laws, rules, and regulations

21

UNIT

LEARNING OBJECTIVESWhen you have completed this unit, you will be able to accomplish the following.ff Explain and give examples of the exceptions to TRELA/TREC’s rules regarding the use of promulgated

forms.ff Describe the unauthorized practice of law and how to avoid it.ff Describe the composition and duties of the Broker-Lawyer Committee.ff Recall how many TREC forms there are and identify whether a TREC form is a promulgated contract,

addendum, amendment, resale certificate, notice, consumer disclosure, or approved optional/voluntary use form.

ff Describe the proper procedure for presenting offers and multiple offers and identify when the offer becomes a contract.

KEY TERMScounterofferoffer promulgate tort

Texas Real Estate Broker-Lawyer Committee

TREC (Texas Real Estate Commission)

TRELA (Texas Real Estate License Act)

unauthorized practice of law

TEXAS REAL ESTATE LICENSE ACTReal estate professionals in Texas were first licensed through the Securities Division of the Secretary of State’s office, beginning in 1939 with passage of the Real Estate Dealers License Act (House Bill 17, 46th Legislature, Regular Session).

In 1949 the Texas Real Estate Commission (TREC) was created to administer the act (Senate Bill 28, 51st Legislature, Regular Session).

The act’s name was changed to the Texas Real Estate License Act in 1955. The purpose of the TRELA is to protect the public through regulation of licensed real estate brokerage practitioners, real estate inspectors, residential service companies, and entities offering time-share interests.

2 Laws, Rules, and Regulations

TX_Prom_Forms_book.indb 21 5/16/2019 12:43:21 PM

Unauthorized reproduction or resale of this product is in direct violation of global copyright laws. Customized for use solely by CE Source, #2015-17238.

22 Unit 2 Laws, Rules, and Regulations

The policy-making body of the Texas Real Estate Commission is a nine-member commission appointed by the governor with the advice and consent of the senate for overlapping six-year terms. Six members must be active in real estate as full-time brokers for five years immediately preceding appointment. Three members must not be licensed by the Commission and have no financial interest in real estate, except as consumers.

The Commission has rule-making authority and the Rules of the Commission have the full force and effect of law. As it pertains to contract forms, that authority is established in the part of the TRELA, reproduced in the following:

Sec. 1101.155. RULES RELATING TO CONTRACT FORMS.

(a) The commission may adopt rules in the public’s best interest that require license holders to use contract forms prepared by the Texas Real Estate Broker-Lawyer Committee and adopted by the commission.

(b) The commission may not prohibit a license holder from using for sale, exchange, option, or lease of an interest in real property a contract form that is:

(1) prepared by the property owner; or

(2) prepared by an attorney and required by the property owner.

In addition to itemizing the current inventory of available forms, the Commission establishes the dos and don’ts for the completion of the forms. A careful reading of the rules tells license holders all they need to know. The underlining in the following excerpt has been added for emphasis:

537.11. Use of Standard Contract Forms

(a) When negotiating contracts binding the sale, exchange, option, lease or rental of any interest in real property, a real estate license holder shall use only those contract forms promulgated by the Texas Real Estate Commission (the commission) for that kind of transaction with the following exceptions:

(1) transactions in which the license holder is functioning solely as a principal, not as an agent;

(2) transactions in which an agency of the United States government requires a different form to be used;

(3) transactions for which a contract form has been prepared by a principal to the transaction or prepared by an attorney and required by a principal to the transaction; or

(4) transactions for which no standard contract form has been promulgated by the commission, and the license holder uses a form prepared by an attorney at law licensed by this state and approved by the attorney for the particular kind of transactions involved or prepared by the Texas Real Estate Broker-Lawyer Committee (the committee) and made available for trial use by license holders with the consent of the commission.

537.11 (b) and Following

(b) A license holder may not:

(1) practice law;

(2) offer, give or attempt to give legal advice, directly or indirectly;

(3) give advice or opinions as to the legal effect of any contracts or other such instruments which may affect the title to real estate;



Unit 2 Laws, Rules, and Regulations 23

(4) give opinions concerning the status or validity of title to real estate; or

(5) attempt to prevent or in any manner whatsoever discourage any principal to a real estate transaction from employing a lawyer.

(c) Nothing in this section shall be deemed to limit the license holder’s fiduciary obligation to disclose to the license holder’s principals all pertinent facts which are within the knowledge of the license holder, including such facts which might affect the status of or title to real estate.

(d) A license holder may not undertake to draw or prepare documents fixing and defining the legal rights of the principals to a real estate transaction.

(e) In negotiating real estate transactions, the license holder may fill in forms for such transactions, using exclusively forms which have been approved and promulgated by the commission or such forms as are otherwise permitted by these rules.

(f ) When filling in a form authorized for use by this section, the license holder may only fill in the blanks provided and may not add to or strike matter from such form, except that license holders shall add factual statements and business details desired by the principals and shall strike only such matter as is desired by the principals and as is necessary to conform the instrument to the intent of the parties.

(g) A license holder may not add to a promulgated contract form factual statements or business details for which a contract addendum, lease or other form has been promulgated by the commission for mandatory use.

(h) Nothing in this section shall be deemed to prevent the license holder from explaining to the principals the meaning of the factual statements and business details contained in the said instrument so long as the license holder does not offer or give legal advice.

(i) It is not the practice of law as defined in this Act for a real estate license holder to complete a contract form which is either promulgated by the commission or prepared by the committee and made available for trial use by license holders with the consent of the commission.

(j) Contract forms prepared by the committee for trial use may be used on a voluntary basis after being approved by the commission.

(k) Contract forms prepared by the committee and approved by the commission to replace previously promulgated forms may be used by license holders on a voluntary basis prior to the effective date of rules requiring use of the replacement form.

(l) Where it appears that, prior to the execution of any such instrument, there are unusual matters involved in the transaction which should be resolved by legal counsel before the instrument is executed or that the instrument is to be acknowledged and filed for record, the license holder shall advise the principals that each should consult a lawyer of the principal’s choice before executing same.

(m) A license holder may not employ, directly or indirectly, a lawyer nor pay for the services of a lawyer to represent any principal to a real estate transaction in which the license holder is acting as an agent. The license holder may employ and pay for the services of a lawyer to represent only the license holder in a real estate transaction, including preparation of the contract, agreement, or other legal instruments to be executed by the principals to the transactions.

