Sales Contracts and Transaction Guide
A letter of intent, form 4-33 in this chapter, sets out the basic business terms of the transaction for the sale and purchase of real estate without obligating the parties to sell or buy. A letter of intent starts the discussion between the seller and buyer based on the premise that they will enter into a binding contract that will include terms set out in the letter of intent. Form 4-1 in this chapter is a checklist that can assist in completing the letter of intent.
The binding provisions of a letter of intent may include the following: a termination date if a contract is not finalized; cessation of the seller’s marketing efforts for the property; confidentiality; payment by each party of its legal fees; whether the buyer’s access to the property requires the seller’s permission; and indemnification of the seller by the buyer for any claims arising from the buyer’s entry onto the property.
§ 4.2Real Estate Sales Contract
The real estate sales contract, form 4-2 in this chapter, is drafted as a neutral form of contract, intending to provide reasonable terms for the buyer and the seller. While the general terms of the contract may be considered customary in a real estate transaction, all contract terms are subject to negotiation. Terms most likely to vary are in the exhibits. Alternative provisions are provided throughout the contract.
Contracts for the sale and purchase of real estate are as diverse as their subject matter. Attorneys are charged with drafting contracts that reflect the parties’ agreement and protect the interests of their clients. Attorneys typically start with a form and then revise, add, and delete provisions to tailor the form into a contract that documents the parties’ agreement. A contract drafted by an attorney for the seller will not be the same as a contract drafted by an attorney for the buyer. Regardless of which party’s attorney drafts the initial contract, provisions will change as the parties negotiate the final contract.
Once the parties agree on the business terms, with or without a letter of intent, the attorney for the party drafting the initial contract can fill out the basic information for the contract from the completed checklist, form 4-1 in this chapter.
The commentary is organized in the same order as the sections of the contract. The following sections describe the provisions of the real estate sales contract and include considerations for the attorney in drafting, reviewing, and negotiating a contract; assisting the client during investigation of the property; and closing the transaction.
§ 4.3Introductory Paragraph: Offer and Acceptance
The introductory paragraph of the contract identifies the seller and buyer and states what the parties must do to form the contract of purchase and sale. The parties must sign the contract and the title company must receipt the contract and the earnest money.
Proper identification of the parties is important. The seller and the buyer should be identified as fully as possible. Capacity and authority should be considered, especially if a party is not an individual acting on his or her own behalf. See section 3.10 in this manual for a discussion of party designations. The buyer’s earnest money must be paid to the title company in good funds for there to be a binding contract. The effective date of the contract is when the title company receipts the contract and the earnest money in good funds.
§ 4.4Purchase and Sale of Property
§ 4.4:1Purchase and Sale Agreement
Paragraph A.1. of the contract sets out the agreement of the parties to sell and buy the property. The real and personal property are summarily described in this paragraph and more particularly described in exhibit A. The contract should describe the real and personal property with legal specificity. If the property is not described sufficiently, the contract may be unenforceable because of vagueness. See section 3.8 in this manual for a discussion of property descriptions. Attention should also be given to the conveyance of appurtenant rights, such as permits, licenses, access easements, access to utilities, and similar rights. Exhibit A references clause 4-3-9 to provide a more extensive description of the seller’s property rights to be conveyed.
Two versions of paragraph A.2. are provided, one for a “Purchase Price” that is a stated sum and an alternative for an “Adjusted Purchase Price” that is determined by a formula based on the gross or net area of the land or by other methods devised by the parties. The net area for an adjusted purchase price is typically computed by deducting from the gross area any portion of the land within roadways, floodplains, or other areas where rights are restricted, as shown on the survey. If this method is used, the purchase price cannot be calculated until after the survey is delivered, so applying a minimum and maximum price to the formula should be considered. Clause 4-3-1 sets out additional provisions based on the adjustment of the purchase price.
§ 4.4:3Payment of Purchase Price
Paragraph A.3. sets forth two payment options: the total consideration may be paid in cash at closing, or all or a portion of the purchase price may be paid by seller financing.
In the typical seller-financed transaction, at closing, the buyer delivers the cash portion of the purchase price and signs and delivers a promissory note payable to the seller and a deed of trust to be filed of public record encumbering the property as security for the debt. If the seller is providing financing, include exhibit E, which sets forth terms to be selected for the promissory note and deed of trust.
If the transaction is contingent on the buyer obtaining third-party financing, the buyer has two options. The buyer can apply for the financing early enough to confirm before the end of the inspection period. Alternatively, the buyer can negotiate a right to terminate the contract after the end of the financing contingency period if the buyer is unable to obtain third-party financing. The parties may negotiate time limits within which the buyer must separately apply for and obtain third-party financing. The parties may also agree to limit or share the expenses of obtaining the financing. The contract in this manual does not provide for a third-party financing option or a financing contingency period.
See chapters 6 and 8 in this manual for further discussion of financing.
