Three Common Topics when Using the TAR Commercial

Forms?

May 23, 2013

Issues to Discuss

• As-Is Clauses

• Avoiding Illusory Contracts

• Avoiding Allegation that Email or Text Constitutes a Signature

As-Is Clauses

• Intent of an As-Is Clause is to bring finality with respect to physical condition

• Feasibility period allows buyer time to inspect, study, and make final decisions

• Repairs and concessions can be negotiated

• As-Is Clause becomes more critical after feasibility expires

TREC & TAR Forms

• Courts have consistently held the language in the TREC and TAR forms is equivalent to an As-Is provision

• Buyer accepts the Property in its present condition

• Why not stop the discussion here?

Lawyer may want “beefed-up” As-Is Clause

• The seller’s attorney is usually trying to close the doors on all potential litigation. Wants to close door on allegation that the seller:

– Omitted a material disclosure

– Made any type of misrepresentation

– Made any type of warranty (eliminate implied warranties)

– That any oral agreements or understandings exist outside the contract

– Took unfair advantage of the buyer

– Obstructed buyer’s right to gain full knowledge of the property’s condition

Buyer’s Attorney

• Usually the buyer’s attorney is seeking to preserve any rights the buyer may have for an unforeseen or latent defects

– Whether known by seller or not

– Especially with regard to concealment and misrepresentations

Negotiating As-Is Clauses

• The negotiating of as-is clauses beyond what is contained in the forms, outside the direction of one of the party’s legal counsel, moves the broker into the unauthorized practice of law.

• 22 TAC 537.11 - A licensee may not practice law or give legal advice. Licensee may use only the standard forms, fill in blanks, and insert business details or factual statements.

Landmark As-Is Case• Prudential v. Jefferson (1995)

• AS-IS clause is enforceable if:

– Seller disclosed all known defects and did not make misrepresentations of known facts

– Seller did not obstruct buyer’s right to inspect

– As-Is clause must be material to the bargain

– Parties must be in equal bargaining positions

– Disclaimer of reliance clauses must be clear and unequivocal

Prudential cont.

• In a nutshell, Prudential provides that absent fraud in the inducement an as-is clause can waive claims based on the property’s condition.

• Also means that the implied warranty of suitability can be waived.

TAR & TREC Forms

• The TAR forms and TREC forms seem to follow the policy articulated by the Supreme Court in Prudential.

– Sell “as-is”, but the Seller should disclose all known defects

– Paragraph 19 of TAR Commercial Forms & Paragraph 7 of TREC Forms

• Standard forms have obligation to strike a fair balance.

As-Is focuses on the Physical

• As-Is clauses are normally enforceable with respect to the physical condition of the property.

– A property defect is something that is physical, mars the appearance of functionality of something in the property

– Materiality is required for any action

Non-Physical Issues can Arise

• Courts have reviewed seller’s and broker’s obligations to disclose other issues

– Zoning

– Economic conditions or potential

– Non-physically impacting off-site conditions

• Usually no duty exists unless

– Asked

– Represented

Brokers’ Goals• Let parties and attorneys

negotiate as-is clauses beyond the standard forms (avoid unauthorized practice of law)

• Watch statements in brochures, flyers, listing services, emails, etc. (even puffing)

• Do what you say you will do

• Do not sugar-coat problems

• Convince seller full disclosure is best

Broker’s Goals cont.

• Give buyer ample time to inspect. Encourage inspection.

• Keep records of all disclosures and statements

• Encourage use of legal counsel

• Use final walk-throughs and acceptance forms

• Do not be silent about physical issues

• Do not have any agreements (even immaterial) outside contract – use amendments

Avoiding Illusory Contracts

“Contract” Defined

• A contract is a promise or set of promises between two or more parties that:

– is enforceable in a court of law

• law gives a remedy for a breach

• the performance under which the law recognizes as a duty

• Enforceability requires consideration

– Other conditions for enforceability may be required (e.g., statute of frauds in real estate)

Illusory Contract

• An contract is illusory if it fails to bind a party

• Illusory promise of performance invalidates a bilateral contract

• Invalid illusory contract in effect allows either party to walk at will

Illusory Obligation of Performance

• An illusory obligation exists when a party can walk the deal with no penalty or no obligation to tender consideration for walking.

• Commonly known as “the gentleman’s agreement,” “my word is my bond,” “the handshake deal.”

Common Illusory Contracts created under the TAR or TREC Forms

• Paragraph 15 – attempting to strike all remedies

• More commonly occurs when Seller attempts to strike all of buyer’s remedies except to terminate and get a refund of earnest money

– This action creates an illusory contract

Paragraph 15 (cont.)

• TAR and TREC Forms have 3 basic remedies for each party

– Terminate and receive earnest money

– Sue for damages

– Enforce specific performance

• Striking all of buyer’s remedies except termination and receiving earnest money creates illusory contract

Option / Feasibility

• Lack of consideration for the unilateral and unrestricted right to terminate creates an illusory contract

• Allows buyer to end contract (breach) with no penalty or consideration

• Suggestion is that consideration should be more than nominal

Special Provisions

• Poorly drafted clauses that give unilateral rights to terminate can create illusory contracts

• A contingency tied to a event-certain or review-certain is not a unilateral right to terminate and usually does not create an illusory contract, but care needs to be exercised

Brokers’ Statements in Email or Text

• Recently, a few cases have popped up that raised questions about whether an agent’s (broker, lawyer, or other) statements in an email bound the principal.

UETA

• Like all other states, Texas has adopted UETA

• UETA provides that a record or signature cannot be denied legal effect simply because it is in electronic form.

UETA (cont.)

• UETA says that an electronic signature exists if it is found “to be the act of the person to whom it is attributed.”

• UETA did not alter statute of frauds’ requirements

• Question is whether the agent’s actions are attributable to the principal

Authority of Agents

• Brokers are usually special agents, whereas attorneys can be, more commonly, general agents

• Seems wise for an agent to express his authority to bind or not bind.

• To date, Texas courts have not favored arguments that brokers can bind

Authority to Bind v Causing Disputes

• Even though a broker may not have authority to bind, the lack of expressing that authority may lead others to a different conclusion and the parties into a dispute

– Could face disciplinary complaints at TREC or TAR

Suggested Expressions

• Include statement that broker does not have authority to bind the principal or similar

• “My client informs that he is inclined to accept a proposed offer or counter offer that would…the acceptance of which requires my client’s final approval and signature”

Historical Pitfalls to Avoid

• Avoid placing broker’s or client’s initials on forms during negotiations

• Avoid striking forms without initials or signatures.

• If creating a “true” counter-offer or offer, have principal sign and initial appropriately

• Avoid statements such as “my clients accept” unless it is what principal intends

Awareness of Details may help avoid trouble