal is to simply transfer property title, either in whole or in part, from one or more parties to another, without the necessity of contracts, closing statements, mortgage payoffs, title insurance, etc., then that goal may be accomplished with a warranty deed. Examples may be a transfer between former spouses during/after divorce, a gift of property from one to another, or a transaction where the parties are familiar with each other, do not require a closing, mortgage payoff, title insurance, etc., and just need the legal documentation to evidence the transfer, choosing to handle any financial considerations between themselves. If the seller plans to “seller-finance” the transaction and receive future payments, additional loan documents would be necessary.

But what kind of deed? A quick search of the internet will uncover a plethora of forms, most often the quite popular but oh-so-troublesome Quitclaim Deed (often mistakenly referred to as a “quick-claim” deed”). In Texas, quitclaim deeds should be avoided in all situations. Why? Because, contrary to long-held beliefs that they serve to transfer title, in actuality they fall short of that goal. Rather than “conveying” title from one owner to another, they merely “release any claim” to a property in favor of another. That “stepping-aside” and releasing any claim is not NEAR strong enough to convince a title company, for example, to insure the grantee’s ownership. Title attorneys and title companies typically require that all transfers in a chain of title be accomplished by actual conveyances, not releases.

Which leads to the need for the most commonly accepted form of deed, the warranty deed. A warranty deed serves to convey title, while at the same time warrants to the grantee that they will hold title free and clear of any superior lien or claim of others. Especially combined with title insurance, a warranty deed provides a grantee the security they need to acquire such a major asset.
Warranty deeds typically come in two different flavors: general warranty deeds, and special warranty deeds. Despite its perhaps attractive name, a special warranty deed isn’t so special after all. It is a limited deed, whereby a grantor warrants that title is free and clear of claims only during the time of the grantor’s ownership, but not prior in time. Conversely, a general warranty deed contains warranties of title from the beginning of time, providing a grantee much greater security.

If a grantor simply insists on signing only a special warranty deed, a prudent grantee should accept only if they obtain title insurance from a reputable title insurance company, providing third party protection from prior claims of others.

Contracts, Legal Documents, Real Estate Law

Formation of Business Entities

March 28, 2016 Jeff Rattikin

calculator-178127_640 There is no question that in situations other than personal homestead, it is extremely prudent to hold title to business or investment real estate in the name of a separate entity, and not the owner’s individual name. Why? If properly set up, a separate entity can protect an individual from personal liability if an accident occurs on the property, certain operating expenses/debts, and other potential perils. Without such protection, an individual’s personal assets could be at risk if a lawsuit ensues and a judgment is issued against the landowner.

With today’s technology, it is easier than ever for an individual to attempt to set up their own business entity. Forms are readily available on the internet, and the Secretary of State’s office hosts a website allowing for online registration and formation of a business entity. Unfortunately, more times than not, individuals operating without competent legal assistance tend to choose incorrect or incomplete forms when attempting to document the matter themselves.

In a growing number of situations, individuals are merely filling out the required formation registration on the Secretary of State website. While this procedure may be enough to register the entity and obtain a Certificate of Formation from the State, a fully viable entity has not been formed. Unless an actual Company Agreement (in the case of an LLC) or Bylaws (in the case of a corporation) are prepared, in addition to other necessary ancillary documents and corporate formalities, the validity of an entity could be easily attacked in the event of a lawsuit. Opposing counsel would argue that without a full set of entity documents, the entity was in fact operating as a sham. Without the entity protection, the plaintiff would typically execute their judgment against the individual, and the individual’s non-exempt assets.

In order to realize the benefits of owning real estate under a separate business organization, it is critical to document the entity formation fully. A qualified attorney should be able to assist in an efficient and cost-effective manner.

Contact Rattikin & Rattikin, LLP

Contracts, Leases, Legal Documents, Mortgage/Finance, Real Estate Law

Home Sales and Existing Leases: How to Deal With Current Tenants

February 9, 2016 Jeff Rattikin

hand-101003_640 Although more common in commercial transactions, many residential transactions involve the sale of homes subject to existing leases and tenants. A potential buyer of a property in which a tenant currently resides should be aware of the legal status of such leases after closing, and be comfortable with rights and obligations imposed on them by the lease after closing.