The contract sets deadlines for performance by the seller and buyer and provides two alternate ways to determine most of the deadlines: either a stated date or a specified number of days after the effective date of the contract or another milestone. Paragraph A.4. states that deadlines expire at 5:00 p.m. local time where the property is located; provides for an extension of a deadline when a deadline falls on a Saturday, Sunday, or holiday; and stresses that time is of the essence.
§ 4.5:1Deposit of Earnest Money
Paragraph B.1. provides the amount of the earnest money and the name of the title company that will receipt the earnest money and serve as escrow agent. The escrow agent will be responsible for closing the transaction and receiving and disbursing funds according to the terms of the contract.
The escrow agent’s representative should sign the receipt at the end of the contract and acknowledge the deposit of the earnest money with the escrow agent. In addition, the parties can use form 4-4, the escrow agent receipt and escrow agreement, which defines the rights and duties of the escrow agent.
The amount of earnest money is negotiable and depends on several factors, including the purchase price, the type of financing, and the relative financial strengths of the parties. The contract provides that the earnest money will be deposited in one lump sum. The parties alternatively may agree that the buyer is obligated to deposit additional earnest money after agreed conditions have been satisfied—for example, if the buyer decides not to terminate the contract at the end of the inspection period and to proceed to closing.
§ 4.5:2Interest on Earnest Money
Section B.2. states that the buyer may direct the escrow agent to invest the earnest money in an interest-bearing account in a federally insured financial institution. If the earnest money is to be invested, the escrow agent will require the buyer’s tax identification or Social Security number so that accrued interest may be reported to the Internal Revenue Service.
Form 4-4 in this chapter (escrow agent receipt and escrow agreement) provides that the buyer pays the fees charged by the financial institution.
§ 4.5:3Application of Earnest Money
Paragraph B.3. sets forth that the earnest money will be applied to the purchase price at closing or, if the buyer terminates the contract before closing, applied in accordance with section D.2. and section G.1. of the contract, based on whether the buyer has the right to terminate before the end of the inspection period or fails to close after the end of the inspection period and is in default under the terms of the contract.
Paragraph C.1. incorporates the statutory notice that the Texas Real Estate License Act requires real estate brokers and real estate salespersons to give to a buyer, advising that the buyer should either have title examined by an attorney or obtain a title insurance policy. . If a broker or salesperson is not involved, the paragraph may be deleted.
§ 4.6:2Title Commitment; Title Policy; Survey; UCC Search
Paragraphs C.2. through C.4. define the terms “Title Commitment,” “Title Policy,” “Survey,” and “UCC Search.”
§ 4.6:3Delivery of Title Commitment, Survey, and UCC Search
Paragraph C.5. sets the deadlines for the seller to deliver the title commitment, the UCC search, and the seller’s existing survey. If the buyer is not satisfied with the seller’s survey, this paragraph sets a deadline for the buyer to obtain a current survey. While this process is customary, the designation of a party to deliver the title commitment, UCC search, and survey is negotiable. The party responsible for the costs of these items is also negotiable.
Paragraph C.6. provides a typical procedure under which the buyer reviews the title commitment, the survey, and the UCC search and notifies the seller of any objections. After notice, the seller may elect to cure the buyer’s objections but is not required to do so. If the seller elects to cure the buyer’s objections, the seller must give the buyer timely written notice of its agreement to cure. If the seller elects not to cure, the buyer must proceed to close the transaction and accept the property subject to the uncured matters or terminate the contract. The seller is obligated to remove all liquidated liens; all exceptions that arise by, through, or under the seller after the effective date; and any title objections that the seller has agreed to cure in the process described in the contract.
§ 4.6:5Review of Title Commitment
Section C.2. of the contract provides that the condition of title will be established by the title commitment. The owner policy of title insurance will be issued in conformity with the last title commitment approved by the buyer. Section H.4.a. provides for the seller to pay at closing the basic charge for the owner title policy naming the buyer as the “Insured.”
An essential reference on title insurance is the Basic Manual of Rules, Rates and Forms for the Writing of Title Insurance in the State of Texas, available from the Texas Department of Insurance at www.tdi.texas.gov/title/titleman.html. The manual contains Texas rate and procedural rules; the text of title 11 of the Texas Insurance Code, relating to title insurance; and various bulletins of the Texas State Board of Insurance dealing with title insurance practices.
The signature and effective date of the title commitment must be after the effective date of the contract.
Schedule A: The attorney should confirm that the proposed insured parties are correctly named, the amounts of insurance are correctly stated, and the correct estate is insured—for example, surface, easement, or leasehold. Record title for the property to be conveyed should be vested in the seller. The attorney should confirm that the property description is correct and conforms to the description in the survey (if applicable).
Schedule B: The attorney should review the following matters:
•Item 1, relating to covenants and restrictions, should be noted as either “Covenants, conditions, and restrictions (other than any restrictions indicating preference, limitation, or discrimination based on race, color, religion, sex, handicap, familial status, or national origin, which are unconstitutional) as set forth in [recording data] of the real property records of [county] County, Texas” or “Item 1 of schedule B is hereby deleted in its entirety.”
