Real Estate 2024 Comparisons

In Texas, the main sources of real estate law include state statutes, case law (ie, court decisions), and administrative regulations. Key statutes include the Texas Property Code, which addresses a wide range of property issues including ownership, land use, and landlord-tenant relationships. These laws are supplemented by common law principles that have evolved through case law over time. Additionally, Texas real estate practices are influenced by federal laws in areas such as fair housing, and financing and federal and state laws on environmental regulation. Local ordinances also play a significant role, particularly in zoning, building codes, and property taxes.

The Texas commercial real estate market in 2024 has demonstrated a mix of resilience and challenges influenced by various economic factors and regional differences.

Market Stability and Performance

The market has shown stability, particularly in industrial and multi-family properties. Industrial real estate remains robust, supported by e-commerce demand, with significant construction activities, especially in the Dallas-Fort Worth area. This region saw about 67 million square feet of industrial properties under construction, indicating a strong market with stable rental rates and land prices.

Office Space

The office market presents mixed signals with a general trend towards stabilisation. North Texas, in particular, shows resilience with a healthy pace of leasing, especially in smaller and Class B office spaces. The return-to-work movement has helped stabilise this sector.

Economic and Policy Influences

The market faces potential pressures from high inflation and interest rates, influencing investment and refinancing activities across real estate sectors. The Texas legislature passed an act to cut property taxes resulting in a projection of over USD18 billion saved by taxpayers, aiming to keep home ownership attainable and sustainable.

Recent proposals for reform in Texas’s real estate sector have focused on providing tax relief to homeowners and businesses. The Texas Legislature passed an act to cut property taxes resulting in a projection of over USD18 billion saved by taxpayers, aiming to keep home ownership attainable and sustainable. Key components of the reform include:

• a homestead exemption to more than double the current exemption, aiming to lower the taxable value of homes and thereby reduce property taxes for homeowners;
• a temporary, heightened appraisal cap for commercial, mineral, and residential properties not otherwise eligible for a homestead exemption, intended to limit the annual taxable value increase for the next three years, with the programme slated to end in 2026 unless extended; and
• franchise tax exemptions are part of the package, intending to substantially increase the revenue threshold for businesses required to pay franchise tax.

In Texas, various categories of property rights can be acquired, including the following.

• Fee Simple Absolute – this is the highest form of ownership interest and grants the owner complete control and rights over the property for an indefinite period.
• Life Estate – in this type of ownership, the owner holds rights to the property only for the duration of their life or the life of another person.
• Leasehold Estate – this involves possessing the property for a specific period under a lease agreement. The rights are limited to the terms outlined in the lease.
• Mineral Rights – these rights pertain to the ownership of minerals or resources beneath the surface of the property.
• Easements – these are rights to use or access someone else’s property for specific purposes, such as utilities, access, or drainage.
• Licences – similar to easements, licences grant permission to use another person’s property for a specific purpose, but they are revocable at any time.
• Air Rights – these rights allow the owner to use the space above the property, often for construction or airspace leasing.

In Texas, the transfer of real estate title is governed primarily by state laws, which include the Texas Property Code. These laws cover a broad range of real estate transactions, including the sale and purchase of residential, industrial, office, retail, and hotel properties. While the general legal framework for transferring title applies to all types of real estate, there may be specific considerations or additional regulations for certain types of properties, such as zoning laws for commercial properties or residential housing standards.

Formatting requirements for real estate documents to be recorded in the real property records, the documents required for transfers, and enforcement of statewide rules can also vary on a county-by-county basis in Texas. Special laws or ordinances at the local level may also impact the transfer of certain types of real estate, addressing issues like land use, building codes, and environmental assessments.

In Texas, a lawful and proper transfer of title to real estate is effectuated through the execution of a deed, which must be delivered and accepted. Deeds are recorded in the county real property records in which the property is located to provide public notice and protect the interests of both parties. Title insurance is common in Texas to protect against defects in the title. During the COVID-19 pandemic, Texas implemented new procedures, including remote notarisation and electronic recording of documents, to accommodate restrictions on in-person transactions, and many of these processes remain in use.

Commercial real estate due diligence for Texas properties typically involves a comprehensive evaluation of the property, including its legal, financial, and physical aspects. This process usually includes title search and title insurance to verify ownership and check for liens or encumbrances, property and environmental inspections to assess the condition and identify potential issues, review of local zoning and land use regulations to ensure compliance and understand permissible uses, and financial analysis of income-producing properties. One example of routine environmental due diligence in Texas is that many purchasers will often conduct a Phase I environmental site assessment.

In Texas, as in other jurisdictions, typical representations and warranties in a commercial real estate transaction might include the legal authority to sell, the absence of liens or encumbrances, compliance with laws (including zoning and environmental laws), and the condition of the property. A seller’s warranties provided under statutes may include disclosures about the property’s condition, but these vary.

