Devil in the Details

A new contract addendum adopted by the Texas Real Estate Commission addresses leases on residential properties for sale. Contracts with residential leases executed after March 31, 2021, must include this addendum. By Kerri Lewis

he Texas Real Estate Commission’s (TREC) promulgated contracts previously addressed leases on residential properties for sale in two places. Paragraph 10 required copies of leases be delivered within seven days, and Paragraph 9 required any security deposits be turned over to the buyer at closing if the lease will continue. However, these general provisions do not address the many details a buyer should know when assuming a lease on a property.

With this in mind, TREC adopted a new Addendum Regarding Residential Leases that is required on all contracts with residential leases executed after March 31, 2021. This addendum is designed to make sure parties affirmatively agree on whether the lease is going to be terminated by the closing date and possession turned over to the buyer or assigned and assumed by the buyer. If assumed, the addendum helps ensure that the seller discloses and the buyer is aware of the terms of the lease and any potential issues regarding lease status or current or prior tenants. A copy of the addendum is provided on page 20.

What is Considered a Residential Lease?

The addendum defines “residential lease” as any lease of the property to a tenant. It includes not just the actual lease document but any addendum or amendment to the lease and any move-in condition form.

The addendum covers leases (whether oral or written, or long-term or short-term) that give a person the right to occupy the property.

It does not, however, cover a temporary lease between the parties to the contract. Under the addendum, the seller cannot execute or amend any residential lease after execution of the addendum without the buyer’s written consent.

Understanding the Structure of Addendum for Residential Leases

There are two sections to choose under the addendum—Sections A and B. Parties will choose one or the other when completing the form. If there is an existing residential lease on the property, it is imperative that the listing agent take a copy of this addendum to the listing appointment so the agent can review these two options and what they entail with the seller before the property is listed.

Box A should be checked when the seller is sure the lease can be terminated and possession of the property delivered to the buyer at closing. The seller’s right to terminate the lease is determined by the terms of the existing lease. The seller should be encouraged to locate and review the lease documents early in the listing process so he will know how to proceed. If a seller is unsure whether he has the right to terminate, he should consult a real estate attorney to review the lease. emember, license holders cannot read and interpret lease terms for the seller. That would constitute the unauthorized practice of law. Keep in mind that if this box is checked, the seller will be in default of the contract if he cannot get the tenant out of the property on or before the closing date.

Box B should be checked when the lease is going to be assigned by the seller and assumed by the buyer at closing. If this box is checked, the seller will have additional obligations and representations under the addendum. These are discussed in the next sections.

Can this addendum be used for multiple leases on the property (for example, in a duplex or four-plex situation)? Yes, the addendum is designed to be used for all residential leases on the property. However, since the addendum form instructs license holders to choose only A or B, it anticipates the same disposition for all leases. In other words, all leases will be terminated, or all will be assigned. If the buyer wishes to live in one of the units and assume the lease on the other unit, the best practice is to use a different addendum for each unit. Delivery of Lease Documents If the buyer is going to assume a lease on the property, the seller has the obligation to deliver copies of the residential lease documents to the buyer under Section B(1) of the addendum. Remember, the lease documents are defined by the addendum to include more than just the actual lease.

The seller has two choices regarding delivery, each with different consequences. He can either deliver copies of the residential lease documents prior to the execution of the contract or within three days after the contract’s effective date. Similar to the Seller’s Disclosure Notice provisions, if the seller does not deliver the lease documents prior to execution of the contract, the buyer will have a period of time after receiving the lease documents to terminate the contract for any reason and have his earnest money returned. Length of this period is negotiable by both parties. If the seller wants to avoid creating an additional option period for the buyer, the listing agent should encourage the seller to find the lease documents early in the process so they can deliver the documents to the buyer prior to executing the contract. Can the license holder put a copy of the lease documents in the Multiple Listing Service (MLS) to satisfy the delivery of the lease documents prior to executing the contract? This is not a good idea as not all buyers—or their agents—may have access to the MLS. It may also create a violation of privacy action by the tenant under the lease. A best practice would be to note in the MLS that there are residential leases on the property, then send a copy of the lease documents to the buyer’s agent when the buyer is contemplating submitting an offer on the property.