•Item 2, relating to the standard survey exception, may be amended to read “any shortages in area” if a current survey approved by the title company is obtained. An additional 5 percent premium is charged to amend the owner policy for a residential transaction; an additional 15 percent premium is charged to amend the owner policy for a commercial transaction. No additional premium is required to amend the loan policy. The responsibility for paying the extra premium for the survey modification in the owner policy of title insurance is often negotiated between the parties. Section H.4.b. provides for the extra premium for the survey exception in the owner title policy, and any other endorsements or modifications to the standard form of the owner title policy requested by the buyer should be paid by the buyer.
•Item 3, relating to homestead or community property or survivorship rights, and paragraph 4, relating to tidelines, lands comprising the shores and beds of waterways, lands beyond the line of the harbor or bulkhead lines, filled-in lands, artificial islands, statutory water rights, and areas extending from the line of mean low tide to the line of vegetation, apply only to the owner policy and cannot be deleted or amended.
•Paragraph 5, relating to property taxes, should be reviewed for the status of tax payments and the existence of rollback taxes. In the title policy, the exception for taxes should be restricted to taxes for the year in which the closing occurs (unless paid at or before closing), taxes for subsequent years, and rollback taxes for prior years.
•Paragraph 6, relating to the terms and conditions of the documents creating the insured’s interest in the land, cannot be revised but will not appear on the title policy. The referenced documents (typically the deed from the seller to the buyer) should be reviewed.
•Paragraph 7, relating to materialman’s and mechanic’s liens, applies only to mortgagee policies on interim construction loans and may be deleted if satisfactory evidence is furnished to the title company that the transaction is not an interim construction loan.
•Paragraph 8, relating to subordinate liens and leases, applies only to the mortgagee policy.
•Paragraph 9, relating to existing liens, should show only liens permitted by the contract. Copies of all lien documents should be reviewed regarding due-on-sale provisions; dragnet clauses relating to other debt; condemnation provisions; notice, cure, and default provisions; and subordinate financing. See sections 8.4 and 10.10 in this manual. A superior lienholder’s estoppel certificate should be obtained from any lienholder whose note and lien are being either assumed or taken “subject to.” See form 10-10 in this manual. All other special exceptions, such as easements, mineral interests, leases, or matters shown on a current survey, should be listed specifically and carefully reviewed to determine if they affect the buyer’s intended use of the property.
Schedule C: The attorney should ensure that the seller has complied with the contract by curing and effectively removing all matters appearing on schedule C at or before closing. Schedule C matters may require obtaining releases of liens, settling specific claims or lawsuits affecting title to the property, furnishing evidence of good standing and authority (corporate resolution or partnership agreement), and obtaining proof of property settlement and divorce, proof of heirship or probate of a particular estate, or evidence relating to a bankruptcy. From the buyer’s perspective, curative matters appearing on schedule C should be addressed by either the seller or the title company. The buyer should object to all schedule C items in the commitment to ensure that they are not added to schedule B of the title policy.
Schedule C of the title commitment includes requirements for the buyer to satisfy, such as delivery of the buyer’s organization documents and the representative of the buyer’s authority to execute closing documents.
Note: Endorsements providing additional coverage may be available on request, subject to payment of the applicable additional premium. The Basic Manual of Rules, Rates and Forms for the Writing of Title Insurance in the State of Texas should be consulted for the eligibility, cost, and use of these endorsements and policy.
The contract requires that the seller provide a current survey of the property. Different types of surveys and survey certifications are available, depending on the nature of the property and the requirements of the parties. An excellent resource on surveys is the Manual of Practice for Land Surveying in the State of Texas (“Texas Standards”), published by the Texas Society of Professional Surveyors. It describes the various categories and conditions for surveys in Texas, the level of accuracy required for each category of survey, matters to be depicted on the survey, and the nature of certificates. In some cases, the lender or buyer may require the surveyor to comply with the most recent Minimum Standard Detail Requirements and Accuracy Standards for ALTA/NSPS Land Title Surveys (“ALTA”), as adopted by the American Land Title Association and the National Society of Professional Surveyors. See www.alta.org/policy-forms.
The attorney should keep the following points in mind when reviewing the survey:
•The survey should bear a recent date and should conform to, as applicable, ALTA or the required category and condition under the Texas Standards for the type of survey specified in the contract and location of the property.
•The certificate should be sealed, signed, and conform to any certificate specified in the contract.
•There should be a north compass bearing on the survey.
•The attorney should observe the system of reference used for the survey, locate the beginning point, and determine that it is monumented and locatable.
•The survey, particularly all course and distance notations, should be compared to the legal description appearing on or attached to the survey. This legal description should be compared to the one appearing in the contract and the title commitment. If they are not the same, the contract should be amended and the title commitment revised to provide for the updated legal description from the survey.
