Colorado Contracts and Regulations

Introduction

By now, most students will have come to an appreciation of the complexity of even a simple real estate transaction, and of the special privilege afforded by the Colorado Supreme Court in the Conway-Bogue decision allowing brokers to practice law in a limited fashion. 

There are a few remaining forms that may or may not ever be used in your real estate practice that we will cover in this chapter. This chapter will then also look at some remaining subjects in Colorado statute or Commission rule or process that have not been covered elsewhere. 

By the end of this unit, you will be able to:

· Explain the various types of Promissory notes and Deeds of Trust

First, a look at available promissory notes and deeds of trust.

· A promissory note is “a promise to pay” at some future date. It is often called “evidence of the debt,” meaning it is the document that proves a debt exists.

· Promissory notes are negotiable – meaning they may be assigned the same as cash or a check. Therefore, a buyer should only sign the original, and any photocopies should have the signature blocked out and clearly be marked as “COPY.”

· There are three distinct Commission-approved promissory notes. They are presented here in summary form without headings and signature blocks. Just the facts, ma’am.

 

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Earnest Money Promissory Note

Click here to open the  Earnest Money Promissory Note . 

Just as it states, this form may be used by a buyer who wishes to make an offer to purchase without putting actual money immediately at risk.

U.S. $ _____________________________________, 

___________________________ Date:_____________

City State 

FOR VALUE RECEIVED, 

Name(s) of Maker(s), Address (The "Maker(s)" is/are the person(s) promising to pay, i.e. the buyer(s)) jointly and severally,  (This means the buyers agrees that both are liable and if one doesn't pay the other one is liable for the whole enchilada.) promise to pay to the order of:  (seller or broker) the sum of ___________ Dollars, with interest at ___ per cent per annum from ___________until paid. 

Suggest the interest rate be comparable to the current financial market for short-term loans, and the date entered here is the date from which interest on the sum will be calculated. It is often marked n/a by the buyer, although it seems reasonable for the Seller to expect some interest as compensation for delaying receipt of his or her earnest money.

Both principal and interest are payable in U.S. dollars on or before___________, 

This is the date the note is due and payable. For the buyer, this would ideally be at closing. For the seller, this is ideally at the time of contract acceptance. In fact, a broker working with the seller ought to have the seller consider a counterproposal if this amount is not due until late in the transaction. While it is still a form of legal tender, it is not the same as having money in the escrow account.

At ________________or at such other address as note holder may designate. Presentment, notice of dishonor, and protest are hereby waived. If this note is not paid when due, I/we agree to pay all reasonable costs of collection, including attorney's fees.  Presentment, notice of dishonor and protest are procedural safeguards in the world of debt collection. They are not important here as the buyer waives these protections.

This note is given as earnest money for the contract on the following property:  Include the legal description and street address here.

You've received the Counterproposal from the Sellers on Main Street in Colorado Springs on October 26. In it, the sellers require an additional $10,000 earnest money deposit. Since the Buyers would face a penalty on immediate withdrawal of that sum, they suggest an Earnest Money Promissory Note be prepared. You are back in the role of the Buyer Agent and prepare the form for their signature. As it will be due and payable 10 days before closing (November 20th) you do not include an interest rate. 

 

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Earnest Money Promissory Note

Click here to open the  Promissory Note .

The other two forms of promissory note are designed for use with Commission-approved deeds of trust when the broker is drafting the finance paperwork for seller financing. Obviously, since they are Commission-approved forms, any broker may fill in the blanks and use them in a transaction. May we suggest, however, that because of the infrequency of their use, the complexity of their content and the amount of money/risk involved, a broker is well advised to personally possess or actively seek expertise in the preparation of these notes and deeds of trust!

U.S. $ ______________

1. FOR VALUE RECEIVED, the undersigned (Borrower) promise(s) to pay ___________________ (Holder) or order, the principal sum of _________ Dollars, with interest on the unpaid principal balance from _____________, until paid, at the rate of _______ percent per annum. Principal and interest shall be payable at _____________________, or such other place as Note Holder may designate, in _______ payments of ________________________Dollars (U.S. $ __________), due on the ____ day of each __________, beginning _____________________. Such payments shall continue until the entire indebtedness evidenced by this Note is fully paid; provided, however, if not sooner paid, the entire principal amount outstanding and accrued interest thereon, shall be due and payable on __________.

This is the promise to pay. It is very similar to the earnest money promissory note with the addition of the periodic payment schedule.