(n) A license holder shall advise the principals that the instrument they are about to execute is binding on them.

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(o) Forms approved or promulgated by the commission may be reproduced only from the following sources:

(1) numbered copies obtained from the commission, whether in a printed format or electronically reproduced from the files available on the commission’s web site;

(2) printed copies made from copies obtained from the commission;

(3) legible photocopies made from such copies; or

(4) computer-driven printers following these guidelines:

(A) The computer file or program containing the form text must not allow the end user direct access to the text of the form and may only permit the user to insert language in blanks in the forms. Blanks may be scalable to accommodate the inserted language. The commission may approve the use of a computer file or program that permits a principal of a license holder to strike through language of the form text. The program must be:

(i) limited to use only by a principal of a transaction; and

(ii) in a format and authenticated in a manner acceptable to the commission.

(B) Typefaces or fonts must appear to be identical to those used by the commission in printed copies of the particular form.

(C) The text and order of the text must be identical to that used by the commission in printed copies of the particular form.

(D) The name and address of the person or firm responsible for developing the software program must be legibly printed below the border at the bottom of each page in no less than 6 point type and in no larger than 10 point type.

(p) Forms approved or promulgated by the commission must be reproduced on the same size of paper used by the commission with the following changes or additions only.

(1) The business name or logo of a broker, organization or printer may appear at the top of a form outside the border.

(2) The broker’s name may be inserted in any blank provided for that purpose.

(q) Standard Contract Forms adopted by the Commission are published by and available from the Commission at P.O. Box 12188, Austin, Texas 78711-2188 or www .trec .texas .gov.

The rules clearly require you to use a promulgated form if one is available, and to have an attorney prepare the appropriate document if a promulgated form for your situation does not exist. In practice, however, numerous situations can arise that cause no small amount of worry to a license holder who is concerned with getting a deal written up as quickly as possible.

Clients expect almost instantaneous responses and results and aren’t particularly interested in the hoops the license holder must jump through to comply with rules and regulations. This pressure can tempt license holders to take shortcuts rather than risk losing deals.

For example, the agent accompanies a client to an open house, negotiations take place with the seller and the seller’s agent, and a verbal agreement is reached. Buyer and seller are ready to sign a contract, but there are numerous repairs, alterations, personal property issues, closing conditions, and possession contingencies that must be covered. Because of the complexity of these items, there is no promulgated form or combination of forms that can cover everything. The seller and the buyer both agree that their respective agents should pull up whatever forms do exist, modify them fit the situation, have each party sign, and get things moving. With




large commissions at stake, pressure from buyer and seller, and the technology immediately available to accommodate the wishes of the buyer and seller, what should these agents do?

The rules state that an agent is permitted to fill in blanks in the promulgated contracts, but also that the license holder can add “factual statements and business details desired by the principals.” What constitutes a “business detail” or a “factual statement”?

In the fact situation outlined previously, the agents have decided that no promulgated form exists to adequately document the parties’ agreement. Possibilities include the following:

1. The buyer’s agent prepares such promulgated forms as are applicable, and the seller and the buyer together prepare the necessary contract additions that the buyer, with the advice of her broker, can review and sign if she wishes.

2. The parties themselves (not the agents) write up the deal and then sign it after review by their respective agents.

3. The buyer and her agent meet with the buyer’s attorney to have a contract prepared.

4. The buyer’s agent prepares the contract (using promulgated forms) to the extent possible, with the nonpromulgated portions to be prepared by the buyer’s attorney as soon as pos-sible.

There are obvious concerns with each of these alternatives.

� Alternative 1: While the rules certainly permit buyer and seller to prepare their own contract additions or addenda, unless they are experienced in the real estate business, this could lead to any number of complications.

� Alternative 2: Same problems as Alternative 1.

� Alternative 3: This is probably the smartest and safest way to go, but the delay could jeopardize the deal.

� Alternative 4: This approach has the benefit of getting the process going immediately (preparation of promulgated forms) and keeping the parties engaged, leaving only the nonpromulgated portion to the lawyers.

It is also important to note that a license holder is required to use the most recent promulgated form. Care should be taken not to automatically assume that the form in your office’s computer files, or the form you used last week is a current form. The best practice is to make sure the form you are about to complete is the current form made available by TREC.

How can you tell? In the upper right-hand corner of each page of a TREC form is a number indicating the effective date of the form. For example, if the current One to Four Family Residential Contract (Resale) form displays “2-12-xx” in the corner, this indicates the form became effective February 12, 20xx. You can confirm this is the most recently approved form for the transaction by referring to the TREC website on the Contract Forms page and comparing the number to the most recent effective date for your specific form. If your form has an earlier date, switch to the newer form.

It is always advisable to prepare your buyer’s offer rather than ask the seller’s broker to do so. It is very seldom a good idea to have the “other” side prepare a document that is meant to express your client’s position. Although not specifically permitted in the statute, TREC has made it clear that members of the public are free to use promulgated forms. The forms are designed for used by license holders, but the public is free to use them if so desired.

Before engaging in the business of completing any contract forms that bind the sale, lease, temporary lease, or rental of any real property, the license holder should become thoroughly familiar with what the rules do and do not permit.

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UNAUTHORIZED PRACTICE OF LAWThe TRELA specifically prohibits license holders from practicing law by giving opinions or counsel regarding the validity or legal sufficiency of an instrument that addresses real property rights or as to the status of title to real estate. Throughout the act, it is clearly established that, prior to signing a purchase contract, the license holder must give a buyer written advice to have the abstract covering the property examined by an attorney of the buyer’s selection or to obtain an owner’s title insurance policy before closing. Failure to give this written advice may result in disciplinary action by the TREC.

License holders who choose to become REALTORS® subscribe to a REALTORS® Code of Ethics that demands a very high level of professional conduct. The National Association of REALTORS® Code of Ethics advises against the unauthorized practice of law. Again, license holders are to advise their clients/ customers to seek an attorney’s advice for matters that require it.

The TRELA clearly establishes that it is illegal for the license holder to draw a deed, note, deed of trust, will, or other written instrument that transfers or may transfer an interest in or title to real property. However, the act goes on to give permission for a license holder to complete a contract form that may bind the sale, exchange, option, lease, or rental of any interest in real property as long as forms that are used have been prepared by or are required by the property owner or have been provided by the real estate commission, prepared by an attorney licensed by Texas, and approved by that attorney for a particular type of transaction.

