Legal FAQs for REALTORS®
— Contracts and Forms
My client wants to purchase a property and make that contract contingent on the sale of his current home. Do I have to use the Addendum for Sale of Other Property by Buyer, or can I just write this language in the Special Provisions Paragraph of the One to Four Family Residential Contract (Resale)? (updated July 9, 2015)
You must provide the addendum. TREC rules require a license holder to provide the Addendum for Sale of Other Property by Buyer to a buyer who wants to make a contract contingent on the sale of another property. License holders are not allowed to write language into the Special Provisions Paragraph for situations that are covered by a TREC promulgated form, such as the contingency addendum. If your client doesn’t want to use the addendum, you should advise him to consult his attorney to draft language that will reflect his intention.
Does a buyer always have to use the Addendum for Sale of Other Property by Buyer if she is selling another property? (updated July 9, 2015)
No. A buyer who can qualify for a loan without having to sell her other property doesn’t need to use the addendum. However, she can still use it if she wants to make the contract contingent on the sale of her other property.
Can a broker modify the Addendum for Sale of Other Property by Buyer when a buyer wants to make the contract contingent on some other event, such as a transfer or receiving probate proceeds? (updated July 9, 2015)
No. The addendum is drafted for a specific purpose, the sale of another property. Using the addendum for another purpose requires that it be modified by a lawyer. A broker who makes such modifications is likely engaging in the unauthorized practice of law.
My buyer client needs to close on the sale of his current home to afford purchasing a new home. Must he disclose this to the seller? (updated July 9, 2015)
Yes. If your client’s ability to perform under a contract (i.e., close the transaction) is contingent upon the closing of another property, the contingency should be made part of the contract by using the Addendum for Sale of Other Property by Buyer. Otherwise, the buyer risks default under the contract if he fails to close because the sale of the other property doesn’t close. Default by the buyer could result in the loss of earnest money. The seller could also take action for specific performance or other remedies through the legal system, or both.
Remember, while your primary duties are to your client, you also owe a duty of fairness and honesty to the seller. If you know when an offer is made that your buyer cannot perform under the terms of a contract and you don’t disclose this to a seller, you may be breaching your duty to the seller, and there’s potential for a claim that you and your buyers have made material misrepresentations or misstatements to the seller or the seller’s agent.
If a buyer waives the contingency under the Addendum for Sale of Other Property by Buyer, then doesn’t qualify for a loan, does she get the earnest money back? (updated July 9, 2015)
No. If the buyer’s failure to qualify for the loan was because she didn’t sell the other property, Paragraph D of the addendum states that she is in default and the seller may exercise the remedies in Paragraph 15 of the sales contract. One of the remedies available to the seller is to terminate the contract and keep the earnest money.
My buyer client’s Addendum for Sale of Other Property by Buyer gives him three days after receiving notice from the seller that she has accepted another offer to waive the contingency or his contract will automatically terminate. The contract also contains a 10-day termination option for my client. Two days after the effective date, the seller notified my client that she accepted another offer. Does my client have to waive the contingency within the three-day period, or does he have until the end of the option period to waive the contingency? And if my client waives the contingency, can he still terminate under the option within the 10-day period? (updated July 9, 2015)
The time periods and rights provided under the contingency addendum and the termination option are completely independent. If the buyer doesn’t waive the contingency within the three days provided for in the addendum, the contract will automatically terminate. His right to terminate within the 10-day termination option period is not diminished by his election to waive the contingency.
My buyer received written notice by the seller that he requires my client to waive her contingency on the sale of her current property or the contract will terminate, as stated in the addendum. Everything is on track with the sale of her current property, so she decided to waive the contingency and gave timely written notice using Notices Regarding Contingency Under Addendum for Sale of Other Property by Buyer (TAR 1912). Now, the seller wants my client to provide proof that the she can obtain her loan even if the sale of her current property doesn’t happen before our closing. Can the seller force my client to do this? (updated July 9, 2015)
No. The Addendum for Sale of Other Property by Buyer doesn’t require the buyer to provide evidence to support her decision to waive this contingency. The only requirements in the addendum are that the buyer notify the seller in writing within the time stated and deposit the additional earnest money with the escrow agent in a timely manner.
Buyers should consider the risks of waiving this contingency when they don’t already have the proceeds from the sale of another property. A buyer would be in default on her contractual obligations if she waives the contingency and then fails to close solely because she didn’t receive the sale proceeds.
My client wants to submit an offer for a property already under contract using the Addendum for “Back-Up” Contract. How do we determine the contract’s effective date? (updated July 9, 2015)
The effective date for purposes of depositing earnest money and paying any termination option fee is the date of final acceptance. This is the date that the last party to sign the backup contract communicates acceptance back to the other party or the other party’s agent, if applicable.
If the first contract terminates, the effective date changes to the amended effective date. This is the date the seller notifies the backup buyer that the first contract is terminated and the backup contract becomes the primary contract. All performance obligations under the contract—other than depositing earnest money and paying any termination option fee—use the amended effective date for purposes of performance.
Does the backup buyer need to perform under the contract while in the backup position? (updated July 9, 2015)
The backup buyer must deposit the earnest money and pay the option fee, if any, to the seller at the time the parties execute the backup contract. No other performance is required unless and until the backup contract becomes the primary contract. These requirements are detailed in Paragraph A of the addendum.
If the seller agrees to extend closing or otherwise changes the first contract, can the backup buyer claim the first contract is terminated? (updated July 9, 2015)
No. An amendment to the first contract does not terminate the first contract.
If the termination option applies in the backup contract, may the backup buyer terminate when in the backup position? (updated July 9, 2015)
Yes. If the termination option applies, the backup buyer may terminate at any time when in the backup position. The counting of days for the option period doesn’t begin until the date the backup contract becomes the primary contract, which is the amended effective date.
Can the Addendum for “Back-Up” Contract be used to negotiate a backup contract to another backup contract? (updated July 9, 2015)
How does a seller notify a backup buyer that the first contract is terminated? (updated July 9, 2015)
Notice must be in writing. TAR created the Notices Regarding Contingency Under Addendum for Sale of Other Property by Buyer (TAR 1912) form to be used for this purpose.
If the backup contract never moves into the primary position, is the backup buyer refunded the earnest money and option fee? (updated July 9, 2015)
The earnest money is returned to the backup buyer, but the seller retains the option fee. Remember that the backup buyer retained the right to terminate the backup contract at any time while in the backup position.
Legal Disclaimer: The material provided here is for informational purposes only and is not intended and should not be considered as legal advice for your particular matter. You should contact your attorney to obtain advice with respect to any particular issue or problem. Applicability of the legal principles discussed in this material may differ substantially in individual situations.
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