1. Borrower shall pay to Note Holder a late charge of _____ % of any payment not received by Note Holder within ________ days after the payment is due.

2. Payments received for application to this Note shall be applied first to the payment of late charges, if any, second to the payment    of accrued interest at the default rate specified below, if any, third to accrued interest first specified above, and the balance applied in reduction of the principal amount hereof.

3. If any payment required by this Note is not paid when due, or if any default under any Deed of Trust securing this Note occurs, the entire principal amount outstanding and accrued interest thereon shall at once become due and payable at the option of Note Holder (Acceleration); and the indebtedness shall bear interest at the rate of ________ percent per annum from the date of default. Note Holder shall be entitled to collect all reasonable costs and expense of collection and/or suit, including, but not limited to reasonable attorneys' fees.

This is the "acceleration clause." It accelerates the entire balance of the loan from whatever the original paid-in-full date to today(!) because a payment was late. Can anyone define "reasonable attorneys' fees?"

 

Promissory Note (continued)

1. Borrower may prepay the principal amount outstanding under this Note, in whole or in part, at any time without penalty except:

This is the lender's choice. Free comment: Since I would refuse a commercial loan with a prepayment penalty, it seems right that as a lender, I wouldn't impose a penalty for getting paid back early.

Any partial prepayment shall be applied against the principal amount outstanding and shall not postpone the due date of any subsequent payments or change the amount of such payments.

2. Borrower and all other makers, sureties, guarantors, and endorsers hereby waive presentment, notice of dishonor and protest, and they hereby agree to any extensions of time of payment and partial payments before, at, or after maturity. This Note shall be the joint and several obligation of Borrower and all other makers, sureties, guarantors and endorsers, and their successors and assigns.

Similar to the earnest money promissory note, the borrower waives these self-protections and allows the lender to pursue payment of the debt post-haste. 

Any notice to Borrower provided for in this Note shall be in writing and shall be given and be effective upon (a) delivery to Borrower or (b) by mailing such notice by first class U. S. mail, addressed to Borrower at Borrower's address stated below, or to such other address as Borrower may designate by notice to Note Holder.

3. Any notice to Note Holder shall be in writing and shall be given and be effective upon (a) delivery to Note Holder or (b) by mailing such notice by first class U.S. mail, to Note Holder at the address stated in the first paragraph of this Note, or to such other address as Note Holder may designate by notice to Borrower. The indebtedness evidenced by this Note is secured by a Deed of Trust dated ___________, and until released said Deed of Trust contains additional rights of Note Holder. Such rights may cause Acceleration of the indebtedness evidenced by this Note. Reference is made to said Deed of Trust for such additional terms. Said Deed of Trust grants rights in the following legally described property located in the __________ County of ___________________, State of Colorado: known as No. _________________________________ (Property Address). (CAUTION: SIGN ORIGINAL NOTE ONLY/RETAIN COPY) KEEP THIS NOTE IN A SAFE PLACE. THE ORIGINAL OF THIS NOTE MUST BE EXHIBITED TO THE PUBLIC TRUSTEE IN ORDER TO RELEASE A DEED OF TRUST SECURING THIS NOTE. 

 

Promissory Note (UCCC - No Default Rate)

Click here to open the  Promissory Note (UCCC - No Default Rate) .

UCCC stands for Uniform Consumer Credit Code, a federal statute regulating credit transactions and affording certain protections to the borrower. It is identical in form and content to the promissory note just presented with the exceptions of paragraphs 4 and 5 with the differences shown in bold face below.

1. If any payment required by this Note is not paid when due, the entire principal amount outstanding and accrued interest thereon shall become due and payable at the option of Note Holder (Acceleration)  twenty days after notice of Acceleration has been given. This time period shall run concurrently with the right to cure, if any, allowed by the Uniform Consumer Credit Code. Such notice of Acceleration shall specify the amount of the nonpayment plus any unpaid late charges and other costs, expenses and fees due under this Note. Until the expiration of said twenty-day period, Borrower may cure all defaults consisting of a failure to make required payments by tendering the amounts of all unpaid sums due at the time of tender, without Acceleration, as specified by Note Holder in such notice. Cure restores Borrower to Borrower's rights under this Note as though defaults had not occurred. Any defaults under this Note occurring within twelve months after Note Holder has once given a notice of Acceleration, entitles Borrower to no right to cure, except as otherwise provided by law. Note Holder shall be entitled to collect all reasonable costs and expense of collection and/or suit, including, but not limited to reasonable attorneys' fees.