A buyer’s remedies for misrepresentation typically include rescission of the sale, damages, or specific performance. Caps on liability vary and are subject to negotiation. Representation and warranty insurance is increasingly used to mitigate risks associated with potential breaches of representations and warranties. Pursuant to Section 16.070(a) of the Texas Civil Practice & Remedies Code, any representation or warranty made in an agreement must survive for a minimum period of two years. To satisfy statutory requirements, purchase agreements will commonly state explicitly that all representations and warranties have a survival period of at least two years and a day. During the COVID-19 pandemic, there might have been new representations and warranties regarding the health and safety measures taken at the property or the impact of the pandemic on the property’s use and occupancy on case-by-case basis, but substantial shifts in the market arising from the pandemic have so far failed to materialise.

In Texas, key areas of law for a real estate investor to consider include property law (covering aspects like title, ownership types, and property rights), contract law (for sale and lease agreements), zoning and land use regulations (determining how property can be developed or used), environmental laws (addressing potential contamination and liability issues as well as conditions that could restrict development such as endangered species), and tax law (including property taxes and implications for investment structures).

In Texas, as in many jurisdictions, buyers can potentially be held responsible for existing environmental contamination on a property they purchase, even if they did not cause the pollution. This is due to laws that aim to ensure contaminated sites are cleaned up, regardless of the current owner’s role in causing the contamination. While defences to this type of liability are limited and the state defences differ somewhat from the federal defences, many of the available defences turn on performing appropriate due diligence, such as a Phase I, prior to purchase (or in the case of a tenant, lease). Further, the Texas Commission on Environmental Quality administers the Voluntary Cleanup Program, which can provide protection to a prospective purchaser who enters the programme prior to purchase, and the Innocent Landowner Program, which provides protection to owners of land contaminated by contamination migrating from an unaffiliated adjacent parcel of land.

In Texas, buyers can ascertain the permitted uses of a parcel of real estate under applicable zoning or planning law by consulting with local municipal or county zoning offices, where they can access zoning maps and ordinances. It’s also possible to request zoning verification letters for specific properties. Moreover, buyers can enter into specific development agreements with relevant public authorities to facilitate a project. These agreements can outline the development conditions, infrastructure improvements, and other project specifics, and they often require approval from local government bodies.

In Texas, governmental entities and quasi-governmental entities (eg, municipal utility districts (MUDs) and school districts) have the power to take land through condemnation, expropriation, or compulsory purchase for public use, known as eminent domain. The process typically involves the government entity providing notice to the property owner, making an offer to purchase the property and, if necessary, filing a condemnation lawsuit. The owner is entitled to receive just compensation for the property taken.

Generally, in Texas, real estate transactions do not incur transfer, recordation, stamp, or similar taxes that are common in other states. The sharing of transaction costs between buyer and seller, including title insurance, escrow fees, and others, is typically negotiated in the purchase agreement. In the case of share deals or transfers of interest in property-owning entities, these transactions are subject to federal and state capital gains taxes, not specific transfer taxes. Typically, sellers of a property will pay for the base policy premium of the owner’s policy of title insurance, buyers for any desired endorsements (which are limited in scope in Texas compared to many other states), and escrow fees will be split among the parties.

In Texas, there are no specific legal restrictions on foreign investors acquiring real estate purely based on their nationality. However, foreign investors must comply with applicable US federal laws.

Generally, acquisitions of commercial real estate in Texas can be financed through a variety of methods including traditional bank loans, commercial mortgage-backed securities, life insurance companies, private lenders, and seller financing. For large real estate portfolios or companies holding real estate, financing options may also include syndicated loans from multiple lenders, mezzanine financing, and equity financing from investment funds. Each financing method comes with its own set of terms, conditions, and costs, which can vary based on the size of the transaction, the risk profile of the investment, and the financial standing of the borrower.

Generally, in Texas, commercial real estate investors often secure financing through mortgage loans, where the real estate itself serves as collateral. This involves creating a lien on the property in favour of the lender. The grant of a secured interest in the property to the lender is typically memorialised in a deed of trust. Pursuant to the Texas Assignment of Rents Act, codified as Section 64.052(b) of the Texas Property Code, lenders do not need to file a separate assignment of rents in addition to the deed of trust to perfect a security interest in the rents for a given property as recordation of the deed of trust automatically perfects such an interest. 

Other common securities include mezzanine financing, which is secured by equity interests in the entity that owns the real estate. Developers might also use construction loans for development projects, which are disbursed in stages based on construction progress and in addition to collateral assignments of agreements related to the design and construction of the projects are secured by a deed of trust.