•All recorded easements appearing in the title commitment should be located and noted on the survey with the appropriate recording data. Conversely, the attorney should examine the survey for any matters (such as easements) not appearing in the title commitment.
•The survey should be examined for the location of improvements: Do improvements protrude onto adjoining property or easement areas; are there encroachments of improvements from adjoining property onto the property; are there building setback line violations?
•Any written notations on the survey, such as those relating to rights of parties in possession, should be reviewed to determine their effect on the property and its anticipated use.
•The property should have legal and adequate access to public streets or roads.
•The survey should show the existence and location of utilities.
•The surveyor’s certificate should indicate the location of the floodplain, if applicable.
The contract includes provisions for personal property and requires that the seller furnish UCC searches from the Texas secretary of state, UCC records for any other appropriate state, and UCC records in the jurisdiction where the seller is organized. The scope of the search would depend on the nature of the collateral. See sections 9.2 through 9.6 in this manual.
§ 4.7Inspection Period and Buyer’s Right to Terminate
Paragraph D.1. sets the period during which the buyer has the opportunity to investigate the property and decide whether to close the transaction.
§ 4.7:2Buyer’s Right to Terminate
Paragraph D.2. provides that the buyer may terminate the contract at any time before the end of the inspection period for any reason and have the earnest money returned, except for the $100 independent consideration for the buyer’s right to terminate the contract. The amount of independent consideration is subject to negotiation.
§ 4.7:3Review of Seller’s Records
Paragraph D.3. sets the deadline for the seller to deliver its records as listed on exhibit C to the buyer for its review.
Paragraph D.4. provides for reasonable rules of entry by the buyer onto the property, including delivering evidence of commercial general liability insurance.
§ 4.7:5Environmental Assessment
Paragraph D.5. provides for cooperation by the seller with the buyer’s right to conduct environmental assessments of the property.
§ 4.7:6Buyer’s Indemnity and Release of Seller
Paragraph D.6. states that the buyer will indemnify the seller for claims resulting from the buyer’s inspection of the property. Except for the environmental indemnity stated in exhibit B in the contract, the indemnity provisions of the contract are not intended to shift risk from the indemnified party to the indemnitor for the indemnified party’s own negligence. One consequence of this allocation of risk is that the indemnified party may not be able to recover the costs of defense from the indemnitor if the indemnified party is sued for the consequences of its alleged negligence. See Fisk Electric Co. v. Constructors & Associates, 888 S.W.2d 813 (Tex. 1994). The environmental indemnity shifts the risk for the seller’s own negligence from the seller to the buyer. The environmental indemnity will not shift risk in the event of misrepresentation or fraud.
Section E sets forth suggested seller’s and buyer’s representations by referencing Exhibit B, sections A and D. Representations are negotiated by the parties. The seller’s representations in section A may include authority to execute the contract and close the transaction; status of any litigation that may adversely affect the property; notice or knowledge of violations of any law, ordinance, regulation, restriction, or legal requirements affecting the property; expiration of any required license, permit, or approval necessary to use the property; notice or knowledge of condemnation, zoning, or other land-use regulations or presence of hazardous materials affecting the property; no restrictions on the seller from doing business by the Office of Foreign Asset Control of the Department of the Treasury; no restrictions on the sale of the property, no liens that will not be paid at closing or agreed to by the buyer to remain on the property at closing; the accuracy of the seller’s records; and all required notices having been given by the seller. The buyer’s representations in section D are limited to authority, and there are no restrictions on the buyer from doing business by the Office of Foreign Asset Control of the Department of the Treasury.
In negotiating representations, the parties often consider issues such as whether the representations will be absolute or based on the seller’s knowledge and belief; whether the representations will be based on the knowledge of the entity that is the seller or on the knowledge of specified individuals; whether the seller must perform further investigation to make the representations or may rely on its current knowledge, without further investigation; and whether and to what extent the representations will survive closing.
As set out in exhibit B of the contract, the approach used limits the seller’s representations, but it is not intended to insulate the seller from liability for fraud or misrepresentation.
•The seller represents only facts, not opinions. For example, the seller does not represent whether, in the seller’s opinion, the property complies with applicable laws and regulations. Instead, the seller represents that it has not received notice of violation of any law, ordinance, regulation, or requirement affecting the property or use of the property, except as stated in the contract.
•The seller makes no representation that is not stated in the contract, including exhibit D (notices, statements, and certificates required by law and regulation).
In the optional clauses in exhibit D, the seller limits its liability under section B—the “As Is, Where Is” provision—and shifts liability for environmental problems affecting the property in section C.
The contract provides that the parties’ representations are true and accurate when made and must be true and accurate at closing, or the buyer may terminate the contract.
