Business agreements can be complex, especially when both parties still have duties to fulfill. Maybe you’re managing a renovation or temporarily hiring an accountant. In these scenarios, you’re likely dealing with an executory contract—i.e., an agreement where performance is ongoing.
Understanding the nature of executory contracts is key to protecting your business and avoiding costly disputes. Below, we explore what these contracts mean under Texas law, why they matter, and how to safeguard your interests.
Executory Contract Definition: A Closer Look
What is the executory contract definition? An executory contract is a legally binding agreement where both parties have ongoing responsibilities to fulfill. These contracts frequently appear in real estate, construction, and service industries, where terms unfold over time instead of being completed immediately.
Under Texas Property Code § 5.062, examples of executory contracts include:
- Contracts for deeds—the buyer makes payments over time before ownership transfers;
- Lease-to-own agreements—ownership transfers only after payment obligations are met; and
- Lease options exceeding 180 days—these combine leasing with an option to purchase property.
In construction, phased projects often rely on executory contracts, where contractors complete work in stages, and owners make periodic payments. Similarly, employment agreements may include future obligations, such as deferred compensation or non-compete clauses.
To be enforceable, these contracts must comply with Texas’s strict legal requirements. Failure to meet disclosure rules or deadlines could void the contract or lead to legal disputes.
Where Executory Contracts Are Commonly Used
Executory contracts play an essential role in various sectors in Texas, each shaped by legal requirements designed to protect fair practices and ensure consumer protection. Here’s how they commonly appear.
Real Estate Transactions
Executory contracts are prevalent in real estate, including lease-to-own arrangements. Texas requires strict compliance with the relevant laws, such as providing warranty deeds on time and offering buyers protections in case of default. These safeguards promote transparency and protect consumers.
Construction Projects
Contracts tied to phased work and payment schedules are common in construction. Federal bankruptcy law (11 U.S.C. § 365) treats these contracts as executory, giving debtors the option to either assume (enforce) or reject (cancel) them during bankruptcy. This flexibility can significantly impact all parties, making precise contract drafting crucial.
Employment Agreements
Executory clauses in employment contracts often cover deferred benefits or restrictions, like non-compete agreements. For these clauses to hold up in Texas courts, they must be reasonable in scope, duration, and geography.
Why Legal Compliance Matters
Texas law imposes strict rules on executory contracts to ensure fairness and clarity. Ignoring these requirements can lead to serious consequences, such as financial penalties or the entire contract becoming unenforceable. That’s why working with an experienced legal professional is critical. A skilled attorney can help you draft, review, and manage executory agreements to ensure compliance and protect your interests.
Key Legal Considerations
By their very nature, executory contracts raise special legal issues and drawbacks you must be aware of to safeguard your rights.
Ongoing Obligations
An executory contract’s defining characteristic is its mutual obligations, requiring both parties to comply with their responsibilities until the contract is fully executed. These ongoing obligations require careful monitoring and communication between parties to meet all terms. Additionally, parties should be aware of the potential legal consequences of failing to fulfill their obligations under an executory contract. Such repercussions could include a court ordering the payment of damages to the aggrieved party or terminating the agreement.
Breach and Remedies
When one party fails to meet their obligations, the other party may have legal remedies, including:
- Specific performance—requires the breaching party to fulfill their contractual obligations; and
- Monetary damages—the breaching party must compensate the non-breaching party for financial losses.
Legal remedies under Texas Law aim to restore balance and uphold the integrity of the contractual relationship. Parties must understand their rights and obligations under an executory contract to avoid potential legal disputes. If there is a breach, getting legal help can help both parties understand the relative rules to protect their interests.
Bankruptcy Considerations
Executory contracts become notably more complex during bankruptcy proceedings. Under federal bankruptcy law, debtors may have the option to “assume/enforce” or “reject/cancel” executory contracts. The debtor’s choice can have a significant impact on creditors and business partners alike.
Unclear Terms
Ambiguities in obligations or timelines can create confusion and disputes. For example, a service contract that doesn’t clearly outline deliverables may lead to disagreements about what obligations have or have not been fulfilled.
Financial Risks
In some cases, executory contracts expose parties to financial risks if one party fails to perform as agreed. For instance, in a lease-to-own real estate agreement, a buyer’s failure to make payments could result in forfeiture of all prior payments made.
Regulatory Compliance
Certain types of executory contracts, such as contracts for deeds, are heavily regulated in Texas. Failure to comply with these laws can result in penalties or loss of rights under the contract.
How to Protect Your Interests in an Executory Contract
Protecting your interests in an executory contract begins with a proactive and informed approach.
Get Advice from a Legal Professional
Work with an attorney to ensure the agreement complies with Texas law and addresses your specific needs.
Draft Clear, Comprehensive Terms
Every executory contract should include explicit terms detailing each party’s obligations, deadlines, and remedies for non-compliance.
Monitor Performance
Track obligations and deadlines to avoid disputes or missed opportunities to enforce your rights.
Taking these steps can significantly reduce risks and help you maximize the benefits of your executory contracts.
Call The Curley Law Firm Today
Understanding and managing executory contracts can feel overwhelming without the proper guidance. With more than 10 years of combined experience, the team at The Curley Law Firm is here to guide you through the maze of these agreements. Whether you need assistance drafting clear terms, resolving disputes, or safeguarding your interests during bankruptcy, our knowledge protects you.
Located in The Heights, we have strong roots in the Houston community and are dedicated to providing personalized, practical legal solutions. Contact us today to take the first step in protecting your business and achieving peace of mind.
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