Contracts for deeds have been popular methods for purchasing real property in Texas for some time. A contract for deed is an agreement between a seller and buyer to purchase real property over a period of time. Typically, the parties sign an agreement that obligates the buyer to make a down payment followed by a series of payments until the full purchase price of the property is paid. Upon payment of the full purchase price, the seller is obligated to deed the property to the buyer.
While contract for deeds have been a popular means for selling property in Texas, there has been ample abuse by sellers concerning the agreements. Most notoriously, sellers have been prone to immediately convert the contract for deed into a lease upon any default by the buyer. Conversion to a tenancy relationship after a buyer has made a large down payment plus years of monthly payments on the contract often results in the buyer suffering a terrible inequity. Other common seller abuses have included encumbering the property during the contract period and failing to provide full disclosure of a host of items affecting the property.
Contracts for deed are governed by Subchapter D, titled "Executory Contract for Conveyance," of the Texas Property Code. The subchapter generally only applies to residential real property to be used as the purchaser's residence where the contract is to be completed after 180 days from execution. See Tex. Prop. Code Ann. § 5.062 (West 2015). To curb seller abuses, the legislature enacted numerous regulations governing contract for deeds in Texas. These regulations make it extremely difficult for sellers to enter into contracts for deed and remain compliant under the law. Moreover, statutory remedies against the seller have been prescribed when violations occur. Some of the obligations and remedies under the code include the following:
1) Restriction on seller's ability to enforce buyer default and notice requirements of seller. Tex. Prop. Code Ann. § 5.063, 5.064 (West 2015).
2) Requirements for seller to engage trustee for foreclosure and additional notice requirements by seller when a buyer has obtained enough equity in the property or the contract for deed has been recorded. Tex. Prop. Code Ann. § 5.066 (West 2015).
3) Seller requirements to disclose certain conditions and items regarding the property and transaction where seller's failure to make disclosures entitles the buyer to cancel and rescind the contract and receive a full refund of all payments made to the seller. Tex. Prop. Code Ann. § 5.069, 5.070, 5.071 (West 2015).
4) Seller's requirement to record the contract in the real property records. Tex. Prop. Code Ann. § 5.076 (West 2015).
5) Seller's annual accounting requirements to buyer. Tex. Prop. Code Ann. § 5.077 (West 2015).
6) Seller's requirement to transfer title to the buyer within 30 days of receiving full purchase price where failure by seller to do so may result in penalties of up to $500 per day. Tex. Prop. Code Ann. § 5.079 (West 2015).
7) Buyer's right to convert the contract for deed at any time into recorded legal title. Tex. Prop. Code Ann. § 5.081 (West 2015).
It is obvious from examining Subchapter D of the Texas property code that the immense burden of compliance and large exposure associated with contracts for deed falls on the seller. In fact the compliance burden and risk to seller is so great, that most law firms will no longer assist parties in entering into a contract for deed.
Upon an initial reading of the code, the greatest risk to the seller seems to be the buyer's right to "cancel and rescind" a contract for deed and "receive a full refund of all payments made to the seller." Tex. Prop. Code Ann. § 5.069(d)(2) (West 2015). On its face, this language appears to provide a complete windfall to the buyer, allowing a buyer to live in a property for free (for perhaps years) by receiving a full refund of all payments and having all obligations on the contract absolved. In Morton v. Nguyen, the Supreme Court of Texas was asked to decide whether the code calls for such a harsh remedy against the seller.
In analyzing the legislative intent and applying the concept of mutual restitution, the court held "that Subchapter D's cancellation-and-rescission remedy contemplates mutual restitution of benefits among the parties. Thus, we conclude that the buyers here must restore to the seller supplemental enrichment in the form of rent for the buyers' interim occupation of the property upon cancellation and rescission of the contract for deed." Morton v. Nguyen, 412 S.W.3d 506, 508 (Tex. 2013).
Essentially, the supreme court has said that buyers do not receive a windfall when electing to rescind a contract. A buyer's right to a refund of all payments made under the contract must be offset by some rental value of the property. While this is some good news for sellers, the legal landscape is still very much against the use of contracts for deed.
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