2. Borrower may prepay the principal amount outstanding under this Note, in whole or in part, at any time  without penalty. Any partial prepayment shall be applied against the principal amount outstanding and shall not postpone the due date of any subsequent payments or change the amount of such payments.

Remember in the previous note, the lender had the option of collecting a prepayment penalty.

Having compared the deed of trust to a mortgage in the Real Estate Law and Practice Course, you know that the deed of trust is commonly used as the security instrument in Colorado - whether it is a commercial loan or a seller or third party loan.

Security instrument means it is the lender's security for the promise to pay. If the borrower cannot pay, the lack of a security instrument means the lender is left holding an empty money pouch. With the security instrument, failure to pay is backed up by loss of the property to the lender.

There are three different Commission-approved Deeds of Trust. As with the promissory notes we'll cover the simplest one first and note the differences in the other two.

 

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Deed of Trust (Due on Transfer - Strict)

All three Colorado Commission Approved Deeds of Trust were changed to reflect some changes in the foreclosure laws.  There is a new “Expedited Foreclosure” statue in Colorado (HB10-1249).  Should a borrower qualify and wishes to proceed to an Expedited Foreclosure under this law the form change eliminates the specific statement of the number of times publication of the foreclosure is required. The change merely requires the Lender to publish the number of times the law requires the Notice to be published.  This general statement will allow for the expected additional changes to the statute in the next year. This change of language also drops the word “advertise” in favor of the more correct “Notice.” As a result state changes will not continue to require changes to the forms since the language is now more general.

Click here to open the  Deed of Trust (Due on Transfer – Strict) .   Due on Transfer – Strict means that the loan is not transferable under any circumstances. Because of the length and complexity of the forms, we will summarize each of the paragraphs below. This level of familiarization will suffice until you first need to prepare one of these – which as we’ve already suggested – should never be attempted without competent expertise.

As a reminder, the three parties are the  borrower or trustor (who is giving this deed of trust), the  public trustee who will receive it and either foreclose in the event the borrower defaults or release when it is paid off. The public trustee holds this deed of trust for the benefit of the  lender or beneficiary. 

1. Property in Trust.  Defines the property being offered as security.

2. Note: Other Obligations Secured.  Repeats all the rates and dates from the promissory note.

3. Title.  Borrower warrants having clear title to the security property.

4. Payment of Principal and Interest.  Borrower shall pay on time.

5. Application of Payments.  1st to escrow for taxes and insurance, 2nd to anything protecting lender’s interests (Paragraph 9) and 3rd in accordance with the promissory note.

6. Prior Mortgages and Deeds of Trust; Charges; Liens.  If any exist, borrower promises to pay them off to preclude any other liens having higher priority over this loan.

7. Property Insurance. Borrower promises to keep the property insured. No lender will accept the risk of a fire or tornado destroying the property and not having the loss insured.

8. Preservation and Maintenance of Property.  Borrower promises to keep the property in good repair and not to permit “waste, impairment or deterioration.”

9. Protection of Lender’s Security.  If Borrower defaults in any of the above requirements, lender may step in at borrower’s expense and correct the default. For example, the lender may pay a missed insurance premium, or a prior lien and the expense is added to borrower’s indebtedness under this deed of trust.

10. Inspection. Many people don’t understand this clause common to most trust deeds. The lender reserved the right, with proper notice, to inspect the premises. Few lenders, if any, have the time or resources to do this – unless the borrower presents problems. 

 

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Deed of Trust (Due on Transfer - Strict) (continued)

11. Condemnation.  If the property is condemned, the lender gets the proceeds.

12. Borrower not Released.  From original terms even if payment or amortization schedules are modified.

13. Forbearance by Lender Not a Waiver.  Just because the lender lets the borrower slide once, it doesn't set a precedent that the lender will let any borrower default go a second time.

14. Remedies Cumulative.  The lender may pursue one, any combination or all of the remedies cures allowed in this trust deed.

15. Successors and Assigns Bound; Joint and Several Liability; Captions.  Any heirs or successors are bound by this trust deed. If multiple borrowers, all or each individually are liable for the terms herein. The bold-faced captions are for convenience and are not legally binding.

16. Notice.  The methods of notice delivery are defined.

17. Governing Law; Severability.  Colorado law applies. If any provision of this trust deed or the note conflict with the law, they may be severed from the document and all of the rest remains in full effect.