For whatever reason, many folks believe that once a property sells, any existing lease automatically terminates, and the new buyer would have the right to immediate possession. This misunderstanding is obviously incorrect; an existing lease, whether written or oral, conveys a leasehold interest in the land that would be superior to any contractual rights that may arise thereafter. Therefore, anyone who goes under contract to buy the property, and ultimately closes on the purchase, would take title subject to the pre-existing lease. The new buyer would in effect step into the shoes of the seller as landlord until the term of the lease has expired. Yes, the new buyer would be entitled to future rent payments made under the lease, but would also be responsible for any obligations and promises the previous owner may have agreed to under the lease.

Because the new buyer will be saddled with the rights and obligations due under the lease, it is imperative that the buyer conduct sufficient due diligence to understand what they are taking on. What does the buyer need to know? For starters, what are the basic terms? Length, amount of rent, rights to renew or purchase, responsibility for repairs, maintenance, taxes, insurance, and the like, are all important. Are the tenants current on rent? Has the tenant pre-paid any rent? The last thing a new buyer wants to find out when he or she becomes the new landlord is that the tenant has prepaid rent for a year, will not be paying any future rent during that time, and oh, by the way, the landlord promised in writing to replace the roof the next month (true fact scenario!).

Most commercial sales contracts contain clauses that provide satisfactory treatment of these issues, but the TREC contract is fairly bare. Fortunately, TREC amended the base form last year to help a bit. Now, under Par. 10B., the seller must provide copies of existing leases within 7 days of the contract effective date. The Buyer will want a chance to review the lease and get comfortable with the terms, so it is important that an option period extend a minimum of 10 days. If the Buyer doesn’t like the lease terms, they would be able to terminate the contract during the option period. Par. 9B (5) provides that any security deposit will be transferred from seller to buyer at closing, and Par. 13 provides that rent will be prorated at closing.

But what important agreement does the TREC form lack? Most well-drafted commercial properties require the seller to obtain an “estoppel certificate” from the tenant, and provide it to the buyer during the option period. An estoppel certificate is a statement from the tenant themselves as to the tenant’s understanding of the lease terms, the amount of rent already paid, and any accrued obligations owed by the landlord. It is always best to confirm with the tenant that they are in agreement with the landlord’s characterization of the lease status. A buyer is well advised to add a provision in Par. 11 calling for an estoppel certificate.

Because lease and tenant-related issues expand the complexity of the transaction, the assistance of a competent attorney will be of great help in wording the contract and evaluating future rights and obligations. Armed with these protections, buyers of tenant-occupied property are in better position to protect themselves from post-closing lease surprises.

Contact Rattikin & Rattikin, LLP

Contracts, Legal Documents, Mortgage/Finance, Real Estate Law

Good Fences Make Good Neighbors – Boundary Lines and Encroachment Agreements

January 27, 2016 Jeff Rattikin

house-908459_640 Misunderstandings regarding boundary lines and fence locations often lead to strained relationships between neighbors. Addressing encroachment issues prior to closing can help ensure that a buyer enjoys a more fulfilling ownership experience.

It is not uncommon for fences to be situated off of a boundary line, especially in older subdivisions. In fact, an argument can be made that it is better for an owner to place a new fence slightly inside the boundaries of his/her lot, so that the neighbor has no right to dictate its location and maintenance. However, human nature dictates that if you give your neighbor an inch, they sometimes take a mile, laying claim to ownership of the strip of land between the fence and the boundary line. Their claim, while typically unenforceable, can still lead to future problems and loss of future contracts.

Who actually owns the fence, and who can control its appearance/location? The brief answer is that the fence is “owned” by the owner (or the predecessor in title) who constructed it, even if it encroaches onto the neighbor’s property. While the fence owner had no right to encroach over the boundary line, that encroachment still does not give the neighbor license to unilaterally move/destroy it. A prudent neighbor should approach the encroacher with evidence of the encroachment (such as a current survey), and reach a resolution of the matter, and head to court if necessary. But exercising a self-help remedy of forcible removal can only lead to future complications.