Generally, in the United States, including Texas, there are not significant restrictions on granting security over real estate to foreign lenders compared to domestic lenders. Both foreign and domestic lenders can take security interests in real estate.

In general, when securing real estate with a deed of trust or other security instruments in Texas, parties might incur certain costs such as recording fees for the deed of trust in county records to perfect the lien, and notary fees for the execution of documents. Texas does not impose a documentary stamp tax on mortgages or deeds of trust, which differentiates it from other states. Similar to recording fees generally, fees imposed for granting or enforcing a secured interest in real property will vary by county.

In Texas, the main legal requirements before an entity can provide valid security over its real estate assets involve ensuring the security agreement is in writing, signed by the party granting the security interest (debtor), and reasonably identifies the secured property. The security interest is typically “perfected” through filing a financing statement with the appropriate government office to put third parties on notice. While Texas does not specifically enforce “financial assistance” rules as known in other jurisdictions, the transaction must not violate any statutes, including without limitation any provision of the Texas Business Organizations Code or prohibitions on usurious interest in the Texas Finance Code.

When a borrower defaults on a mortgage loan for property in Texas, the foreclosure process typically involves non-judicial means. The foreclosure process starts with the borrower signing a promissory note and a deed of trust, which includes a power of sale clause allowing the lender to sell the property non-judicially if the borrower fails to make payments. Upon default, the lender must send a notice of default and intent to accelerate, giving the borrower at least 20 days to cure the default. After this period, a Notice of Sale must be mailed to the borrower at least 21 days before the foreclosure sale, also being posted at the courthouse door and filed with the county clerk.

The foreclosure sale itself is public, with the highest bidder becoming the new owner of the property. Texas law does not provide a right to redeem the property after a foreclosure sale. However, borrowers have specific rights, including the possibility to reinstate the loan within 20 days after receiving the notice of default and intent to accelerate. Also, lenders may seek a deficiency judgment if the sale does not cover the total debt, but borrowers can challenge the deficiency amount by proving the fair market value of the property. Federal and state laws offer protections and options for loss mitigation, such as loan modifications, forbearances, or repayment agreements.

Foreclosure activity in Texas, along with other states, has seen a significant uptick in the wake of the COVID-19 pandemic. This uptick represents a continuation of the rising trend in foreclosure activities, gradually moving towards pre-pandemic levels. Despite this increase, the foreclosure activity remains below the historical norms observed before the Great Recession, signalling that while there is a rise, it has not reached the peak levels of the past.

In Texas, it is possible for existing secured debt to voluntarily become subordinated to newly created debt. This process is typically managed through a subordination agreement, which is a legal document that establishes a hierarchy of debt and priority of repayment for multiple creditors. This kind of agreement is particularly used when there are multiple loans secured by the same property, and the parties involved want to establish the order in which their claims will be satisfied in the event of default or foreclosure.

In Texas, a lender holding security interests in real estate are generally exempt from liability for environmental contamination on the property as long as they do not participate in the management of the facility or worsen the contamination, as well as take certain steps with respect to divesting itself of the property after a foreclosure. At the federal level, the Comprehensive Environmental Response, Compensation and Liability Act outlines this exemption, focusing on the lender’s role as not being an “operator” or actively managing environmental aspects of the property. This allows lenders to minimise risks associated with loans secured by properties that may have environmental challenges. Texas environmental law offers similar lender liability protections. 

In Texas, security interests created by a borrower in favour of a lender generally remain valid even if the borrower becomes insolvent. The filing of bankruptcy by a borrower can introduce complexities, such as the automatic stay on collection activities, but it does not automatically void existing security interests. Lenders may need to seek relief from the bankruptcy court to enforce their security interests in such situations.

Texas does not impose a mortgage tax on the recording of mortgages or deeds of trust. Recording fees are typically required for the recording of mortgages and deeds of trust in the county where the property is located. These fees vary by county and are intended to cover the cost of entering the document into the public record, ensuring it is accessible for public inspection.

In Texas, planning and zoning laws are generally governed by Title 7 of the Texas Local Government Code, which grants municipalities and counties the authority to enact zoning and planning regulations. These local entities have the power to regulate land use to promote public health, safety, and general welfare. Specific controls may include zoning ordinances, comprehensive plans, subdivision regulations, and other development standards.

In Texas, the design, appearance, and construction methods of new buildings or the refurbishment of existing buildings are regulated by various state laws and local ordinances. These regulations often include zoning ordinances and regulations and building codes, which set minimum standards for construction to ensure safety, health, and sometimes even aesthetic conformity. Local municipalities may have specific ordinances regarding the architectural style, height restrictions, and materials used in construction to preserve historical character or maintain a certain community aesthetic.

