What to do with Harvey-affected transactions already under contract

Thousands of clients are in limbo due to the devastation left by Hurricane Harvey. And while every situation is different, here are sections in the TREC One to Four Family Residential Contract (Resale) and related addenda that might apply to transactions affected by this disaster. The TAR commercial contracts and other TREC contracts have similar provisions.

Please call the TAR Legal Hotline (800-873-9155) for additional help understanding how you and your clients can proceed.

Property damage

If any part of the property is damaged or destroyed while under contract, Paragraph 14 deals with casualty loss. The Casualty Loss paragraph will require the seller to restore the property to its previous condition as soon as reasonably possible. Under the circumstances, that may not be feasible. If that is the case, this paragraph provides the buyer with three options:

  • Terminate and receive a refund of the earnest money.
  • Extend the time for performance up to 15 days, which extends the closing date.
  • Accept the property in its damaged condition with an assignment of insurance proceeds, if permitted by the insurance carrier, and receive a credit from the seller at closing in the amount of the deductible.

Third-party financing

Keep in mind that the property will still need to meet the lender’s underwriting requirements for the loan if the contract is subject to the Third Party Financing Addendum. If so, the lender may require re-inspections, re-appraisals, or repairs.

Property approval
Under the Third Party Financing Addendum, if the property approval is not obtained, the buyer may terminate the contract by providing notice to the seller before closing and the buyer will receive a refund of the earnest money. If the closing is approaching, but the property has not yet met the lender’s underwriting requirements, the buyer will need to consider whether to terminate the contract or submit an amendment to delay the closing. The buyer is obligated to make every reasonable effort to communicate with their lender regarding the status of the loan.

Paragraph 12 of the One to Four Family Residential Contract (Resale) provides that appraisal fees, loan-related inspection fees, final compliance inspection, repair inspection, and expenses incident to any loan are expenses payable by the buyer. However, the parties may have agreed for the seller to pay up to a certain amount of the buyer’s expenses.

Lender repairs
The lender may require certain repairs to be completed prior to approving the loan. Under Paragraph 7E of the One to Four Family Residential Contract (Resale), neither party is obligated to pay for these repairs unless they have agreed otherwise in writing. If that is the case, the contract will terminate and the buyer will receive a refund of the earnest money. In addition, if the cost of the lender required repairs exceeds 5% of the sales price, the buyer may terminate and receive a refund of the earnest money.

In most cases, delays with performance and closing may occur. It is important for the agents to communicate with all those involved in the transaction, including the other agent, the title company, the lender, and the parties’ attorneys.

If the parties are not using a TREC or TAR contract and the contract does not expressly provide for the rights and duties when all or a material part of the property is destroyed without fault of the parties, the
Texas Vendor and Purchaser Risk Act will apply. The act protects the purchaser of real estate when there is a binding contract and the property is destroyed before the purchaser has taken legal title.

Temporary leases

If you are under a temporary lease agreement, review the following provisions regarding repairs:

  • Paragraph 14, Repairs and Maintenance, provides that “Except as otherwise provided in this Lease, Tenant shall bear all expense of repairing and maintaining the Property…unless otherwise required by the Texas Property Code.” However, the Texas Property Code requires a landlord to make a diligent effort to repair and remedy a condition if the condition materially affects the physical health of safety of an ordinary tenant as long as other conditions are met.
  • Under a Buyer’s Temporary Residential Lease, Paragraph 18, Termination, the lease may terminate if the contract terminates prior to closing.

Other resources

You can share with your clients that State Bar of Texas legal hotline (800-504-7030) will answer their basic legal questions and connect them with local legal aid providers. And NAR has published “Transaction Guidance After Natural Disaster,” which contains additional tips.

Again, call the TAR Legal Hotline (800-873-9155) for help understanding how you and your clients can proceed.

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About Texas Association of REALTORS®

The voice for Texas real estate
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