18. Acceleration; Foreclosure; Other Remedies.  In the event of borrower breach of any covenant or default in any payment, lender has the option to accelerate all sums due right now, and may sell the property to collect such sums.

19. Borrower's Right to Cure Default.  If borrower pays any delinquent payments or fees by the date allowed by foreclosure law, this deed of trust remains in full force as if acceleration had not occurred.

20. Assignment of Rents; Appointment of Receiver; Lender in Possession.  Borrower assigns post-acceleration rent (if any) to lender. Lender is entitled to a court-appointed receiver if necessary. Lender may reenter and take possession of the premises after acceleration.

 

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Deed of Trust (Due on Transfer - Strict) (continued)

21. Release.  Upon final payment, this deed of trust must be released. Lender must furnish original promissory note.

22. Waiver of Exemptions.  Borrower waives homestead and any other exemptions for property. Otherwise, borrower could receive full loan funds, default and only be liable for amount borrowed minus the homestead exemption ($45,000).

23. Escrow Funds for Taxes and Insurance.  22 lines of how to set up escrow for the lender to pay taxes and insurance premiums.

24. Transfer of the Property; Assumption.  This is the clause that gives this version its title: Due on transfer - Strict. It defines what constitutes a transfer.

· The  following events shall be referred to herein as a "Transfer:"

i. a transfer or conveyance of title (or any portion thereof, legal or equitable) of the Property (or any part thereof or interest therein),

ii. the execution of a contract or agreement creating a right to title (or any portion thereof, legal or equitable) in the Property (or any part thereof or interest therein),

iii. or an agreement granting a possessory right in the Property (or any portion thereof), in excess of 3 years,

iv. a sale or transfer of, or the execution of a contract or agreement creating a right to acquire or receive more than fifty percent (50%) of the controlling interest or more than fifty percent (50%) of the beneficial interest in Borrower,

v. the reorganization, liquidation or dissolution of Borrower.

· Not to be included as a Transfer are:

2. the creation of a lien or encumbrance subordinate to this Deed of Trust,

2. the creation of a purchase money security interest for household appliances, or

2. a transfer by devise, descent or by operation of the law upon the death of a joint tenant.

· At the election of Lender, in the event of each and every Transfer:

3. All sums secured by this Deed of Trust shall become immediately due and payable (Acceleration).

3. If a Transfer occurs and should Lender not exercise Lender's option pursuant to this paragraph 24 to Accelerate, Transferee shall be deemed to have assumed all of the obligations of Borrower under this Deed of Trust including all sums secured hereby whether or not the instrument evidencing such conveyance, contract or grant expressly so provides. This covenant shall run with the Property and remain in full force and effect until said sums are paid in full. Lender may without notice to Borrower deal with Transferee in the same manner as with Borrower with reference to said sums including the payment or credit to Transferee of undisbursed reserve Funds on payment in full of said sums, without in any way altering or discharging Borrower's liability hereunder for the obligations hereby secured.

3. Should Lender not elect to Accelerate upon the occurrence of such Transfer then, subject to (b) above, the mere fact of a lapse of time or the acceptance of payment subsequent to any of such events, whether or not Lender had actual or constructive notice of such Transfer, shall not be deemed a waiver of Lender's right to make such election nor shall Lender be estopped therefrom by virtue thereof. The issuance on behalf of Lender of a routine statement showing the status of the loan, whether or not Lender had actual or constructive notice of such Transfer, shall not be a waiver or estoppel of Lender's said rights.

25. Borrower's Copy.  Borrower has a copy of the note and deed of trust. 

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Deed of Trust (Due on Transfer - Creditworthy)

Click here to open the  Deed of Trust (Due on Transfer – Creditworthy).

Once again, the Commission-approved deed of trust forms are set up in very similar fashion, so that once you know the “Due on Transfer – Strict” version previously covered, you only need to deal with a few small changes to understand the other two types of trust deeds.

This “Due on Transfer – Creditworthy” version simply permits the borrower to transfer title to another party who will assume the loan, only after the lender has approved the credit rating of the new party. The following is the only paragraph that changes.

1. (a) Borrower shall, upon Lender’s request, submit information required to enable Lender to evaluate the creditworthiness of the person (“Transferee”) who is, or is to be, the recipient of a Transfer, as if a new loan were being made to Transferee. If Transferee is reasonably determined by Lender to be financially incapable of retiring the indebtedness according to its terms, based upon standards normally used by persons in the business of making loans on real estate in the same or similar circumstances, then all sums secured by this Deed of Trust, at Lender’s option, may become immediately due and payable (“Acceleration”). 

