what is the difference between an assignment and an assumption

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The definition of assignment & assumption agreement.

By Rebecca K. McDowell, J.D.

October 19, 2019

Reviewed by Legal Expert

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• Land Contract Law in Florida

Assignments and assumptions are part of contract law and refer to the transfer of someone's duties and benefits in a contract to another. Assignments and assumptions are common with respect to contracts for loans or leases. A lender or lessor may assign its rights to another lender or lessor, and a borrower or lessee may find someone to assume the loan or lease and make the payments.

The Elements of a Contract

A contract is legally formed when two or more parties enter into an agreement with certain elements, which include:

• An offer. For instance, in a mortgage transaction, the lender offers to loan money to the borrower.
• Acceptance of the offer. The mortgage borrower agrees to borrow the money.
• Consideration. Consideration in a contractual relationship means the things the two parties give to each other in exchange for entering the contract. A mortgage lender loans money to the borrower, and in exchange, the borrower agrees to repay the money and give the lender a lien on the house. The loan, the repayment with interest and the mortgage lien are consideration for the contract.
• Mutuality. The parties must have come together and agreed upon the terms of the contract Read More: How Does a Contract Work?

Burdens and Benefits of a Contract

The contract sets forth what the parties are required to do during the contractual relationship. With a mortgage, the lender is required to loan the money and apply the payments correctly in accordance with the agreement, and then release the lien when the loan is paid. The borrower is required to pay the loan back with interest, pay the property taxes and make sure the property has insurance.

These contractual obligations create both burdens and benefits on both sides. The lender has the burden of making the loan and applying the payments correctly, but it has the benefit of receiving interest on the loan. The borrower has the burdens of making payments and insuring the property but has the benefit of owning the home.

Assigning a Contract

An assignment occurs when one party to a contract transfers, or assigns, its rights and obligations under the contract to another party. This happens frequently with mortgage loans, as lenders sell loans to other lenders. The lender will enter into an assignment agreement and assign the note and the mortgage to another party. The borrower then must make the payments to the assignee. The assignee's right and obligations under an assignment are the same as the assignor's rights and obligations and cannot be changed without a new contract.

Assuming a Contract

An assumption is the other side of the coin, in a sense. Assumptions are common with respect to leases and mortgages and typically occur when the borrower or lessee wants to transfer the property to someone else without paying off the loan or lease. Assumption means someone is taking over the side of the contract that requires payment.

If the contract allows it, another person can agree to assume the original party's obligations under the contract – the obligations to make monthly payments, etc. – in exchange for taking over the ownership or the lease.

Not every contract can be assumed. The language of the contract will state whether the borrower or lessee is allowed to transfer the property or lease by assumption.

Assignment and Assumption Agreements

Assignments and assumptions are both conducted by written agreement. Sometimes an assignment and an assumption will occur in the same transaction, and one agreement will cover both; the parties are assigning the benefits and assuming the burdens.

Assignments and assumptions are both transfers of contractual benefits and burdens from one party to another. They differ from each other based on the original position of the transferring party and the duties and benefits being transferred.

• Bankrate: Assumable Mortgage: Take Over Seller's Loan
• The Law Dictionary: What is Assumption?
• Nolo: What Is an Assignment of Contract?
• U.S. Legal: Elements of a Contract

Rebecca K. McDowell is a creditors' rights attorney with a special focus on bankruptcy and insolvency. She has a B.A. in English from Albion College and a J.D. from Wayne State University Law School. She has written legal articles for Nolo and the Bankruptcy Site.

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Assignment and assumption agreement

What is an assignment and assumption agreement?

An assignment and assumption agreement is a contract that allows one of the parties to transfer their contractual rights and duties to another party.

An assignment of contract is used after a previous agreement has been signed and one of the parties wants to pass on its obligations to a third party that wasn\’t originally part of the contract.

The parties involved in an assignment of contract are:

Uses of assignment agreements

Asset purchase transactions.

 During mergers and acquisitions , the parties typically enter into additional agreements that are accessory to the purchase contract to evidence the transfer of assets. Among these ancillary documents is the assignment and assumption agreement, which may be required to make the Asset Purchase Agreement (APA) effective. 