The development and use of Texas real estate are primarily regulated by local governments through zoning ordinances and development codes. These local regulations determine how land can be used, the types of buildings allowed, their sizes, and their placement on a lot. The Texas Local Government Code provides the statutory framework for these local regulations. Planning and zoning commissions, city councils, and county commissioners’ courts typically oversee these regulations.

In Texas, obtaining entitlements for new developments or major refurbishments typically involves submitting detailed plans and applications to local planning or development departments. These applications are reviewed against zoning regulations, building codes, and other local ordinances. Public hearings and meetings may be part of the process, allowing for community input and objections. Approval from planning commissions, city councils, or other regulatory bodies may be required, and conditions or modifications might be imposed to address planning concerns or public feedback.

The Texas government generally recognises a right of appeal against decisions made by local or state authorities regarding applications for development or land use. This can include decisions on zoning, permits, and other regulatory approvals.

It is common for developers operating in Texas to enter into agreements with local, governmental, or quasi-governmental authorities to facilitate development projects. These agreements, such as development agreements and public improvement agreements, can address infrastructure improvements, utility services, and compliance with zoning and planning requirements. For larger projects or planned unit developments, agreements might also involve land dedication for public use, transfers of development rights, or concessions regarding density and design standards to ensure the project aligns with local development goals and community needs.

In Texas, enforcement of restrictions on development and designated use is typically carried out by local government agencies through zoning and planning regulations. These agencies have the authority to review and approve development projects, ensuring compliance with local zoning laws, land use plans, and building codes. Violations can lead to penalties, including fines, stop-work orders, or requirements to modify or demolish non-compliant construction.

The types of entities available to investors for holding real estate assets in Texas include corporations, limited liability companies (LLCs), partnerships (including general partnerships, limited partnerships, and limited liability partnerships), tenancies in common (TICs), Delaware statutory trusts (DSTs), condominiums, and professional entities. Each type offers different benefits, operational structures, and tax implications.

When it comes to investing in real estate in Texas, various entities are available that each offer specific benefits, especially concerning tax implications and liability protection.

C-Corporations and S-Corporations

These are popular choices, with S-Corps being particularly beneficial for developers because they can reduce self-employment tax liability by distinguishing between W-2 wages and distributions. However, S-Corps have limitations on the number and type of shareholders they can have and strict protocols for payroll and profit distribution must be followed to avoid double taxation common in C-Corps.

LLCs

LLCs are often a preferred choice due to their flexibility in management and favourable pass-through tax treatment, which avoids the double taxation that corporations may face. The LLC structure allows profits and losses to pass directly to the members, avoiding corporate taxes, while still providing liability protection.

Partnerships

Partnerships are also available as options. In general partnerships, all partners are considered equal owners and share responsibility for managing the business. Limited partnerships, on the other hand, consist of at least one general partner, who manages the partnership and has unlimited liability, and one or more limited partners, who contribute capital and have liability limited to the extent of their investment. Both entities benefit from pass-through taxation, avoiding corporate tax levels and allowing profits to be taxed at the individual partner level. Both partnership types have their place in real estate investment, with the choice largely depending on the level of involvement and liability the partners are willing to assume.

TICs

TICs allow two or more parties to hold title to real estate. Each tenant in common holds an individual, undivided ownership interest in the property that can be sold, transferred, or bequeathed to heirs. Each tenant in common can independently control their share of the property without the need for consent from the other owners, subject to any agreements made among the co-owners. Income and expenses from the property are reported based on each owner’s respective share. If the property generates rental income, each co-owner reports their share of the income on their personal tax returns.

DSTs

DSTs are separate legal entities created as a trust under Delaware statutory law, which allows for fractional ownership of property by investors. DSTs are treated as grantor trusts for tax purposes, meaning the DST itself is not taxed. Instead, all income and deductions flow through to the investors, who report these on their individual tax returns. DSTs are often used in 1031 exchanges because they qualify as like-kind property. This allows investors to defer capital gains taxes by reinvesting the proceeds from the sale of a property into a DST.

Condominiums

Condominiums involve ownership of a specific unit within a larger property. The owner has title to the interior space of the unit but not to the land or common areas, which are owned collectively with the other condo owners. Condominium owners pay property taxes on their individual unit(s) and will typically also pay a fee to any homeowner’s association formed to manage the larger property.

REITs are recognised in Texas as a popular investment vehicle, offering both public and private forms. These vehicles are accessible to foreign investors and provide a structured way to invest in real estate assets without directly managing properties. REITs in Texas, like elsewhere in the United States, must adhere to specific federal tax requirements to qualify and maintain their REIT status, including being organised as a corporation, trust, or association, and meeting income distribution and asset investment thresholds related to real estate. The benefits of REIT status include significant tax advantages, as a qualifying REIT can deduct dividends paid to its shareholders, potentially avoiding corporate tax. This allows REITs to attract both tax-exempt and foreign investors.

