The Legal Corner By Sam A. Moak: Contracts For Deed – A Bad Option

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The information in this column is not intended as legal advice but to provide a general understanding of the law.  Any readers with a legal problem, including those whose questions are addressed here, should consult an attorney for advice on their particular circumstances.

Many folks have experienced a bad real estate deal.  The best way to avoid a bad real estate experience is to hire a trusted real estate agent and close through a title company.  Another common real estate practice to avoid is the method of seller financing through a Contract for Deed.  In this transaction, the seller and purchaser enter into an agreement that the purchaser will make payments over time and once a certain amount is paid the seller will deed the property to the purchaser.  If you have previously or will be selling or purchasing property under a Contract for Deed, then you should be aware that the law regarding such transactions changed in September 2001 and more recently there was another important change in how to proceed when there is a default under a Contract for Deed.

First I will discuss the 2001 change. Effective September 1, 2001, Senate Bill 198 amended the Texas Property Code regarding Contracts for Deed.  This amendment applies to all contracts regardless of when they were entered into.  Again, if you are currently in a contract for deed, the following changes apply.

Under the current law sellers now have to provide purchasers under a contract for the deed a tax certificate from the tax assessor-collector, proof of insurance coverage, and a current survey of the property. 

Further, the law now requires that a Seller’s Disclosure Notice be provided.  Such notice must inform the purchaser of the following:

–         Whether or not the property is in a recorded subdivision ;

–         Whether or not the property has sewer service;

–         Whether or not the property has water service;

–         Whether the property has been approved for a septic system by the appropriate authority;

–         Whether the property has electric service;

–        Whether the property is in a floodplain;

–        Who maintains the roads;

–        Whether anyone else has an interest in the property;

–        Whether any individual or entity has a lien filed against the property;

–        The purchaser has the right to obtain a title abstract or title commitment to the property; and,

–        The purchaser has the right to purchase a title policy to the property.

Another important change is that the law now requires the seller to disclose to the purchaser BEFORE the contract is signed, in a written statement, the price, interest rate, total amount of principal and interest that will be paid and the amount of any late charge. 

Failure of the seller to provide any of the notices mentioned would be a violation of the Deceptive Trade Practices Act.  This could nullify the contract, subject the seller to penalties of up to $500 per day, and subject the seller to treble (triple) damages and attorneys fees for the violation. 

Another important change affects the cancellation of the contract in the event of default.  In the past the law required written notice be by either mail or personal delivery to the purchaser.  The law now requires the seller to give written notice by certified or registered mail, return receipt requested.

Under the old law, the amount of time a purchaser had to cure the default varied depending upon what percentage of the purchase price had been paid.  This ranged from 15 days to 60 days.  The law now provides that purchasers have 60 days to cure the default. 

Perhaps a more significant development is related to what the court has jurisdiction over when there is a default under a Contract for Deed or a Lease with Option to Purchase.  Historically, these matters were handled in the Justice Courts (i.e., by the Justice of the Peace) as a forcible entry and detainer suit.  However, in Ward v. Malone, 115 S.W.3d 267 (Tex.App.-Corpus Christi-Edinburg 2003, pet. denied), the court held that in order to determine the right to possession, issues of title would have to be resolved; the Justice Court lacked jurisdiction to proceed with forcible entry and detainer actions because such actions involve the issue of tenants at sufferance; and, determining who has the right to possession and issues of title.  Thus, suits involving Contracts for Deed, and possibly Leases with Option to Purchase,  must be filed in District Court. 

It seems obvious that our legislature and courts want to discourage the use of contracts for deed and to protect purchasers under such instruments.  This legislation and case law places a huge burden on the seller under a contract for deed with some very substantial penalties for non-compliance. These actions may very well do away with the use of contracts for deed.   

If you have sold or purchased property under a contract for deed, then you should consult an attorney to see how these changes may have affected your rights and duties.   

Sam A. Moak is an attorney with the Huntsville law firm of Moak & Moak, P.C.  He is licensed to practice in all fields of law by the Supreme Court of Texas, is a Member of the State Bar College, and is a member of the Real Estate, Probate and Trust Law Section of the State Bar of Texas.

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