Home > Blogs > Tom Branch > Dallas Real Estate and Short Sale Blog

When Does a Texas Contract Become Binding?

By Tom Branch

Real Estate Agent with RE/MAX Dallas Suburbs TX Broker 0513551

June 18, 2011 02:52 AM

Delivery of Earnest Money

I read an interesting post on Facebook the other day. There was a discussion about the delivery of the earnest money being required before a contract becomes binding.

I’m going to argue that a Texas contract becomes binding when it’s signed by all parties, executed, and all parties have received notice.

I base this on several things:

The Texas Property Code (TPC) requires delivery of the earnest money by the close of business on the second business day after execution unless otherwise stated in the contract.

The delivery of earnest money to the escrow officer is a performance issue under the contract. This is clearly spelled out in a Texas 1 to 4 Family Residential Resale Contract. Paragraph 5 reads, “If Buyer fails to deposit the earnest money as required by this contract, Buyer will be in default.” I don’t know how you can be in default if there is no contract. You can only default on a binding contract.

Both the TPC and the Texas 1 to 4 Family Residential Resale Contract support the concept that delivery of the earnest money is a performance issue.

Additionally, Texas has no “right to rescind” the contract within a certain number of days. Once signed, executed, and notice is delivered to all parties, it is binding.

Source: http://www.thebranchteam.com/wordpress/2011/06/18/when-does-a-texas-contract-become-binding/

Re-Blog

Comments(8)

Comment

Show All Comments

Sort:

Scott Petersen

Client First, Realtors - Canton, MI - Canton, MI

I would agree that the contract is binding when it is signed and executed. EMD like other conditions like private inspection are simply performance issues contained in the executed contract.

Jun 18, 2011 02:54 AM

Tom Branch

RE/MAX Dallas Suburbs - Plano, TX

Broker, CDPE, SFR, ACRE, Plano TX Ambassador

Scott,

I suspect this is true in many places but each state and contract may be different.

Tom

Jun 18, 2011 02:56 AM

Alan Kirkpatrick

Austin Texas Homes - Round Rock, TX

Alan in Austin

Tom:

Interesting post. I think if it went to court however the absence of consideration. would nulify the contract In the case of a real estate contract the consideration is the escrow monies:

Consideration is a legal concept that describes something of value given in exchange for a performance or a promise of performance. The presence of consideration distinguishes contracts from gifts. Consideration can be a promise to do something there is no legal obligation to do, or a promise to not do something there is a legal right to do. Promises to exchange money, goods, or services are forms of consideration. All parties in an agreement must give consideration in order to create a contract, but courts typically do not make a determination about the adequacy of the consideration unless there is evidence of some type of wrongdoing by the party benefiting most from the contract.

Jun 18, 2011 03:00 AM

Alan,

Consideration does not have to be money. As you stated, the courts have long-held that mutual promises are consderation in a contract. The promise to sell and the promise to buy are clearly stated in Paragraph 1 of the contract.

I also think the contract itself and the TPC support the concept that delivery of the earnest money is a performance issue.

The only place where consideration is even mentioned in a Texas contract is Paragraph 23 referencing the Option Fee.

I'm not a lawyer but I will run this by one on Monday as a follow-up.

Jun 18, 2011 03:07 AM

Bryan Robertson

Los Altos, CA

Tom - California is the same as Texas in terms of what defines a binding contract. It is rare that a EMD is sent to escrow right away. The check has to be in within 3 days. However, one difference in CA is that the buyer has 3 days to rescind the contract (5 days for foreclosure contracts) for any reason. It's rare that the buyer takes advantage of that but it is a factor.

Jun 18, 2011 05:07 AM

Leslie Ebersole

Swanepoel T3 Group - Saint Charles, IL

I help brokers build businesses they love.

So delivery of earnest money is a performance issue? I know, I'm a little slow. Maybe by the 5th time I'll get it.

Happy Father's Day.

Jun 19, 2011 04:21 PM

Leslie,

I argue that tendering earnest money is not necessary for the contract to be binding upon the parties. A Texas contract is binding when the contract is signed, executed, and notice is given to all parties.

The delivery of earnest money is a performance issue in the same way as delivering anything else that is required for a contract.

Some people believe that the earnest money is the consideration. I don't believe that to be true based upon my reading of the contract and the Texas Property Code.

Jun 20, 2011 01:57 AM

I spoke to Matt Aycock, a local title attorney this morning. He wrote:

"You are 100% accurate. Most agents don't realize this and I have had difficulties explaining it to them from time to time. That's why it's not that important to send a courier to pick up earnest money so long as it is put in transit through legitimate means (US mail works).

I always read them the last sentence of Section 5 of the standard TREC form. You can't be in default of a contract if there is no contract...."

Jun 20, 2011 02:28 AM

When Does a Texas Contract Become Binding?

Comments(8)

Tom Branch

Service Areas

Real Estate Resources

Recent Posts

Additional Information