In Texas, the minimum capital required to set up each type of entity used for real estate investment varies depending on the specific entity structure chosen. For instance, the formation of a corporation, LLC, or partnership does not have a specified minimum capital requirement by law.

Entities used for Texas real estate investment, including without limitation general partnerships and limited partnerships, need to comply with governance requirements as stipulated in the Texas Business Organizations Code, in addition to federal specifications.

Operating both domestic and foreign, or out-of-state, entities in Texas for the purpose of investing in real estate involves various accounting and compliance costs. Each taxable entity formed or organised in Texas or doing business in the state is subject to the franchise tax. Tax rates vary based on entity type and income, and entities below a certain income threshold need not pay the franchise tax but still must file a “no tax due” report. Entities organised in Texas must pay a nominal fee, usually several hundred dollars, upon formation, while foreign entities doing business in Texas must pay a fee of similar size to register.

Texas law recognises several types of arrangements for the use of real estate without outright purchase. These arrangements include leases, which can be for residential or commercial properties, and licence agreements that permit the use of property for specific purposes without transferring ownership. Additionally, easements grant the right to use a portion of another’s property for a particular function, such as access or utility placement, and are another form of recognised arrangement.

There are several types of leases applicable in Texas, including without limitation the following.

Gross Lease

This type of lease involves a tenant paying an annual flat fee that covers both the rent and yearly operating expenses like utilities, cleaning services, and taxes. A variation, known as a modified gross lease, may see tenants responsible for some building operational costs not included in the annual fee.

Percentage Lease

Commonly used for retail spaces, this lease type includes base rent and operating expenses, with the addition of a percentage of the business’s monthly gross sales. This structure aligns the landlord’s interests with the tenant’s sales performance.

Net Lease

This is particularly prevalent in commercial properties. Tenants pay base rent plus a share of operating costs, with the specifics varying by the lease type. Net leases can be single net (tenant pays base rent and property taxes), double net (tenant also pays insurance), or triple net (tenant pays base rent, property taxes, insurance, and possibly other expenses like utilities and maintenance).

In Texas, rents and lease terms are generally freely negotiable between landlords and tenants without widespread state-level rent control or regulation. However, local ordinances may impose specific regulations, and any adjustments or protections introduced during the COVID-19 pandemic would be subject to local jurisdiction decisions. For the most part, commercial and residential rental agreements in Texas are determined by the lease terms agreed upon by the parties involved.

Commercial lease terms, including rent, are generally freely negotiable between the landlord and tenant without extensive regulation by the Texas state government. While there are laws protecting against discrimination and ensuring basic contractual fairness, the specific terms, including rent amounts and lease durations, are largely determined by the parties involved and market conditions. Regarding the COVID-19 pandemic, there have been temporary measures and moratoriums on evictions in various jurisdictions, but these are temporary and vary locally rather than being permanent or state-wide regulations.

The rent payable under a lease can remain the same or change, depending on the lease terms agreed upon by the landlord and tenant of Texas properties. Fixed leases keep the rent the same throughout the lease term and are less common in practice, while most leases include escalation mechanisms for rent increases at specified intervals or based on certain criteria, such as inflation rates or operational costs.

The determination of new rent after an increase depends on the terms specified in the lease agreement. Common methods include fixed percentage increases, adjustments based on inflation or consumer price index (CPI), or market rent reviews where the new rent is aligned with current market rates. Leases also include predetermined incremental increases at specified intervals. The exact method and criteria for rent adjustments should be clearly outlined in the lease documentation.

Texas does not impose a VAT (or equivalent tax) on the sale or purchase of real estate.

At the start of a lease in Texas, tenants typically face various costs beyond just the rent. These costs can include a security deposit, which the landlord holds as a form of “insurance” against damage or non-payment by the tenant. Under Texas law, security deposit must be refunded within 60 days of vacating the premises under a commercial lease (30 days under a residential lease), provided the tenant has not caused damage beyond normal wear and tear and has paid all amounts due and payable pursuant to the lease.       

In Texas, the maintenance and repair responsibilities in a commercial lease vary, but generally, landlords are responsible for maintaining the property’s structural integrity, while tenants are expected to take care of interior maintenance and repairs. This delineation ensures the property remains habitable and safe for tenants, while also outlining that tenants are responsible for keeping their specific leased space in good condition. This standard is quite common in commercial leases and helps to prevent legal disputes by making it clear who is responsible for what types of maintenance and repair work.

