Ken Paxton

Highlights of Some Recent Texas Laws Related to Executory Contracts for Deeds

In 2001 the Texas Legislature expanded protections for persons buying land under executory contracts (typically called contracts for deeds). The major change was to make applicable statewide amended versions of provisions that had applied only in certain economically distressed counties. The revised provisions are in Subchapter D of Chapter 5 of the Texas Property Code ("Prop. Code"). Subchapter B of Chapter 232 of the Texas Local Government Code ("LGC"), enacted in 1995 and applying only near the Texas-Mexico border, has special requirements when a subdivider of land sells the property through a contract for deed. The two subchapters apply under different (and sometimes overlapping) conditions and have different emphases, as explained below.

SUBCHAPTER B of Texas Local Govt. Code, Chapter 232

Subchapter B applies in counties any part of which is within 50 miles of the border with Mexico. Within those 28 counties, Subchapter B generally applies to subdivisions of two or more lots intended primarily for residential use located outside city limits. A lot of five acres or less is presumed residential. [LGC § 232.022]

LGC § 232.033 (part of Subchapter B) basically requires of a subdivider seller: disclosure of utility availability in advertisements, a pre-sale notice/warning about property conditions, an annual accounting statement (of amounts paid, balance due, etc.) by Jan. 31st, and Spanish language versions of all documents when requested or when Spanish is used. Violations are subject to criminal punishment (Class A misdemeanor) and civil penalties (plus court costs and attorneys fees). [LGC §§ 232.033(h), 232.035, & 232.037] A subdivider must record with the county clerk all sales contracts, including disclosure statements, not later than 30 days after the sale. [LGC § 232.031(b)] Further, county subdivision rules must require each "purchase contract" between a subdivider and a lot buyer to contain a statement describing how and when water, sewer, electricity, and gas services will be made available to the subdivision. [LGC § 232.025(6)]

SUBCHAPTER D of Texas Property Code, Chapter 5 [§§ 5.061-5.080]

Subchapter D applies statewide to contracts for deeds covering land used or to be used as the residence of the purchaser or a close relative of the purchaser. (The relative must be within the second degree - a spouse, parent, child, sister, brother, grandparent, or grandchild, or spouse thereof.) A lot measuring an acre or less is presumed residential. There are exceptions for contracts providing for delivery of the deed within 180 days, and for sales of state land.

Subchapter D sets out procedures when a purchaser has defaulted and the seller wants to demand payment in full or rescind the contract. Prop. Code § 5.063 specifies the contents of the notice that must be provided to a purchaser. Under §§ 5.064 and 5.065, as amended in 2003, the seller must allow the purchaser at least 30 days to cure the default for contracts signed beginning Sept. 1, 2003. Laws for older contracts require cure periods from 15 to 60 days.

Once a purchaser has made the equivalent of 48 monthly payments or has paid at least 40 percent of the total amount due, if the purchaser defaults, then the seller may not simply cancel the contract or demand payment in full. Instead, the seller may appoint a trustee to sell the property at public auction at the courthouse, and if the sales price at the auction is greater than the debt on the contract, the former purchaser gets the excess. [§ 5.066] However, if the sales price is less than the unpaid balance due, then the original seller has two years to sue the original purchaser for the deficiency (which is, however, subject to certain offsets or reductions if the fair market value was greater than the sales price at the auction). [§ 5.066(e), see also §§ 51.003-.005]

Subchapter D requires disclosure of utility availability in advertisements [§ 5.069(c)], a pre-sale notice/warning about property conditions [§ 5.069(a)(3)], an annual accounting statement (of amounts paid, balance due, etc.) by Jan. 31st [§ 5.077], recording of the contract [§ 5.076], and translations of all written documents when negotiations are conducted in a language other than English [§ 5.068]. These requirements are similar (but not identical) to requirements in Subchapter B of Chapter 232 of the Local Government Code, mentioned above.

In addition, under Subchapter D a seller must provide - before an executory contract is signed by the purchaser - a current survey or plat [§ 5.069(a)(1)], a copy of every document describing any easement or restrictive covenant or other encumbrance affecting title [§ 5.069(a)(2)], a tax certificate [§ 5.070(a)(1)], information about insurance on the property [§ 5.070(a)(2)], a statement specifying the financing terms [§ 5.071], and if the land is not in a recorded subdivision, a separate disclosure stating that utilities may not be available until the subdivision is properly recorded [§ 5.069(b)]. The seller must provide a statement explaining that any oral agreement does not control over the written contract. [§ 5.072] Failure to provide certain information is basis for a suit under the Deceptive Trade Practices-Consumer Protection Act and entitles the purchaser to cancel the contract and get a full refund. [§§ 5.069(d), 5.070(b), 5.072(e)]

Subchapter D also prohibits some contract terms, including pre-payment penalties, excessive late-payment fees (greater than the lesser of eight percent or the actual cost of processing the late payment), and restrictions against pledging equity for certain loans. [§ 5.073] Subchapter D lets any purchaser have a lien placed for the value of improvements on the property to finance utility service, even if the contract forbids it. [§ 5.067] An insurer must be notified of the names and addresses of all parties to an executory contract, and insurance proceeds must be spent on the property. [§ 5.078] A purchaser has a right to cancel and get a full refund--without cause--within 14 days, and must be notified of that right by the seller. [§ 5.074] When a contract is finally paid off, the seller must transfer the title within 30 days or be subject to increasing liquidated damages. [§ 5.079]

Non-compliance with various provisions of Subchapter D is actionable under the Texas Deceptive Trade Practices-Consumer Protection Act. Being late with the annual accounting statement makes the seller liable for attorneys fees and $250 per day in liquidated damages. While some provisions in Subchapter D apply only to new transactions, others (such as the annual accounting statement, handling of insurance, and transfer of title) apply to older contracts, too.