This addendum is designed to make sure parties affirmatively agree on whether the lease is going to be terminated by the closing date and possession turned over to the buyer or assigned and assumed by the buyer.

If the seller fails to deliver the documents within three days after the contract’s effective date, the buyer can declare the seller in default at any time before delivery up to closing and seek whatever remedies the buyer elects under Paragraph 15 of the contract. Obligations Regarding Tenant’s Security Deposit Section B(2) of the addendum should be familiar as it simply moved the provision regarding security deposits from Paragraph 9 of the previous contract to this addendum. It reiterates the Texas Property Code provision that the seller is required to deliver any security deposits he holds to the buyer at closing, and the buyer is responsible for notifying the tenant that the buyer has acquired the property and holds the tenant’s security deposit. The amount of the security deposit must be set out in the notice to tenant.

Disclosure of Residential Lease Status

Section B(3) is a significant change to selling property where a lease is assumed. It requires the seller to affirmatively acknowledge seven facts about the lease. These factors, which can be seen on the addendum at the end of this article, deal with the status of the lease, payment of rent, and any disputes or agreements with the current tenant or prior tenants.

A listing agent should review each of these statements with a seller who will be assigning a lease as part of the sale of the seller’s property at the listing appointment. If significant issues exist, it might be best if the seller tries to resolve those issues prior to putting the property on the market. If any of the seven statements about the lease are not true at the time of contract, the seller can explain why that statement is not true using the space provided. or example, Section B(3)(c) states that, to the seller’s knowledge, no tenant has prepaid any rent. It is common in some areas to have the tenant prepay the last month’s rent. If that were the case, the seller would have to insert an explanation in the space at the bottom of B(3) stating that tenant has prepaid the last month’s rent for the month of ________ in the amount of $_______. This will notify the buyer to negotiate for that amount to be transferred to the buyer at closing and to send a notice to the tenant after closing acknowledging possession of the last month’s rent under the lease.

Change in Residential Lease Status Following Execution of the Contract

Under Section B(4), if at any time after the execution of the contract (with the addendum) one of the seven statements under Section B(3) becomes untrue, the seller has an obligation to notify the buyer and remedy the situation.

Time frames become particularly important in this section. The seller is required to promptly notify the buyer that a statement became untrue. That means as soon as the seller finds out about it. The seller has an obligation to cure the condition making the statement untrue within seven days after giving the buyer notice that the statement became untrue. Note the addendum says, “Seller shall cure the condition . . .,” which means the seller must make his best effort to cure the condition.

If the condition making the statement untrue persists beyond this seven-day period, the buyer has five days following the seven-day period to decide whether to terminate the contract and have the earnest money returned or waive the condition and close. If the buyer does not terminate within that five-day period, the buyer waives the right to terminate under this section.

Built-in Closing Extension

A unique feature of the addendum is the automatic extension of the closing date to allow the time frames to cure and election to terminate to play out.

he last sentence of Section B(4) provides that the closing date will be extended daily as necessary to afford the parties time to provide notices under this paragraph. So, depending on when the statement in B(3) becomes untrue, the closing date could be extended up to 12 days. Note that if the seller is able to cure the issue making the statement in B(3) untrue within the seven-day period, the buyer’s right to terminate or waive does not arise. This is another set of timeframes that license holders will need to help their clients keep track of to navigate through the transaction.

Nothing in this publication should be construed as legal advice for a particular situation. For specific advice, consult an attorney. Lewis (kerri@2oldchicks.com) is a member of the State Bar of Texas and former general counsel for Texas Real Estate Commission.

Courts will solve any mysteries or disputes about the terms of an express easement. However, many such disputes can be avoided by careful negotiation and drafting. If a court can ascertain the terms intended by the parties, it will give them effect. By Rusty Adams

Easements for electric lines and pipelines crisscross many miles of Texas land. Many of the easements exist without incident for decades. Sometimes, however, a change in circumstances leaves the easement owners and the landlords in dispute.

