The primary source of real estate law in Texas is the Texas Property Code, a statutory code that governs a wide range of issues related to property ownership, rights and transactions. Such issues include conveyances, residential and commercial leases, easements, adverse possession, property owners and condominium owners associations, restrictive covenants, liens, evictions and foreclosures, and trusts.

Other important statutory codes include:

• the Texas Local Government Code, which contains laws pertaining to both city and county platting, zoning and other land-use regulations;
• the Texas Civil Practice and Remedies Code, which establishes the civil procedures and guidelines governing the enforcement of many property rights;
• the Texas Natural Resources Code, which governs the Texas survey system, the regulation of oil, gas and other minerals, and state-owned lands; and
• the Texas Water Code, which primarily governs environmental regulation, local water and utility districts, and water rights.

These statutory codes are supplemented by:

• other specific Texas statutes;
• common law (ie, court-made case law);
• regulations adopted by state agencies; and
• local ordinances such as building and zoning codes.

Federal statutes and regulations also govern a number of areas of real estate ownership and operation, including environmental matters, fair housing and consumer protection.

Residential

Texas’ residential real estate market stabilised in 2024, with the number of home sales increasing by 1.6% over 2023, while home prices and mortgage rates remained largely steady. This was driven by a surge in sales outside of Texas’ four largest metro areas (Houston, Dallas, Austin and San Antonio), with total home sales outside of those markets surging by 33.5% in December 2024.

Office

Commercial office markets in Texas continue to undergo a dramatic shift as post-COVID workplace policies affect tenant demand. Office-using employment has increased by more than 500,000 jobs since 2020, but office use remains at two-thirds of pre-COVID levels. The impact varies across Texas’ local markets as well. While there has been a general shift toward more suburban office leasing, Austin and San Antonio have seen substantially higher rent increases in Class A+ and Class A buildings compared to Class B and Class C buildings, while Dallas has seen rents increase the most in Class A+ and Class C buildings, and rent increases in Houston have generally been the same across all building classes.

Other

The industrial real estate sector in Texas continued its upward trajectory in 2024, with significant development of large-scale warehouses and fulfilment centres to serve the continued growth of e-commerce. Mixed-use developments continue to become more popular in Texas’ major cities, and retail leasing has remained strong, with a shift toward more omni-channel retail that integrates online and offline shopping as well as experiential retail that focuses on more immersive in-store experiences.

The Texas Legislature is currently in session, and the following two real estate issues are high on the legislative agenda.

Housing Affordability

There is bipartisan support for addressing the housing affordability crisis in Texas. Most legislative proposals currently under consideration focus on increasing the state’s housing inventory, by:

• reducing the minimum lot sizes that certain cities can require to increase housing density and affordability;
• modifying zoning laws to permit the construction of duplexes, townhouses and smaller apartments in areas zoned for single-family use or for commercial use; and
• speeding up permits to convert commercial buildings into housing.

Property Tax Reform

Texas legislators are considering a package of bills intended to reduce the property taxes of school districts, which are responsible for the largest portion of most owners’ tax bills. Passage will depend on agreement as to the portion of the state’s budget surplus that will be sent to school districts to replace such reduced property taxes.

There are also efforts to enact a ban on the purchase of Texas real estate by governmental entities of China, Iran, North Korea and Russia, by companies headquartered there, and possibly by individuals domiciled there. Similar efforts failed in the last legislative session, and it is unclear if the latest efforts will have any more success.

In Texas, real property rights include the following.

Fee and Similar Estates

• Fee simple absolute is the most complete form of ownership, granting the owner indefinite duration and the greatest control over real property.
• Fee simple conditional is similar to fee simple absolute but comes with specific conditions. If these conditions are violated, the property may revert to the original grantor or pass to a third party.
• Life estate: this interest lasts for the lifetime of a specified individual. Upon his or her death, the property typically passes to another designated person or reverts to the original grantor.
• Future interests: these are rights to property ownership and possession that will begin in the future, such as reversionary interests.

Leases, Easements and Similar Interests

• A leasehold estate is a temporary right to occupy and use property, typically established through a lease agreement. The duration and terms are defined within the lease contract.
• Easements are exclusive or non-exclusive rights to use or access someone else’s property for specific purposes, such as utilities, access or drainage. Easements are typically established through easement agreements, but in some circumstances they may arise by operation of law.
• Licences are similar to easements, and grant permission to use another person’s property for a specific purpose, but often on a revocable or short-term basis. They are considered contractual rather than property interests.

Minerals, Water and Similar Rights

• Mineral rights pertain to the ownership of oil, gas or other minerals beneath the surface of the property. In Texas, such rights typically involve oil and gas.
• Geothermal energy resources rights relate to steam, heat and other underground products of geothermal processes.
• Pore space rights: Texas law is currently unclear as to whether underground spaces, such as pores within rocks (which may be used for carbon sequestration), are owned by the surface (fee) owner or by the mineral estate owner.
• Water rights: Texas law recognises ownership rights in two types of water resources.
1. Groundwater – ie, water underneath a tract of land. The landowner may extract such groundwater, subject to possible local regulation.
2. Surface water – ie, water in rivers, streams, lakes and other surface bodies, which is owned by the state. Permits to use such water are granted to private parties, with priority based on the age of the permits (subject to rights of adjacent landowners to use surface water for domestic and livestock purposes).
• Air rights allow the owner to use the space above the property, often for construction or airspace leasing.

