Contracts for Deed & Executory Contracts -- New Texas Law Gives Real Teeth to Recording Requirement - HB 311

Trey Wilson San Antonio Texas Real Estate Attorney, Trey Wilson Real Estate Lawyer in San Antonio wrote:

Over the course of several years and multiple legislative sessions, Texas lawmakers have tinkered with Chapter 5, Subchapter D of the Texas Property Code related to "executory contracts" a/k/a "contracts for deed." In prior posts on this blog, I have outlined some of the issues, problems and requirements related to this category of transactions for selling real estate to buyers who cannot obtain conventional financing (mortgage loans). I have also pontificated on my experiences with these instruments, as a lawyer who routinely handles real estate transactions and real estate litigation. It's no secret that I have very mixed emotions about the need for and potential for abuse of Contracts for Deed.

Obviously, the Texas Legislature feels the same way, as they, again, "beefed-up" the requirements, and told us how serious they are about the requirement that contracts-for-deed be required. Enter HB 311...

This new law, which becomes effective on September 1, 2015, amends numerous statutes contained in Chapter 5 of the Property Code. According to the legislation's author/sponsor, the intent of the new law is pretty clear. He introduced the law as follows:

Executory contracts for the sale of residential property (sometimes referred to as “contracts for deed”) have long been disfavored because they encumber title without transferring title, cannot be sold in the real estate market, cannot be used to borrow money to make improvements, and are potentially abusive transactions under which legal title to homestead property may be withheld until many years after the buyer has built a home and made other expensive improvements. While the Texas Legislature has made changes to discourage the use of these instruments, serious problems persist from their use. Parties also contend that there remain significant misunderstandings among sellers, buyers, and even judges and attorneys about the nature of executory contracts and about the rights and obligations of the various parties to such instruments. H.B. 311 continues the progression to modernize residential real estate transactions, improve transparency, and improve the process of conversion of these relics of real estate. 

As eventually passed, HB 311 also enacts a new civil penalty for violations of state law related to executory contracts.  

Stay tuned, in a future post on this blog, I will cover the numerous changes to Chapter 5, on a section-by-section basis, and give a personal commentary on HB 311. 

Legal vs. Equitable Title to Real Estate -- The Deed Doesn't Always Dictate Ownership

San Antonio Texas Real Estate Attorney Trey Wilson wrote:

In the area of real estate law in Texas, ownership of property isn't always black and white. In fact, many a real estate lawsuit has been fought over divided, fractured and disputed ownership interests in a single property. In some instances, the "owner of record," or "title owner" (i.e. the party whose name appears on the deed) is not the only (or even the superior) possessor of an ownership interest in real estate.

In fact, there are two components to ownership of real estate in Texas -- "legal title" and "equitable title." While both components are usually vested in the same owner, sometimes they can be vested in different parties, and that's where disputes frequently arise. 

Legal title arises from the appearance of a patty's name on a deed, which evidences his ownership.  Thus, "legal title" to property evidences apparent ownership (ownership "on paper"). Yet, legal title "does not necessarily signify full and complete title or a beneficial interest." Longoria v. Lasater, 292 S.W.3d 156, 165 (Tex. App.-San Antonio 2009, pet. denied). In fact, standing alone, legal title is sometimes unimportant because equitable title is superior to legal title. 

As one court of appeals stated, it is "[o]wnership of the equitable estate [that] is the real ownership, and the legal estate is no more than the `shadow following the equitable estate,' which is the substance. . . ." Neeley v. Intercity Mgmt. Corp., 623 S.W.2d 942, 951 (Tex. App.-Houston [1st Dist.] 1981, no writ) (quoting Patty v. Middleton, 17 S.W. 909, 912 (Tex. 1891)). 

This is because "equitable title" indicates a beneficial interest in property and "gives the holder the right to acquire formal legal title." Longoria, 292 S.W.3d at 165. Equitable title arises by operation of law and exists independent of the execution of a deed; the recording of the deed is not essential to an effective conveyance of title. Gaona v. Gonzales, 997 S.W.2d 784, 787 (Tex. App.-Austin 1999, no pet.). Further, a party holds equitable title when it possesses "the present right to [compel] legal title." Harris County Appraisal Dist. v. Southeast Texas Hous. Fin. Corp., 991 S.W.2d 18, 23 (Tex.App.-Amarillo 1998, no pet.); see also Comerica Acceptance Corp. v. Dallas Cent. Appraisal Dist., 52 S.W.3d 495, 497-98 (Tex.App.-Dallas 2001, pet. denied).

Equitable title is vested in the purchaser from the date of the contract to convey real property or from the date he takes possession of the property. See Cadle Co., 46 S.W.3d at 287 (citing Leeson v. City of Houston, 243 S.W. 485, 488-90 (Tex. Comm'n App. 1922, judgm't adopted)). That is, a purchaser receives equitable title in property when he pays the purchase price and fully satisfies the obligations under the contract of sale (or a "contract for deed"). See Johnson v. Wood, 157 S.W.2d 146, 148 (Tex. 1941); Cadle Co. v. Harvey, 46 S.W.3d 282, 287-88 (Tex. App.-Fort Worth 2001, pet. denied); see also Yarto v. Gilliland, 287 S.W.3d 83, 89-90 (Tex. App.-Corpus Christi 2009, no pet.). 

Determining the rights of various "owners" of property can have far reaching implications bearing on the right of possession of the property, the right to sell or convey it, and the extent to which liens or judgments placed against the property are enforceable.