James has made 46 appearances for Bristol City since joining last summer and is entitled to a new deal with the club.
The 40-year-old has recently been linked with a move to Premier League side Wigan.
“David has been in contact with us and told us he will be in to sign the contract before the deadline,” Sexstone told the Bristol Evening Post.
“There is always going to be speculation surrounding players of his calibre and, while he had given an indication that he wanted to return for next season, there was still some doubt.
“But the facts are these: he is happy here and wants to take up the option to stay in the Championship with Bristol City.”