Concurrent Estates

Ownership is shared by two or more individuals, including:

• a Tenancy in Common where each owner holds an undivided interest in the property, which can be passed to heirs; and
• a Joint Tenancy with Right of Survivorship where owners have equal shares – upon the death of one owner, the surviving owners automatically acquire the deceased's interest.

The transfer of real estate title is governed primarily by the Texas Property Code and other state law.

Deeds and Other Transfers of Real Property

Transfers of most types of real property, including fee estates, are effected through the execution and delivery of a deed. When this occurs, the person to whom the property is transferred acquires ownership from the seller, but has no protection against the claims of most third parties unless the transfer is recorded (as described below).

Real property is not registered in Texas. Instead, transfers of real property are recorded in the official public records of the county in which the property is located, which are maintained by the County Clerk. Such recordation puts third parties on “constructive notice” of the document and its contents.

To be recorded in the public records, the document must be executed and acknowledged before a notary public, or otherwise proved according to law.

Texas authorises the remote notarisation and electronic recording of documents.

Title Warranties in Deeds

The deed will typically include one of the following types of title warranty.

• A general warranty of title is the strongest type of title warranty, and protects the buyer against title defects regardless of who created them. General warranties are standard in sales of residential real estate.
• A special warranty of title is standard in commercial real estate transactions, and only protects the buyer against title defects created by the seller or by persons acting through or under the seller.

In most deeds, Texas law also implies a warranty against title defects created by the seller and against encumbrances.

Texas also permits quitclaims as well as “deeds without warranty”.

Title Insurance

Title insurance is commonly used in Texas. Insurable interests include fee and similar interests, leasehold interests and easements, but not mineral interests. Loan policies are also available to insure liens that are secured by property interests, including the priority of such liens.

In the vast majority of US states, title insurance is based on standardised forms issued by the American Land Title Association (ALTA). Texas, by contrast, is one of the few “non-ALTA states”, using Texas-specific forms. Texas offers fewer endorsements than ALTA states and Texas title insurance rates are strictly regulated, cannot be negotiated, and apply to all insurers.

In most real estate transactions, the seller will pay the base premium for a title insurance policy, and the purchaser will pay for any endorsements to that policy.

Surveys

Although Texas is a non-ALTA state for title insurance purposes, it is common for surveys of commercial real estate to comply with the ALTA/National Society of Professional Surveyors (NSPS) survey standards. When an ALTA/NSPS survey is not required, surveyors typically comply with standards established by the Texas Society of Professional Surveyors.

Typical due diligence conducted by buyers will vary depending on whether the property being acquired is improved or unimproved, and further depending on other factors such as whether the property is income-producing (and tenants will be inherited) and whether environmental conditions may exist.

Due diligence typically includes examination of a survey, a title commitment and recorded title exception documents, and obtaining and reviewing a Phase I environmental site assessment. Depending on what the Phase I assessment reflects, it may be necessary to obtain a Phase II environmental site assessment and to test for soil or groundwater contamination or the presence of asbestos. Again, depending on the site, the assessment may also include wetlands and endangered species determinations.

Improved properties will typically include a report on the physical condition of the property, including foundation, roof, structural elements, mechanical systems, plumbing and HVAC. In jurisdictions outside of Houston, a zoning report should also be obtained. In any event, a review of local zoning and land use regulations (public and private) should be part of the due diligence process, as should a financial analysis of the property’s income, revenue and potential.

For certain developments, an analysis of mineral ownership and surface rights may be necessary. In Texas, the mineral estate is dominant, and mineral owners and lessees generally have the right to exploit minerals from the surface, absent the waiver of that right.

Purchase agreements typically give the buyer a period in which to terminate the agreement for any reason and to receive a return of its earnest money. The length of the period is negotiable, but 30 to 60 days is common. This termination right must be supported by non-refundable “independent consideration” paid by the buyer.

In Texas, a typical commercial real estate purchase and sale transaction is structured AS IS and with limited representations and warranties from the seller. The extent of representations and warranties is negotiated between buyer and seller. Typically, the purchase and sale agreement may include representations regarding authority to sell, compliance with law, no litigation and others, but (depending on the negotiations) may not include representations and warranties regarding the physical and environmental condition of the property.

Typical buyer remedies include termination and a return of the earnest money deposit, or specific performance (provided that suit is filed during a limited period), and may also include the recovery of certain types of actual out-of-pocket due diligence costs. After closing, a buyer may also recover actual damages (sometimes capped) that are incurred for a breach of representations and warranties by the seller. False representations can also result in fraud liability under Section 27.01 of the Texas Business and Commerce Code.

The seller’s remedy is typically limited to termination of the agreement and recovery of the earnest money deposit as liquidated damages.

