LEGAL UPDATE

Revised November 2009

Course Objectives

Forms Legislative Changes Hot Topics Case Studies

FORMS

Forms – Addendum for Oil Gas & Other Minerals (44-0) Adopted in response to transactions over

Barnett Shale (DFW and surrounding counties)

Historically, minerals were not at issue in urban and suburban areas

Deals only with fundamental Mineral Issues – May need assistance of counsel

Defines minerals; calls for a reservation by seller; has simple waiver of surface rights

Forms - Short Sale Addendum

Adopted in response to demand for short sales

Mirrors provisions in Addendum for Back-Ups

Upon execution, buyer must deposit earnest money and pay option fee

All other performance is suspended until lienholder gives approval

Extends option until after the lienholder gives approval

Designed to protect Seller & Buyer until lienholder consents

Forms – Notice of Termination Amended in 2008 to

merge 2 prior forms that dealt with termination rights under Financing Addendum and Option

Added other common reasons why buyer might terminate

Forms – T-47 Affidavit

Text of Form is promulgated by TDI Survey Paragraph (6C(1)) calls for delivery

of the survey AND the affidavit at the same time; BOTH should be delivered

Affidavit identifies if any changes have occurred in survey

Question for Buyer is to decide if new survey is wise

Buyer may want to delete the boundary exception to protect buyer

Forms – Water District Notices

Common in MUDs and other Water Districts

Chap. 49 of Water Code requires delivery of the notice at time of contract; otherwise buyer has termination rights

A second notice will be given at closing as well

Problems: Must be signed before notary Which of the 3 forms to give (must

check with District) Best to have District complete the

Notice

CASES – Related to Forms

Nguyen v. Woodley

Contract signed; TREC Financing Addendum used

Buyer was approved for financing but the lender required repairs

Buyer wrote seller stating, “we cannot obtain financing approval by now.” Asked to extend closing. Notice given within time required by Financing Addendum.

Buyer was able to secure approval about 4 days after the scheduled closing date

Seller then wanted new contract with increased sales price and non-refundable earnest money

Nguyen v. Woodley (cont.)

Buyer sued for specific performance Summary Judgment awarded to Seller Appellate court held Buyer could not sue

for specific performance because buyer’s notice that he could not obtain financing (although still trying) terminated the contract

Qst: What about Financing Approval v. Loan Approval?

Rich v. Olah

Buyer sued Seller after closing for foundation defects

Seller disclosed that there had been prior foundation repairs

Buyer had inspections noting prior repairs Buyer claimed that foundation needed additional

repairs & Seller did not disclose this need Court held that undisputed facts were that Buyer

was aware of some problems and proceeded to close & that Buyer could not rely on the Seller’s alleged failure to disclose

Seller was able to recover attorney fees because of attorney fee provision in contract form

Sierra Group v Bryan Hardeman Buyer sued seller and seller’s broker Alleged that seller failed to disclose restrictions Trial court granted summary judgment to Seller

and Broker & gave them attorney’s fees against Buyer

Buyer appealed that Seller and broker not entitled to attorney fees because allegations were not related to the contract

Court held the attorney fee provision is clear and entitled seller and broker to attorney fees

ERA v Advocates for Children Broker sued buyer (client) for breach of

buyer rep. agreement Client did not buy but leased property Rep. Agrmnt. provided for 6% commission

if client bought property; but blanks were not filled in for payment in event of a lease

Court held for Client because broker did not strictly complete form and construed it against them since it was their form

ERA v Advocates for Children (cont) The parties agree that Broker will

receive a commission calculated as follows: (1) % of the gross sales price if Client agrees to purchase property in the market area; and (2) if Client agrees to lease property in the market a fee equal to (check only one box): ____% of one month’s rent or ____% of all rents to be paid over the term of the lease.

Fawcett v Idaho Northern R&R

Seller agreed to sell a ranch & used TREC form

Parties were not sure of exact size of ranch

Form contains a variance clause that allows either party to terminate if the actual size varies by more than 10% after survey is complete

5,000 acres was used in initial contract as the size

Survey showed that size was 5,531 acres; and seller terminated

Fawcett (cont.)

