The answer to the title of this article is an unequivocal, “yes!” Historically, Texas local counsel played a major role in Texas real estate transactions involving out-of-state parties. In recent years, the role of local counsel has diminished significantly, primarily because the client and lead counsel are often concerned about the cost of engaging local counsel. Particularly in the area of real estate, pressure continues to grow to document transactions more efficiently to keep legal bills in line with client expectations that may not have been reasonable in the first place. The result is that local counsel is often seen as a dispensable luxury item to non-Texas parties, particularly if the lead counsel has closed a deal in Texas in recent years or mistakenly believes there is nothing special about Texas real estate laws and custom.
So why engage Texas counsel? First, and foremost, Texas counsel should always be engaged because, without doing so, lead counsel may be (and probably is) engaged in the unauthorized practice of law. Likewise, malpractice issues arise without Texas counsel, given the magnitude of issues lead counsel would otherwise need to research and properly document, including recording requirements, notice requirements, waivers, lien perfection, proper granting language, enforceability of remedies, title insurance, and tax issues, to name just a few. This article will discuss a few select issues in more detail, though it is by no means intended to be an exhaustive study or checklist of the many unique Texas real estate issues.
Texas Government Code Section 83.001 provides that no person may charge or receive, either directly or indirectly, any compensation for all or any part of the preparation of a legal instrument affecting title to real property, including a deed, deed of trust, note, mortgage, and transfer or release of lien, other than (1) an attorney licensed in Texas, (2) a licensed real estate broker or salesperson performing the acts of a real estate broker pursuant to Chapter 1101 of the Texas Occupations Code, or (3) a person performing acts relating to a transaction for the lease, sale, or transfer of any mineral or mining interest in real property.
The main issue under this statute is determining what activities constitute the practice of law. Texas Government Code Section 83.002 permits an attorney to pay secretaries, paralegals, and the like for the preparation of legal instruments that do not require legal skill or knowledge, removing those activities from the realm of the practice of law. According to the Fifth Circuit, data entry by a non-lawyer into a form previously prepared by a licensed attorney is most likely a clerical or secretarial function within the meaning of Section 83.002. However, the Texas attorney general isn’t quite as liberal, having stated “[w]hether the completion by [non-lawyer employees] of standard forms prepared by attorneys for routine transaction is ‘practicing law’ will always be a factual and often a close question.” Moreover, Texas law does not distinguish, for purposes of the unauthorized practice of law statutes, between a non-lawyer and a lawyer licensed to practice in a state other than Texas, so lead counsel should assume that the unauthorized practice of law statute will apply to an out-of-state lawyer in the same manner it would be applied to a title company, mortgage lender, or entrepreneurial paralegal. The penalty for the unauthorized practice of law can range from injunction and damages under Texas Government Code Sections 83.005 and 83.006 to conviction of a third-degree felony under Texas Penal Code Sections 38.122 and 38.123. As a result, Texas counsel should be consulted and engaged for drafting real estate documents.
Texas permits severance of the surface and mineral estates, so it is not unusual to purchase and develop property in which the minerals are not owned. Severance of minerals does, however, present special development issues because in Texas, the mineral estate is the dominant estate. While early case law gave mineral owners absolute discretion to use the surface estate for mineral extraction, more recent cases require the dominant rights of mineral owners be balanced with due regard for the rights of surface owners (now known as the “accommodation doctrine”), particularly in cases where mineral extraction can be performed in an alternative way but a surface owner has no alternative means for its use. Most municipalities have drilling ordinances that prevent drilling within a certain number of feet of existing structures, but those ordinances tend to allow for special approval to drill, rather than providing an absolute prohibition.
Additionally, title companies are now expressly authorized to exclude the entire mineral estate from policies and are no longer required to issue the relatively cheap T-19.2 or T-19.3 “Minerals and Surface Damage” endorsement. By eliminating this requirement, title companies may be able to force insureds to purchase the much more expensive T-19 or T-19.1 “Restrictions, Encroachments, Minerals” endorsement, which may even have the relevant insuring provisions for minerals coverage deleted. Therefore, an unwary buyer or borrower may end up paying an additional 10-15 percent of the entire base premium rate of their title policy for no mineral coverage at all.