Sec. 1101.654. SUSPENSION OR REVOCATION OF LICENSE OR CERTIFICATE FOR UNAUTHORIZED PRACTICE OF LAW. (a) The commission shall suspend or revoke the license or certificate of registration of a license or certificate holder who is not a licensed attorney in this state and who, for consideration, a reward, or in a pecuniary benefit, present or anticipated, direct or indirect, or in connection with the person’s employment, agency, or fiduciary relationship as a license or certificate holder:

(1) drafts an instrument, other than a form described by Section 1101.155, that transfers or otherwise affects an interest in real property; or

(2) advises a person regarding the validity or legal sufficiency of an instrument or the validity of title to real property.

(b) Notwithstanding any other law, a license or certificate holder who completes a contract form for the sale, exchange, option, or lease of an interest in real property incidental to acting as a broker is not engaged in the unauthorized or illegal practice of law in this state if the form was:

(1) adopted by the commission for the type of transaction for which the form is used;

(2) prepared by an attorney licensed in this state and approved by the attorney for the type of transaction for which the form is used; or

(3) prepared by the property owner or by an attorney and required by the property owner.

The license holder is free to explain to the principals the meaning of the factual statements or business details contained in the contracts, as long as the license holder does not offer or give legal advice.

When adding things to Special Provisions, license holders must take care that they do not cross the line and say things that change parties’ legal rights. For example, saying “this




contract is contingent upon a satisfactory appraisal or satisfactory inspection” changes the buyer’s rights under the contract and may be the unauthorized practice of law.

Another common error is for license holders to add things to special provisions that are already in the TREC contract or on a TREC addendum. A thorough understanding of the forms will prevent issues like this.

People not familiar the unauthorized practice of law might not realize how innocently these situations might arise and cause an individual’s real estate license to be in jeopardy. For example, suppose a broker’s sister has contracted to sell a rental property and, a few days before closing, the current tenant refuses to leave. Her regular attorney is out of town and the tenant’s behavior is threatening the closing. She asks her brother what her rights are and what she should do. Being very experienced in landlord-tenant law, he reviews the lease and tells her not to worry. He prepares the eviction papers for her signature and shows her how to file in order to remove the tenant before the closing.

There are obvious problems here:

1. In trying to be helpful and to preserve the closing, the agent has advised his sister-client about her legal rights.

2. He has drawn up legal documents (eviction papers) and given legal advice on how to file them to obtain the eviction order.

While it is true that experienced license holders may have more experience and perhaps even more knowledge in a specific area of real estate law than does the average general law practitioner, both TREC and state bar association authorities are serious about the unauthorized practice of law. Note the language of the statute; it does not make provision for a reprimand or a fine. It requires TREC to suspend or revoke the license of a real estate license holder who practices law without a license.

Note the interaction between the use of promulgated forms and the unauthorized practice prohibition. The license holder can be very careful to always use the most recent promulgated form, yet still violate the rule by not using the form properly. Recall the provision of the statute that says the license holder is authorized to fill in blanks on the promulgated form, “and may not add to or strike matter from such form, except that license holders shall add factual statements and business details desired by the principals and shall strike only such matter as is desired by the principals and as is necessary to conform the instrument to the intent of the parties.”

A buyer or a seller might think an item is a business detail or a factual statement, but license holders must exercise sound judgment when deciding whether to make alterations. If that item has the effect of creating or altering the legal rights or relationship of the parties, or of making or altering an agreement between the parties with respect to the title of the property, or the quality of the title to be delivered by the seller, the license holder would be wise to refer that issue to an attorney.

Another test that should be applied to items being negotiated by the parties is whether a promulgated contract form, addendum, or other TREC-approved form exists to address the situation, which would eliminate the need to decide whether the contract alterations go beyond the license holder’s authority. In fact, if such promulgated form exists, the license holder is required to use that form rather than to try to include the provisions in some other manner.

License holder are specifically prohibited from advising a person regarding the validity or legal sufficiency of an instrument or the validity of title to real property. What does this mean?

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A common situation might be when a client expresses concern about a specific aspect of a contract, such as the type of deed that will be used to convey title, or the wording of an easement that shows up on the title insurance commitment, or the impact of a lease to which the property is subject. Many questions might arise: “What does this mean?” “Am I protected from the tenant on this deal?” “Does this mean I can’t ever build on that part of the property?” “Is there some way to clear up this restriction?” In each of these instances, the agent is being asked to provide an opinion about the legal impact of some portion of the agreement or about the impact on the title to the property. TRELA prohibits license holders from doing this.

This can be a tricky area for license holders. A license holder who has specialized in particular types of property (farm and ranch, commercial, townhomes, estate-sized single family, etc.), has most likely developed substantial expertise in that specialty. She likely knows a great deal about things that impact her field (easements, water rights, HOAs, mineral rights, repair costs), and her expertise and assistance are valuable to her clients. However, if that assistance comes in the form of legal advice, she can face consequences from TREC. If the client suffers some sort of damages because the license holder gave the wrong advice, there can be financial consequences as well. That being said, the license holder should not be afraid to share her knowledge and experience. When she does, she should accompany it with a statement like this: “Based on my experience, here is what I think. However, I am not a lawyer and I am not giving you legal advice. You should list your concerns and consult with an attorney about each of them so you can decide how best to proceed.” Depending on the significance of the issues, the size of the transaction, and the nature of the relationship with the client, the license holder might even wish to follow up the conversation with an email summarizing the discussion and reemphasizing the recommendation to seek the advice of an attorney.

License holders should be aware of Section 81.101 of the Texas Government Code. Although this provision is not part of the TREC rules, it could influence a disciplinary proceeding in which unauthorized practice of law is being charged. The relevant portion says the following:

(a) In this chapter the “practice of law” means the preparation of a pleading or other document incident to an action or special proceeding or the management of the action or proceeding on behalf of a client before a judge in court as well as a service rendered out of court, including the giving of advice or the rendering of any service requiring the use of legal skill or knowledge, such as preparing a will, contract, or other instrument, the legal effect of which under the facts and conclusions involved must be carefully determined.

(b) The definition in this section is not exclusive and does not deprive the judicial branch of the power and authority under both this chapter and the adjudicated cases to determine whether other services and acts not enumerated may constitute the practice of law.