In section A.1. of exhibit B, the seller represents that it is duly organized with authority to perform the obligations under the contract. In section D.1. of exhibit B, the buyer represents that it is duly organized with authority to perform the obligations under the contract. Section H.3.a. of the contract requires the seller to deliver at closing evidence of the seller’s authority to close the transaction. Section H.3.b. requires the buyer to deliver at closing evidence of the buyer’s authority to close the transaction.
Evidence of authority customarily consists of certificates of existence and good standing from public records, certified copies of organizational documents, corporate resolutions or partnership consents, and certificates of incumbency.
While the contract only requires representations that the seller and the buyer have due authority, the attorney may consider requiring documentary evidence at the execution of the contract to avoid encountering a claim after substantial obligations have been paid or incurred that the other party is not authorized to consummate the transaction. The seller’s organizational documents should be available at the time of execution of the contract. The representative of the buyer signing the contract should have due authority at the time of signing. Where the buyer has reserved the right to assign the contract to another entity, the assignee of the buyer may not prepare its organizational documents just before the closing date.
§ 4.9Condition of Property Until Closing; Cooperation; No Recording of Contract
Section F provides for the parties’ obligations after signing the contract concerning maintenance and operation of the property, casualty damage, condemnation, claims, governmental proceedings, permits, licenses, and inspections. The contract also sets out the parties’ agreement not to record the contract or any memorandum or notice thereof.
Section G provides for disposition of the earnest money when either the seller or the buyer exercises its right of termination. The buyer has the right of termination and the return of its earnest money as provided in section D.2. (the right to terminate before the end of the inspection period) or section I.1.a. (the seller’s default and the buyer’s election to terminate and receive its earnest money). The seller has the right of termination and to have the earnest money paid to the seller as set out in section I.3. (the buyer’s default resulting in the seller’s termination and right to have the earnest money paid to the seller).
Section G.1. sets out the steps to be taken by the parties to direct the title company to release the earnest money to the party claiming the right to it. Section G.2. requires the buyer to return to the seller or destroy as directed by the seller all of the seller’s records in the buyer’s possession or control.
Section H addresses the closing process. Paragraph H.1. sets the closing date and states that the transaction will close at the title company’s offices. Most commercial transactions are closed remotely. The parties’ attorneys send the original documents required to be recorded of public record to the title company. Paragraph H.2. sets out the conditions for closing. Paragraph H.3. lists the closing documents to be delivered by the seller and buyer. The contract provides that, unless the parties agree otherwise before closing, the closing documents for which forms exist in the current edition of the Texas Real Estate Forms Manual (State Bar of Texas) will be used in preparing the forms. This approach defers the time and expense of negotiating the closing documents until after the contract is signed, while providing certainty if the parties do not otherwise negotiate closing documents. Alternately, the closing documents can be negotiated before the contract is signed and attached as exhibits to the contract. When determining whether to contract for a general warranty deed or a special warranty deed, the attorney should refer to section 5.4 in this manual for its discussion of Chicago Title Insurance Co. v. Cochran Investments, Inc., 602 S.W.3d 895, 901 (Tex. 2020).
Paragraph H.3.f. provides that the buyer acquires possession of the property at closing. If the parties agree that the buyer will take possession before closing or the seller will remain in possession after closing, the parties should enter into a separate lease agreement. See chapter 25 in this manual.
Paragraph H.4. allocates closing obligations and transaction costs between the parties and provides for proration of ad valorem taxes, income, and expenses and for postclosing adjustments.
Paragraph H.4.f. addresses the payment of real estate commissions. Real estate brokers and real estate salespersons must have a written commission agreement to enforce payment of a real estate commission. The contract provides that the commission agreement is a separate document between the broker and the party responsible for paying the commission. For applicable forms, see forms 26-29 through 26-31 in this manual. Alternatively, the contract may include the commission agreement or restate its key terms. The parties indemnify each other against claims by brokers and finders arising by, through, or under the indemnifying party. The contract may state that there are no brokers, but there is no requirement to do so.
Section 25.9:1 in this manual discusses the right of a real estate broker to claim a lien for their brokerage services incident to the sale or lease of commercial real estate. See . The parties to a contract for the sale and purchase of commercial real estate should identify the rights of any broker to assert a claim for a real estate commission incident to the transaction and the party responsible for the payment of the real estate commission.
If either the buyer or the seller is licensed as a real estate salesperson or real estate broker and is acting as a broker in the transaction, a disclosure to that effect is required under the Real Estate License Act. .
Paragraph I.1. provides that if the seller fails to perform its obligations under the contract or if the seller’s representations are not true and correct as of the closing date, the buyer may elect one of the following remedies: termination (with disposition of the earnest money and payment of additional liquidated damages) or specific performance. In addition, if the seller conveys or encumbers the property before closing so that the buyer cannot enforce specific performance, the buyer may seek recovery of its actual damages caused by the seller’s default. The parties may agree to limit the amount of actual damages to be recovered.
Paragraph I.3. provides that if the buyer fails to perform its obligations under the contract, the seller may terminate the contract and have the earnest money paid to the seller. Clause 4-3-6 provides an optional provision that allows the seller to seek additional liquidated damages.
