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Lease with Option to Buy

How House Bill 1823 Affects Leases with Options to Purchase Homes

House Bill1823, effective September 1, 2005, expands the Texas law governing contracts for deed to apply also, to some extent, to home leases that contain options to purchase.

Current section 5.062 of the Texas Property Code describes what transactions are governed by the current contract for deed laws. House Bill 1823 amends section 5.062 to include the following language:

[A]n option to purchase real property that includes or is combined or executed concurrently with a residential lease agreement, together with the lease, is considered an executory contract for conveyance of real property.

In short, if a lease of residential property is accompanied by an option to purchase the property, the entire transaction (lease and option agreement together) is considered to be a single contract for deed (hereinafter referred to as "lease/option contracts").

The bill goes on, however, to provide that some of the contract for deed requirements will not apply to lease/option contracts. The provisions that do not apply are Texas Property Code sections 5.066, 5.067, 5.071, 5.075, 5.081, and 5.082.

Section 5.066 is the "equity protection" section that requires foreclosure of properties for which the purchaser has paid 40 percent of the amount due or 48 monthly payments.

Section 5.067 provides that utility liens shall not constitute a breach of a contract for deed.

Section 5.071 provides for pre-contract disclosure of the seller's financing terms.

Section 5.075 is basically irrelevant and relates to the purchaser's right to pledge the property to make certain safety improvements as to contracts entered into before September 1, 2001.

Section 5.081 is the new provision allowing purchasers the right to convert the contract for deed to a note and deed of trust transaction.

Section 5.082 is a new provision allowing purchasers to request current balances in order to prepare a note in association with the conversion process.

Lease/Option Contracts Greater than Three Years

For lease/option contracts with terms greater than three years or to which the parties have been parties for greater than three years, the following provisions of the contract for deed laws will apply:

Applicable Section Nos.

Description

Penalty for non-compliance

5.063-5.065

Thirty-day notice of default, right to cure, and remedies.

Potential for wrongful eviction and Debt Collection Act claims

5.068

Foreign language requirements.

Statute is silent as to penalties.

5.069

Seller's Disclosure of Property Condition

DTPA violation;

Right to cancel and receive full refund of all payments

5.070

Disclosure of Tax and Insurance information

DTPA violation;

Right to cancel and receive full refund of all payments

5.072

Contract must contain specific disclosure regarding no oral agreements

DTPA violation;

Right to cancel and receive full refund of all payments;

5.073

Prohibited Contract Terms (more than 8% late fee, pre-payment penalties, etc.)

Statute is silent as to penalties.

5.074

14-day right to cancel and required notice language

Statute is silent as to penalties.

5.076

Recording Requirements

Statute is silent as to penalties.

5.077

Annual Accounting Statement

Now: $250 per day up to fair market value of property;

Attorney's fees

5.078

Disposition of Insurance Proceeds

DTPA violation

5.079

Title Transfer upon completion

$250 per day - first 90 days

$500 per day thereafter

5.080

States that disclosure by agent equals disclosure by seller

N/A

5.083 *New

Right to cancel for improper platting

5.084 *New

Right of purchaser to deduct damages from payments

5.085 *New

Fee Simple Title Required

DTPA violation;

Right to cancel and receive full refund of all payments;

Lease/Option Contracts Less than Three Years

For lease/option contracts with terms of less than three years and to which the parties have not been parties for greater than three years, only the following provisions of the contract for deed laws will apply:

Applicable Section Nos.

Description

Penalty for non-compliance

5.063-5.065

Thirty-day notice of default, right to cure, and remedies.

Potential for wrongful eviction and Debt Collection Act claims

5.073

Prohibited Contract Terms (more than 8% late fee, pre-payment penalties, etc.)

Statute is silent as to penalties.

5.083 *New

Right to cancel for improper platting

Full refund of all payments

5.085 *New

Fee Simple Title Required

DTPA violation;

Right to cancel and receive full refund of all payments;

The bill also provides that Chapter 92 of the Property Code dealing with residential leases will also apply to lease/option contracts until the option is exercised.

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9001 Airport Freeway
North Richland Hills, Texas 76180-7774
Phone: (817) 788-1111
Fax: (817) 485-2836
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Foster & East is an association of Ross T. Foster, P.C., and Kenneth E. East, P.C.