Below is a summary of the major provisions of Senate Bill 198 that led to our recommendations. The summary is divided into those provisions affecting ALL Contracts for Deed, regardless of when they were signed, and those affecting only NEW Contracts for Deed entered into on or after September 1, 2001. Since the changes in the law are extensive, the summary is necessarily lengthy. IF YOU DON'T READ ANYTHING ELSE IN THIS CLIENT ALERT, DON'T FAIL TO GIVE THE ANNUAL ACCOUNTING DUE BY JANUARY 31 AS DESCRIBED IN PARAGRAPH 4 ON PAGE 2. Otherwise, you may find yourself owing more to the buyer than the buyer owes you under the contract for this simple oversight.

Provisions affecting ALL Contracts for Deed (regardless of when signed):

1. Right to Cure Default - Most of you are familiar with the statutory notices that were required be sent to a buyer who has defaulted. It was necessary to advise the buyer of the specific default and notify the buyer that all defaults had to be cured within 15 days, 30 days or 60 days, depending upon how much of the original purchase price had been paid at the time of the default. A statutorily required notice had to be sent with the default notice stating the date by which the contract had to be brought current. Under the new law, all buyers must be given a MINIMUM OF 60 DAYS to cure the default.

2. Equity Protection- If the buyer defaults after paying 40% of the amount due OR the equivalent of 48 monthly payments under the contract, then the seller may not enforce the remedy of rescission or forfeiture. Instead the Seller must send a 60 day notice of default and opportunity to cure, with a new statutory notice. If the default is not cured within the 60 days, then the Seller may proceed to sell the property at a trustee's sale, just like under a deed of trust. That means a 21 day notice of trustee's sale must also be given before the sale can take place on the first Tuesday of the month. The wording of this part of the new law is not exactly a model of clarity. It is not clear whether 40% of the "amount due" includes principal and interest or only principal. Likewise, the interpretation of the "equivalent of 48 monthly payments" is open to question. Would this include any down payment? If so, would you divide the amount of the monthly payments of principal and interest or would you need to calculate how many payments of principal and interest would be needed to reduce the principal balance by the amount of the down payment? Prudence would dictate that you must make your calculations in such a way as to give the most benefit of the doubt to the buyer in order to risk liability for wrongful forfeiture if your interpretation is different from the court's.

3. Lien for Utility Service - The placement of a lien for the reasonable value of improvements for providing utility service to residential property subject to a contract for deed cannot constitute a default, regardless of provisions to the contrary contained in the contract. This means, for example that a buyer under a contract for deed has the absolute right to sign a mechanic's lien contract for the installation of a septic system.

4. Annual Accounting Statement - The Seller must provide the buyer with an annual statement covering each year during the contract by January 31st of the following year. An annual statement covering 2001 must be given by January 31st, 2002. The statement must be hand delivered or sent by certified mail, return receipt requested. If mailed, the statement must be postmarked not later than January 31.

The statement must include the following information:

(a) the amount paid under the contract [presumably since the beginning of the contract - to be safe, include total payments and principal portion paid];
(b) the amount owed under the contract [again to be safe, include total scheduled payments remaining and principal balance];
(c) the number of payments remaining under the contract;
(d) the amounts paid to taxing authorities on the buyer's behalf if collected by the seller;
(e) the amounts paid to insure the property on the purchaser's behalf if collected by the seller;
(f) if the property has been damaged and the seller has received insurance proceeds, an accounting of the proceeds applied to the property; and
(g) if the seller has changed insurance coverage, a legible copy of the current policy, binder, or other evidence that indicates the name of the insurer and insured, a description of the property insured and the amount for which the property has been insured. A seller who fails to furnish the annual accounting statement by January 31 is liable to the buyer for liquidated damages in the amount of $250.00 per day for each day after January 31 that the seller fails to provide the buyer with the statement, and reasonable attorneys's fees.

5. Insurance Proceeds - The named insured (usually the seller) must inform the insurer, not later than the 10th day after the date the coverage is obtained or the contract is executed, whichever is later, of: (a) the contract for deed and the term of the contract, and (b) the name and address of the other party. In the event of a claim under the policy, the insurer is required to issue proceeds jointly to the purchaser and seller designated in the contract. For contracts in existence when the law became effective, the insurer must be notified not later than January 1, 2002. The purchaser and seller are required to ensure that the proceeds are used to repair, remedy or improve the condition of the property. The failure to apply the proceeds as required by this subsection is a deceptive trade practice.