The contract is drafted to limit the parties’ remedies, but remedies are often negotiated.
The contract provides that the party prevailing in litigation is entitled to recover attorney’s fees and court and other costs.
§ 4.13Miscellaneous Provisions
Section J sets out a number of provisions integral to a real estate sales contract, including notice, entirety of agreement, amendment, assignment, survival, choice of law and venue, waiver of default, no third-party beneficiaries, severability, ambiguities not construed against the drafting party, no special relationship, counterparts, confidentiality, and binding effect.
There are optional provisions for waiver of consumer rights under the Texas Deceptive Trade Practices–Consumer Protection Act and waiver of a right to trial by jury.
Paragraph J.4. contains alternate clauses concerning assignment. The buyer either may not assign the contract without the seller’s prior written consent or may assign the contract to only an entity controlled by the buyer.
If the contract provides that the buyer has the right to assign, the assignment provision should state whether the buyer is relieved from obligations under the contract after assignment.
Included in this chapter are four forms related to the assignment process. Form 4-29 is a short-form assignment by a buyer of its rights and obligations under the contract and is typically used as an assignment by the buyer to an entity controlled by the buyer. It can also be used in transactions not involving representations, warranties, and covenants between the buyer and the assignee. Form 4-30 is a long-form assignment that contains representations, warranties, and covenants between the buyer and the assignee. Form 4-31 is a form for consent by the seller if consent is required by the contract. Form 4-32 is a contract for the sale by a buyer to an assignee of the buyer’s rights under the contract. It allows the assignee time to investigate the property before paying the buyer for the assignment and before unconditionally depositing substitute earnest money with the title company. The inspection period under the contract should be long enough to allow the assignor or buyer to step back in if the assignee elects to terminate its right to purchase the property.
The names of the seller and buyer and the names and capacities of the representatives for the seller and buyer should be clearly stated. See section 3.9 in this manual for discussion of signatures on real estate documents.
Section K is a list of exhibits referenced in the contract that should be attached to the contract, as applicable.
Exhibit A—Legal Description of Land: See section 4.4:1 above.
Exhibit B—Representations; Environmental Matters: Party representations are always negotiated by the parties and will vary from transaction to transaction.
Exhibit C—Seller’s Records: This exhibit lists the seller’s records of the property that will be delivered or made available to the buyer for review during the inspection period and delivered to the buyer at closing. The list is limited to records in the seller’s possession or control and should be revised based on the specific transaction.
Exhibit D—Notices, Statements, and Certificates: Federal and state laws and regulations require delivery of certain notices, statements, and certificates when common real estate contracts are executed. The items applicable to the transaction should be included in this exhibit. See the commentary at the tops of forms 4-5 through 4-23 in this chapter addressing those particular notices, and see chapter 2 in this manual for a brief discussion of each law and regulation and for references to other laws and regulations that require notices, statements, and certificates for less common transactions.
Exhibit E—Seller Financing Addendum:This addendum is for use only in situations in which the seller is providing the financing. If obtaining third-party financing is a condition to the buyer’s obligations, that fact and the terms of third-party financing may need to be addressed in the contract.
The title company, acting as escrow agent, will close the transaction by attending to the following matters.
§ 4.14:1Payoff Information and Other Closing Expenses
The escrow agent should send a written request to each lienholder for the lienholder’s written payoff statement and to sign a release of lien. The authorized representative of the lienholder should be requested to state the remaining principal balance due on the note; the accrued interest as of a certain date; a per diem amount of interest; and whether the lienholder will credit the amount held in the escrow account, if one exists, to the total due or, alternatively, refund the amount directly to the borrower. Closing must occur, resulting in the escrow agent having the funds to pay the lienholder, before the escrow agent records the signed release of lien delivered by the lienholder. Some lienholders will not deliver a signed release of lien until the escrow agent has the funds or has delivered the funds to the lienholder.
Additionally, information concerning other matters requiring payment at closing should be obtained, such as payoff amounts for mechanic’s lien claims, federal or state tax liens, property taxes, paving assessments, and abstracted judgments that affect the property. The escrow agent must have the funds required by and a signed release of lien from these lien claimants to satisfy requirements set out in schedule C of the title commitment.
The closing agent must obtain from the appropriate third parties the amounts of closing costs, such as surveying expenses, attorney’s fees, brokers’ commissions, and loan fees.
§ 4.14:2Prorations and Deposits
Unless otherwise provided in the contract, the buyer acquires both the monetary benefits and burdens of the property. Prorations are generally based on the settlement or closing date.
Tax Prorations: Tax prorations may be based on the most current property tax information available to the closing agent. The tax proration serves as an adjustment on the closing statement between the seller and the buyer relating to taxes. If taxes have not been paid for the current year, this adjustment involves the seller’s being charged on the closing statement with property taxes for the period the seller owned the property. The buyer receives a corresponding credit of the seller’s prorated amount. The buyer is responsible for the payment of taxes. The contract requires that the seller and the buyer reprorate taxes when actual tax statements become available after closing.
