Seven-Day Notices in Texas Real Estate Transactions

Introduction

The Texas Property Code contains a general notice requirement that applies whenever transfer of title occurs that does not result in the payoff and release of existing lienholders. This requirement applies to wraparounds, certain seller financing, executory contracts, and any other circumstance where an existing lien will remain in place after closing. Property Code Section 5.016 requires that a seller:

(1) provide 7 days notice to the buyer before closing that an existing loan will remain in place;

(2) allow the buyer this same 7-day period in which to rescind the contract; and

(3) also send the 7-day notice to the lender.

These notices are the sole obligation of the seller and must be in the form prescribed by the statute. Section 5.016(c)10 provides an exception to the notice requirement “where the purchaser obtains a title insurance policy insuring the transfer of title to the real property.” Thus if a title company is willing to insure an owner-financed transaction then 7-day notices may be dispensed with.

The text of Section 5.016 reads as follows:

Prop. Code Sec. 5.016. Conveyance of Residential Property Encumbered by Lien

(a) A [seller] may not convey an interest in or enter into a contract to convey an
interest in residential real property that will be encumbered by a recorded lien at the time the interest is conveyed unless, on or before the seventh day before the earlier of the effective date of the conveyance or the execution of an executory contract binding the purchaser to purchase the property, an option contract, or other contract, the [seller] provides the PURCHASER and EACH LIENHOLDER [caps added] a separate written disclosure statement. . . .

(b) If a contract is entered into without the seller providing the notice required by this section, the purchaser may terminate the contract for any reason on or before the seventh day after the date the purchaser receives the notice in addition to [any] other remedies. . . .

Section 5.016 notice theoretically allow the lender an opportunity to take action to protect its interests. No time period is specified during which a lender must respond to the notice, if at all. Actual lender consent for the title transfer is not required.

There are no notice requirements imposed on buyers in transactions where an existing loan is left in place.

A violation of the seven-day notice requirements in the Property Code does not invalidate a conveyance (Prop. Code Sec. 5.016(b)).

Contents of Seven-Day Notices

Property Code Section 5.016 requires that seller notices include the following warning:

WARNING: ONE OR MORE RECORDED LIENS HAVE BEEN FILED THAT MAKE A CLAIM AGAINST THIS PROPERTY AS LISTED BELOW. IF A LIEN IS NOT RELEASED AND THE PROPERTY IS CONVEYED WITHOUT THE CONSENT OF THE LIENHOLDER, IT IS POSSIBLE THE LIENHOLDER COULD DEMAND FULL PAYMENT OF THE OUTSTANDING BALANCE OF THE LIEN IMMEDIATELY. YOU MAY WISH TO CONTACT EACH LIENHOLDER FOR FURTHER INFORMATION AND DISCUSS THIS MATTER WITH AN ATTORNEY.

Section 5.016 notices must include: (1) an identification of the property; (2) the name, address, and phone number of each existing lienholder; (3) the amount of debt that is secured by each existing lien; (4) a summary of terms including the interest rate, the amount of monthly payments, and the account number; (5) the details of any insurance policy relating to the property including the name of the insurer and insured as well as the amount for which the property is insured; and (6) the amount of the property taxes. It must also be stated clearly whether or not the existing lienholder has given consent.

The Department of Savings and Mortgage Lending has promulgated a model notice and disclosure that can be found on the agency’s website.

Exceptions to the Property Code Notice Requirement

Section 5.016(c) lists eleven exceptions to the seven-day notice rule. A seller is not required to give notices in the following circumstances:

Prop. Code Section 5.016(c). This section does not apply to a transfer:

(1) under a court order or foreclosure sale;

(2) by a trustee in bankruptcy;

(3) to a mortgagee by a mortgagor or successor in interest or to a beneficiary of a deed of trust by a trustor or successor in interest;

(4) by a mortgagee or a beneficiary under a deed of trust who has acquired the real property at a sale conducted under a power of sale under a deed of trust or a sale under a court-ordered foreclosure or has acquired the real property by a deed in lieu of foreclosure;

(5) by a fiduciary in the course of the administration of a decedent’s estate, guardianship, conservatorship, or trust; conservatorship or trust;

(6) from one co-owner to one or more other co-owners;

(7) to a spouse or to a person or persons in the lineal line of consanguinity of one or more of the transferors;

(8) between spouses resulting from a decree of dissolution of marriage or a decree of legal separation or from a property settlement agreement incidental to one of those decrees;

(9) to or from a governmental entity;

(10) where the purchaser obtains a title insurance policy insuring the transfer of title to the real property; or

(11) to a person who has purchased, conveyed, or entered into contracts to purchase or convey an interest in real property four or more times in the preceding 12 months.

