Commentary on the New Texas Realtors COVID-19 Addendum
The Texas Association of Realtors has just published a non-mandatory addendum form for use in conjunction with the TREC-approved residential real estate sale contracts to provide a 30-day extension of the closing date stated in the contract upon notice by either party that the closing date “is not able to be performed due to a voluntary or mandatory SARS-CoV-2 (COVID-19) virus quarantine or closure.”
The COVID-19 Addendum (TXR-2520) also provides that if the buyer is not able to fund their loan and close the transaction “due to Buyer’s loss of income from COVID-19 related issues,” either party may terminate the contract with the earnest money returned to buyer.
The Addendum can be used with the One to Four Family Residential Contract (Resale), condominium contracts, new home construction contracts, and unimproved land contract mandatory forms promulgated by the Texas Real Estate Commission (TREC).
A few comments about this new Addendum—followed by a strong recommendation that parties consider consulting with their attorney if they have any questions or concerns about how the Addendum would actually work in different situations.
First, paragraph A of the Addendum provides for a 30-day extension of time for closing the sale upon notice given by a party, but it does not require the other party to agree it is in fact impossible to close the transaction by the set closing date due to a virus quarantine or closure. So if buyer gives notice that they are unable to attend closing due to, let’s say, being called up for National Guard service to assist in distribution of supplies related to the pandemic, seller can come back with: “Dear Buyer, you can view and sign the closing papers remotely, so being sent to another state does not prevent you from closing, and besides, the Addendum only applies to a ‘quarantine or closure.’ Being called up for Guard duty is neither of those, so I reject your notice and insist that you close as scheduled.”
Now, it is true that the closing date section of the Texas Realtors form residential real estate contract (Section 9) does not make time of the essence with respect to that date. Absent “time of the essence” language (such as appears in the option fee section), contractual deadlines are subject to a rule of reason—meaning that if a party needs a few more days to meet a deadline, courts will generally allow the party a reasonable time to perform if there is a legitimate reason for delay. Of course, this requires going to court, and the objective of the Addendum is to keep parties from having to resort to the burden and expense of litigation to resolve contract disputes related to the pandemic.
As long as the parties agree that meeting the closing date has been rendered impossible by a COVID-19-related quarantine or closing, the closing is extended by 30 days—no fuss, no muss. But if the parties agree on that, they would probably also agree to extend the closing date a few days by Amendment. No need for the Addendum if the parties can agree to an Amendment. But what if they do not agree that the criteria for an extension have been met?
In my opinion, it would be better if the Addendum’s 30-day extension was automatic and not contestable once notice is given. In other words, the parties agree in advance not to argue about the merits of the notice. A seller who is not under time pressure may be perfectly fine with such a provision. However, a seller who is in a hurry or nervous about a rapidly-changing real estate market will be leery about giving buyer the right to an automatic 30-day extension upon request.
Another problem with the language of the Texas Realtors Addendum is the term “voluntary or mandatory virus quarantine or closure.” This phrase is ambiguous and potentially both under- and over-inclusive. Can buyer simply send a notice delaying closing for 30 days because he says he is running a fever and has decided to cloister at home, without any diagnosis or note from his doctor? This would be a “voluntary quarantine,” would it not? Here, seller has no effective way of determining whether buyer has actually come down with COVID-19 or some other ailment, or (perish the thought) faking it. Is buyer’s fear or suspicion that he might have caught the bug enough to trigger the automatic extension? Is a medical diagnosis of COVID-19 necessary? Nothing in the Addendum requires it. Thus, seller might want to talk to her lawyer about removing or clarifying the word “voluntary” in the Addendum, and/or requiring a medical directive that quarantine is necessary because a party may have COVID-19.
And, as the National Guard scenario discussed above illustrates, a party who has a compelling COVID-19-related reason to delay closing is out of luck if the situation is not a “quarantine or closing.” A party who is subject to possible military call-up might want to discuss with his lawyer whether this language is broad enough to encompass the myriad ways COVID-19 might interfere with the scheduled closing.
Paragraph B of the Addendum has potential problems as well. Paragraph B says that “if Buyer is not able to fund their loan and close due to buyer’s loss of income from COVID-19 related issues”—even if buyer has “removed their financing contingency”—“either party may terminate the contract and earnest money will be refunded to the Buyer.”