In the context of a business transaction, the assignment and assumption agreement is a shorter agreement than the APA. A buyer will use the assignment contract to evidence the ownership of the assigned assets, while the seller uses it to prove that it is the buyer who now has assumed all the rights and obligations related to the assigned asset.

In asset acquisitions, it is common to have several assignment agreements that are used to authenticate the property of different assets, such as patents, trademarks, or copyrights. 

Opting out of a contract

If the party of a contract is no longer able to fulfill its obligations or wants to cede its rights to someone else, assignment agreements can come into place. Only if the terms of the original contract allow it, the assignor can transfer its property rights and obligations or debt to someone else.

An example could be a contractor who needs help to complete a job and assigns tasks and entitlements to a subcontractor.   

Startup Assignment Agreements

Assignment contracts are typically used by newly formed businesses that rely on software, trademarks, or other sort of intellectual property. Since technology startups expect financing from outside investors, a technology attorney will usually recommend the use of assignment agreements as a means of ensuring third parties, such as shareholders, can profit from using their IP and make it easier to find funding for their businesses. 

Conditions for an assignment contract to be valid

To be able to hand over the contractual obligations, the following criteria need to be met:

It’s essential to notice that, although assigning a contract will transfer the rights and duties to the receiving party, the assignor will not be released from any obligations that arose before the assignment. Before entering a contract assignment, ensure a contract review lawyer advises you it is safe to proceed, how to do it, and if you will be still liable for specific terms in the contract.

An assignment will not be enforced if:

Elements of an Assignment Agreement

Details on the existing agreement: Provides identification data on the existing contract, such as its date of execution and purpose. 

Additionally, the assignment contract will contain provisions related to indemnification and governing law.  

In M&A, when in need to prove the ownership of specific assets, or if you are facing difficulties in fulfilling your contractual obligations, an assignment and assumption agreement will demonstrate you are the right owner and keep your business’s credibility intact. 

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Understanding Assumption Agreements: A Simple Guide

LegalGPS : July 25, 2024 at 11:20 AM

Have you ever heard of the term "assumption agreement" and wondered what it meant? You're not alone. To understand assumption agreements, we need to delve a bit into the world of contractual law. But don't worry, I promise to make it as simple as possible while still bringing you the essential knowledge you need. Also, we have an assumption agreement template if you need one.

Assumption Agreement Template

Legal GPS templates are drafted by top startup attorneys and fully customizable.

Table of Contents

Detailed understanding of assumption agreement, the purpose of assumption agreement, benefits of using assumption agreements, real-life examples of assumption agreements, faq on assumption agreement, components of an assumption agreement.

• Identify and review the original agreement
• Negotiate terms with the assignee
• Draft the assumption agreement
• Edit and finalize
• Retain a copy

Do you need a lawyer for this?

Definition: An assumption agreement is a kind of legal document that you'll find commonly used in finance and real estate transactions. This type of agreement transfers the obligations of one party under a contract to another party.

Imagine you want to sell your business but have outstanding debts that need to be paid. The buyer of your business agrees to assume those debts and pay them, along with owning the business. This situation is where an assumption agreement comes in; it's there to ensure that everyone knows who's responsible for paying these debts after the transaction takes place.

Usage: We often see assumption agreements during mergers and acquisitions, wherein the buyer will assume certain liabilities of the selling company. Another common scenario is in loan assumption, wherein the obligation of paying a loan is transferred from the initial borrower to a new borrower.

Parties Involved: Typically, an assumption agreement includes two main parties: the assignor (let's say, Seller A) and the assignee (Buyer B). Seller A is looking to transfer their obligations, while Buyer B is ready to assume those obligations.

The purpose of an assumption agreement is to ensure the seller is freed from their obligations, while the buyer agrees to take on these obligations. Legally, the seller could still be held liable if they don't have a proper assumption agreement in place that absolves them of those responsibilities. The agreement provides a clear record that the buyer has taken over the obligations, ensuring that everyone is on the same page.

For example, if the seller is responsible for paying property taxes, they'll want to be sure that's transferred over to the new owner. If it's not, then they could still be held liable for those payments. The same goes for any other obligations such as utilities or insurance premiums.

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Much like a sturdy handrail on a steep staircase, an assumption agreement provides fundamental support, helping to avoid slips and falls in the world of contract law.