Sellers often negotiate a limitation on the survival of the representations and warranties to an agreed period after closing, typically between six and 18 months, and require the buyer to notify the seller of a breach during that period. Section 16.070(a) of the Texas Civil Practice and Remedies Code, however, provides that a contract may not limit the time for bringing suit on the contract to less than two years. It is unclear how this statutory provision applies to the common practice of requiring a notice of breach in less than two years.

Representations and warranties insurance is not commonly used in Texas real estate transactions.

The most important areas of Texas law for an investor to consider when purchasing real estate will depend in part on the nature of the investment itself – eg, is the property producing income, is the plan to develop a residential or multifamily community, retail, office or industrial project, and does the plan involve operating, leasing, holding or selling and over what period of time?

Depending on the nature of the investment and the plan itself, prioritising the areas of law in terms of importance will vary, but all areas of real property law are important, including:

• title, zoning, land use, regulations, leasing and landlord/tenant issues;
• environmental laws – conducting needed assessments for liability protection and identifying potential contamination and development restrictions, including wetlands and endangered species;
• business organisations law – entity selection for acquisition and operations;
• tax law, for capital gains and margin tax issues;
• oil and gas law, regarding surface use protection from mineral owners; and
• contract law.

Owners and operators of contaminated real property can be held liable to remediate hazardous substances under existing federal and state law. In order to become protected as an innocent landowner, a Phase I environmental assessment must be performed before a purchaser acquires real property. Depending on what is disclosed in that assessment, it may also be necessary to have a Phase II environmental assessment performed.

State protections that may be available to some purchasers include those under two programmes administered by the Texas Commission on Environmental Quality:

• the Innocent Owner/Operator Program; and
• the Voluntary Cleanup Program.

See 4. Planning and Zoning.

Private land may be taken in Texas by eminent domain through condemnation proceedings instituted by authorised governmental entities, quasi-governmental entities such as municipal utility districts, and public utilities, provided the taking is for a public use and just compensation is paid for the taking. Texas law prohibits takings to enhance tax revenues or foster economic development.

The process is initiated by written notice given to the property owner. If the parties fail to agree on just compensation, the matter is litigated in the courts to determine the amount of compensation that is appropriate.

In Texas, there are nominal filing fees that vary from county to county and are applicable to the filing of any documents in the real property records. However, real estate transactions are not subject to transfer taxes, document, stamp or similar taxes or fees.

Similarly, Texas does not impose any transfer or similar taxes or fees on transfers of shares in entities, including entities owning real estate.

Foreign investors must comply with any applicable US federal laws. Texas law, however, does not impose any restrictions or requirements on foreign investors purchasing Texas real estate.

Commercial real estate financing can be structured through a variety of methods, including traditional bank loans, private investor financing and seller financing, each secured by property being acquired or developed. Financing may also include mezzanine loans or mortgage-backed securities, particularly with a portfolio or equity transaction. Each method of financing has varying terms depending on factors such as the type of lender, the loan size, the borrower’s creditworthiness and the type and risk of the investment.

In Texas, a deed of trust (which is a mortgage instrument) is the document used to grant a lien in real property. The lien is granted in favour of the lender as security for payment and performance of the borrower’s obligations.

Technically, a deed of trust is granted to a trustee for the benefit of the lender. The trustee’s role is nominal, unless the borrower defaults and the lender exercises its remedies, in which case the primary role of the trustee is to conduct the non-judicial foreclosure sale of the property.

To be effective against third parties, the deed of trust must be recorded in the county records. Like a deed or any other document to be recorded, it must be executed and acknowledged before a notary public (or otherwise proved according to law).

The lender will also typically take a security interest in tangible and intangible personal property located at or relating to the real property being acquired or developed. This may be created in the deed of trust or by a separate security agreement. The security interest is perfected by the filing of a UCC-1 financing statement.

If the property is or will become income-producing, the lender will typically also secure the loan with an assignment of rents, which can be included in the deed of trust or created by separate instrument.

If a mezzanine loan is involved, equity ownership in the borrower will be pledged to secure the loan, evidenced by a separate security agreement.

Foreign lenders must comply with applicable US federal laws, but there are no specific legal restrictions on foreign lenders being granted liens or security interests with respect to Texas real estate.

Texas does not impose a mortgage tax or a documentary transfer tax on real estate transactions, including with respect to the granting or enforcement of liens and security interests. Nominal recording fees that vary from county to county apply to the recordation of security instruments, and nominal notary public fees may be charged.

A borrower entity obtaining a real estate financing loan must establish that it:

• properly exists and is in good standing under the laws of its state of formation;
• is in good standing in Texas (if the entity was not formed in Texas); and
• has the requisite power and authority to enter into the subject loan transaction.

A borrower may be required to submit its governance documents for review, and to provide corporate resolutions or consents and other documents relevant to the loan transaction.

The US Patriot Act requires lenders to verify the identity of customers to ensure they are not doing business with prohibited persons. Under this Act, financial institutions must:

• implement reasonable procedures to verify the identity of a person seeking to open an account;
• maintain records of the information used to verify the person’s identity; and
• determine whether the person appears on any government-provided lists of known or suspected terrorists or terrorist organisations.