The recent boom in oil and gas exploration has led to more and more mineral owners asserting rights to the surface estate. Texas counsel should be consulted to confirm that (i) the greatest title insurance coverage possible is obtained with respect to mineral ownership, (ii) surface waivers or drillsite designations are obtained from mineral owners wherever possible, and (iii) drilling ordinances are fully examined.
With real estate mortgage loans, lenders typically require an assignment of leases and rents as part of the collateral. However, in Texas, an assignment of leases and an assignment of rents are two distinct issues that fall under both the deed of trust and sometimes a separate assignment document. Under a deed of trust, leases of the property should be included in the definition of the mortgaged property because a lease is typically considered an interest in real property. This concept allows a lender to foreclose on a borrower’s interest in leases if an event of default occurs. It is important to note, however, that leases also have certain characteristics of contracts, and security interests in contract rights are governed by the Uniform Commercial Code. To resolve the apparent conflict between real property and personal property security interests, the Texas Uniform Commercial Code provides that real property foreclosure procedures can govern a security instrument that covers both real and personal property.
On the other hand, assignment of rents is a different question altogether. In 2011, Texas enacted the Texas Assignment of Rents Act (“TARA”) to clarify the process for creating, perfecting, and enforcing security interests in rents. Prior to the enactment of TARA, the concept of an “absolute” assignment of rents, which was separate from the deed of trust, was favored by practitioners in Texas because under this type of assignment, the borrower would transfer title to the rents to the lender and the lender granted a license back to the borrower to receive and use the rents until an event of default. And then, upon such default, the license would automatically terminate, providing the lender with an immediate right to the rents without the need for further action (e.g., foreclosure or receivership) to claim the rents. TARA significantly affects all Texas real estate transactions that include an assignment of rents to the lender because it provides that an assignment of rents given as security for the loan is now deemed to be the grant of a security interest in rents, even if the assignment purports to be an absolute assignment. Texas counsel should be consulted to confirm that mortgage documents and lender claims for rents conform with TARA.
Texas permits non-judicial foreclosure of the lien of a deed of trust, but with very specific statutory requirements for acceleration of the debt, notice, and conducting of the sale, in addition to the necessity for the lender to strictly observe notice and cure requirements of the loan documents with respect to any default used as the basis for acceleration of the debt and foreclosure of collateral. It is important to note that the statutory requirements for notice of sale are probably different from the notice and cure provisions of the deed of trust with respect to declaration of defaults and other non-foreclosure matters – particularly with respect to timing and methods of delivery. As such, Texas counsel should be consulted to confirm that the foreclosure notice provisions of the deed of trust are consistent with the statutory notice requirements.
If real property is sold at foreclosure for less than the amount of debt outstanding, the lender is entitled to pursue the borrower (and, if applicable, guarantor) for the deficiency. In response to what was viewed by many as predatory lending practices, with some lenders accepting extremely low bids at foreclosure (and thus generating excessively high deficiency judgments), the Texas legislature enacted what are commonly known as the Anti-Deficiency Statutes (Texas Property Code Sections 51.003, 51.004 and 51.005, dealing with deficiencies after non-judicial foreclosure, judicial foreclosure and against guarantors, respectively). The statutes provide that if real property is sold at foreclosure for less than its fair market value, the amount of the deficiency will be offset by the difference between fair market value and the foreclosure sales price of the property. There are procedures for ascertaining the fair market value of the property, and, of course, there are exceptions to the general rule. However, failure to comply with the statutes can result in significant losses to a foreclosing lender, so deed of trust provisions dealing with the Anti-Deficiency Statutes should be carefully scrutinized by Texas counsel.
These are just a few examples of the many unique aspects of Texas real estate law. Whether it is for the purchase and sale of real estate, drafting loan documents, negotiating leases, obtaining title insurance, or otherwise, lead counsel would be well advised to engage local counsel when doing business in Texas.
Alfred M. Meyerson is a Partner in Thompson & Knight’s Houston office. He is board certified in Commercial Real Estate Law by the Texas Board of Legal Specialization. He wishes to thank Briggs Knight and Meredith Cobb for their assistance with this article.