There was a dispute on what was to be included (as there were 14 different tracts) Buyer alleged that tracts for which seller did

not have marketable title should not be included

But court said that this was a Paragraph 6 objection and not a determination of the size of the property the parties agreed to buy and sell

Therefore, seller had right to terminate

Chapter 2 – Legislative Changes

HB 3502 – Seller’s Disclosure Notice

Clarifies amendments made in 5.008, Property Code in 2007 regarding smoke detectors Added an explanation of provisions

in Chapter 766, Health & Safety Code (see Page 15); specifically sets out when a buyer may have seller install a hearing impaired smoke detector

Eliminated provision that required buyer to acknowledge that property complies with Chapter 766 and waives any rights under 766

SB 862 andthe Real Estate Recovery Fund SB 862 = TREC Housekeeping bill If consumer seeks payment from

recovery fund and licensee is in bankruptcy; the consumer can file a verified statement that he has made good faith effort to obtain a discharge & then can seek payment

Legislation concerning ARB Protests

Pilot Appellate Program to start under SOAH may appeal ARB order

determining market value SOAH will hear appeal with ALJ For properties with value in

excess of $1 million

ARB Protest Legislation (cont.) Chief Appraiser cannot increase value in

year after a successful tax protest unless supported by substantial evidence (Burden of proof lies with appraiser)

A sale is not comparable unless occurred in last 24 months

Appraiser cannot exclude sales as a result of foreclosures or because of declining economy

Value of a residence is determined by value as a homestead (not highest and best use)

Tax Exemption – Disabled Vet Disabled Vet who receives 100%

disability compensation due to service-related disability is entitled to an exemption of total value.

Title Insurance Legislation

Title agts. were required to maintain residence in TX; now may have residence in adjoining state if with an office in TX

Title Agents (like insurers could) may now file an affidavit that confirms a release of lien if it paid the lien and never received the release back from the lender Applies only to homes & liens under $1.5

million Must notify mortgagee (who can object)

Title Insurance Legislation (cont.) Title companies now permitted to charge

(separate from premiums) for 3rd party charges incurred with a closing (electronic filing fees, or tax report)

Statute of Limitations at TDI against a title company is 5 years from date of conduct or 2 years when TDI learned of conduct

Commissioner is to provide for expansion of coverage of title insurance to an individual for heirs, divorced spouses, trustees or successor trustees, or beneficiaries of trust on death of insured

Title Insurance Legislation (cont.)

Legislation overhauled solvency issues as a result of failures of out-of-state companies TDI can conduct audits

who it deems impaired TDI can assess guaranty

fee (not more than $5.00) TDI can limit impaired

agents from issuing new policies

TDI can require funds to be held in trust for underwriters

TDI can obtain access to agent’s file to determine financial impairment

Landlord – Tenant Legislation Expanded rights of tenants who are

subject to family violence to terminate residential leases (See Page 18 for discussion of expanded rights)

Expanded Smoke Detector requirements in residential tenancies for hearing-impaired tenants (may request hearing-impaired smoke detectors) Considered a reasonable accommodation

Landlord – Tenant Legislation (cont.) If Landlord fails to repair a health and

safety repair, then justice court may award damages to tenant (not to exceed $10,000) Such proceedings are expedited (6 to 10

days after service) The late fee provisions amended in 2007

were clarified that late fee may be charged if rent is not paid after 1 full day after rent is due

Landlord – Tenant Legislation (cont.)

