In Texas, executory contracts are a form of seller-financed real estate arrangement where critical obligations are deferred until a future date. Unlike conventional real estate sales, these contracts separate possession from title. They also require compliance with strict statutory rules.
What is an Executory Contract?
Under Texas law, an executory contract is any agreement in which a material part of ownership or possession is delayed. Most often, this means the buyer gets possession of the property now, but won’t receive legal title until all payment obligations are fulfilled. These agreements differ from traditional purchase and sales agreements, where title and possession typically transfer at the same time.
Legal Protections and Regulation in Texas
Texas law has strict requirements for executory contracts, especially for residential property. These rules were implemented to protect buyers from predatory practices that were historically common in seller-financed deals.
Some of the legal obligations for sellers include:
- Providing a written disclosure of the property’s condition, including utility availability and property restrictions
- Recording the contract in the county’s property records
- Giving the buyer an annual accounting statement showing payments made, amounts owed, and the balance due
- Ensuring the property is free of liens or disclosing any existing liens, including the status of any mortgage
If the seller fails to comply with these requirements, the buyer has the right to cancel the contract and demand a full refund of all payments made. Additionally, the buyer may pursue damages under consumer protection laws.
Common Types of Executory Contracts
Typical examples of executory contracts include:
- Contract for Deed: A common type where the buyer agrees to pay the purchase price over time while the seller retains the deed until full payment is made.
- Lease-Purchase or Lease-Option Agreements: These combine a lease with either a binding purchase obligation or a right to purchase. When the option term exceeds 180 days, these agreements are typically treated as executory contracts under Texas law.
Some types of seller financing, like wraparound mortgages and subject-to transactions, are not executory contracts because they transfer title at closing. However, those arrangements have their own legal risks.
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Risks & Considerations for Buyers and Sellers
Buyers should be aware that they do not receive legal title until the contract is fulfilled. If they default, they may lose the property and any equity built through their payments. However, the law gives them substantial protections, including the right to cancel the contract and get a refund if the seller fails to comply with statutory requirements.
Sellers need to understand that Texas law imposes strict compliance standards. Mistakes such as failing to record the contract, disclose a lien, or provide required notices can result in cancellation of the contract and significant financial liability.
Additionally, many sellers mistakenly believe they can finance sales on encumbered properties without lender involvement. In reality, most mortgage lenders prohibit this and may call the loan due if the property is sold without consent. In such cases, parties should also consider the property’s assessed value and any implications for property tax appeal.
The 180-Day Rule
If a lease-option or lease-purchase agreement exceeds 180 days and is combined with a residential lease, it will likely be classified as an executory contract. This triggers the full range of protections and obligations under Texas law.
When a property is subject to a lien, the law may require the buyer to be notified of the lien status and potentially make payments directly to the lienholder if the seller becomes delinquent.
Contact a Texas Real Estate Lawyer for Help Understanding Executory Contracts
Executory contracts in Texas offer a way to finance real estate purchases outside of traditional lending, but they come with strict legal requirements. Whether you’re buying or selling, it’s wise to seek guidance on contract formation and review to avoid costly disputes and ensure your agreement complies with Texas law. Contact Porter Law Firm today at (713) 621-0700 to schedule a consultation to create or review an executory contract and advise you of your rights.