Click here to open the  Deed of Trust (Assumable – Not Due on Transfer) .

This version is even more lenient, possibly used by a lender who is not too concerned with the return on their investment or for a property expected to change ownership often. It allows the buyer to transfer the loan without the seller’s permission.

In this version, Paragraph 24 is simply omitted, and the acknowledgment of buyer having received a copy of this and the promissory note moves up from #25 to #24. 

 

Deed of Trust (Assumable - Not Due on Transfer)

Given the formidable array of Commission-approved contract forms, it is understandable that students may be less than comfortable with their detail. 

One mechanism to deal with this seeming overload is to simply ignore the forms, or skim them too quickly. DO NOT BE FOOLED! These are your bread and butter. You must know both what forms are published – as they are the only ones you may use – and you must know the purpose and general content of every form.

Obviously some forms will have more of an impact on your success as a real estate professional than others. Presumably you will have an intimate familiarity with the exclusive property and buyer listing forms, and the four (4) Contract to Buy and Sell Real Estate forms. Others you may encounter rarely after licensure.

Regardless of your opinion of their future utility, the Real Estate Commission requires you to demonstrate mastery of the contract forms as a prerequisite to licensure. We have required you to fill out and submit some of the more commonly used forms following some hypothetical transaction scenarios to make sure you are on track. But you must be able to fill out any of them as the need arises. 

A “Hyperlink” to the Commission Website has been provided for each form. If it is easier to study the forms chapter of your Colorado Real Estate Manual, then do so (although by necessity the print is painfully small). But remember that your instructor may require you to submit additional completed forms if it is evident that you failed to understand facets in previously submitted samples.

 

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Student Advisory

This concludes Chapter 9. Below is a brief summary which you can review before taking your quiz.

A  promissory note is a negotiable “promise to pay” at some future date.

Earnest Money Promissory Note

Promissory Note

· Periodic payment schedule.

· Acceleration clause.

· Borrower may prepay the principal amount outstanding under this Note, in whole or in part, at any time  without penalty.

· The borrower waives self-protections and allows the lender to pursue payment of the debt post-haste. 

· Any notice to Borrower shall be in writing and shall be given and be effective upon delivery to Borrower.

Promissory Note (UCCC - No Default Rate)

· Notice of Acceleration shall specify the amount of the nonpayment plus any unpaid late charges and other costs, expenses and fees due under this Note.

· Any  defaults occurring within twelve months after a notice of Acceleration, entitles Borrower to no right to cure.

· Borrower may prepay the principal amount outstanding under this Note, in whole or in part, at any time  without penalty.

Deed of Trust (Due on Transfer - Strict)

The loan is not transferable under any circumstances. The three parties are the  borrower or trustor, the  public trustee and the  lender or beneficiary. 

· The property being offered as security.

· Borrower warrants having clear title to the security property.

· Application of Payments - 1st to escrow for taxes and insurance, 2nd to anything protecting lender’s interests (Paragraph 9) and 3rd in accordance with the promissory note.

· Borrower promises to keep the property  insured.

· If Borrower  defaults, lender may step in at borrower’s expense and correct the default.

· The lender reserved the right, with proper notice, to  inspect the premises.

· If the property is  condemned, the lender gets the proceeds.

· In the event of borrower  breach, lender has the option to accelerate all sums due right now, and may sell the property to collect such sums.

· Borrower assigns post-acceleration rent (if any) to lender.

· Borrower waives  homestead and any other exemptions for property.

Deed of Trust (Due on Transfer - Creditworthy)

· Permits the borrower to transfer title to another party who will assume the loan, only after the lender has approved the credit rating of the new party.

· Borrower shall, upon Lender’s request, submit information required to enable Lender to evaluate the creditworthiness of the person who is the recipient of a Transfer.

Deed of Trust (Assumable - Not Due on Transfer)

· Possibly used by a lender who is not too concerned with the return on their investment or for a property expected to change ownership often.

· Allows the buyer to transfer the loan without the seller’s permission.

Click here if you would like to open this summary as a pdf, which you can then print or save to your device:  Chapter 9 Summary

You have completed Chapter 9. You must now complete the Chapter 9 Quiz with a score of 80% or better before moving on to the next (and last!) chapter -- Chapter 10.

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