Benefits for the Assignor: The assignor, having fulfilled their obligations up to the point of the sale, can walk away without having to worry about what happens next. With a legally binding assumption agreement in place, they're unburdened from any obligations in the contract previously held.

Benefits for the Assignee: For the assignee, an assumption agreement clearly states what obligations they're now responsible for. As with any binding agreement, it's important to have all the details in black and white. After all, no one wants to enter a business arrangement based on hearsay.

This is important because assumptions can be legally binding, meaning that if the assignee is not given full disclosure on what their obligations are, they could be held liable for any damages incurred.

For example, if they were to sign a lease on an office space but didn't know that it was also being used as a storage unit for the previous owner's inventory or equipment, they could be held responsible for returning the premises back to its original state when they vacate.

Consider a real estate scenario. Let's say you're buying a house that still has an existing mortgage. Assume you plan to pay the remaining mortgage rather than obtaining a new mortgage. An assumption agreement can transfer the responsibility of the mortgage from the seller to you, the buyer. The seller can walk away from the mortgage, and you can continue making payments on the existing mortgage.

Another example, let's say a business is sold, and the new owner takes responsibility for the lease on the building. The lease assumption agreement details the new obligations of the new owner and ensures the original owner is no longer responsible for the lease.

Lastly, an assumption agreement can be used for a joint venture, in which two or more parties are working together to create something. This type of agreement details how the business will be run and what each party's responsibilities will be.

Q: Are assumption agreements legally binding?

Yes, assumption agreements are legally binding. Like any other contract, it sets out the terms and conditions of the agreement that the assignor and the assignee have mutually agreed upon.

Q: What happens if the assignee is unable to fulfill the obligations listed in the assumption agreement?

The remedies will depend on the stipulations of the agreement. The assignor might legally be able to retrieve their transferred right/obligation if the assignee fails to perform their contractual duty.

Q: What happens if the assignee does not fulfill the obligations listed in the assumption agreement?

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When you're preparing an assumption agreement, it's essential to include specific elements to ensure its legality and enforceability. Here are some of the key components to include in an assumption agreement:

Identification of parties: Clearly outline the legal names and contact information of the assignor and the assignee to avoid any confusion or misunderstandings.

Description of the original agreement: Provide a brief description of the initial agreement, including its date, purpose, and any relevant reference numbers or identification codes. In many cases, attaching a copy of the original agreement as an exhibit is helpful.

• List of obligations: Clearly identify and list all obligations being transferred from the assignor to the assignee in the assumption agreement. This helps to ensure clarity and accountability for both parties.
• Effective date: State when the obligations will officially transfer from the assignor to the assignee and when the agreement comes into effect.
• Full assumption: Include a clause stating that the assignee assumes all obligations and liabilities and that the assignor is released from these responsibilities once the agreement comes into effect.
• Representations and warranties: This section should include any necessary representations or warranties from both the assignor and assignee. This might cover the current status of the obligations, the absence of any outstanding disputes, and confirmation that all necessary approvals have been obtained.
• Notices: Outline how and where any notices or official communications related to the agreement should be delivered, specifying any necessary mailing addresses or email addresses.
• Governing law: Clearly state which jurisdiction's laws will apply to the agreement. This ensures there's a clear legal framework if any disputes arise later.
• Signatures: Finally, make sure both the assignor and the assignee sign and date the agreement. This brings the contract into effect and makes it legally binding.

Preparing Your Assumption Agreement

If you're planning to create an assumption agreement, following these steps can help you prepare a well-crafted, legally sound document:

Identify and review the original agreement: To prepare an accurate assumption agreement, you'll first need to identify the initial agreement you intend to assume. Review it thoroughly to identify any clauses or inconspicuous details that may affect the assumption. Take note of any laws that apply to the original agreement and whether they will be carried over into the assumption. For example, if the initial contract was made in another state, you'll need to consider how this affects your ability to assume it. If there are specific laws regarding assumption agreements in your state, make sure you're familiar with them before proceeding.

Negotiate terms with the assignee: Just as with any other agreement, both parties' interests should be safeguarded through negotiation. Discuss any concerns or demands with potential assignees before finalizing the components of your assumption agreement. This is important because assumption agreements are legally binding contracts, so you'll want to ensure that all of your needs are met. In some cases, the assignee may not be willing to accept certain terms and conditions; if this is the case, it's best to walk away from the deal rather than proceeding without agreement.