6. Title Transfer - Not later than the 30th day after the seller receives the purchaser's final payment due under the contract, the seller (or seller's successor, assignee, personal representative or executor) must transfer recorded, legal title to the property. This seems to indicate that it is the seller's obligation to prepare, sign and record the deed. A seller who violates this statute is liable to the purchaser for liquidated damages in the amount of $250.00 per day for each day seller fails to transfer title from the 31st day after payment in full through the 90th day after payment in full, and $500.00 per day from the 90st day until title is transferred. The buyer is also entitled to reasonable attorney's fees. If a seller's heir or other successor in interest is required to obtain a court order to convey good and indefeasible title to the property, the court in which the action is pending may waive the payment of liquidated damages and attorney's fees if the court finds that the person is pursuing the action to establish title with reasonable diligence.

Provisions affecting only NEW Contracts signed on or after September 1, 2001:

1. Foreign Language Requirement - If the negotiations that precede the signing of the contract for deed are in a language other than English, the seller must provide a copy in that foreign language of all written documents relating to the transaction, including the contract, disclosure notices, annual accounting statements, and any notices of default.

2. Seller's Disclosure of Property Condition - Before a contract is signed, the Seller must provide the buyer with a survey which was completed within the past year [presumably from date of contract], a legible copy of any document that describes title exceptions [you would need a title report to get this information], and a special notice attached to the contract providing disclosures regarding: the existence of a recorded subdivision, available utilities, floodplain status, existence of roads and who maintains them, names of all parties claiming an ownership interest in the property, the existence of any liens, deed restrictions or encumbrances that prohibit the construction of a residence on the property. The statute sets out the form of these disclosures which includes a notice to the buyer that buyer should obtain an abstract of title reviewed by an attorney or an owner's policy of title insurance. If the property is not in a recorded subdivision, then the seller must provide a separate disclosure form stating that utilities may not be available to the property until the subdivision is recorded as required by law. If the seller advertises the property for sale under a contract for deed, the advertisement must disclose the availability of water, sewer and electric service. Failure of seller to provide the required notices is a deceptive trade practice (possibly subject to treble damages) and also entitles the buyer to rescind the contract and obtain a refund of all payments made to seller.

3. Seller's Disclosure of Tax Payments & Insurance - Before the contract for deed is signed, the seller must provide to the buyer a tax certificate from each taxing authority that collects taxes on the property, and a legible copy of the insurance policy covering the property. Failure of seller to provide the required notices is a deceptive trade practice (possibly subject to treble damages) and also entitles the buyer to rescind the contract and obtain a refund of all payments made to seller.

4. Oral Agreements Prohibited - A contract for deed is not enforceable unless the contract is in writing and signed by the party to be bound or its authorized agent. Any prior oral agreements are superceded and merged into the contract. The seller is required to include a statement in 14 point bold uppercase type, as set out in the statue, either in the contract or in a separate document. Failure of seller to provide the required notice is a deceptive trade practice (possibly subject to treble damages) and also entitles the buyer to rescind the contract and obtain a refund of all payments made to seller.
Contract Terms Prohibited - The seller may not include provisions in the contract for deed that: (a) impose a late fee that exceeds the LESSER of (i) 8% of the monthly payment or (ii) the actual administrative cost of processing the late payment [no clues as to how that cost is determined], (b) prohibit the buyer from pledging the buyer's interest in the property as security to obtain improvements to the property or, (c) impose a prepayment penalty.

5. Purchaser's Right to Cancel Without Cause - The buyer is given the absolute right to cancel a contract for deed without cause by giving the seller a signed written notice of cancellation by telegram, certified or registered mail, return receipt requested, or by personal delivery, within 14 days after the date of the contract. If the buyer cancels, then the seller must return the executed contract and any money or property received and cancel any security interest arising out of the contract within 10 days after seller receives the signed written notice from the buyer. The seller is required to include a notice of the right to cancel in 14 point bold uppercase type, as set out in the statue, next to the buyer's signature line in the contract and also provide a separate, more detailed notice of the right to cancel that must be signed and dated by the buyer. The seller may not request the buyer to sign a waiver of the requirement for a signed receipt of notice of right to cancel.

6. Recording Requirements - The seller is required to record (and pay all recording fees) the contract for deed, including the required property disclosure statement, on or before the 30th day after the date of the contract. Although the statute does not specify where the contract is to be recorded, it is presumed that it would be in the Real Property Records of the county where the property is situated. If the contract is terminated for any reason, the seller must record the instrument that terminates the contract.

7. Liability for Disclosures - Any disclosures required by the new law that are made by the seller's agent is a disclosure by the seller.

This is a summary of the law. It contains a paraphrasing of the statutory language. You can see the full text of Senate Bill 198 on the Internet. Go to http://www.capitol.state.tx.us/ and click on "Search Bills by Bill Number" in the frame on the left side of that web page. This bill amends Sections 5.061 through 5.103 of the Texas Property Code. You can access the Texas Property Code on the Internet by going to http://www.capitol.state.tx.us/statutes/statutes.html. Note that the changes made by Senate Bill 198 are not scheduled to be posted to that site until June of 2002.