A mystery arises. Exactly what rights are included in the easement? How much “easement” is in the easement? Who knows? The court knows, or at least it is tasked with deciding. Three Texas cases illustrate how the courts solve these mysteries under Texas law.

The first episode features an easement granted by one Mrs. Ida Wolcott, who by a “Deed of Right of Way” granted an easement to South Plains Pipe Line Company in 1928. By the time the dispute arose, the land belonged to Richard Knox and the easement to Pioneer Natural Gas Company. 22 22

The deed granted the easement “for the purpose of constructing and placing on, in and under the surface of the ground a pipe line . . . and for . . . placing, constructing, erecting, and maintaining . . . private telegraph or telephone line.” It gave the grantee the right to place poles, guy wires, and braces, as well as “to enter upon said lands at all times for the purpose of making additions to, improvements on, and repairs to [the lines] and to keep and maintain the same and to remove or replace the same.” It provided that the pipelines and telephone and telegraph lines “shall be constructed in an approved manner and with as little damage to said premises as may be practical considering the nature of the construction.” The grant did not define the location and width of the right of way.

In 1928, South Plains laid a pipeline using eight-inch and ten-inch pipe. In 1938, by agreement, Pioneer was allowed to remove part of the ten-inch line and replace it with a 15-inch low-pressure line. In 1955, Pioneer decided to replace both of the existing lines with a 12-inch high-pressure line. When Knox refused, Pioneer moved ahead with the work, resulting in damage to the land. A lawsuit ensued.

Although the grant did not define the location and width, the grantee had located and cleared a 30-foot right of way and used it for 27 years. Knox contended that by doing so, the location and width had become fixed and definite and could not be expanded.

The court disagreed, noting that the deed allowed a right-of-way “of sufficient width” to permit the pipeline and the right to enter for the purpose of “making additions to, improvements on, and repairs to” the pipeline to “keep and maintain the same and to remove or replace the same.”

The court noted that although the extent of an easement created by prescription is fixed by use, that is not so in the case of an express easement created by a conveyance. In the latter case, “the extent of the right depends on a proper construction of the grant.” Unless the grant says otherwise, it is assumed that the parties contemplated changes in use. An easement carries with it the right to do whatever is reasonably necessary for the full enjoyment of the easement. The extent to which those rights may be exercised depends on the object and purpose of the grant and whether those rights are limited in the grant itself.

The court also opined that details that impose no greater burden on the land are immaterial unless they are specifically addressed by the granting instrument. Bottom line: The court held that Pioneer could replace the pipeline because the deed said it could. For the complete story, see Knox v. Pioneer Natural Gas Co., 321 S.W.2d 596 (Tex. Civ. App.—El Paso 1959, writ ref’d n.r.e.).

This next legal thriller takes place in 1964, when the court was asked to construe an easement granted to Houston Pipe Line Company in 1926. The agreement in question was on a printed form that had been modified by the parties to reflect their agreement. It had provided that the right-of-way was “to lay, maintain, operate, repair, and remove a pipeline for the transportation of gas.” However, the words “and remove” had been struck from the agreement prior to signing. Additionally, a paragraph granting the right to construct additional pipelines was struck. Elsewhere in the document, removal of the pipeline was authorized, but only on termination of the easement. As in Knox, the size of the pipeline and the exact location and size of the easement were not defined.

The pipeline was built and it was a beaut—an 18-incher that served its purpose for 33 years. In 1959, though, the company was ready for bigger and better things. It ceased transporting gas for a few weeks, removed the old line, and replaced it with a much bigger 30-inch line. Enter Dwyer, who asserted that the removal of the original line terminated the easement completely. He further asserted that, even if the easement were not terminated, it only authorized one pipeline, and the pipeline company was not allowed to replace it with a larger pipeline.

