Issues to Consider with Texas Contracts for Deed

Real Estate Law

Monday, October 16, 2006
Contributed by: James Wester

Some important reminders regarding contracts for deed in the state of Texas.

1. Compliance with Texas Property Code.

It is paramount that you comply with the requirements of Chapter 5 of the Texas Property Code, including without limitation, as follows:

If the sale is negotiated primarily in a language other than English, copies of all documents relating to the transaction must be provided to the buyer in that other language. sec. 5.068.
Prior to the contract for deed being signed, the seller must provide the buyer the following:
- a current survey;
- any title exception documents;
- a property condition disclosure;
- a tax certificate;
- a copy of the insurance policy or title commitment or binder for the property; and
- a disclosure of financing terms.

See sec. 5.069(a), 5.070, 5.071.
The seller must include a notice of final agreement in the contract for deed or in a separate document. sec. 5.072.
The seller must include an abbreviated notice of cancellation in the contract for deed and a prescribed form of notice of cancellation in a separate document at the time the buyer signs the contract. sec. 5.074.
If the property is not located in a recorded subdivision, the seller must provide the buyer with a separate disclosure form stating that utilities may not be available to the property until the subdivision plat is recorded. sec. 5.069(b).
The seller must provide the buyer with an annual accounting statement in January of each year for the term of the contract for deed or be liable for liquidated damages of $250 per day for each day after January 31 that the seller fails to provide the statement, plus reasonable attorney's fees. sec. 5.077.
The seller must transfer recorded, legal title to the property within thirty days after the date the seller receives the buyer's final payment under the contract for deed or be liable for liquidated damages of $250 per day during the first sixty days of delinquency and $500 per day thereafter, plus reasonable attorney's fees. sec. 5.079.

2. Additional Considerations.

A contract for deed may not include:
- late charges in excess of the lesser of 8 percent of the late payment or the actual administrative cost of processing the late payment;
- a prohibition against the buyer pledging its interest in the property to secure a loan for improvements, including utility or fire protection improvements; or
- a prepayment penalty or similar fee. sec. 5.073.
The seller must record the contract for deed and the property condition disclosure within thirty days after the contract for deed is executed. sec. 5.076.
The party who obtains the property insurance must inform the insurer within 10 days after the coverage is obtained or the contract is executed, whichever is later, of the existence and term of the contract and the name and address of the other party to the contract. The insurer must disburse insurance proceeds jointly to the seller and the buyer, and the seller and the buyer must ensure that the proceeds are used to repair, remedy, or improve the property. sec. 5.078.

3. Cautions

The attorney who prepares the contract for deed, if deemed the person responsible for closing, may be required to satisfy Internal Revenue Service Form 1099-S reporting requirements. 26 U.S.C.A. sec. 6045(e).
If the property is in a municipal utility district, a mandatory notice must be given by the seller. Tex. Water Code Ann. sec. 49.451-.456.
The past use of the property should be considered to determine if action is required to comply with state and federal environmental laws. If residential property was constructed before 1978, a disclosure concerning lead-based paint may be required.
If chapter 39 of the Texas Business and Commerce Code regarding cancellation of certain consumer transactions applies to the contract for deed transaction, the seller must provide the buyer with the notice of right of rescission prescribed in section 39.004(a) and (b) and the form of cancellation notice prescribed in section 39.004(c), and the buyer may cancel the contract not later than midnight of the third business day after the buyer signs the contract for deed. Tex. Bus. & Com. Code Ann. sec. 39.003, 39.004.
The person who prepares the contract for deed should also determine whether the contract-for-deed transaction is subject to the federal Truth in Lending Act and its accompanying Regulation Z.

4. Defaults

If a buyer defaults after paying 40 percent or more of the amount due or the equivalent of forty-eight monthly payments under the contract for deed, the seller may recover possession of the property only by foreclosing the buyer's interest under the contract for deed pursuant to a non-judicial foreclosure under section 51.002 of the Texas Property Code. The remedies of rescission or of forfeiture and acceleration are not available under these circumstances. Tex. Prop. Code Ann. sec. 5.066.
If a buyer defaults before the 40 percent or forty-eight monthly payments threshold described above, the seller may enforce the remedies of rescission or of forfeiture and acceleration. Tex. Prop. Code Ann. sec. 5.064. Before exercising the remedies of foreclosure, rescission, or forfeiture and acceleration, the seller is required to send the buyer a prescribed form of notice affording the buyer a thirty-day right to cure the default. Tex. Prop. Code Ann. sec. 5.064-.066. The notice must be delivered by registered or certified mail, return receipt requested. Tex. Prop. Code Ann. sec. 5.063.
A foreclosing seller is now required by statute to warrant in the foreclosure deed that the property is conveyed free from any encumbrance. Tex. Prop. Code Ann. sec. 5.066(d)(2). Because of the definition of an "encumbrance," this requirement contradicts the normal practice of qualifying the warranty in a foreclosure deed as it relates to prior liens and exceptions to conveyance and warranty as set forth in the instrument being foreclosed.

This column is published for informational purposes only. It should not be construed as legal advice and is not intended to create an attorney client relationship. The views expressed are those of the author and do not necessarily reflect the views of the author's law firm or its individual partners.