Typically, a meandering fence was constructed so long ago that it is unclear to either owner which property the fence belongs to. While not foolproof, the parties could rely on the appearance of the fence itself. Usually, a wooden fence owner would construct the fence in such a way that the “smooth” side of the fence faces the owner’s home, and the bracketed support beams face the neighbor. But not always, of course.

Can a property owner lay claim the extra strip of land outside his/her property line and the constructed fence? The theory of adverse possession stands for the proposition that a party who possesses real estate for a significant time can claim ownership of the land, even if they don’t have a deed to it. Although the doctrine is quite popular among those who are encroaching over a boundary line, courts are extremely reluctant to recognize such ownership, especially for platted residential lots and fence issues. And even if viable, adverse possession must be proved up in a court hearing, and a court order obtained. Without a deed or long-term tax payments on the claimed strip, the argument will typically be summarily dismissed.

A prudent buyer under contract to buy a home subject to an offset fence would be prudent to require an agreement from the neighbor as to the property line and rights to move and maintain the fence before closing on the transaction. These encroachment agreements can go a long way to avoid future buyer’s remorse.

Contact Rattikin & Rattikin, LLP

Contracts, Leases, Legal Documents, Mortgage/Finance

Tenant Evictions – a Time Consuming Process

January 18, 2016 Jeff Rattikin

hand-101003_640 If you clients are faced with the need to evict a tenant, they should know that the process must be undertaken in strict adherence to the Texas statutes, and may take longer than expected. If a tenant knows how to play the game, they could stretch out the ordeal for well over a month before possession is finally obtained.

The job of a landlord is never easy, but perhaps the most difficult task most landlords face is retaking possession of a property after a tenant default or lease expiration. The Texas statutes are very precise in outlining the requirements an evicting landlord must follow.

It’s important to understand that for residential tenancies, a landlord cannot simply lock out the tenant and haul off their possessions. A landlord must first properly terminate the right to possession in accordance with the terms of the lease, and then send a three-day written notice of termination before an eviction suit can be filed. Once an eviction suit is filed in the appropriate court, a minimum of six days must pass before a hearing is held. Assuming the landlord is successful at the hearing, a judge will not issue a writ of possession until five additional days expire, during which the tenant may appeal. And after the writ is finally issued, a constable will post an eviction notice on the premises, giving typically three more days before a locksmith and moving crews can show up to physically remove the inhabitants and belongings. All in all, an eviction will take a minimum of 20 days or so after lease termination, and if an appeal is filed, the process can be extended for months. Ultimately, a landlord will often retake possession from an extremely agitated and disgruntled tenant, who may vacate the property in less than pristine condition.

A prudent property owner should understand the inherent risks involved with rental property, and conduct appropriate credit checks and due diligence on any prospective tenant before agreeing to turn over possession to such a valuable asset.

Contact Rattikin & Rattikin, LLP

Contracts, Mortgage/Finance

The New SAFE Act: The Death of Seller-Financing in Texas?

August 6, 2014 Jeff Rattikin

A recent law passed by the Texas Legislature has quietly hit the books, one that promises to have a significant and adverse effect on Texas consumers’ ability to obtain financing for the purchase of residential property. The legislation serves to place further limitations on a prospective purchaser’s financing options, at a time when the current negative banking environment already has severely restricted the viability of real estate transactions.

Continue reading →

Contracts

MINERAL RIGHTS AND REAL ESTATE PURCHASES: A BREEDING GROUND FOR CONTRACT DISPUTES

August 5, 2014 Jeff Rattikin

No issue has given rise to as many contract disputes in North Texas in recent years as the effect of Barnett Shale development on real estate transactions. For decades, real estate practitioners in North Texas rarely considered mineral rights when negotiating and drafting contracts for sale. However, the rapid rise in the value of mineral rights resulting from the financial success of Barnett Shale drilling, coupled with the increased awareness of the public with respect to minerals, has led to a sometimes heated negotiation over post-closing mineral rights. Continue reading →