STATUTORY DAMAGES AVAILABLE WHEN SELLERS BUNGLE CONTRACT FOR DEED

Posted on by Trey Wilson -- San Antonio Real Estate Attorney
                        
                            Trey Wilson San Antonio                         
                    

WHAT IS A CONTRACT FOR DEED?

A contract for deed is a form of real property conveyance in which the purchaser obtains an immediate right to possession but the seller retains legal title and has no obligation to transfer it unless and until the purchaser finishes paying the full purchase price (and, often, interest, fees, or other related obligations), which is typically done in installments over several years. See Flores v. Millennium Interests, Ltd., 185 S.W.3d 427, 429 (Tex. 2005) (“… executory contracts [are] also known as contracts for deed.

A contract for deed, unlike a mortgage, allows the seller to retain title to the property until the purchaser has paid for the property in full.”); Reeder v. Curry, 294 S.W.3d 851, 856 (Tex.App.-Dallas, 2009 pet. denied) (“[i]n an executory contract for the sale of land, such as the contract for deed in this case, the superior title remains with the 625*625 seller until the purchaser fulfills its part of the contract” and “[i]f the purchaser defaults under the contract, the seller is entitled to possession of the property”); Ward v. Malone, 115 S.W.3d 267, 270-71 (Tex. App.-Corpus Christi 2003, pet. denied) (stating that a “contract for deed is an agreement by a seller to deliver a deed to property once certain conditions have been met” and that it entitled the buyer to immediate possession, that the seller retains title until the purchase price is fully paid, and that the price is typically paid in installments over several years); Graves v. Diehl, 958 S.W.2d 468, 470 (Tex.App.-Houston [14th Dist.] 1997, no pet.) (same). Under traditional mortgage, legal title transfers when the transaction closes. Flores v. Millennium Interests, Ltd., 185 S.W.3d 427, 429 (Tex. 2005); see id. at 435 (Wainwright, J., concurring) (citing majority).

A Contract for Deed is considered an “executory contract” under subchapter D, of Chapter 5 of the Texas Property Code.  An executory contract is one that contemplates “that the purchaser complete performance in the future.”  Reeder, 294 S.W.3d at 856.

DISTINGUISHING A CONTRACT FOR DEED FROM CONVENTIONAL REAL ESTATE CONTRACTS

A contract for deed differs from a conventional contract for sale of realty, in which the seller and purchaser mutually agree to complete payment and title transfer on a date certain (the “closing date”). See Flores, 185 S.W.3d at 429 (comparing a contract for deed with a mortgage); id. at 435 (Wainwright, J., concurring) (“in [contracts for deed], legal title to the property does not transfer until after all purchase payments have been made, unlike a traditional mortgage in which legal title transfers upon closing the transaction”).

Unlike a contract for deed, under which the buyer has an equitable right, but no obligation, to complete the purchase, Gaona v. Gonzales, 997 S.W.2d 784, 786-87 (Tex. App.-Austin 1999, no pet.), the buyer under a typical real estate contract is contractually obligated to complete the purchase and may be liable for breach upon failure to pay the seller, Carroll v. Wied, 572 S.W.2d 93, 95 (Tex.Civ.App.-Corpus Christi 1978, no writ) (“In a contract of sale, one party is obligated to sell and the other to purchase.”).

In effect, a contract for deed serves to provide persons unable to obtain conventional mortgage financing an alternative means of purchasing real property. See Flores, 185 S.W.3d at 434-35 (Wainwright, J., concurring) (explaining that residents building homes in the colonias “need this method of financing because they do not have access to traditional mortgage financing”); Marker v. Garcia, 185 S.W.3d 21, 26-27 (Tex.App.-San Antonio 2005, no pet.) (noting that enactment of parts of subchapter D responded to a problem with substandard housing developments whose residents did not have access to traditional financing); Sanchez v. Brandt, 567 S.W.2d 254, 259 (Tex.Civ. App.-Corpus Christi 1978, no writ) (observing, with reference to contracts for deed, “[i]t is a matter of common knowledge… that many poor people are unable to obtain conventional financing when they wish to purchase residential property. Frequently it is necessary for them to pay out the entire purchase price of a tract of land prior to procuring title….”).

SELLER’s MANDATORY PROCEDURES UNDER CONTRACT FOR DEED ARRANGEMENT

Subchapter D of Chapter 5 of the Texas Property Code contains numerous requirements of Sellers under Contracts for Deed. This laundry list is onerous, and was enacted to protect buyers from unscrupulous sellers.

These provisions require Sellers to perform the following (non-exhaustive) functions:

  • Deliver to the buyer Disclosures in accordance with Section 5.069, Texas Property Code, to include:
    • a survey completed within the year prior to executing the Contract;
    • a legible copy of any documents describing encumbrances or other claims against the Property; and
    • written disclosure of the Property’s condition in the statutory form prescribed by Section 5.069(a)(3).
  • Deliver to the buyer Disclosures in accordance with Section 5.070, Texas Property Code (relating to tax payments and insurance coverage), to include:
    • a tax certificate; and
    • a legible copy of an insurance policy relating to the Property.
  • Deliver to the buyer Seller’s Disclosures in accordance with Section 5.071 (relating to financing terms), Texas Property Code;
  • Deliver to the buyer the written notice required by Section 5.072(d), Texas Property Code;
  • Deliver to Silva the Disclosure Statements in accordance with Section 5.074(c, d), Texas Property Code (relating to cancellation of the Contract);
  • Record copy of the Contract, as required by Section 5.076(a), Texas Property Code;
  • Deliver to the the buyer Annual Account Statements, as required by Section 5.077, Texas Property Code;
  • Deliver to Silva disclosures of liens or encumbrances (and obtaining Silva’s written acknowledgment and consent thereof) on the Property, in accordance with Section 5.085(b)(3), Texas Property Code; and
  • Deliver to the buyer (within 10 days of written request) the amount owed under the Contract, as required by Section 5.082 of the Texas Property Code.