“Customers” refers to individuals, corporations, partnerships, trusts, estates and any other entities recognised as legal persons.

Under Texas law, real property foreclosures may be non-judicial, quasi-judicial or judicial. Quasi-judicial foreclosures are limited to:

• a home equity loan, reverse mortgage or home equity line of credit;
• a tax lien transfer or property tax loan; or
• a property owners’ association assessment.

Judicial foreclosure requires the filing of a civil lawsuit and a court order of sale.

The most common foreclosure method in Texas is non-judicial foreclosure, which is significantly quicker and more cost-effective than judicial foreclosure. It is a contractual right arising only where a power of sale is expressly granted by the borrower in the deed of trust. It allows a trustee to proceed with a non-judicial sale of the property if the borrower is in breach of a material obligation under the deed of trust or promissory note.

If a borrower has not waived its right to receive notices of default, presentment and the lender’s intent to accelerate and foreclose, the lender must send appropriate notices to the borrower before it may foreclose, in order to give the borrower an opportunity to cure the default before foreclosure can occur, which is equal to the cure period stated in the deed of trust, and no less than 30 days if attorneys’ fees are sought. Foreclosure sales are conducted on the first Tuesday of each month. At least 21 days before the foreclosure sale, the lender must give notice of the sale which, among other statutorily required items, must be:

• posted at the courthouse in the county where the property is located;
• filed with the county clerk; and
• served on the defaulting borrower.

If a federal tax lien has attached to the property, notice of the foreclosure sale must be given to the IRS at least 25 days before the sale; otherwise, the tax lien will not be extinguished by the foreclosure.

It is possible for existing secured debt to become subordinated to newly created debt by agreement. Subordination agreements will cause an existing lender to become lower in lien priority and repayment. This can occur in situations where a borrower is seeking additional financing or is restructuring its debt to raise additional financing.

New lenders may require existing debt to be subordinated to their loan before they will extend credit. The existing (subordinated) lenders must agree to any subordination before the newly created debt will have priority. A subordinated lender may seek to negotiate a loan modification or other concession from its borrower in return for its agreeing to a lower priority.

The Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA) imposes broad liability on owners and operators of facilities where hazardous substances were released or disposed of. It includes a secured creditor exemption that protects lenders from owner/operator liability if they hold ownership in a CERCLA facility primarily to protect their security interest, and they do not “participate in the management of the facility”, meaning that their actions are limited to those of a typical lender, such as inspecting the property, providing financial advice or monitoring the borrower’s financial condition. The lender is barred from undertaking responsibility for hazardous substance handling or disposal practice, and from exercising control at a level similar to that of a manager of the facility. Texas has enacted similar state-level exemptions for secured creditors.

In Texas, a lender’s lien or security interest is still valid even if the borrower becomes insolvent. A borrower’s bankruptcy is typically an automatic event of default under a deed of trust that results in immediate acceleration of the debt (ie, foreclosing). However, this type of provision is unenforceable under the Bankruptcy Code as a so-called “ipso facto” clause. A borrower’s bankruptcy will trigger the Bankruptcy Code’s automatic stay, which prevents the lender from either foreclosing on the property or exercising other remedies against the borrower. The lender may nevertheless be able to seek from the bankruptcy court relief from the automatic stay to enforce its lien or security interest.

Texas does not impose a mortgage tax or a documentary transfer tax in connection with mortgage loans or mezzanine loans related to real estate, including the granting or enforcement of liens and security interests. Nominal recording fees that vary from county to county apply to the recordation of security instruments.

Planning and zoning are primarily governed by a combination of state statutes and local authority. Significant control is delegated to municipalities and counties. The Texas Local Government Code grants cities the power to regulate land use, building heights, lot sizes and population density through zoning ordinances. Municipal ordinances govern subdivision planning and development standards within a city’s jurisdiction, including its extraterritorial jurisdiction. The Texas Property Code regulates property owners’ associations, which can impose additional restrictions beyond municipal zoning, but those are private agreements rather than governmental controls.

Texas does not impose a uniform zoning code. The City of Houston does not have zoning per se, but is largely regulated through private restrictions and municipal ordinances governing subdivision planning and non-zoning land use restrictions. Counties in Texas have limited zoning power compared to municipalities, focusing on subdivision rules rather than zoning. State agencies like the Texas Commission on Environmental Quality impose additional requirements that intersect with local zoning, such as flood plain management.

Legislative and governmental controls over the design, appearance and method of construction for new buildings or the refurbishment of existing buildings are affected by a combination of state laws, local ordinances and private restrictions. These controls vary significantly depending on whether the property is in a municipality, its extraterritorial jurisdiction or an unincorporated county area, and also whether the property may be located in Houston; see 4.1 Legislative and Governmental Controls Applicable to Strategic Planning and Zoning.

