You inherited a small house with a mortgage still due. Instead of selling it outright, you decide to help someone else. You agree that he will make the mortgage payments, and once it is fully paid off in ten years, he will then own the house.
Under Texas law, this lease/purchase contract that you are entering into is called an “Executory Contract,” and there are many pitfalls that both parties should be aware of before agreeing to this type of arrangement.
What Disclosures are Required?
As the seller in an exectuory contract, you must provide specific disclosures to the purchaser before the contract is even signed.
First, the seller must provide a disclosure of the condition of the property that includes a survey completed within the last year, a legible document that describes any encumbrances, restrictive covenants, or easements that affect the title to the property, and a statutory checklist concerning certain facts about the property.
Next, the seller must provide a disclosure of tax payments and insurance coverage that includes a tax certificate from the tax collectors of the property, and a legible copy of any insurance policy.
Finally, the seller must provide a disclosure of the financing terms that specifies the purchase price, the interest rate, the dollar amount of the interest charged for the term of the contract, the total amount of principle and interest to be paid under the contract, and the late charge that may be assessed under the contract. Further, the seller must inform the purchaser that the seller may not charge a prepayment penalty or any similar fee if the purchaser elects to pay the entire amount due under the contract before the scheduled payment date.
The seller’s failure to provide these disclosures is considered a false, misleading, or deceptive act or practice under the law, and entitles the purchaser to cancel and rescind the executory contract and receive a full refund of all payments made to the seller.
What Notices are Required?
In addition to the disclosures discussed above, the contract itself must contain certain notices.
The seller must include in a separate document, or in a provision of the contract, a statement that specifies that no oral agreements exist between the parties. This is often referred to as a statute of frauds provision, which means that all agreements between the parties must be in writing and that writing must be signed by both parties to be enforceable.
The seller must also include a provision that alerts the purchaser of his right to cancel the contract for any reason within fourteen days of signing it. This notice must be placed immediately above the purchaser’s signature. The seller must also provide a notice of cancellation form to the purchaser at the time he signs the contract.
What if the Purchaser Breaches?
Once the contract has been signed, there are specific formalities that must be followed in the event the purchaser breaches the terms of the contract.
The seller must send the purchaser a written notice by registered or certified mail, return receipt requested. The notice must contain a statement that alerts the purchaser of exactly how he is breaching the executory contract.
If the purchaser breaches, the seller can enforce her remedies of rescission or forfeiture and acceleration. Rescission returns the parties to their earlier positions as if no contract had existed. Forfeiture essentially returns the property to the seller. Acceleration means that all the remaining payments under the contract are now due.
In order to enforce her remedy of rescission or of forfeiture and acceleration against a purchaser in default, the seller must notify the purchaser of her intent to enforce the remedy. Further, the seller must notify the purchaser of his right to cure the default within thirty days. Finally, the purchaser must fail to cure the default within the thirty days.
This means that if the purchaser cures the default within thirty days of the notice, he may continue abiding by the terms of the executory contract without the seller taking possession of the property.
What Else is Required?
The seller must provide the purchaser with an annual statement in January for each year for the term of the executory contract. This statement must include the amount paid under the contract, the remaining amount owed, the number of payments remaining, the amounts paid to taxing authorities, the amounts paid to insure the property, an accounting of any insurance proceeds applied to the property, and a copy of any new insurance coverage policy.
A seller who fails to provide this statement can be liable to the seller in an amount up to $250.00 a day for each day after January 31 that she fails to provide the statement, and reasonable attorney’s fees.
It should be noted that this is not an exhaustive list of everything that is required when entering into an executory contract, but rather a brief overview of some notices and disclosures that are required. Please speak with your attorney if you are considering a contract for deed real estate purchase option.
–Authored by Carrie A. Harris, Esq.,
Matthew Harris Law, PLLC – Civil Litigation Division
1001 Main Street, Suite 200, Lubbock, Texas, 79401-3309
Tel: (806) 702-4852 | Fax: (800) 985-9479