Guaranty of a residential tenant is limited to original lease term, unless guarantor agrees to

guarantee the renewal Guaranty of renewal also requires

lease to state the last date on which the renewal will renew the obligation of the guarantor

Guaranty of renewal is permissible only if renewal involves the same parties

Guaranty of renewal is permissible only if it does not increase potential financial obligation

Homestead Legislation

Person can convey title to homestead to a “qualifying trust’ and not lose the homestead protection Prospective only Statute defines “qualifying trust”

Child Support lien will be treated same as judgment lien for purposes of homestead protection

Foreclosure Legislation

Previously buyer at foreclosure sale was required to tender bid amount

Now trustee can agree to a reasonable time to produce the funds

Mortgage Originator Legislation

HB 10 passed to comply with SAFE (Federal Secure and Fair Enforcement of Mortgage Licensing Act

Originator will be identified in the new Nationwide Mortgage Licensing System

Originator who is employee of depository institution is licensed by the banking agency; Other Originators are governed by their licensing agencies

Mortgage Originators (cont.) See definition of Originator and

exclusions on Page 20 Picks up Mortgage Bankers Originators are subject to continuing

education and must pay a recovery fund fee

The nationwide identifier will be disclosed on applications and other documents

Condemnation Legislation

Provides for an amendment to the Texas Constitution that states that “public use” does not include taking property that will be transferred to a private entity for economic development or enhancement of tax revenue

Public Use is required for a governmental entity to have the right to exercise eminent domain

Lis Pendens - Legislation

To file a lis pendens, notice must be sent to all parties having an interest

Notified parties can move to expunge the lis pendens

Requires court to expunge lis pendens if pleading: Does not contain a real

property claim; Fails to establish probable

validity to the claim; or Notices were not properly

sent

HOA Legislation

HOAs now required to issue updates to Resale Certificates within 7 days (limited to 180 days of original certificate)

If HOA fails to file management certificate in property records, then property owner is not liable for amounts owed to HOA for amounts before a transfer of the property

HOA that forecloses must give notice to lienholder and lienholder can redeem for the owner after 90 days but not exceeding 180 days after the foreclosure.

TX Res. Construction Commission

TRCC was dissolved (“sunsetted”) in 2009 Legislative Session As of 9-1-2009, TRCC no

longer accepts complaints or requests for inspections

Complaints before 9-1-2009, processed by TRCC as it winds down.

HOT TOPICS

Earnest Money Disputes

If parties cannot agree on disbursement of EM after a contract has been terminated; one party may: Follow procedures in Para. 18

of contract Invoke mediation clause Ask escrow agent to

interplead Seek assistance of counsel

(maybe seek injunctive action)

Earnest Money Disputes (cont.) Para. 18 Procedures

Send written demand to Escrow Agent for EM Escrow Agent will send copy of demand to

other party Escrow Agent may release EM if other party

does not object within 15 days (automatically release Escrow Agent)

Mediation Procedures Demanding party has to set up mediation Costs shared equally May need court to order mediation of other

party is not cooperative

Earnest Money Disputes (cont.) Injunctive Relief or Interpleader

If EM is less than $10,000, may be able to resolve in JP

Prevailing party can recover costs and attorney fees

Probably need to attempt demands under Para. 18 first

May need assistance of counsel Para. 18 entitles prevailing party to penalty

up to 3 times of EM

Failure to Document Amendments Amendments, even if seemingly

insignificant, should be documented Oral extensions or amendments have

been subject to litigation and are difficult to enforce

Relates to broker’s duty to be meticulous

RESPA

New Rules effective 1-16-2009 Third Party charges by title companies

must be separately itemized and cannot exceed actual amounts

Settlement Service Providers can use an “average charge” for amounts billed by 3rd party service providers

Settlement Service Providers can offer combined services if price is lower than the sum of the individual services if use is voluntary (and therefore, not violate required use provisions)

RESPA – Good Faith Estimate

Effective January 1, 2010, new GFE to be used

GFE to be provided with 3 days after application

GFE must be good for 10 days after issued

GFE is subject to tolerances; but origination fees and transfer tax have Zero tolerance

Tolerance apply if lender providers are used; but not if buyer chooses providers

Lender can cure any violation by reimbursement within 30 days

Executory Contracts

Executory Contract (Contract for Deed or Lease/Purchase or Lease/Option) Involves residence Closing does not occur for 180 days Possession by buyer