Municipalities may regulate building design and appearance through zoning ordinances. This can include aesthetic standards and construction methods, although the focus is on land use. Subdivision planning and development standards can indirectly affect construction methods by requiring infrastructure like roads, drainage and utilities to meet required specifications. Cities may adopt versions of national building codes, with permitting and inspection requirements to ensure compliance with codes and ordinances. Certain historic buildings or historic districts may require special approvals regarding renovations.

Planning and zoning controls in Texas are decentralised, with municipalities having the most authority through zoning ordinances and subdivision rules, while counties play a narrower role focused on development standards. State law provides the enabling framework; see 4.1 Legislative and Governmental Controls Applicable to Strategic Planning and Zoning.

Obtaining development entitlements in Texas for a new project or a major refurbishment involves processes governed by local government regulations, primarily at the municipal or county level, depending on the project’s location. Typically, the process includes securing approvals such as zoning and subdivision changes, permits, plats and site development plans, including to address specific concerns expressed by the agencies or public. Public hearings are often required.

There is a right in Texas to appeal a relevant authority’s decision regarding an application for development permission or the carrying out of a designated use. The process depends on the type of decision, the jurisdiction and the specific issue involved. Zoning decisions can be appealed to the local board of adjustment. If administrative remedies are exhausted or unavailable, judicial relief can be sought in Texas courts.

In Texas it is possible to enter into agreements with local or governmental authorities, agencies and utility suppliers to facilitate development. These agreements help to ensure compliance with regulations, secure infrastructure support and address community or environmental impacts.

Examples include:

• development agreements with municipalities or counties;
• utility service agreements with municipalities, water districts or private utility companies;
• impact agreements with municipalities or counties;
• economic development agreements;
• Municipal Utility District agreements;
• Industrial District agreements; and
• transportation agreements.

Restrictions on development and designed use are enforced in Texas through a combination of local zoning ordinances, building codes and state regulations. Because of Texas’s decentralised approach allowing municipalities to tailor regulations to their specific needs, enforcement can vary significantly from location to location.

Any type of entity may hold real estate in Texas. This section describes the entities typically used in Texas for directly acquiring ownership of a parcel of land – ie, the “titleholder entity”. Please see 5.2 Main Features and Tax Implications of the Constitution of Each Type of Entity for a description of the entities that are typically used as investment structures for real estate acquisitions, and which in turn own the titleholder entity.

Commercial real estate in Texas is typically acquired and held in a new, single-asset limited liability company (LLC), to protect the buyer’s existing assets from environmental or other liabilities of the purchased property (a new “series” of a “series LLC” may also be used, but this is less common). The LLC is disregarded as a separate entity for federal tax purposes. Significantly less often, a limited partnership (with an LLC or corporation acting as its general partner) is used to hold title.

Operating companies (as opposed to real estate investors) will sometimes acquire a new property directly in an existing entity that owns other assets.

Although title to Texas real estate is typically acquired and held in a single-asset LLC, the investment or operating “vehicle” that owns such titleholding entity can take many forms. The most common in Texas are the:

• LLC;
• limited partnership; or
• corporation.

All of these entities may have one or more owners, except that a limited partnership must have at least one general partner and one limited partner. The general partner is typically an LLC but could be a corporation, which may be wholly owned by one or more limited partners.

In each case, all owners are protected from the entity’s liabilities, except that the general partner of a limited partnership has no such protection. Using a special-purpose LLC or corporation as the general partner, however, accomplishes the same goal.

All of these entities are subject to the Texas franchise tax, which is based on the entity’s marginal revenue.

Regardless of which type of entity is used, the most important question is usually what classification the entity will have for federal income tax (FIT) purposes – either by “default” (automatically) or by “election” (through a voluntary filing with the IRS). The four principal federal tax classifications are as follows.

Disregarded Entity

The entity is disregarded for FIT purposes, with its assets and income attributed to its sole owner. This is the default classification of:

• an LLC with a sole owner; or
• a limited partnership with a sole limited partner, and a sole general partner that is a disregarded entity of the sole limited partner.

Partnership

The entity is a “pass-through” for FIT purposes: its owners pay FIT on the entity’s income, but the entity itself does not pay FIT.

This is the default classification of an LLC with multiple owners, or a limited partnership that is not a disregarded entity.

S Corporation

Like a partnership, the entity is a “pass-through” for FIT purposes. However, there are strict federal requirements regarding owners and shares that must be met in order to elect and maintain this classification.

This classification may be elected by any corporation, LLC or limited partnership, if it meets the requirements.

C Corporation

The entity is subject to federal “double taxation”: it pays FIT on its income, and its owners pay FIT on dividends they receive from the entity.

This is the default classification of a corporation. This classification may also be elected by any LLC or limited partnership.

A real estate investment trust must be formed as a corporation or trust and must meet federal REIT rules, including the distribution of at least 90% of its income to its shareholders. There is no tax at the entity level, with income passing to the shareholders and dividends being deductible by the entity. REITs are subject to Texas franchise tax if formed as a corporation.

REITs in Texas may be either public or private and are available to foreign investors. REITs must comply with federal requirements in order to maintain their status.

There are no minimum capital requirements in Texas for the entities listed in 5.2 Main Features and Tax Implications of the Constitution of Each Type of Entity.