HISTORY AND PURPOSE OF STATUTORY PROTECTIONS FOR BUYERS UNDER CONTRACTS FOR DEED

The various conditions and requirements imposed on sellers entering into certain contracts for deed are intended to protect Buyers. Morton v. Nguyen, 412 S.W.3d 506, 507 (Tex. 2013). These requirements were  expanded and revised during the mid-1990’s to mid 2000’s.

In 1995, the Texas Legislature amended Chapter 5 of the Texas Property Code “to address serious abuses in the acquisition of homes in the colonias,” which are “substandard, generally impoverished, rural subdivisions . . . [c]oncentrated on the Texas border with Mexico.” Flores v. Millennium Interests, Ltd., 185 S.W.3d 427, 434 (Tex. 2005); (Wainwright, J., concurring); see also De La Cruz v. Brown, 109 S.W.3d 73, 76 (Tex. App.-El Paso 2003), rev’d on other grounds, 156 S.W.3d 560, 48 (Tex. 2004).

Although the Legislature considered prohibiting conveyances by contract for deed altogether to end the abuses, it determined that many residents in these areas are without access to traditional mortgage financing and need this method of financing. Flores, 185 S.W.3d at 435 (Wainwright, J., concurring); Brown, 109 S.W.3d at 76. Therefore, instead of an outright prohibition, the Legislature enacted further protections, including provisions requiring the seller to provide annual accounting statements containing specified information to the buyer and allowing the buyer to deduct a percentage of his monthly payment during the time the seller fails to provide the required information. See Act of May 27, 1995, 74th Leg., R.S., ch. 994, § 3, 1995 Tex. Gen. Laws 4983, 4987 (formerly Tex. Prop. Code § 5.100), amended by Act of May 18, 2001, 77th Leg., R.S., ch. 693, § 1, 2001 Tex. Gen. Laws 1319, 1326-27 (current version at Tex. Prop. Code § 5.077).

Initially, these statutory Buyer protections  were applicable only in certain areas with a below average per capita income and an above average unemployment rate. Id. at 4983; see Flores, 185 S.W.3d at 429 n.1(explaining 2001 amendments).  However, in 2001, the Legislature amended and expanded the statute “substantially increasing the monetary penalties and applying the protections statewide.” Flores, 185 S.W.3d at 435 (Wainwright, J., concurring).

The 2001 revisions to Subchapter D provided for a purchaser’s recovery of liquidated damages in the amount of $250 a day for a seller’s failure to provide the annual accounting statement and attorney’s fees. See 2001 Tex. Gen. Laws 1319, 1326-27 (current version at Tex. Prop. Code § 5.077).

In 2005, the Legislature further amended section 5.077 to differentiate between sellers who conduct fewer than two transactions and those who conduct two or more transactions in a 12-month period—imposing greater liquidated damage penalties against those who conduct two or more transactions. See Act of May 26, 2005, 79th Leg. R.S., ch. 978, § 5, 2005 Tex. Gen. Laws 3280, 3282.

REFERENCE NOTE: For a detailed review of the history and perceived need for these protections on an ongoing basis, check out the 2012 Report issued by the “Contract for Deed Prevalence Project.”

STATUTORY PENALTIES FOR NON-COMPLIANCE

These same statutes provide significant penalties to be imposed against Contract for Deed Sellers who fail to comply with Subchapter D’s requirements.

These penalties range from one-time charges to daily penalties of up to $500.00. Attorneys’ fees and costs are also available.

For example,

  • Failure by a Seller to record the Contract for Deed with the County Clerk in violation of Tex. Prop. Code  § 5.076, gives rise to a penalty calculated under the same methodology as is used for violations of Section 5.079 (but capped at $500 for each calendar year of noncompliance). See Tex. Prop. Code  § 5.076(e);
  • Failure by a Seller to provide an Annual Statement  for violation of Tex. Prop. Code § 5.077, gives rise to liquidated damages calculated as $100 for each annual statement that the Seller  fails to timely provide and reasonable attorneys’ fees. See Tex. Prop. Code  § 5.077(d)(1);
  • Failure by a Seller to transfer legal, recorded title to the property within 30 days after receiving the Buyer’s final payment in violation of Prop. Code  § 5.079, gives rise to liquidated damages of $250/day for days 31-90 (following receipt of final payment) and $500/day thereafter. See Tex. Prop. Code § 5.079(b)(1)(A);
  • Failure by a Seller to convert a Contract for Deed into a deed (thereby transferring legal, recorded title to the property to the Buyer) within 30 days after receiving the Buyer’s final payment in violation of Tex. Prop. Code 5.081, gives rise to liquidated damages of $250/day for days 31-90 (following receipt of final payment) and $500/day thereafter. See Tex. Prop. Code §§ 5.079(b)(1)(A) and 5.081(e).

The foregoing is a non-exhaustive sampling of the statutory penalties available under Subchapter D, and by operation of statute, many of these violations are also deemed to be “false,  misleading or deceptive act or practice” under the Texas Deceptive Trade Practices Act.

THE TAKEAWAY

Although Subchapter D was created for the express purpose of leveling the playing filed concerning Contracts for Deed and other executory contracts, enforcing its provisions can be complicated. Buyers who believe their rights under a Contact for Deed have been violated should contact an experienced real estate attorney to assist.