Note the key phrase “including the giving of advice or the rendering of any service requiring the use of legal skill or knowledge.” Even though a real estate license holder may have extensive experience and “legal skill or knowledge,” unless she is licensed as an attorney in Texas, she must be very careful in how she uses that knowledge.

Here are some examples of disciplinary actions involving the unauthorized practice of law:

In the Longhurst case, among many other violations, the agent inserted sales contract provisions into the special provisions section of a lease agreement, the intent of which was to create a lease with option to purchase. This was clearly the unauthorized practice. Due to the nature of this and other violations, the agent’s license was suspended and a reprimand issued, as well as an administrative penalty (fine) being levied.




In the Wickware case, the agent violated a number of rules and regulations, including the preparation of a special warranty deed at the request of the purchaser, her client. The result of the proceedings was revocation of the agent’s license and a fine. It should be noted that the unauthorized practice of law was the least serious of numerous ethical violations. There was no allegation that the deed was improperly prepared or that the client suffered adverse consequences as a result of the agent’s preparation of the deed. Nonetheless, when this violation was added to the all the others, revocation was the result.

For many years, there have been battles between title companies and unauthorized practice (grievance) committees about what title companies can and cannot do. Here are examples of the unauthorized practice of law that might surprise you.

The title insurance company had some documents drafted by one of the title company’s employees, who also happened to be an attorney licensed in Texas. The documents had to do with the title to the real estate the company was about to insure and were used to solve problems with the title. In Hexter Title & Abstract Co., v. Grievance Committee, 179 S.W.2d 946 (Tex. 1944), the court held that the title company was practicing law without a license. In Rattikin Title Co. v. Grievance Committee, 272 S.W.2d 948 (Tex. Civ. App.—Ft Worth 1954, no writ), the title company had to use outside (nontitle company) employees to draft documents or the title company would be practicing law.

Conversely, there doesn’t seem to be any statute prohibiting a nonlicensed person from preparing a deed that the nonlicensed person will sign to convey an interest in real estate. This would seem to be consistent with the situation in which a person who has neither a law license nor a real estate license is permitted to prepare that person’s own contracts to sell real estate.

I N P R A C T I C E

While preparing one’s own deed or real estate contract might be lawful, it still might not be a good idea. Completing a simple deed to disclaim any interest in property to clean up a title might be a simple transaction and result in no problems, but it can also create more problems than it solves. What if the legal description is wrong? What if the spelling of the name or names is wrong? What if the deed makes an erroneous referral to another document? What if the execution and delivery of the deed creates an unanticipated tax liability? What if the execution of the deed violates a local ordinance or causes the remaining property to become ineligible for a building permit? These are issues that an experienced real estate lawyer will consider before preparing a deed, and the reason a nonlicensed people should be cautious about preparing their own documents.

How might this impact a license holder? Let’s assume you are at the closing table and a minor title problem is discovered that can be solved by a simple quitclaim deed signed by the seller. There are lawyers at the table, so the seller’s attorney should be able to use a readily available form, complete the deed, and have the seller sign it. What if there are no attorneys quickly available? Should the seller prepare a deed? The buyer? A title company employee? These are not the best alternatives for the reasons already mentioned.

The easy but inconvenient answer is that an attorney should review the situation and prepare the appropriate deed for the seller to sign, but that might create unacceptable delays and jeopardize the closing.

One possibility would be to have all closing documents signed and held in escrow by the title company pending receipt of the quitclaim deed. While this raises the question of who will prepare the escrow agreement, escrow agreements are very common with title companies and should be available fairly quickly.

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Another possibility is to refer the matter to your managing broker for advice on exactly how your firm wants it handled.

While this transaction can be resolved in a number of different ways, it’s important for license holders to remember to comply the TRELA to avoid the unauthorized practice of law: do not draft an instrument that transfers or otherwise affects an interest in real estate, and do not give legal advice.

THE BROKER-LAWYER COMMITTEEOne of the advisory committees that exists under the TRELA is the Texas Real Estate Broker-Lawyer Committee (Broker-Lawyer Committee or committee).

The committee is composed of six Real Estate Commission appointees (who are licensed real estate brokers) and six lawyers, appointed by the president of the State Bar of Texas, and one public member, appointed by the governor. They serve staggered six-year terms.

The Broker-Lawyer Committee drafts and revises contract forms for use by real estate license holders. The purpose is to expedite real estate transactions and reduce controversies while protecting the interests of the parties involved.

This Broker-Lawyer Committee does not promulgate, or publish, forms for mandatory use by license holders. Only the TREC has been given rule-making authority. The Broker-Lawyer Committee develops forms and recommends their adoption, but it is the TREC that promulgates the forms for mandatory use. The act clearly establishes the membership in and responsibilities of the committee. Carefully review the following text of the act.

SUBCHAPTER F

TEXAS REAL ESTATE BROKER-LAWYER COMMITTEE

Sec. 1101.251. DEFINITION OF COMMITTEE. In this subchapter, “committee” means the Texas Real Estate Broker-Lawyer Committee.

Sec. 1101.252. COMMITTEE MEMBERSHIP.

(a) The Texas Real Estate Broker-Lawyer Committee consists of 13 members appointed as follows:

(1) six members appointed by the commission;

(2) six members of the State Bar of Texas appointed by the president of the state bar; and

(3) one public member appointed by the governor.

(b) Appointments to the committee shall be made without regard to the race, creed, sex, religion, or national origin of the appointee.

Sec. 1101.254. POWERS AND DUTIES.

(a) In addition to other delegated powers and duties, the committee shall draft and revise contract forms that are capable of being standardized to expedite real estate transactions and minimize controversy.

(b) The contract forms must contain safeguards adequate to protect the principals in the transaction.

Sec. 1101.253. TERMS; VACANCIES.

(a) Committee members serve staggered six-year terms, with the terms of two commission appointees and two State Bar of Texas appointees expiring every two years and the term of the public member expiring every six years.




(b) A committee member shall hold office until the member’s successor is appointed.

(c) If a vacancy occurs during a member’s term, the entity making the original appointment shall appoint a person to fill the unexpired term.

USE OF PROMULGATED FORMSTREC rule 537.11 addresses the use of standardized forms and lists the forms that are currently promulgated (published) for mandatory use by a license holder when the form fits a transaction.