The most obvious available exception between non-family members is a transaction where title insurance is issued. Transfers into a trust do not constitute an exception to the notice requirements, although transfers by an existing trustee are excepted.

Seller Notice Requirement under the Finance Code

The Finance Code notice requirement is in addition to the notices required by the Property Code (discussed above). The Finance Code includes specific regulation of wraparound transactions, which are an obvious case of leaving an existing loan in place after closing.

Under Finance Code Section 159.101, a seller-lender in wraparound transaction must, on or before the seventh day before the wrap mortgage loan agreement is entered into, provide to the wrap borrower a separate written disclosure statement in at least 12-point type warning that insurance coverage can be problematic:

NOTICE REGARDING PROPERTY INSURANCE: ANY INSURANCE MAINTAINED BY A SELLER, LENDER, OR OTHER PERSON WHO IS NOT THE BUYER OF THIS PROPERTY MAY NOT PROVIDE COVERAGE TO THE BUYER IF THE BUYER SUFFERS A LOSS OR INCURS LIABILITY IN CONNECTION WITH THE PROPERTY. TO ENSURE THE BUYER’S INTERESTS ARE PROTECTED, THE BUYER SHOULD PURCHASE THE BUYER’S OWN PROPERTY INSURANCE. BEFORE PURCHASING THIS PROPERTY, YOU MAY WISH TO CONSULT AN INSURANCE AGENT REGARDING THE INSURANCE COVERAGE AVAILABLE TO YOU AS A BUYER OF THE PROPERTY.

The notice required by Section 159.101 must be given to the wraparound buyer-borrower on or before the seventh day before the wrap mortgage loan agreement is entered into (interpreted to mean the date of closing). It must be dated and signed by the wraparound borrower when the wrap borrower receives the statement.

There is also a foreign language requirement. If negotiations preceding execution of the wrap closing documents are conducted primarily in a language other than English, the wrap seller-lender must provide the required disclosures in the language to the wrap buyer-borrower (TFC Sec. 159.102).

Exceptions to Finance Code Notice Requirements

Finance Code seller-notice requirements do not apply to unimproved residential real estate (defined as residential real estate on which a dwelling has not been constructed) so long as the holder of [the] unreleased lien has consented to the sale of the residential real estate. . . .” (Fin. Code Sec.159.002 (a) and (b)). The statute does not apply to “a sale of residential real estate that is the wrap lender’s homestead” (Fin. Code Sec. 159.002(b)(2)).

Notice requirements under the Finance Code do not apply to “an owner of residential real estate if the owner does not in any 12-consecutive-month period make, or contract with another person to make, more than three wrap mortgage loans to purchasers of the property for all or part of the purchase price of the residential real estate against which the mortgage is secured” (Fin. Code Sec. 159.003(4)).

Executory Contracts

The typical executory contract is a contract for deed that delays delivery of title to the buyer after full payment of the purchase-money obligation—but delivers possession to the buyer now. Executory contracts are subject to extensive restrictions and requirements by the Texas Property Code, including Section 5.085(b)(3)(C) which requires in the case of an executory contract that “the lienholder consents to verify the status of the loan on request of the purchaser and to accept payment directly from the purchaser if the seller defaults on the loan.” The lienholder must be notified of and consent to an executory transaction.

Lender consent to an executory contract is unlikely to occur as a practical matter. Accordingly, residential executory contracts longer than 180 days are effectively limited to paid-for properties.

Conclusion

Property Code and Finance Code seven-day notice requirements are clearly designed to discourage transactions that separate title from debt and that could result in a lender losing control over its loan. The actual effect of the notice requirements remains unclear, particularly since the only sanction under Section 5.016 is to allow a prospective purchaser to back out of a contract before closing (but not after).

As a practical matter, Section 5.016 notices (often sent to the loan servicer) usually produce no response. Also, since Section 5.016 is a law that has no effective enforcement mechanism, compliance is erratic. Future legislation may add penalties, but for now giving these notices has not been a significant impediment to creative transactions that involve carrying an existing unpaid lien against the property.