Governance requirements for partnerships, LLCs and corporations are set forth in the Texas Business Organizations Code and may also be set forth in written partnership agreements, company or operating agreements, by-laws and shareholders’ agreements, in addition to certificates of formation. Governance requirements for trusts are set forth in the Texas Trust Code (part of the Property Code) and trust agreements.

The federal Corporate Transparency Act (CTA) would have imposed an important new governance requirement on many private companies by requiring reporting of their beneficial owners, but a recent rule issued under the CTA renders the CTA inapplicable to US entities.

Taxable entities formed or doing business in Texas are subject to Texas franchise tax. The income of certain entities below a designated threshold is not subject to franchise tax. As indicated in 5.2 Main Features and Tax Implications of the Constitution of Each Type of Entity, certain entities are subject to a filing fee upon formation, and foreign entities qualifying to do business in Texas must file a registration fee; certain annual reporting may also be required, but no fee is applicable.

The most common types of arrangement for the temporary use of real estate are leases, licences and easements. A lease grants the lessee exclusive possession of property for a limited duration. Licence agreements are usually for a substantially shorter duration than a lease and are not considered an interest in real property, and are used to grant the right to occupy property for a limited duration for a specific purpose. Easements grant the exclusive or non-exclusive right to use property (but not the right to occupy) for a specific purpose.

Net Lease

The net lease is the most prevalent type of commercial lease in Texas. In addition to base rent, a tenant under a net lease paysa proportionate share of the landlord’s operating expenses, which may include property taxes, insurance and maintenance costs, and which vary over time. Net leases are widely used in all commercial sectors, including office, retail and industrial.

Gross Lease

A tenant under a gross lease pays a fixed rent amount, and the landlord is responsible for all operating expenses. Gross leases are often used in office leasing, but rarely in other sectors.

Percentage Lease

Under a percentage lease, a tenant pays a specified percentage of its revenues as rent. The percentage rent will usually be payable in addition to a base rental amount, which will typically be lower than in other types of leases. Percentage leases are most often seen in the retail and restaurant sectors.

Lease terms and rental amounts in commercial leases are largely unregulated in Texas and are negotiable by the parties. For residential leases, the Texas Property Code imposes certain obligations and restrictions on landlords, and prohibits discrimination in leasing, but lease terms are mostly negotiable and rental amounts are unregulated.

The duration of a lease is negotiable and varies depending on the nature of the business. For office leases, three to five years is common (but ten years is not uncommon), while the duration of a ground lease will typically be 15 to 25 years or more. Renewal or extension options are also frequently included in leases.

Maintenance of a tenant’s leased premises will usually be the responsibility of the tenant, although landlords will often be responsible for the maintenance of structural components and building systems within the premises.

Rent is usually payable monthly in advance, although parties may negotiate for rent to be payable quarterly or annually.

Rent may remain the same throughout a lease’s term, or the parties may negotiate for it to periodically escalate during the term, often based on an inflation index or operating costs, or by an agreed percentage.

The most common methods for determining rent increases are fixed percentage increases, adjustments based on changes on an inflation index, and increases in market or appraised rental value, which is typically determined by a procedure negotiated between the parties when the lease is initially executed.

Texas does not impose VAT or substantially similar tax on rents.

Tenants in Texas will usually pay a security deposit (typically equal to one month’s rent) at the beginning of a lease. Depending on the financial strength of the tenant, a landlord may also require one or two months of pre-paid rent and/or operating expenses (if the lease is a net lease).

A landlord will generally be responsible for paying to maintain and repair common areas. However, a tenant under a net lease is required to reimburse the landlord for the tenant’s pro rata share of those costs.

For single-tenant properties, the tenant will usually be required to contract directly with utility and telecommunications providers. For multi-tenant properties, landlords will generally contract for utilities and charge tenants for their usage. However, tenants may be required to contract directly for specified utilities and/or telecommunications services.

A tenant of a single-tenant property will typically be responsible for the payment of real estate taxes applicable to the property. This may be accomplished by the tenant agreeing to pay taxes directly to the taxing authority, or the landlord may be required to pay taxes and then seek reimbursement from the tenant.

For multi-tenant properties, landlords will be responsible for the payment of applicable real estate taxes, but tenants will usually be required to reimburse their pro rata share.

Tenants in single-tenant buildings are usually required to carry property insurance, covering physical damage to the premises, and liability insurance, which provides financial protection in case the tenant is found liable for injury or damage to people or property.

In multi-tenant buildings, landlords will carry property insurance, although it is often not actually a lease obligation, while tenants will be required to carry liability insurance covering their premises and may be required to carry property insurance insuring their personal property within the premises.

Commercial tenants in Texas have largely been unable to recover damages attributable to COVID-19 under business interruption insurance policies, as most business interruption insurance policies only covered losses resulting from interruption of business caused by a direct physical loss or damage to covered property. Several recent cases have found that COVID-19 did not cause a direct physical loss or damage to property.