The Real Estate Commission has promulgated and approved these forms for license holders’ use:

� 6 promulgated contracts

� 17 promulgated addenda (including 2 temporary leases)

� 1 promulgated amendment (which is shown on the TREC site as a contract form)

� 2 promulgated resale certificates

� 2 promulgated notices

� 3 promulgated consumer disclosures

� 7 approved forms (including approved addenda)

The promulgated forms available through TREC are listed on the following pages. The forms change regularly; visit TREC’s website for information about current forms, including the date the form was promulgated and the current version number of the form. Earlier versions of forms may not be used; to do so could be considered the unauthorized practice of law.

The version number (form number) of the form is included in the bottom right corner of each page of the form (see Figure 2.1). Pay attention to the form numbers. In addition to providing version control, it’s possible you might hear a form referred to by its number instead of its name (e.g., 20-14 instead of One to Four Family Residential Contract).

FIGURE 2.1: One to Four Family Residential Contract Version Number

Initialed for identification by Buyer and Seller TREC NO. 20-14

Approved vs. PromulgatedAlthough the emphasis here is on promulgated forms, TREC also provides a number of other forms that have been approved for use by license holders but that are not mandatory. Sometimes these are forms that TREC wants to experiment with to see how they work in the real world before making them mandatory. This includes forms prepared by the Texas Association of Realtors® that have been approved by TREC for use by license holders. Approved, but not mandatory.

The forms indicate at the top whether they’re promulgated (mandatory) or approved (for voluntary use). If a contract or addendum is promulgated, that means that it is required when its particular use comes up in a transaction. For example, the Farm and Ranch Contract is a promulgated contract but that does not mean it will be required for every transaction. It will, however, be required for agricultural transactions for which it was created unless there is an

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exception to its use. Remember that you must use promulgated forms unless one of the four exceptions (537.11. Use of Standard Contract Forms) comes into play.

The approved forms are identified in a different way than the mandatory forms. The promulgated (mandatory) forms are identified with a form number (e.g., 20-14), but the approved (voluntary use) forms are identified by form letters, beginning with OP (e.g., OP-C).

While it is not covered in detail in this lesson, it will be helpful for you to know a little about the lead-based paint addendum. As you have seen, this is not a form promulgated by TREC. However, information about the hazards of lead-based paint must be provided to purchasers of homes built before 1978. If the seller knows of the presence of lead-based paint in the structure, that must be disclosed to the purchaser. The lead-based paint addendum form provided by TREC is not a required form, but it has been approved for voluntary use. Given that TREC has approved the form, there would be no reason not to use it to fulfill the federal requirement. The thing to remember here is that the form is not promulgated, but it does satisfy the federal requirement for disclosure.

Texas Real Estate Commission FormsPromulgated Contracts:

Unimproved Property Contract

One to Four Family Residential Contract (Resale)

New Home Contract (Incomplete Construction)

New Home Contract (Completed Construction)

Farm and Ranch Contract

Residential Condominium Contract (Resale)

Promulgated Addenda:

Addendum for Sale of Other Property by Buyer

Addendum for Back-Up Contract

Addendum for Release of Liability on Assumed Loan and/or Restoration of Seller’s VA Entitlement

Seller’s Temporary Residential Lease

Buyer’s Temporary Residential Lease

Seller Financing Addendum

Environmental Assessment, Threatened or Endangered Species, and Wetlands Addendum

Addendum for Coastal Area Property

Addendum for Property Located Seaward of the Gulf Intracoastal Waterway

Addendum for Property Subject to Mandatory Membership in an Owners’ Association

Third Party Financing Addendum

Loan Assumption Addendum

Addendum for Reservation of Oil, Gas and Other Minerals

Short Sale Addendum

Addendum to Property in a Propane Gas System Service Area




Addendum Concerning Right to Terminate Due to Lender's Appraisal

Addendum for Authorizing Hydrostatic Testing

Promulgated Amendment:

Amendment to Contract

Promulgated Resale Certificates:

Condominium Resale Certificate

Subdivision Information, Including Resale Certificate for Property Subject to Mandatory Membership in an Owners Association

Promulgated Notice:

Notice of Buyer’s Termination of Contract

Notice of Seller’s Termination of Contract

Promulgated Consumer Disclosures:

Consumer Protection Notice

Disclosure of Relationship with Residential Service Company

Information About Brokerage Services

Approved Optional/Voluntary Use Forms:

Notice to Prospective Buyer

Seller’s Disclosure Notice

Texas Real Estate Consumer Notice Concerning Hazards or Deficiencies

Lead-Based Paint Addendum

Non-Realty Items Addendum

Notice Concerning Easements and Rights-of-Way

Property Inspection Report

Why Aren’t There More Forms?You might notice that there are no promulgated or approved forms for such things as leases (other than the temporary buyer and seller forms), listing agreements, purchases of businesses, leases with options to purchase, purchases of commercial property, and buyer-broker agreements. While these agreements all deal with different aspects of real estate sales and leasing, they have one thing in common: they are far more complex than the typical residential or farm/ranch transaction. It would be virtually impossible to devise standardized forms that would “expedite real estate transactions and minimize controversy.” To the contrary, the forms would be so long and contain so many blanks to be completed and special provisions to be added that they might well delay transactions and create more controversy.

As a practical matter, commercial transactions are sufficiently complex that buyer and seller will almost certainly have their own lawyers that will be drafting a custom contract to fit the transaction, or they will be using their own form created from years of experience in the field.

Likewise, with the intense competition in the real estate business and the ever-changing ways in which commissions are charged and services provided, each brokerage will want its

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own listing and buyer-broker agreements that are based on that firm’s practices, as well as its experience in dealing with clients. Any attempt at standardizing these forms would be futile, and imposing a specific contract form on all real estate firms would likely be a losing proposition if the form were challenged in court.

PRESENTING OFFERS AND MULTIPLE OFFERSAll offers should be in writing and presented to the property owner as quickly as is reasonably practical. The TREC rules call for immediate presentation. No real estate broker or salesperson has the right to withhold an offer from a property owner. To do so may result in suspension or revocation of one’s license under the provisions of the TRELA or, worse, result in an unpleasant lawsuit for tortious interference. A tort is an act that damages another individual and gives rise to legal action. A property owner may consider the license holder’s failure to present an offer in a timely manner a tortious interference with the license holder’s ability to sell the property.

