TAR Commercial Sale/Purchase Agreement Forms Prohibit Assignment/Conveyance of Verbal Leases

San Antonio Texas Real Estate Attorney Trey Wilson wrote:

A broker client of mine recently inquired about the legality and/or feasibility of a Seller attempting to convey certain unimproved real property to one of the broker's Buyer-clients.  Turns out that the "unimproved" property being sold was actually occupied by third-parties living in mobile homes that were situated on the property under some non-specific verbal authorization from the Seller.  The Seller, apparently, desired to consummate the sale to the Buyer, even though the terms of  the various mobile home residents' tenancy was largely unknown, and certainly not reduced to writing (i.e. no written lease agreements existed).   

In addition to the obvious title issues that could be created by such an arrangement (including, at a minimum, (i) implied or constructive notice to the Buyer that the parties in possession (the "verbal tenants") might claim ownership interests; and (ii) exclusion under standard title insurance policies for "parties in possession"), standard Texas Association of Realtors ("TAR") Contract forms prohibit the assignment by a Seller to a Buyer of verbal leases.

Where unimproved commercial property is concerned, TAR Form 1802 is the applicable purchase/sale contract document.  Section 8 of Form 1802 pertains to "Leases" and contains specific requirements for "each written lease Seller is to assign to Buyer."  See TAR Form 1802 at Section 8(A).  Notably, Section 8 contains no reference, whatsoever, to verbal leases. Likewise, the "Property Information" that a Seller is required to deliver to a Buyer under Section 7(D) (information to be used by the Buyer in connection with the due diligence investigation) is silent with regard to verbal lease agreements.  Thus, when these two sections are read in conjunction, it appears that there exist no special requirements of the Seller with respect to disclosing the specifics of verbal lease agreements existing at the time of sale.

However, it is Section 10 (related to Closing) that requires the Seller to convey the property (at the time of Closing) "with no persons in possession of any part of the Property as lessees, tenants at sufferance or  trespassers, except tenants under the written leases assigned to Buyer under this contract."  See TAR Form 1802 at Section 10(C)(3).  The unequivocal language of this section expressly prohibits any transfer of an occupied property, unless the occupants are parties to a written lease agreement that is being assigned to the Buyer at the time of closing. 

The provisions of TAR Form 1801 (Commercial Contract - Improved Property) are virtually identical, and Section 10(C)(3) of forms 1802 and 1801 are identical.  Thus, where improved commercial properties are being sold, verbal leases are also prohibited.

By contrast, TAR Form 1701 (Farm and Ranch Contract) expressly provides for disclosure of oral surface leases. See TAR Form 1701 at Section 6(F). 

Reasonable Buyers and Sellers of Texas real estate will ensure that the rights and liabilities of tenants, occupants or parties in possession of a part of the property to be sold are reduced to a solid writing, that provides a clear understanding of the relations between Buyer, Seller and Tenant.