Additional Disclosures and Notices are Required

Significant Penalties apply to Noncompliance Seek assistance of Counsel Do not “warp” TREC or TAR forms for these

types of transactions

Unauthorized Practice of Law TREC Rules set boundaries for brokers

when negotiating contracts so as not to move into unauthorized practice of law

Unauthorized practice of law is a criminal act and carries significant penalties

Unauthorized Practice of Law (cont.) Licensees must use only TREC forms

except: When licensee is a principal When Gov’t agency requires different form When no form is promulgated and an

attorney has drafted the form for that particular use

When form is prepared by property owner or his attonrney and required by property owner

Unauthorized Practice of Law (cont.) Licensees may not

Give legal advice (directly or indirectly) Act as a public conveyancor Give opinion as to the legal effect of a

contract or instrument Give opinion as to validity of title Discourage person from seeking a lawyer Prepare documents defining legal rights of

parties

Unauthorized Practice of Law (cont.) When using standard forms, licensees

may: Fill in blanks Add factual statements or business details

(Para. 11) If a promulgated addendum exists for a

matter, the licensee must use it and not draft otherwise

Unauthorized Practice of Law (cont.) See Discussion on Page 27 and 28 on

Common Issues concerning Standard Forms Writing in 7D(1), “everything found in the

inspection.” Delivery of Option Fee Escalation Clauses in Paragraph 11

Energy Audits

Local Ordinances (Austin) may require an energy audit as a condition of selling property

CASE STUDIES

Cases on Forms – Johnson v. Conner Agt. completed Farm & Ranch form In the “Reservation” blank, agent wrote,

“None of the above are available to be conveyed.”

Sellers thought they were reserving minerals

After closing, sellers learned buyers had leased minerals and were receiving rentals

Seller sued to reform deed Agt. testified in support of seller

Johnson v. Conner (cont.)

Trial court held for buyer Despite agent’s testimony, the court

held that the language was clear; namely, that the language says that the sellers did not have any minerals to convey but did not say that they were reserving any minerals

Busby v. JRHBW Realty

Admin. Fee charged to buyer at closing Fee was in addition to commission paid by seller Buyer sued and attempted to have case

certified as a class as a RESPA violation Trial court denied certification & appl court

reversed Trial court found that broker violated RESPA

because it was not for separate charges, but for a fee to the broker

Transaction fees are concern – must clearly state why additional fee is charged and must be supported by additional services provided by broker

Prudential v. Italian Cowboy

Restaurant lease; both parties represented by counsel and were sophisticated parties

After moving in tenant notices a bad sewage odor

Attempts to remedy odor were not successful

Tenant later learned the prior tenant had same problem

Tenant closed restaurant and sued landlord

Prudential v. Italian Cowboy (cont.) Trial court found the agent stated:

Premises were practically new and problem-free

Prior tenant did not have any problems Site was perfect for a restaurant

App. Ct. held the statements were not actionable because: Lease said landlord and agt. did not make

any representations Parties were represented by counsel and

sophisticated Written lease was to be given effect as it was

negotiated

Dick’s Last Resort v. Market/Ross Tenant signed commercial lease Lease was guaranteed by an affiliate

company Tenant breached lease Trial court held that tenant and the guarantor

were liable for damage (through corporate veil piercing) Tenant had been set up as a no-asset company Lease had been transferred within various

affiliate companies for the purposes of avoiding liability under the lease and the guaranty

Dick’s Last Resort (cont.)

App. Ct. permitted the piercing of the veil because it determined the evidence at trial was sufficient to permit the jury to conclude that the corporation was used for the purpose of perpetuating a fraud for the direct benefit of the affiliate

Piercing Corporate Veil usually occurs through allegations that corporation is the alter-ego of another or that the 2 entities are a single enterprise

Here, court held arrangement was a sham, was an alter-ego arrangement designed to avoid legal obligations

Pleasant v. Bradford

Buyers bought house that was shown to have 1,824 square feet in MLS

Source was not identified in MLS Buyers claimed that they based their

purchase on a price per square foot basis

There was a disclaimer in MLS stating that information needed to be verified

After closing, buyer obtained a copy of the lender appraisal which showed house had 1,571 square feet

Pleasant v. Bradford (cont.)