Every license holder in Texas must successfully complete a 30-hour course in the law of agency to obtain a license. As taught in the law of agency, license holders must never lose sight of their fiduciary duties to their clients when helping them negotiate contracts. In addition to obedience (finding a buyer for the property), loyalty (putting the client’s interest above all others, including the license holder’s own), confidentiality (not revealing the client’s personal information, although license holders have the duty to disclose all material facts about the property not specifically excluded by statute), reasonable care, and due diligence, license holders owe their clients disclosure and accounting. Failure to present an offer is certainly a breach of a license holder’s fiduciary duties, as well as the possible basis for a tortious interference lawsuit. Unless instructed otherwise by the seller, all offers must be presented. A seller’s instruction not to present backup offers must be given to the license holder in writing.

A seller presented with a written offer may

� accept it,

� reject it,

� counter it, or

� do nothing (ignore it).

When an offer is unacceptable to the property owner, the owner’s interest is best served when the owner gives written notice that the offer is unacceptable, thanks the offeror for the prospect’s interest in the property, and invites the offeror to submit another offer. The seller should give the offeror information that will shed some light on what terms would be more acceptable to the offeree. A REALTOR® and his client might use the Texas Association of REALTORS® (TAR) Seller’s Invitation to Buyer to Submit New Offer form, available to TAR members at www .TexasREALTORS .com. The form is specifically designed for this purpose. License holders who are not members of TAR might simply create a letter to convey the message to the offeror.

FIGURE 2.2: Letter of Nonacceptance

Dear Mr. and Mrs. Cross,

Thank you for your offer to purchase our home at 4221 Pine Hollow Drive. We cannot accept your offer as presented. We appreciate your interest and encourage you to submit another offer which will be more favorably considered if you will

■ offer a purchase price more in line with current market value,




■ close within 30 to 60 days, ■ purchase the property in its present condition, and ■ pay your own loan origination costs including the fee for the survey required by your lender.

Although this is not a counteroffer, we look forward to hearing from you soon.

Sincerely,

John and Elizabeth Wagner

Note: When using this letter, do not sign the offer.

Remember, an offer or counteroffer remains open until accepted, rejected, or withdrawn. For example, if the seller has countered one offer and then a better offer comes in, the seller must be careful to withdraw his counteroffer to the first buyer before making a counteroffer to the second buyer.

A potential purchaser may withdraw an offer to purchase a property in writing anytime before the potential purchaser is notified of the offer’s acceptance.

DocumentationDocumentation is an important aspect of negotiations that is often ignored. In the desire to move things along and conclude negotiations with a contract favorable to the client, an agent has the natural tendency to conduct discussions verbally, to go back and forth several times between the client and the other party’s agent, and to push to reach an agreement. This can result in misunderstandings and, at worst, miscommunications that produce complaints to TREC and lawsuits.

In these situations, a written record of who said what and who agreed to what provides a record to refer to as needed, and it can help prevent disagreements and misunderstandings that lead to more serious disputes. A simple format works well: “From our conversation today, I understand your client has agreed to include in the transaction the living room sofa and chair, as well as all side tables, lamps, and rugs in the room, at no additional cost to my client. I will put this understanding in a document for everyone to sign and get it to you as quickly as possible. In the meantime, if I have misunderstood the agreement, please get back to me as quickly as possible.”

This note can go to the other broker via email, with a copy to your client. This reinforces the agreement by making all parties aware of what has been said and agreed to, and it provides the opportunity to clear up any confusion or mistakes before the amendment is prepared. In other words, it minimizes the possibility of the awkward “but I thought you said” conversation just before closing!

A related concept here is known by various names but is generally referred to as the contemporaneous business records doctrine. This principle states that if you make notes of conversations, transactions, and the like, in the regular course of your business, those notes may later be used to refresh your memory of what was said and of the substance of the conversation. In the event of a dispute, these notes might be helpful in proving the truth of what you are saying. For example, if your listing client says that under no circumstances are you to even transmit to him an offer of less than $350,000 but later tells you by phone that all offers should be transmitted, you should not only make notes in the file of the conversation but also confirm it with an email.

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Multiple OffersThe proper handling of multiple offers is a common challenge. TREC Rule 535.156 provides some guidance on this issue:

(a) A license holder’s relationship with the license holder’s principal is that of a fiduciary. A license holder shall convey to the principal all known information which would affect the principal’s decision on whether or not to make, accept or reject offers; however, if the principal has agreed in writing that offers are not to be submitted after the principal has entered into a contract to buy, sell, rent, or lease a property, the license holder shall have no duty to submit offers to the principal after the principal has accepted an offer.

(b) The license holder must put the interest of the license holder’s principal above the license holder’s own interest. A license holder must deal honestly and fairly with all parties; however, the license holder represents only the principal and owes a duty of fidelity to such principal.

(c) A license holder has an affirmative duty to keep the principal informed at all times of significant information applicable to the transaction or transactions in which the license holder is acting as agent for the principal.

(d) A license holder has a duty to convey accurate information to members of the public with whom the license holder deals.

A you can see, TREC Rule 535.156(a) specifically requires a license holder to “convey to the principal all known information which would affect the principal’s decision on whether or not to accept or reject offers.” Subsection 535.156(c) further provides that “a license holder has an affirmative duty to keep the principal informed at all times of significant information applicable to the transaction or transactions in which the license holder is acting as agent for the principal.” Thus, the rules require the listing agent to submit all written purchase offers to the seller until a buyer and the seller have a fully executed contract.

Although the general rule is that all offers must be communicated to the seller by the listing agent, there are a few exceptions. These include instances where the seller has specifically instructed the listing broker, in writing, not to bring the seller any offers below a certain price, or situations in which a binding contract has been executed between a seller and buyer. A good business practice to follow is to always have such directives reduced to writing and retained in your permanent file on the property and/or client. In the latter situation, Rule 535.156(a) provides that “the license holder shall have no duty to submit offers to the principal after the principal has accepted an offer.” However, the seller may want to continue to try to negotiate a backup offer. Be certain you know the seller’s wishes going forward. Furthermore, the listing agent is discouraged from sharing any information about one buyer’s offer with another buyer.

Good business practice dictates that listing agents keep other agents informed about their offers. If the seller rejects an offer, the listing agent should ask the seller to write rejected on the offer and sign or initial. This gives the other agent and the buyer proof that the offer was presented.

The listing should address the broker’s duty regarding backup offers to avoid confusion on the issue. Also, trade association rules and standards of practice may affect the broker’s duty.