A common practice for Texas properties with a single tenant is for the tenant to contract directly for utility and telecommunications services and pay the cost for those services. For multi-tenant properties with common utilities, landlords often give tenants the right to install separate meters (but it is often negotiable whether the landlord or tenant pays for utilities or telecommunications).

In Texas, the responsibility for insuring real estate subject to a lease typically falls on both the landlord and the tenant, with each party having specific obligations. Landlords generally require tenants to carry commercial rental insurance, including liability insurance, to protect against accidents or injuries occurring within the leased space. This requirement helps ensure that landlords are not financially responsible for incidents arising out of the tenant’s business operations.

The COVID-19 pandemic’s unprecedented nature means there is little existing legal precedent for such scenarios. Tenants and landlords are still navigating this complex territory, with tenants seeking relief under doctrines like “impracticability” and “frustration of purpose” in the absence of specific force majeure provisions that mention pandemics. The outcome of these legal challenges is still pending in many cases and may set important precedents for business interruption coverage and force majeure applicability in future pandemics.

Landlords have broad authority to impose restrictions on how a tenant may use real estate under a lease in Texas. For example, in the use provision of a lease for a commercial property, the landlord may stipulate the types of business for which a tenant may use the property and allow the landlord to declare the tenant to be in default under the lease for any violation of the use provision by the tenant. Local zoning and land use laws comprise another layer of restrictions limiting how real estate may be used.

In Texas, the ability of a tenant to alter or improve leased real estate largely depends on the terms agreed upon in the rental agreement. Any modifications to the lease, including those allowing alterations or improvements by the tenant, should be discussed with the landlord and incorporated into the agreement. While Texas law does provide broad rights around health, safety, and security, including the repair of conditions materially affecting these areas, specific rights or obligations related to property alterations or improvements are not explicitly covered in the general tenants’ rights overview provided by the Texas Attorney General’s Office. For detailed guidelines on alterations or improvements, tenants should refer to their specific lease agreements and negotiate terms directly with their landlords.

In Texas, regulations and laws governing leases vary by the category of real estate, such as residential, commercial (which includes industrial, offices, and retail), and others like hotels. What follows is an overview of how laws and regulations apply to different types of real estate leases and any distinctions related to COVID-19 legislation.

Commercial Tenancies

For commercial properties, including industrial, offices, and retail spaces, Chapter 93 of the Texas Property Code specifically addresses commercial tenancies. It outlines requirements for security deposits, the obligations for refunding these deposits within 60 days of termination, and how damages and charges should be accounted for upon the termination of the lease. This section of the law ensures that commercial landlords maintain accurate records of all security deposits and that tenants are provided with an itemised list of deductions upon moving out. Furthermore, if a landlord’s interest in the property ceases, the new owner becomes responsible for the security deposit from the date title to the premises is acquired.

Residential Leases

Residential leases are governed by Chapter 92 of the Texas Property Code, which focuses on the protection of renters’ rights and the obligations of landlords. Important aspects include lease violation notices, the process for returning security deposits, lease termination, and landlord retaliation laws. For example, landlords must return security deposits within 30 days after the tenant has moved out and provide an itemised list of deductions for any damages that go beyond normal wear and tear. Texas law prohibits landlords from retaliating against tenants who exercise their rights, such as reporting health or safety violations.

COVID-19 Legislation

During the COVID-19 pandemic, there were various temporary measures and moratoriums put in place to protect tenants from eviction and provide relief to property owners. However, specific asset class distinctions related to COVID-19 legislation would have been part of broader federal and state-level emergency orders and not necessarily permanent changes to property law. These measures were typically designed to address the immediate impacts of the pandemic, such as financial hardship due to unemployment or health-related issues. It’s important to consult current state resources or legal advice for the most up-to-date information on any remaining COVID-19-related regulations affecting real estate leases.

Local Laws and Regulations

It is crucial to note that many cities in Texas might have their own landlord-tenant laws that provide additional protections or regulations beyond state law. Cities like Dallas, Austin, San Antonio, and Houston may have specific ordinances that address rent control, eviction procedures, or other rental-related matters. Therefore, both landlords and tenants should be aware of the local laws that might affect their rights and responsibilities.

In Texas, the impact of a tenant’s insolvency on their lease depends significantly on whether bankruptcy proceedings are initiated. Under the United States Bankruptcy Code, a tenant’s insolvency or bankruptcy does not automatically terminate an unexpired lease of real property. This is because clauses in leases that allow for termination due to insolvency or bankruptcy are generally unenforceable. When a tenant files for bankruptcy, an automatic stay is put into place, preventing landlords from evicting the tenant or taking other actions like serving a notice to quit or prosecuting a pending unlawful detainer. This automatic stay is designed to halt all judgments and actions against the debtor’s property immediately upon the filing of a bankruptcy petition.