The court held that the terms “operate” and “maintain” are “at least broad enough to include the right to remove and replace the original pipe with pipe of the same size when necessary” (emphasis added). Thus, stopping transportation of gas to replace the original pipe did not terminate the easement. This still left a crucial question unanswered: Was the company within its rights to replace the pipe with the larger pipe?

The pipeline company pointed to Knox, saying that as easement holder, it was entitled to the full enjoyment of the easement, and to employ whatever means may be reasonably necessary for its full enjoyment. The court refused to follow Knox, distinguishing it by observing that in Knox, the instrument granted rights greater than those that were actually used. Specifically, the easement was to be “of sufficient width” to permit the pipeline, and included the right to enter for purposes of adding, improving, repairing, keeping, maintaining, removing, and replacing. In Dwyer, there was no such language. The grantee was permitted to lay, construct, maintain, operate, and repair a pipeline. Once it did so by laying the 18-inch line, it could not replace it with a substantially larger line that would place a substantially greater burden on the land that the original parties did not contemplate. A grant in general terms, the court held, becomes fixed and certain once the pipe is laid, and the grantee cannot change the easement. For the full program, see Houston Pipe Line Co. v. Dwyer, 374 S.W.2d 662 (Tex. 1964). fied purposes. The landowners, relying on Dwyer, contended that the width had become fixed by use at 30 feet. The dispute precipitated a lawsuit, once more involving the court to solve the mystery.

The court reasoned that this case was more similar to Knox. While the easement in Dwyer did not include broad, forward-looking language, the easements in Knox and SWEPCO did. The SWEPCO easement specifically allowed for reconstructing and hanging new wires on the transmission line. The court refused to fix the width of the easement by use to 30 feet, and instead recognized a general easement, which includes the right to “unlimited reasonable use such as is reasonably necessary and convenient and as little burdensome as possible to the [landowner].” The court looks at the express written terms of the document. If the court can tell what the terms are and the terms are unambiguous, the court gives them effect without supplying additional terms, such as the width of the easement. It observed that if parties want to write a fixed width into the agreement, they may do so. However, the parties in SWEPCO did not. The court emphasized that even such a general easement is not unlimited. The holder of the easement must use the land in a reasonable manner and only to the extent reasonably necessary. If the holder uses the easements in a way that is unreasonable or not reasonably necessary, or in a way that violates express terms, the landowner may sue. This exciting episode is found in Southwestern Electric Power Co. v. Lynch, 595 S.W.3d 678 (Tex. 2019).

When negotiating or drafting an easement agreement, parties have an opportunity to be clear on specific terms. Neglecting that opportunity is a weed that bears bitter fruit. Who knows what easement lurks?

Nothing in TG should be considered legal advice. For advice on a particular situation, consult an attorney. Adams (r_adams@tamu.edu) is a member of the State Bar of Texas and a research attorney for the Texas Real Estate Research Center at Texas A&M University.

The final installment is a recent one involving an electric transmission line.

Southwestern Gas & Electric Company acquired easements and built a transmission line on wooden poles. The easements, which were later acquired by Southwestern Electric Power Company (SWEPCO), defined a rightof-way but not a Many easements exist width. SWEPCO was granted the without incident for right to ingress and egress “for the decades. Sometimes, purpose of construct- however, a change in ing, reconstructing, inspecting, patrolling, circumstances leaves hanging new wires the easement owners on, maintaining, and removing said line and and the landlords appurtenances.” The easements limited the num- in dispute. ber of poles, towers, and anchors permitted, but gave SWEPCO the option to increase them by giving additional compensation to the landowners. For decades, SWEPCO’s use of the easement had been limited to a width of 30 feet.

In 2014, SWEPCO started a modernization project, which included replacing the wooden poles with steel poles. SWEPCO made offers to landowners to increase the width of the easement to 100 feet by giving them additional compensation, and some landowners accepted. Nevertheless, with respect to those landowners who did not, SWEPCO maintained that it had the right to modernize anyway, because the easements were general easements, giving it the right to use as much of the property as reasonably necessary for the speci-