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. 

Contract for Deed -- Penalties for Seller's Failure to Provide Annual Accounting

Buyers purchasing real property in Texas under a Contract for Deed are entitled to numerous statutory protections. Whether all of these protections are necessary to prevent Seller abuses is widely debated, and many of Property Code Chapter 5's provisions have been criticized for being designed to set Sellers up for failure.

Among the oft' criticized provisions is Texas Property Code Section 5.077, which requires a Seller under a Contract for Deed to provide the Buyer with an annual statement by January 31 of each year during the contract. The statute requires that the state include at least the following information:

(1)  the amount paid under the contract;

(2)  the remaining amount owed under the contract;

(3)  the number of payments remaining under the contract; 

(4)  the amounts paid to taxing authorities on the purchaser's behalf if collected by the seller;

(5)  the amounts paid to insure the property on the purchaser's behalf if collected by the seller;

(6)  if the property has been damaged and the seller has received insurance proceeds, an accounting of the proceeds applied to the property;  and

(7)  if the seller has changed insurance coverage, a legible copy of the current policy, binder, or other evidence that satisfies the requirements of Section 5.070(a)(2).

While few would debate that the statement is a good idea, the penalties for failure to furnish one can be harsh. Those penalties are largely dependent on the number of Contracts for Deed (also referred to as executory contracts) that a Seller enters in a given year.

A seller who conducts less than two transactions in a 12-month period who fails to timely furnish the annual accounting is liable to the purchaser for liquidated damages in the amount of $100 for each annual statement the seller fails to provide and reasonable attorney's fees.

 A seller who conducts two or more transactions in a 12-month period and fails to provide the annual accounting is liable to the purchaser for liquidated damages of $250 per day plus the buyer's reasonable attorneys' fees.

Texas Contracts for Deed MUST Be Recorded

Many times, Sellers of real property under Texas Contracts for Deed hold those contracts "in pocket." The logic for this is that the Seller might default, in which instance no conveyance will take place. Thus, the thought goes, "why complicate the title chain by recording documents, when no conveyance has occurred?" In all honesty, this logic makes sense. Unfortunately, however, it flies in the face of the Recording Requirements prescribed by the Texas Property Code.

Section 5.076 requires that the Seller records the Contract for Deed (and the attached disclosure statement) with the County Clerk of the County in which the property is located WITHIN 30 DAYS AFTER THE CONTRACT IS EXECUTED.

Although the statute does not expressly provide a remedy for failure to record the Contract for Deed, it is likely that a recovery might be had under Texas law if the Buyer can demonstrate that he has been damaged as the result of the Seller's failure.

Annual Accounting Requirements Under the Texas Contract for Deed

I've previously posted articles on this real estate blog describing some of the pitfalls associated with buying and selling property in Texas under a Contract for Deed. A Contract for Deed is one type of an "executory contract," or contract that remains unperformed by both parties. Contracts for the purchase and sale of real estate that have not yet closed are executory in that the Buyer has not yet paid the full purchase price, and the Seller has not yet conveyed title by way of executing a deed.

Executory contracts of all stripes -- including contracts for deed -- have been under fire in texas for more than a decade. This disfavor results from frequent abuses of unsophisticated Buyers by malevolent Sellers. In order to stem these abuses, the Texas Legislature adopted sweeping revisions to the Texas Property Code in 2001.The major change was to make applicable statewide amended versions of provisions that had previously applied only in certain economically distressed (mostly border) counties. The revised provisions are set-forth in Subchapter D of Chapter 5 of the Texas Property Code ("Prop. Code").

One of the frequently violated provisions of Subchapter D is the annual accounting requirement of Texas Property Code Section 5.077. This provision REQUIRES Sellers under Texas Contracts for Deed to provide Buyers with an annual statement in January of each year that the Contract for Deed is in place.

The annual statement must include the following information:

(1) the amount paid under the contract;
(2) the remaining amount owed under the contract;
(3) the number of payments remaining under the contract;
(4) the amounts paid to taxing authorities on the purchaser's behalf if collected by the seller;
(5) the amounts paid to insure the property on the purchaser's behalf if collected by the seller;
(6) if the property has been damaged and the seller has received insurance proceeds, an accounting of the proceeds applied to the property; and
(7) if the seller has changed insurance coverage, a legible copy of the current policy, binder, or other evidence of insurance.

Failure to timely provide this statement can be costly to a Seller. The statute provides for liquidated damages, and attorneys' fees. In some instances, a Buyer might retain remedies under the Texas Deceptive Trade Practices Act. These penalties are most severe for Sellers who enter more than 2 Contracts for deed in a single year.

A savvy Seller of Texas real estate under a Contract for Deed should contact an experienced real estate attorney to advise them on all of the legal hurdles associated with this type of transaction, and to ensure that an innocent mistake doesn't end-up leading to a costly legal problem.