Legal Support With Executory Contracts
Executory contracts include any real estate transaction that defers material action by either party into the future. Any contract for deed, lease option, or purchase option longer than 180 days is defined by the Texas Property Code as an executory contract.
Perhaps the concept is most easily explained in contrast to a traditional real estate purchase contract. In a typical purchase, the buyer and seller enter into a contract for sale, and the buyer is generally obligated to complete its purchase of the property. However, under an executory contract, the buyer has the right, but not the obligation, to complete the purchase.
The rules governing executory contracts for the purchase of residential property and lots measuring one acre or less are primarily found in Subchapter D, Sections § 5.061 et seq. of the Property Code. The rules in these sections, and thus the rules discussed in this article, do not apply to executory contracts that provide for the delivery of a deed from the seller to the buyer within 180 days.
Rent to Own – Options Combined with a Residential Lease Agreement
Generally, an option to purchase real property that includes or is combined or executed concurrently with a residential lease agreement, together with the lease, is considered an executory contract for the conveyance of real property. Options that are not combined with a residential lease and options on commercial property do not qualify as executory contracts and therefore are not governed by the rules described in this article.
Oral Agreements Prohibited – Must Be in Writing
The Property Code explicitly requires that an executory contract be in writing and signed by the person to be bound (or that person’s representative) in order to be enforceable. Any oral agreement that does not meet this requirement will be unenforceable. The Property Code requires the seller to include a notice to this effect in the contract. The seller’s failure to provide this notice is a “false, misleading, or deceptive act or practice” under the Texas Deceptive Trade Practices Act (DTPA) and allows the buyer to cancel and rescind the contract.
Requirements for Validity
Before the buyer signs an executory contract, the Property Code requires that the seller provide a number of documents and disclosures to the buyer:
- a new survey within the past year or a plat of the current survey;
- a copy of all liens, restrictive covenants, easements affecting title to the property;
- a written notice informing the buyer of the condition of the property, executed by both parties;
- if the property is not in a recorded subdivision, a disclosure stating that utilities may not be available to the property until the subdivision is recorded;
- if the seller advertises property for sale under an executory contract, a disclosure of information regarding the availability of water, sewer, and electrical services;
- a tax certificate from the collector for each taxing unit that collects taxes due on the property; and
- a copy of any insurance policy, binder, or other evidence relating to the property that indicates the name of the insurer and insured, a description of the property, and the policy amount.
Penalties for Seller’s Failure to Provide Documents and Disclosures
The Property Code levies heavy penalties on any seller who fails to provide the above required information prior to the buyer signing the executory contract. It defines such a failure as a “false, misleading, or deceptive act or practice” under the Texas Deceptive Trade Practices Act, which allows the buyer to recover treble damages. Additionally, the Property Code permits the buyer to cancel and rescind the executory contract and receive a full refund of all payments made to the seller.
Buyer’s Cancellation and Refund of an Executory Contract
A buyer’s right to cancel and rescind an executory contract does not mean that a buyer can simply demand all of his money back and leave the seller empty-handed. “While the buyer remains entitled to ‘a full refund of all payments made to the seller,’ cancellation and rescission of a contract also requires that the buyer restore to the seller the value of the buyer’s occupation of the property.” Rescission requires mutual restoration and accounting. “Otherwise, the buyer would receive a windfall inconsistent with the general nature of Subchapter D.”
Buyer’s Right to Cancel Within 14 Days for Any Reason
The Property Code also allows the buyer to cancel and rescind an executory contract for any reason within 14 days of execution by delivering signed written notice to the seller by certified or registered mail, return receipt requested, or in person. The seller is required to include a disclosure of the buyer’s right to cancel in the executory contract and provide a notice of cancellation form when the buyer signs.
Seller’s Recording Requirement
On or before the 30th day after the parties sign the executory contract, the seller must record in the real property records of the county in which the property is located the executory contract and the attached disclosure statement required by Section 5.069. If the executory contract is terminated for any reason, the Property Code also requires that the seller record the instrument that terminates the contract.
A recorded executory contract is considered to be the same as a deed with a vendor’s lien for the amount of the unpaid contract price, less any lawful deductions. A general warranty is implied unless otherwise limited by the executory contract.
Transfer of Legal Title After Final Payment
If the executory contract is neither recorded nor converted by the buyer into recorded, legal title (as explained below), the seller must instead transfer recorded, legal title to the buyer within 30 days of the date the seller receives the final payment due under the executory contract.
Conversion of an Executory Contract into Legal Title
A buyer may, “at any time,” to convert the buyer’s interest in property under an executory contract into recorded, legal title by either paying the balance due under the executory contract or delivering a promissory note for the balance to the seller. If the buyer pays the remaining balance, the seller must transfer recorded, legal title to the buyer within 30 days. Alternatively, if the buyer delivers a promissory note, the Property Code requires that the buyer also execute a deed of trust and the seller execute a deed conveying recorded, legal title to the buyer.
Seller’s Termination of an Executory Contract
A seller may rescind an unrecorded executory contract and enforce the remedy of forfeiture and acceleration (eviction) against a buyer in default under the contract. However, the seller must give the buyer notice and an opportunity to cure the buyer’s default within 30 days. The seller may not enforce this remedy after the contract has been recorded.
The “40 or 48 Rule” – Requires Foreclosure Instead of Eviction
If the buyer has paid 40% or more of the purchase price, or the equivalent of 48 monthly payments, then the seller must give the buyer a 60-day notice to cure its default instead of the above-mentioned 30 days. If the buyer fails to cure its default within 60 days, the seller must then conduct a traditional foreclose (instead of an eviction) to regain title.
The Property Code imposes harsh sanctions on sellers of residential property who fail to navigate the technical complexities of Subchapter D. The rules require numerous notices and disclosures and, in many instances, impose DTPA treble damages (three times the amount of actual damages) on sellers who make simple mistakes. These penalties are imposed as a means to dissuade would-be sellers otherwise seeking to take advantage of uninformed buyers by evicting them for minor technical defaults and retaining their payments.
Our real estate attorneys have experience with all issues related to executory contracts. We provide counsel to both buyers and sellers of real property and are aware of the pitfalls that endanger both parties when executory contracts are used for the transfer of real estate.
If you are engaged in a serious dispute related to a real estate transaction or require the assistance of counsel in reviewing and advising you on your real estate contracts and transactional documents, call us at 713-454-7875 or email us your concerns.