In the end, it is always the seller’s decision whether to accept or reject offers they receive. The seller has no legal duty to respond to any offer and is free to consider any and all offers until an offer is accepted. The seller has no duty to respond to the offers in any particular order; if three offers are received, the seller may reject the offers that were received first and second and accept the third.

Before exploring some approaches to avoid confusion and hard feelings when there are multiple offers, let’s consider some of the complications involved in multiple offer situations:

� There is an inherent conflict between the wishes of buyer and seller. The buyer (and therefore the buyer’s agent) is interested in buying as low as possible, while the seller (and therefore the seller’s agent) wants the highest possible price with the least conditions, contingencies, and complications.

� Each agent is obligated to place his client’s interests above those of all parties to the transactions but at the same time to be fair and honest with all parties.

� The agent must make full disclosure of all material facts but is prohibited from disclosing information detrimental to the client unless the disclosure is required by rule, regulation, or law. Such mandatory disclosures would include the presence of lead-based paint, structural defects, known hazardous material issues, and the like. Information that a seller might not want disclosed would include the seller’s desperation to sell quickly or pending financial or personal problems that weaken the seller’s negotiating position. The buyer may wish to keep confidential his need to close very quickly due to having accepted a job or his very strong financial position that allows him to pay the listing price, if not more.

� Disclosure or not of some information can have either a negative or a positive impact on negotiations. For example, if there are multiple offers, buyers might be stimulated to bid higher than they otherwise would or they might be unable or unwilling to bid at all and move on to a different property. If the seller knows the buyer is highly motivated to purchase this specific property, the seller might hold out for a higher price and ultimately either exhaust the buyer’s financial strength or turn the buyer off completely. This is where the expertise and experience of the respective agents is valuable. If each agent has a realistic understanding of the current market, of the client’s needs and reasonable expectations, and of the demand for the property in question, the agents can counsel their individual clients on what they believe is the most likely path to reaching a contract.

� When faced with multiple offers of varying quality and attractiveness, it is easy for the seller’s broker to get caught up in the desire to push the contract price above the original listing, and for the buyer’s agent to win the bidding war so that his client is the ultimate buyer. License holders must remember that the client should be advised of the pros and cons of whatever negotiating position the client takes, including disclosure, or not, of nonmandated information, and that the client must ultimately make the decision.

A good start to avoiding problems and confusion in dealing with multiple offers is to address the issue during the listing process. Although there is no promulgated listing form, the Texas Association of REALTORS® (TAR®) has a listing form that addresses situations that might come up, providing an opportunity to discuss with the seller how these situations will be handled. Only members of TAR are permitted to use the form, but you can benefit from the ideas it contains.

� Variable commission depending on who brings the offer. Some offices will charge a lower commission if the listing broker or someone within the office produces the “winning” offer than if the offer comes from another brokerage. This must be disclosed when the property is listed and can, obviously, impact the net proceeds to be received by the seller. While the broker should never pressure the client to accept an offer from the broker’s own

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office, there is nothing improper about pointing out the net proceeds differential when the seller is comparing offers. Also bear in mind that the listing broker must show in the MLS listing that a variable commission arrangement exists and should advise the broker bringing an offer from outside of this situation. This allows the outside broker to account for the commission differential in crafting his offer.

� There should be a discussion of how the seller wants the broker to handle multiple offers. Should the existence of multiple offers be disclosed to other potential buyers? Should the terms of those offers be revealed? Should the broker continue to present offers after a certain number have been received by the seller but not yet accepted? Should the broker present a backup offer, or not, after a specific offer has been accepted?

� Note that some of these same issues exist if the broker is representing a buyer. For example, as a buyer-broker you may have more than one client that has an interest in the same property and may wish to make an offer. Sometimes called a “competing client” clause, this disclosure makes the broker’s clients aware that the broker may end up making offers on behalf of more than one client on the same property. This clause also obligates the broker to “treat the competing buyers fairly.”

� When there are competing offers, regardless of the source, the listing broker must know whether she can reveal the terms of the offers to other buyers. The decision of whether or not to reveal those terms is up to the seller, and the broker should always have that decision, whichever way it goes, in writing in order that the broker is not accused of revealing confidential information without the seller’s permission.

Presentation of offers

1. Must present all offers unless directed not to by seller

2. Let agents presenting offers know if offer(s) won’t be looked at until a certain day and/or time

3. If offer is rejected, have seller so note and initial or sign the rejection

4. Be sure seller understands all the pros and cons of all offers

One expert suggests putting each offer in a different folder with the terms noted on the outside:

� Net to seller

� Closing date

� Kind of financing

� Possession date

� Have seller choose the offer that is most appealing, then go over it in detail.

That is obviously a very simplified statement of a complex process. You will want to explain the offer in great detail and be sure the client understands the pros and cons of each term and date.

When an offer is presented, the next step is either to accept or counter the offer the client has chosen. The other offers should be rejected in writing and thanked for their interest. If the decision is to counter, the terms of the counter are documented and returned to the buyer’s broker for acceptance, or not.

An interesting variation is offered by TAR’s “Seller’s Invitation to Buyer to Submit New Offer.” In essence, this document says the seller has not accepted the offer, but the buyer is invited to submit a new offer that the seller will “more favorably consider” if it contains




specified terms. The form is not a counteroffer, merely an invitation to the buyer to submit a new offer that the seller will be more likely to accept.

A variation on this approach would be to provide all rejected offers with the same invitation to see who comes up with the best offer. This will provide the seller with the best chance to truly receive the best offer from the competing buyers. It creates almost an auction-like atmosphere without the seller being obligated to accept any of the new offers.

Still another variation that some sellers utilize is to instruct their broker to tell potential buyers to make their “highest and best” offer at the outset. In other words, don’t make an offer that you expect me to counter; give it your best shot and your offer will either be accepted or rejected. The obvious benefit of this, especially in a seller’s market, is to save negotiating time and move toward contract quickly. The obvious danger is that a buyer doesn’t want to be pressured into making a higher offer than she has to and may simply walk away. Again, in a seller’s market, this may be an acceptable risk to the seller. Another benefit of this is that the seller is not legally obligated to accept any of the offers and, in fact, is not prevented from making a counteroffer. The problem with that is if you have indicated you won’t make counteroffers, and then do, it hurts your credibility with potential buyers and it doesn’t help the listing agent’s credibility with other brokers. One way to mitigate this is to make clear to bidders that your goal is to minimize a bidding war and to save everyone time, which is why you are suggesting the highest and best approach. It does not mean you will not counter, only that you are highly unlikely to do so.