In Texas, landlords have several options for securing protection against a tenant’s failure to meet their obligations under a lease agreement. These measures are designed to mitigate risks such as non-payment of rent, damages to the property, or other breaches of the lease terms.

Security Deposits

Texas law does not impose a limit on the amount that can be charged for a security deposit, but it requires landlords to return the deposit minus any amounts used for cleaning and repairs within 30 days of lease termination for residential leases and within 60 days for commercial leases. The security deposit can cover damages incurred because of lease breaches, unpaid rent, cleaning fees at the end of the lease, and other specified damages not considered normal wear and tear.

Insurance Requirements

The lease agreement may require tenants to obtain renter’s insurance. This insurance can provide coverage for the tenant’s personal property, liability in case of accidents within the rented premises, and possibly loss-of-use coverage, which can help both parties in case the property becomes uninhabitable due to covered damages. The landlord may also have its own insurance responsibilities specified in the lease.

Lease Provisions for Termination

Texas lease agreements can include specific provisions outlining how and when a lease may be terminated by either party. This might include conditions for early termination, required notice periods, and potential penalties for early termination.

Lockouts

Section 93.002 of the Texas Property Code permits landlords to change the locks of a premises in the event a tenant is delinquent in paying all or a part of the rent due under the lease. Landlords may prevent a tenant from accessing the premises, resulting in a “lockout” without court action.

In Texas, a tenant’s right to continue occupying commercial real estate after the expiration or termination of a lease depends on several factors and the specific terms of the lease agreement. There is no automatic right for a tenant to remain in the premises without the landlord’s consent after the lease has expired. If the original lease isn’t renewed or a new lease isn’t signed, the tenant may enter into a tenancy at will if the landlord allows them to stay and continue paying rent. Alternatively, without the landlord’s permission, the tenant may find themselves in a tenancy at sufferance, which is less secure and can lead to eviction proceedings.

In Texas, a tenant’s ability to assign a leasehold interest or sublease the leased premises largely depends on the terms of the original lease agreement. Generally, a landlord can prohibit a tenant from assigning a lease agreement or subleasing the leased premises if such a prohibition is expressly included in the lease agreement. However, if the landlord permits assignment or subleasing, the lease agreement must specify the conditions under which the tenant may enter into an assignment or sublease agreement.       

In Texas, the rights to terminate a lease by both the landlord and the tenant are primarily governed by the terms of the lease agreement, state laws, and specific conditions under which the lease can be terminated. For general circumstances, leases can be terminated by mutual agreement or due to lease violations such as failure to pay rent or breach of lease terms. Specific conditions include the following.

Termination by Tenant

Tenants can terminate residential leases early under certain conditions, such as military service deployment, major damage to the property making it uninhabitable, and situations involving family violence. For example, residential tenants have the right to vacate and avoid liability following family violence under certain conditions outlined in Texas Property Code Section 92.016. This does not affect a residential tenant’s liability for unpaid rent before the lease termination, unless specified in the lease.

Month-to-Month Arrangements

After a lease expires, if no new lease is signed, it might automatically renew on a month-to-month basis, depending on the original lease terms or the landlord’s acceptance of rent payments, allowing either party to terminate the lease with proper notice, typically equal to the rent payment period.

Landlord’s Right to Terminate

Landlords may terminate the lease due to lease violations by the tenant, such as non-payment of rent or engaging in prohibited activities. The eviction process is formal and requires court involvement if the tenant disputes the termination.

Health Reasons

Landlords are required to consider tenant health issues reasonably, which might include allowing early termination if the home poses a health risk to the tenant.

In Texas, leases and rental agreements are subject to specific state regulations but don’t generally require formal registration with government authorities for validity. These agreements are binding contracts between landlords and tenants, detailing the conditions under which a property may be occupied. For residential leases, Texas law mandates certain disclosures such as the landlord’s name and address, parking and towing rules, lead-based paint disclosures for older properties, and rights related to repairs.

In Texas, a tenant can be forced to leave (evicted) prior to the originally agreed date in the event of default (beyond any applicable cure and notice periods), such as failing to pay rent or violating lease terms. The eviction process typically unfolds over several steps and can take anywhere from 23 to 30 days if no appeal is filed, but the duration may vary depending on whether the eviction is contested, the days courts are in session, and other potential delays.

The process starts with the landlord serving a three-day notice to vacate, followed by filing an eviction suit if the tenant does not comply. The tenant is then served with a citation, and a court hearing is scheduled within six to ten days after the citation is served. If the court rules in favour of the landlord, a writ of possession can be issued, allowing for the eviction to be executed by a constable. The timeline from serving the initial notice to vacate to executing the writ of possession and forcibly removing the tenant can span one to three months, depending on various factors.

