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In the April 2021 contract changes Paragraph 4 was added to the contract to address different leases that could be applicable to the transaction. The one covered in this article is the Fixture Lease.
What is a fixture?
A fixture is an improvement to real property, generally some type of personal property that is affixed or fastened in some way that makes it become a permanent part of the real property. A fixture conveys with the real property unless specifically excluded in the contract. Common examples of fixtures are solar panels, water softeners, propane tanks, and security systems.
Why does it matter for a real estate transaction?
When these items are installed they are often leased from the installation vendor until they are paid for in full. This means there is a debt associated with the item that may need to be paid. If left unpaid, the vendor has the right to extract the materials and/or system previously installed in the property which would be a very unpleasant surprise for the buyer.
How do you know if there is a fixture lease?
The short answer is “it depends.” Some lienholders will file a UCC-1 in the real property records. UCC-1 stands for Uniform Commercial Code Form 1. It is a document that is filed to show that a lender has a security interest in another party’s property. This filed UCC-1 puts the buyer on notice that there is a lien that needs to be paid as well. If a UCC is filed of record the UCC will appear on Schedule C of the title commitment.
Not all vendors will file a UCC though so the debt may be due but not readily available in the real property records. This means that you need to ask your sellers if they have any debt associated with the fixture.
If there is a fixture item on the property you should also be sure to use the Addendum Regarding Fixture Leases: https://www.trec.texas.gov/sites/default/files/pdf-forms/52-0_2.pdf
Completing The Addendum Regarding Fixture Leases
This addendum is intended to cover a few matters in contract negotiations:
What items, if any, are located on the property (Paragraph A);
Which items, if any, will the Buyer assume responsibility for at closing (Paragraph A(1));
Will the items remain post-closing or will the seller be responsible for removal of those items (Paragraph A(2));
In these paragraphs a real estate agent should be careful to make the selections that apply to the negotiated terms of the transaction. Please note that Paragraph A(1) is stating that the buyer will assume all fixture leases except those listed in the first blank. This means the buyer is obligating themselves to assume all fixture matters checked above unless they specifically list something in this paragraph.
Paragraph B of the Addendum Regarding Fixture Leases requires that copies of the fixture leases be provided to the buyer. You can check that the copies have already been provided (Paragraph B(1)) or that they are due within a certain timeframe (Paragraph B(2). It is important to note that if option B(2) is selected, the buyer has five days from the date of receipt of the lease copies to review and terminate the contract. This adds another cancellation contingency to the contract that has previously not been an option for the buyer. The prudent selection for listing agents would be to choose option B(1) and provide the lease copies pre-contract to eliminate that contingency.
Paragraph C makes a requirement that the seller pay all debts associated with a fixture unless that fixture has already been noted as one that the buyer is assuming above in Paragraph A(1). Something to note here is that not all leaseholder vendors will permit an assumption so it is prudent to find out if that is permissible prior to contract. Additionally some vendors will permit it but require paperwork and transfer fees.
Working with a knowledgeable title company is the key to success! Our escrow teams are always diligently keeping up-to-date with contract changes and the information surrounding them. Any time you have questions please do not hesitate to contact us. Afterall, we are the experts that you need and the partners that you can trust.