Landlords may and usually do impose restrictions on how a tenant may use its premises, by specifying the tenant’s permitted use in the lease and prohibiting the tenant from using the premises for any other purpose without the landlord’s consent. Restrictive covenants (ie, private restrictions on the use of real property often imposed by a developer or property owner) and local zoning laws also limit how a tenant may use its premises.

Tenant alteration rights are freely negotiable in Texas and typically vary depending on the type of premises and/or lease. For a ground lease, a tenant may be required to construct its own building, while under a multi-tenant lease a tenant may be completely prohibited from making any alterations without the landlord’s consent. Landlords may impose any conditions they desire, but the most common are the right to review plans and the right to approve the tenant’s contractors.

The Texas Property Code has separate rules for residential and commercial leases. For residential leases, the Property Code imposes numerous obligations on landlords for the protection of tenants’ rights and their health and safety, and provides tenants with remedies for certain landlord violations.

All leases that are not for residential purposes are classified as commercial leases, and are much less heavily regulated. For commercial tenancies, the Property Code imposes limitations on a landlord’s ability to lock out a tenant or cut off their utilities, and requires landlords to return security deposits within a specified time.

A tenant becoming insolvent may be an event of default under a lease, entitling the landlord to pursue legal remedies. However, the practical impact of a tenant’s insolvency depends primarily on whether the tenant has filed for bankruptcy. Under bankruptcy law, an automatic stay arises the moment a tenant files for bankruptcy, which prohibits a landlord from evicting the tenant regardless of what the lease provides. Upon filing for bankruptcy, a tenant (or bankruptcy trustee) has 120 days to accept or reject the lease; this period may be extended for an additional 90 days for good cause. During this period, a landlord cannot evict a tenant without the approval of the bankruptcy court.

A tenant’s right to occupy the premises after termination or expiration typically depends on the terms of the lease. It is common for commercial leases to contain a holdover provision, which may allow a tenant to remain on the premises after expiration on agreed-upon terms. For leases without a holdover provision, a tenant does not have a right under Texas law to remain on the property after the termination or expiration of the lease. However, such a right may arise if the tenant continues to pay rent and the landlord continues to accept such payments.

Under Texas law, a tenant does not have the right to assign its leasehold interest without the landlord’s consent. However, most commercial leases will include assignment provisions permitting assignment to certain types of pre-approved assignees. The most common requirements that landlords impose on assignments include the right to review the proposed assignee’s financial strength, the requirement that the assignee assumes the tenant’s obligations in writing, and (in the case of many assignees) an agreed personal guaranty.

For commercial leases, each party usually has the right to terminate the lease if the other party defaults and fails to cure its default within a specified period of time. If a landlord terminates due to a tenant default and the tenant refuses to leave, the landlord must evict the tenant via judicial process.

For residential leases, in addition to termination due to a landlord default, tenants have the right to terminate the lease under certain conditions, such as if:

• the landlord has failed to keep the property habitable;
• the tenant is a victim of domestic violence;
• the landlord fails to provide essential services; or
• the tenant is in the military and is called to active duty.

Leases in Texas do not need to be registered with local or state authorities. They must be executed by the parties or their authorised representatives, but no witnesses or acknowledgements are required. Leases are usually not recorded in property records; however, memoranda of leases are sometimes recorded, particularly in the case of ground leases or other significant leases. A memorandum of lease must be executed and acknowledged before a notary public in order to be accepted for recording. No taxes are payable at recording, but a nominal recording fee will be imposed.

Tenants can be evicted prior to the expiration of their lease if they breach their lease and fail to cure their default within the time specified in the lease. There are procedural requirements with which landlords must strictly comply. The eviction process can take anywhere from 23 to 30 days from the initial notice to vacate (if the tenant does not appeal), to three months or even longer if the tenant appeals or there are court delays.

A lease may be terminated by the government or by a quasi-governmental entity through eminent domain. The eminent domain process typically takes between 12 and 18 months and permits any party with an interest in the affected property to pursue claims for a condemnation award. Tenants are entitled by law to compensation for the lost value of their remaining lease term and for moving expenses.

Landlords in Texas have a legal duty to take reasonable steps to attempt to relet premises and mitigate their damages in the event a tenant defaults under a lease. In addition to pursuing a claim for damages, Texas landlords have a statutory lien, and will usually have a contractual lien contained in a lease, creating a security interest in their tenants’ personal property located in the leased premises. After following requisite statutory and contractual requirements (depending on whether the statutory or contractual lien is being foreclosed), they can seize and sell the tenant’s personal property after a tenant default to help cover damages.

Security deposits are held in cash, but in certain circumstances landlords may accept a letter of credit in addition to or in lieu of a security deposit.

Fixed Price

With a fixed price contract, a predetermined price for the entire project is agreed upon, based on existing plans and specifications and well-defined requirements. The owner has cost certainty because the contractor assumes the risk of cost overruns. Agreed change orders may revise the fixed price.

Cost-Plus

With a cost-plus contract, the contractor is reimbursed for the actual costs of labour, materials and equipment, plus an agreed fee which is either a fixed amount or a percentage of the costs. With a cost-plus price contract, the owner assumes the risk of cost overruns.