Insurance Prorations: If the seller assigns its fire and extended coverage to the buyer, the buyer will be charged the unearned portion of the prepaid premium and the seller receives a corresponding credit.
Rent Prorations: If the property is income-producing, rents already received by the seller for the current rental period should be prorated. The seller will be charged the amount for the prorated period, and the buyer receives a corresponding credit.
Interest Prorations: If the sale is being financed through an assumption or “subject to” transaction, interest becoming due at the next regular payment period should be prorated between the seller and the buyer as of the closing date.
Security Deposits: Tenant security deposits that the seller is holding should be charged to the seller and credited to the buyer subject to the buyer’s responsibility for the refund of the deposits. The seller will remain liable to the tenants for security deposits received while the seller was the owner of the property, until the buyer delivers to the tenants a signed statement acknowledging that the buyer has received and is responsible for the tenants’ security deposits and setting forth the amount of each deposit. See , ; form 5-22 in this manual.
§ 4.14:3Preparation of Closing Documents
The closing agent may be expected to prepare several documents.
Closing Statements: Closing statements may be on either the federally prescribed HUD-1 settlement statement, the State Board of Insurance settlement statement, or a separate seller’s, buyer’s, or borrower’s statement, depending on the nature of the transaction. The purpose of a closing statement is to assemble in one document all the pertinent financial features of the contract, including purchase price, loan amounts, costs, expenses of closing the transaction, and prorations. Execution of the statement evidences the parties’ agreement with the numbers and computations appearing on the statement.
Affidavits: Affidavits concerning debts and liens, parties in possession, identity of the parties, leases, and marital status are customarily required at closing by the escrow agent based on the transaction.
Financing documents are prepared by the lender’s attorney. Conveyancing and other closing documents may be prepared by the parties to the transaction, by their attorneys, or by an attorney for the closing agent.
The closing agent disburses funds in connection with the closing. Disbursements are made according to the closing statement, from “good funds” paid by the buyer and its lenders, as defined by the regulations of the Texas State Board of Insurance. See Procedural Rule P-27, Basic Manual of Rules, Rates and Forms for the Writing of Title Insurance in the State of Texas.
Except in the case of certain nontaxable sales of principal residences, the person responsible for closing a real estate transaction is required to file an information return with the Internal Revenue Service relating to the transaction and is subject to penalties for failing to report. See . This reporting requirement is often satisfied by the responsible person by delivering the seller’s closing statement, together with an attachment of additional required information, to the IRS.
The attorney for the buyer and the lender respectively should obtain an insured closing service letter from the title insurance underwriter that issues the owner and loan policies. This letter indemnifies the buyer and/or lender for any fraudulent acts of the closing title insurance company or agency relating to the handling of closing funds. See forms T-50 and T-51, Basic Manual of Rules, Rates and Forms for the Writing of Title Insurance in the State of Texas. See www.tdi.texas.gov/title/titlemm5.html.
The closing agent is responsible for recording documents required to be recorded. This responsibility extends to the recording of releases or transfers of liens for notes secured by liens paid at closing. Each document should be checked before recording to ensure that exhibits referred to in the document are attached and the name and address of the person to whom the document is to be returned after recording is included.
Attorneys for the buyer, the seller, and the lender may each prepare closing instructions for the closing agent. See forms 26-15 through 26-18 in this manual. These instructions relate to the conditions precedent to closing, including the status of the title after closing, the title insurance policies to be issued, disposition of funds, and distribution of documents received by the closing agent.
§ 4.15Additional Considerations
§ 4.15:1Transactions Involving Foreign Persons
Buyer: If the buyer is a foreign person, certain disclosures and reports may be required under the Foreign Investment in Real Property Tax Act of 1980. See .
Seller: With certain exceptions, if the seller of real property located in the United States is a foreign person, the buyer must withhold 15 percent of the purchase price and remit the funds to the Internal Revenue Service within twenty days of the date of transfer. See , (b). The buyer should assume that the seller is a foreign person until the contrary is established. Buyers act at their own peril until they obtain a nonforeign affidavit. See . See forms 26-19 and 26-20 in this manual.
Before closing, the buyer should arrange for Causes of Loss—Special Form property insurance coverage, liability, flood, and similar types of insurance for any required mortgagee endorsements. The buyer and seller should arrange for payment out of the closing proceeds of any accrued taxes even if the taxes will not be delinquent until after closing. The buyer should notify the tax appraisal district of any change in ownership.
The attorney should prepare a closing checklist, itemizing the documents that will be required to close the transaction, including curative documents. The checklist should also refer to all other preclosing considerations relating to the transaction. The closing checklist can be added to form 4-1.