Buyer had visited appraisal district website before closing and saw that the district reported the higher square footage

Buyer sued and Trial Court found for Buyer; namely, that listing agent made a misrepresentation about the size

App. Ct. upheld award for buyer Buyer’s visit to CAD website was not an

independent investigation that removed reliance on the size reported in MLS

Statement signed by Buyer could have applied only to their broker and not listing agent

CB Whiteside v. Ryan Equity

Apts. built in 1964 Rezoned in 1978 to SFR, but allowed

nonconforming use In 1994 City required special-use permit

of any nonconforming use Owner applied for SU-Permit in 1995 but

denied, but continued to operate apts. In 1998, owners sell property to Ryan

Equity

CB Whiteside v. Ryan Equity (cont.) Buyer never asked owners about zoning

or investigated; did ask Brkr who said it was legal nonconforming use.

Buyer filed for application after closing but denied

Bldgs were later demolished Buyer sued seller and brkr Sellers were not liable Ct held that zoning status was not a

“material defect” required disclosure; but was “legal status”

CB Whiteside v. Ryan Equity (cont.) Buyer alleged seller committed fraud

and misrepresentation Seller is under no duty to disclose facts

that buyer should be able to uncover (reasonable diligence)

Buyer did not present evidence why zoning status was could not have been uncovered

Sutton v. Ebby Halliday

Owner built house and then listed it for sale

Agt. was same agt. Owner used when he bought the lot

Seller signed Seller Disclosure Notice and did not report any prior flooding

Buyer was represented by same firm as listing agent

Buyer received a $4,500 credit at closing Seller said it was for grading;

buyer said for other purpose

Sutton v. Ebby Halliday (cont.) After closing, flooding occurred and water

ponded Buyer sued agents claiming they knew the

property flooded Brkr had spoken to neighbor who said lot had

flooded Brkr had disclosed statement from neighbor but

said buyer must verify Jury awarded damages to the buyer; but Trial

Court granted Judgment NOV to broker as to mental anguish and exemplary damages

Both parties appealed

Sutton v. Ebby Halliday (cont.) On appeal, the court noted that finding

that determination of whether the agent “actually knew of prior flooding” was critical to buyer prevailing

App. Ct. held that evidence was insufficient to establish actual knowledge of prior flooding

None of the buyer’s arguments (see Page 37) would have established actual knowledge

Van Marcontell v. Jacoby

Landlord leased house Tenant moved out; but landlord let

her boyfriend (not a tenant) to remain

An agt. informs a buyer that the house was for sale

Agt. told buyer that the occupant was a nice guy

Buyer bought property but made no inquiry about occupant nor asked agt. anything about occupant

Buyer wanted $15,000 from the occupant as an option for occupant to buy the property from him

Van Marcontell v. Jacoby (cont.) At closing, the seller gave the buyer a credit

for the $15,000 option for the occupant After closing, the buyer had to evict the

occupant for non-payment of rent Buyer sued seller for misrepresentation and

failure to disclose information about tenant Trial Ct. held for buyer Reversed on appeal because seller had no

duty to provide information about occupant/tenant Buyer did not ask; and Buyer had negotiations directly with tenant

Seller v Gomez

2 brokers submitted offer to seller

Seller rejected offer Subsequent offers made; but

seller rejected Seller then engaged an

attorney to negotiate a sale. Attorney informed brokers

that seller would not pay a commission

Seller v. Gomez (cont.)

Attorney negotiated sale with buyers Brokers sued seller Since brokers did not have a written

agreement with the seller for a commission, the statute of frauds provision in TRELA prohibited brokers from recovering The alleged oral statements that the brokers

said were made, are not sufficient for brokers to maintain a claim for a commission

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