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Are You Ready for Some Contract Changes? What, So Soon?

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The Broker-Lawyer Committee of the Texas Real Estate Commission (TREC), on November 2, 2015, approved changes to contract forms in order to align Texas contracts with changes promulgated by the Consumer Financial Protection Board (the CFPB), in the TILA-RESPA Disclosure rule, and to comply with state statutory changes enacted by the 84th State Legislature.  Additional changes were recommended to and approved by the Broker-Lawyer Committee to address some issues that have arisen since the last contract revisions or due to recent case law.

Mandatory use of the revised forms is January 1, 2016.  Voluntary use is authorized as soon as the forms are revised and published for use. Almost all of the Texas contract forms are affected by the changes, with a couple of exceptions. Some of the changes are relatively small in nature such as licensees are now called license holders (most of the time).  Forms with name changes and which are referenced in other forms will have the name change there, also. Traditionally, only sponsoring brokers’ license numbers have been part of our contracts; the new contracts require the listing agent’s and buyer’s agent (the “license holders”), and the license holder’s supervisor’s license number as well.

Getting to the contract changes – Primary focus will be on the 1-4 Family Residential Contract (Resale).

Paragraph 3 B provides a choice of boxes to be checked identifying the type of financing, eliminating the reference to ‘financing listed below.” Only one box should be checked.

The previous Financing paragraph, Paragraph 4, is deleted in its entirety.  Most of those provisions are now in the Third Party Financing Addendum.  What is no longer anywhere in the contract or addenda is the previous Paragraph 4 A(2)(b), which said “This contract is not subject to Buyer being approved for financing and does not involve FHA or VA financing.” There were many objections to the loss of this sub paragraph submitted to the Broker-Lawyer committee during the comment period.  It wasn’t reinstated for this revision; maybe next time. Many agents commented that this sub paragraph is really important because it identifies additional contract strength, and not having it as an option significantly limits the ability to present a critical item to sellers. Sponsoring brokers should decide if the wording could be considered a business detail in Paragraph 11, with the advice of legal counsel, of course.

Rather than renumber the remainder of the contract because of the deletion of Paragraph 4, the new Paragraph 4 is the license holder disclosure as being a party to the transaction, representing certain relatives in the transaction, or being the owner of a 10% interest or more of a business which is a party to the transaction. The reason, I am told, is because while the Owner-Agent disclosure is rarely not disclosed, the other license holder disclosure requirements are usually either unknown or ignored.  If any of the provisions of the paragraph do not apply to the license holder, the paragraph is left blank.

There is an addition to Paragraph 6 [6 Title Notices. Sub paragraph E (10)]. Notice of Water Fluctuations.  Although this paragraph is not mandatory until January 1, 2016, the required notice became effective September 1, 2015.  The statutory requirement is “If the property adjoins an impoundment of water, including a reservoir or lake, constructed or maintained under Chapter 11 of the Water Code, that has a storage capacity of at least 5,000 acre-feet at the impoundments normal operating level, Seller must give the following notice to Buyer: “ ‘The water level of the impoundment of water adjoining the property fluctuates for various reasons, including the result of (1) an entity lawfully exercising its right to use the water stored in the impoundment or (2) drought or flood conditions.’ ” Any sale of property meeting the definition required by this Water Code chapter should have the notice from seller to buyer entered in special provisions until it appears in the revised contract. Contracts signed September 1st or later should have the provision added by amendment. Failure to disclose could have troublesome consequences for the seller.  Listing agents dealing with water front property do not appear to have to know or disclose the acre-feet of the lake or reservoir adjoining the property, but buyers might want to know.

The Property Condition paragraph, Paragraph 7, has an addition that any hydrostatic testing must be separately authorized by the seller in writing.  The Broker-Lawyer Committee was advised in several comments that if this invasive test requires seller authorization in writing, so should all invasive tests, including stucco inspections, water penetration inspections, and several invasive termite inspections, to name a few. Looks like we will have to stay tuned for the next round of revisions to see what happens here.  This requirement is excluded from the Unimproved Property and both new home contracts.

Paragraph 9, Closing, sub paragraph (5), dealing with sales of property subject to a residential lease, changed the wording for the buyer acknowledging receipt of the security deposit.

Paragraph 14, Casualty Loss, expands that the assignment of insurance proceeds to the buyer along with the property in its damaged condition, can only be done with the permission of the seller’s insurance carrier.

In Paragraph 18 D, removes liability of the party who wrongfully fails or refuses to sign an earnest money release to pay an amount equal to three times the amount of the earnest money.

Paragraph 23 Termination Option provides for notices under the paragraph to be delivered prior to 5:00 p.m. (local time at the property by the date specified). Additional option fees paid via an Amendment are also subject to the 5:00 p.m. deadline on the revised last day of the option period.

On the Broker Information page, information concerning the Associate’s supervisor has been moved to below information about the Associate.

The Third Party Financing Addendum is completely rewritten and now incorporates most of the provisions of the previous Paragraph 4, and also incorporates Reverse Mortgage financing.  A close examination of the new form is strongly recommended, both for content and placement.  An authorization is included for the lender to release loan status information to the buyer or seller, or their representatives, and authorizes release of the Closing Disclosure by the lender, the title company, and escrow officer to the parties’ respective brokers and sales agents identified on the last page of the contract. This authorization will be extremely helpful since release of these documents is not authorized by the Integrated Disclosure rules.

Finally the Information About Brokerage Service form changes from two columns to one, clarifies definitions of the broker and the sales agent and the duties of each, describes intermediary, and adds a definition of Sub Agent, clarifying that a Sub Agent can assist a buyer, only, but works for the best interest of the seller. License numbers of the broker, the broker’s assumed business name, agent’s supervisor, and the Agent/Associate are required.

Complete information about all rule changes and contract, notice and addenda modifications can be found on the TREC website.  The HAR class entitled Practical Aspects of Contracts discusses all of these changes in detail and gives 3 hours of continuing education credit.

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