There is no doubt many buyers will suffer a loss of income as we muddle and struggle through this pandemic. Buyer may himself be diagnosed with COVID-19 and be unable to work, or laid off from his restaurant job because of a ban on sit-down food service, in which case it’s clear enough that he has lost income due to “COVID-19 related issues.” But what if buyer has plenty of money in the bank to pay the loan, but they are spooked by a drop in stock dividends and are looking for a way out of the transaction? Or what if buyer quits his job because he is afraid of catching COVID-19 from his co-workers and moves into a survivalist compound to ride out the apocalypse? Or buyer decides he needs to move out of state to care for a parent who has been afflicted with a respiratory illness that is or could be COVID-19?
The key phrases “not able to fund their loan” and “due to Buyer’s loss of income from COVID-19 related issues” are inherently vague and potentially create an escape hatch for buyers who have “lost income” in some way, but still have sufficient assets to pay the loan, or whose loss of income was the result of a voluntary choice.
Also note that Paragraph B does not help a cash buyer who experiences a COVID-19 related setback, such as crushing medical bills or a stock portfolio whose value has plummeted? Why exclude such a buyer from the tenders mercies of the Addendum? A cash buyer might want to talk to his attorney about revising the Addendum accordingly.
A big part of what lawyers do is imagine worst case scenarios and unexpected plot twists that might befall their clients. If you’ve been an attorney for a while, you’ve seen a lot of plot twists, and you’ve also seen all kinds of disagreements over what the parties to a contract intended particular words or phrases to mean. If a word or phrase is ambiguous—meaning that it has two conflicting interpretations that are both objectively reasonable—then the question becomes what the parties intended the language to mean, subjectively, inside their brains. In court, this issue is decided by a jury, or the judge in a bench trial, who tries to retrospectively read the parties’ minds at the moment they signed the contract. A murky crystal ball indeed. Monday morning quarterbacking, but months after the magical moment of contract formation.
It is an expensive, risky process, and usually one party is the jig-dancing winner while the other party lies crushed beneath the winner’s heels. Going to trial is not a win-win proposition.
The Texas Realtors COVID-19 form has the advantage of being short without a lot of legalese, and it will take care of many situations that may arise in this context—“take care of” here means keeping the parties out of court. It was very helpful that the Association focused on getting the Addendum out to the membership in these challenging times, and I applaud their work.
But anxious sellers and buyers are peppering their brokers and sales agents with questions about what the Addendum means and how will it work when there is a (real or alleged) COVID-19 related event or circumstance that creates a (real or alleged) necessity to postpone the closing date or let the buyer out of the deal due to (real or alleged) loss of income related to the pandemic. And we in the real estate risk management business are swatting at a buzzing swarm of questions from license holders related to COVID contingencies. The truth is that in this context one-size does not fit all, and the Texas Realtors COVID-19 Addendum may or may not address your client’s particular situation.
The best answer to all these questions is THE CLIENT SHOULD CONSULT WITH AN ATTORNEY. The COVID-19 Addendum states as much, immediately about the signature lines. And of course, real estate brokers and sales agents are strictly prohibited from giving any kind of legal advice to their clients. They cannot “directly or indirectly offer, give or attempt to give legal advice; give advice or opinions as to the legal effect of any contracts or other such instruments which may affect the title to real estate … [or] “draft language defining or affecting the rights, obligations or remedies of the principals of a real estate transaction, including escalation, appraisal or other contingency clauses.” TREC Rule 537.11(b). License holders thus cannot “game out” different scenarios and opine on how they would be resolved under the language of the Addendum, or how the language could be tailored to better fit the client’s situation. Only a licensed attorney can do that.
Of course, a license holder cannot force a client to consult with an attorney. Not every client can afford a lawyer, or has a sister-in-law with a Bar card. (And, I hasten to add, not every attorney is familiar with the regulatory and legal framework governing real estate contracts and approved forms.) But the prudent broker and sales agent will strongly advise their clients to talk to an attorney about the Addendum before they sign it, and document that advice in case a nasty virus or plot twist lies in wait. SBR
Special thanks to Marilyn R. O’Neill of the Real Estate Risk Management & Compliance Association, for her suggestions and insights in the writing of this article.