Another variant: In an effort to squeeze the best deal out of each bidder, the client instructs the broker to tell different things to different bidders. What should the broker do? Given the ethical obligations brokers have toward buyers, sellers, and their fellow license holders, the best practice is to voice understanding of what the client would like to accomplish but to also make it clear that your personal and professional ethics require you to provide the same information to all bidders. This obviously risks a disagreement with the client, but that is likely preferable to developing the reputation of someone who plays fast and loose with the rules.

A lecturer discussing the subject of multiple offers made this suggestion: rather than saying/writing that an offer has been “rejected,” you consider using the term “declined.” A small thing, perhaps, but it indicates a level of respect and professionalism, and encourages a more congenial relationship and perhaps encourages a better offer!

WHEN DOES THE OFFER BECOME A CONTRACT?The offer becomes a contract when all parties have agreed to all terms of the offer and have signed the contract. That final date of acceptance is the date on which the contract becomes binding between the parties. The following four things must take place in order for the contract to become binding and effective (becoming the effective date in the contract):

� Be in writing

� Buyer and seller sign final contract and initial all changes

� Acceptance is complete, without doubt

� Last party to accept communicates (can be verbal) that written acceptance has taken place to the other party (or the other party’s agent)

Remember, the promulgated contract forms instruct the agent acting for the broker to fill in this final date (date of final acceptance) as the effective date. Even though the form says

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“BROKER: FILL IN THE DATE OF FINAL ACCEPTANCE,” affiliated license holders are usually authorized by the broker to complete the effective date.

A good business practice for the license holder who obtains the final signature, or the final initial, on the contract form is to immediately call the license holder working with or for the other party to inform them that the offer is finalized and that they are now filling out the effective date. That communication should be followed up with a written copy as soon as possible.

An important thing for license holders to remember is that until this finalization occurs, the property is still for sale and any other offers must be presented. There is no such thing as “almost sold.”

One of the reasons it is so important to know if a contract has actually been formed is that people sometimes change their minds. A principle of contract law is not only that there must be offer and acceptance but also that acceptance must be communicated to the party making the offer. For example, suppose the buyer signs the contract and it is given to the seller for review. The seller signs the agreement on Friday night and plans to return the signed document to his broker at lunch on Saturday. He doesn’t mention acceptance to his broker right away. The buyer changes her mind and both emails and faxes a note withdrawing the offer at 1:00 am Saturday morning.

Traditional contract law says the withdrawal of the offer occurred before the buyer was notified of acceptance, and therefore there is no contract. If you find yourself in an awkward situation such as this, it is, of course, important to discuss the situation with your lawyer as quickly as possible so as to respond properly. A more profitable choice would have been for the seller to notify his broker immediately upon accepting the offer, and for the broker to have notified the buyer immediately of the acceptance. While verbal notification of acceptance is legally binding, written confirmation is preferable and can be done electronically.

KEY POINT REVIEWReal estate in Texas is governed by the statutory laws of the state. Laws are passed by state legislators and enforced by the TREC.

In addition to TRELA, license holders must be aware of the TREC Rules.

The Broker-Lawyer Committee drafts and edits contract forms for use by real estate license holders and TREC approves and promulgates them.

Real estate license holders must use the promulgated forms except in specific exempted cases. Promulgated contract forms cannot be altered except as a requirement of the parties.

TREC rules contain provisions regarding the presentation of offers and multiple offers. A seller presented with a written offer has four choices: accept it, reject it, counter it, or do nothing.

An offer becomes a contract when all parties have agreed to all terms of the offer and have signed the contract.



41

UNIT 2 EXAM

1. The purpose of the TRELA is toA. protect real estate license holders.B. protect real estate brokers from unscrupulous

salespeople.C. protect the public.D. keep the cost of real estate services under

control.

2. Which group administers the TRELA?A. Texas Real Estate CommissionB. National Association of REALTORS®

C. Texas Association of REALTORS®

D. Broker-Lawyer Committee

3. The Broker-Lawyer CommitteeA. drafts and edits forms.B. approves forms.C. promulgates forms.D. approves and promulgates forms.

4. How many members make up the Broker-Lawyer Committee?A. 9B. 10C. 13D. 17

5. Which action might leave a license holder open to a charge of practicing law without a license?A. License holder advises the seller that the

property probably won’t sell because it is overpriced.

B. License holder advises the buyer, in writing, that a title policy should be obtained, as well as a survey.

C. License holder advises both the seller and the buyer that, in his opinion, title to the subject property is encumbered.

D. License holder adds factual statements and business details to a promulgated form as requested by the client.

6. The seller isA. obligated to accept any offer that is at or

above the list price.B. obligated to accept any offer that will net the

seller the amount she agreed upon.C. never obligated to accept any offer.D. obligated to accept any offer that has a

reasonable possession date.

7. Which of the following is TRUE regarding the presentation of offers to a seller?A. A license holder can use his discretion in

determining which offers to present to the seller.

B. License holders are not required to present offers to sellers that are 30% below the asking price.

C. A license holder doesn’t have to present offers $20,000 below the asking price if the seller has given the license holder that direction in writing.

D. License holders need to present all offers to sellers within one month of receiving the offer.

8. If the seller has already sent a counteroffer to a prospective buyer and then receives another offer that is even better, the sellerA. must wait to hear from the first buyer.B. is free to counter this offer too.C. must tell the first buyer about the second

offer and give them an opportunity to come up to the new amount.

D. should withdraw the first counter before answering the new offer.




9. Which of the following is NOT an exception to the rules requiring that promulgated forms be used and completed by the license holder?A. When the contract form has been prepared

by the seller’s attorney and is required by the seller

B. When an agency of the U.S. government requires a different form

C. When the contract form has been prepared by the buyer’s agent

D. When the license holder is functioning solely as a principal

10. What should a license holder do when there are unusual matters involved in a transaction?A. Explain it to the best of his ability before

letting the prospect sign the contractB. Ignore it and hope that the client understands

itC. Have the client sign the form and then advise

the client to talk to an attorneyD. Advise the client to seek legal advice before

signing anything



laws, rules, and regulations

Documents