Guaranteed Maximum Price

The foregoing are the most common structures, but a guaranteed maximum price contract is sometimes used. This represents a hybrid of the most common contracts, with the contractor providing a cost-plus estimate with a guaranteed maximum price not to be exceeded. The contractor will absorb overruns above that maximum, but savings below it are shared between the contractor and the owner by an agreed percentage.

The different methods for assigning responsibility for the design and construction of a project are as follows.

• Design-Bid-Build: this is the most common method for assigning design (architect/engineer) and construction (contractor) responsibilities, where separate entities are involved for each discipline.
• Design-Build: both disciplines of design and construction are assigned to a single entity.
• Construction Manager at Risk: a construction manager is engaged to oversee the project from start to finish. The construction manager acts as a consultant during the design phase and as the general contractor during construction.
• Construction Manager as Agent: the construction manager acts as the owner’s agent. The project is managed without the construction manager taking on construction risk, as all trades are contracted directly by the project owner. The architect/engineer is responsible for design and the contractor is responsible for construction.

Indemnity provisions are commonly used in construction contracts to allocate the risk of third-party claims, primarily arising from bodily injury, death or damage to property. Texas has an anti-indemnity statute that prohibits broad-form indemnity (ie, a promise to indemnify a person or entity against their own fault or negligence) in most construction contracts, although there are exceptions for certain types of projects or claims. Other types of construction risk on a project are managed by warranties, damage waivers (eg, waivers of consequential damages), limitations of liability, retainage, insurance and bonds. Legal limitations include the aforementioned anti-indemnity statute and those imposed by contract and public policy constraints.

Schedule-related risk of construction projects is managed by contract. The parties may agree that an owner is entitled to compensation if agreed milestone and completion dates are not achieved. In such event, the contract may include a reasonable liquidated damages provision, perhaps allowing extra time for events such as force majeure and weather delays, and may also include detailed scheduling, performance bonds, contingency time, acceleration agreements and notice requirements.

It is typical in Texas for a performance and payment bond to be required in a public project. Performance bonds are also common in private commercial projects. Parent guarantees and letters of credit are less common, but they are used. The use of escrow accounts and standalone third-party sureties is more rare. Unless proper bonding is in place, the Texas Property Code requires 10% retainage for private projects, mitigating the need for additional security in some cases.

In Texas, architects, engineers and contractors (and subcontractors and suppliers) are permitted to file mechanic’s and materialmen’s liens for non-payment, provided that statutory requirements are followed.

Owners can remove filed liens by paying the amount due and recording a release, through waivers, a bonding off procedure, lawsuits or summary motions.

Some counties have no certificate of occupancy requirements and certain non-residential farm buildings may be exempt from such certificates. However, certificates of occupancy are required in most cities before a project may be used for its intended purpose. The certificates ensure fire, health and environmental safety and code compliance for specific uses. There are inspection requirements prior to issuance, and penalties for non-compliance.

No VAT or equivalent tax is payable in Texas on the purchase or sale of commercial real estate. Real estate in Texas is subject to annual property taxes that are assessed by local taxing jurisdictions and vary from location to location. Taxes are assessed annually based on the property’s appraised value. Commercial real estate is not subject to Texas state sales and use tax.

There are no transfer, stamp or similar tax liabilities in Texas on acquisitions or sales of real estate, including large real estate portfolios. Standard tax mitigation strategies apply with respect to the acquisition and disposition of real estate, including, when available or appropriate, utilising Section 1031 “like-kind” exchanges to defer capital gains tax, structuring acquisitions as equity rather than asset transactions, instalment sale financing, and the use of REITs.

There are no specific statewide “municipal taxes” in Texas that are considered taxes on the occupation of business premises, such as an occupancy tax tied directly to leasing or using commercial property. However, annual property taxes are payable with respect to real estate in Texas, except where certain exemptions may apply. These taxes are typically paid by the property owner but can be passed on to tenants through lease agreements.

Texas does not have a state income tax, so there is no state-level income tax withholding for foreign investors (or anyone else) on income derived from real property or other sources within the state. However, foreign investors in Texas are subject to federal income tax rules under US law, including those that apply to income earned in Texas, such as rental income or gains from the sale of real property, because federal tax obligations extend nationwide.

Owning real estate in Texas offers several tax benefits, primarily due to the state’s lack of a state income tax and federal tax provisions that apply nationwide. The lack of a state tax amplifies the impact of federal tax benefits, including by increasing the after-tax return on real estate investments compared to states with income taxes.

In Texas, real estate owners can benefit from certain property tax deductions and exemptions. For homeowners, this includes the homestead, over-65 and disabled exemptions, which can reduce the taxable value of the primary residence; for landowners, it includes the agricultural special appraisal valuation. Local governments may also offer temporary tax abatements to encourage development or business relocation, benefitting commercial property owners.

Federal deductions for property taxes, mortgage interest, operating expenses and depreciation are also available, as is potentially qualifying for a Section 1031 “like-kind” exchange to defer capital gains tax when investing proceeds into another property.