§ 4.15:4Postclosing Considerations
After closing, recorded documents and relevant title insurance policies issued after closing should be reviewed for accuracy and compliance with the title commitment. The owner policy should be dated on or after the recording date of the deed conveying title to the buyer, and the mortgagee policy should be dated on or after the recording date of the deed of trust of the insured lien.
An original or escrow agent’s certified copy of each executed document relating to the closing should be provided to the seller and the buyer or the borrower by their attorneys. Generally, the party benefiting from a document receives the original document, and the other parties receive copies of the document.
Barton, J. Cary. “Pitfalls of Statutory Notices—Or Lack Thereof.” In Advanced Real Estate Drafting Course, 2013. Austin: State Bar of Texas, 2013.
Baucum, Michael, and Kathryn E. Allen. “As-Is Update: ‘Prudential 2012.’” In Advanced Real Estate Law Course, 2012. Austin: State Bar of Texas, 2012.
Becker, Douglas W., and Arturo Machado. “Thorny FIRPTA Withholding Issues Involving Foreign Sellers of Real Estate.” In Advanced Real Estate Drafting Course, 2016. Austin: State Bar of Texas, 2016.
Beyer, Gerry W. Real Property. 2nd ed. West’s Texas Forms 13–15. St. Paul, MN: West, 2001. Supplement 2016.
Dysart, Sara E. “Contract Drafting—A Skill to Be Developed!” In Advanced Real Estate Drafting Course, 2023. Austin: State Bar of Texas, 2023.
———. “Seller Should Provide Accurate Statutory Notices Incident to the Sale of Real Property.” In Advanced Real Estate Law Course, 2015. Austin: State Bar of Texas, 2015.
Dysart, Sara E., Mia Lorick, and David A. Weatherbie. “Drafting Clearly Is Important—Texas Cases Where It Made a Difference [Part II].” In Advanced Real Estate Strategies Course, 2022. Austin: State Bar of Texas, 2022.
Howard, C. Elaine. “Miscellaneous Sections of a Contract.” In Advanced Real Estate Law Course, 2016. Austin: State Bar of Texas, 2016.
Love, G. Roland. “Title and Survey Objection Letter, Instruction Letter: Guidelines and Solutions.” In Advanced Real Estate Law Course, 2019. Austin: State Bar of Texas, 2019.
McPherson, Mark. “Mandatory Statutory Notices for Texas Real Estate Transactions circa 2022.” In Advanced Real Estate Drafting Course, 2022. Austin: State Bar of Texas, 2022.
———. “Statutory Notices: Incorporating a CLE Paper into Real Estate Sales Forms.” In Advanced Real Estate Drafting Course, 2018. Austin: State Bar of Texas, 2018.
Mills, Ken. “Top Ten Issues When Negotiating Earnest Money Contracts.” In Advanced Real Estate Law Course, 2015. Austin: State Bar of Texas, 2015.
Newsome, Kent. “Drafting ROFO/Option Agreements: Key Issues and Sample Forms.” In Advanced Real Estate Drafting Course, 2016. Austin: State Bar of Texas, 2016.
———. “Rights of First Refusal: What They Are, What They Aren’t, and What They Can Do to Your Deal.” In Advanced Real Estate Strategies Course, 2013. Austin: State Bar of Texas, 2013.
Newsome, Kent, and Kristen E. Bollinger. “Words and Phrases: An Explanation of Real Estate Legal Terminology.” In Advanced Real Estate Law Course, 2021. Austin: State Bar of Texas, 2021.
Rider, Brian. “Allocation of Risks in Purchase Contracts for Improved Property (Risk Avoidance and Allocation Pre-Closing).” In Advanced Real Estate Law Course, 2016. Austin: State Bar of Texas, 2016.
Tomek, David W. “Drafting Clearly Is Important—Texas Cases Where It Made a Difference.” In Advanced Real Estate Drafting Course, 2021. Austin: State Bar of Texas, 2021.
———. “From Ridiculous ‘Asks’ to Meaningful Compromise: Drafting and Negotiating Selected Aspects of Earnest Money Contracts for Income-Producing Commercial Properties.” In Advanced Real Estate Drafting Course, 2013. Austin: State Bar of Texas, 2013.
Valkenaar, Lauren A., and Natsumi J. Covey. “Recent Texas Supreme Court Updates Related to Real Estate Contracts.” In Advanced Real Estate Law Course, 2023. Austin: State Bar of Texas, 2023.
Weller, Philip D. “Drafting Confidentiality Agreements and Access Agreements.” In Advanced Real Estate Drafting Course, 2014. Austin: State Bar of Texas, 2014.
Whelan, Thomas M. “Scattershooting at Contracts and Deeds Down at the Courthouse.” In Advanced Real Estate Drafting Course, 2019. Austin: State Bar of Texas, 2019.
———. “Scattershooting While Wondering Whatever Happened Down at the Courthouse to Frequently Litigated Provisions in My Favorite Real Estate Sale Forms.” In Advanced Real Estate Drafting Course, 2015. Austin: State Bar of Texas, 2015.