A lease may be terminated by the governmental or quasi-governmental entity through eminent domain (condemnation). See 2.9 Condemnation, Expropriation, or Compulsory Purchase.

In Texas, landlords can pursue damages for breach of lease, including unpaid rent and costs for property damage. Texas law requires landlords to mitigate damages by attempting to re-lease the property. Security deposits are typically held in cash or as a letter of credit to cover potential damages or unpaid rent.

Landlords typically require security deposits to cover potential damages or unpaid rent, often held in cash or as a letter of credit. The form and conditions for holding and returning these deposits are usually dictated by state law and specified within the lease agreement.

Common pricing structures for construction projects in Texas include fixed price and cost-plus contracts. A fixed price contract sets a specific, agreed-upon amount for the entire project, providing a clear budget but placing the risk of cost overruns on the contractor. The cost-plus contract reimburses the contractor for actual costs plus a fee or percentage of the costs, offering flexibility but potentially leading to higher overall costs for the owner. Each method has its advantages, depending on the project’s scope and complexity.

A few of the common methods for assigning responsibility for the design and construction of a project include design-bid-build, design-build, and construction manager at risk approaches. Responsibilities are typically allocated based on the chosen method: design-bid-build involves separate entities for design and construction; design-build assigns both design and construction to a single entity to streamline the process; and construction manager at risk involves a construction manager overseeing the project from start to finish, acting as a consultant during the design phase and as the general contractor during construction.

Construction contract risk management in Texas transactions is influenced by specific anti-indemnity laws. These laws restrict the extent to which parties can transfer risk between each other in commercial construction contracts. The Texas Anti-Indemnity Act particularly limits broad-form and intermediate-form indemnities, except for specific scenarios like action-over claims. This leads to a hybrid form of indemnity, mixing limited and broad forms depending on the situation.

In Texas and elsewhere in the US, schedule-related risks in construction projects are often managed through contract terms. These contracts can include provisions for liquidated damages, where the parties agree in advance that the owner will receive a specified amount of money as compensation for delays if the contractor fails to meet agreed-upon milestones or completion dates. This arrangement aims to incentivise timely performance and compensate the owner for losses due to delays.

It is common for owners of Texas real estate to seek additional forms of security to guarantee a contractor’s performance on construction projects. This can include requiring performance bonds, letters of credit, parent guarantees, escrow accounts, or third-party sureties. Typically, both private and public owners will require a general contractor to post a performance bond to guarantee completion of a given project.

Contractors and designers on projects in Texas can place a mechanic’s lien on a property if they have not been paid for their work. To remove a lien, the property owner must ensure the contractor is paid the owed amount. The process involves filling out specific forms and meeting statutory requirements, including sending notices and possibly court involvement if disputes arise.

The requirements for a Certificate of Occupancy (CO) (or jurisdictional equivalent) before a commercial building or an individual lease space within a commercial building in Texas can be occupied, or if there are changes to an existing occupancy classification, are specific and regulated by local jurisdictions. For instance, in Fort Worth, any building or structure that is to be used or occupied must have a CO, as stated by the Fort Worth Administrative Building Code. This includes when there’s a change in the existing occupancy classification of a building, structure, or portion thereof.

Texas does not impose a VAT on the sale or purchase of corporate real estate. However, Texas does have a state sales and use tax on most goods and taxable services. Real estate transactions, particularly the sale of commercial real estate, are not subject to this sales and use tax.

Common practices include but are not limited to structuring deals in a tax-efficient manner, utilising 1031 exchanges for investment properties to defer capital gains tax, and taking advantage of available deductions and credits.

Municipal taxes in Texas can include property taxes, which vary significantly across different counties and municipalities. These taxes are based on the assessed value of the property and are used to fund local services like schools, fire departments, and infrastructure. A common feature of transactions which include real estate in Texas are agreements under Chapters 380 and 381 of the Texas Local Government Code, which permit government and quasi-governmental entities, including without limitation counties and school districts, to waive collection of assessed taxes on real and personal property held by contracting businesses in exchange for building projects within the given locality for the purpose of creating jobs or expanding infrastructure.

Texas does not have a state income tax, which means there is no state income tax withholding for foreign investors on real estate transactions. However, foreign investors are subject to federal FIRPTA requirements, which can include withholding of taxes on the income generated from real estate investments and capital gains on the sale of property.

In Texas, real estate owners can benefit from several tax deductions and exemptions. For homeowners, this includes the homestead exemption, which can reduce the taxable value of their primary residence. Real estate investors can benefit from deductions for mortgage interest, property taxes, operating expenses, depreciation, and potentially qualifying for a 1031 exchange which allows deferring capital gains taxes when investing proceeds into another property.