Draft the assumption agreement: Using the guidance outlined above, prepare a first draft of the agreement. Double-check all the details and include both the assignor's and the assignee's input. This might look like the following:

Edit and finalize: Make any necessary revisions and proofread the agreement to ensure clarity and accuracy. Once both parties are satisfied with the terms, sign and date the document. If you don't do this before having the document notarized, then you'll need to get the signatures witnessed by a notary public. The notary will verify your identity and ensure that both parties are signing of their own free will.

Retain a copy: It's essential to keep a copy of the executed assumption agreement in a secure location, preferably both in physical and digital formats. This will serve as a reference in case of any future disputes or clarifications.

In navigating legal processes and transactions, knowledge is your best tool. Understanding how assumption agreements work can open up new strategies and protections for yourself and your business.

Of course, drafting an assumption agreement should be done with careful attention to detail and preferably, with the assistance of legal professionals. If you're looking for a pre-made template crafted by expert legal practitioners, look no further. We provide an easy-to-use, comprehensive Assumption Agreement template at an affordable price. Navigate confidently in the business world supported by our professional legal templates. Click here to get started!

The biggest question now is, "Do you need to hire a lawyer for help?" Sometimes, yes ( especially if you have multiple owners ). But often for single-owner businesses, you don't   need a lawyer to start your business .

Many business owners instead use tools like  Legal GPS for Business , which includes a step-by-step, interactive platform and 100+ contract templates to help you start and grow your company.

Get Legal GPS's Assumption Agreement Template Now

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Understanding the Basics of Assignment and Assumption Agreements

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Note: Links to our free templates are at the bottom of this long guide. Also note: This is not legal advice

Introduction

Understanding the importance of assignment and assumption agreements is essential for any business transaction. These agreements are legal documents which outline the transfer of ownership, rights, and obligations from one party to another in order to protect both parties from liabilities and disputes. Moreover, they help streamline the transition of ownership by providing a clear agreement between all involved.

At Genie AI, we understand that navigating these agreements can be difficult without legal expertise - but it doesn’t have to be! Our team provides free assignment and assumption agreement templates so that anyone can draft high-quality legal documents without paying hefty lawyer fees.

These agreements are crucial in corporate mergers, asset sales, and other business transactions as they protect both assignee and assignor from potential future disputes or disagreements. Furthermore, it helps everyone involved in the process come to an agreement about the transfer of assets or liabilities.

It’s also important for businesses to ensure that all records, documents, and information is properly transferred when assigning contracts - something which assignment and assumption agreements make simpler. Not only does this avoid any potential issues in the future but ultimately makes for a smoother transition when dealing with such matters.

In short, assignment and assumption agreements provide an invaluable service when it comes to safeguarding both parties involved in a business transaction while also simplifying their processes along the way. To learn more about how our team at Genie AI can help you on your way towards drafting these essential documents - read on below for our step-by-step guidance or visit us today to access our template library!

Definitions

Assignor: The party transferring the rights and liabilities. Assignee: The party receiving the rights and liabilities. Asset Assignment and Assumption Agreement: An agreement used when one party transfers all or part of their ownership of a particular asset to another party. Liability Assignment and Assumption Agreement: An agreement used when one party transfers all or part of their liability to another party. Contract Assignment and Assumption Agreement: An agreement used when one party transfers all or part of their contractual obligations to another party. Lease Assignment and Assumption Agreement: An agreement used when one party transfers all or part of their responsibilities under a lease to another party. Representations and Warranties: Promises made by the Assignor and Assignee in order to ensure they understand the risks associated with the transfer and are comfortable taking on the rights and liabilities. Indemnification: A clause outlining the terms under which the Assignor and Assignee are liable for any losses or damages due to the transfer. Choice of Law: A clause specifying which jurisdiction’s laws will govern the agreement. Severability: A clause outlining how the agreement will be enforced if any part of it is deemed unenforceable. Governing Law: A clause specifying which court will have jurisdiction over any disputes that arise out of the agreement. Notices: A clause outlining how notices between the parties will be delivered.

Definition of Assignment and Assumption Agreement

Overview of the different types of assignment and assumption agreements, asset assignment and assumption agreement, liability assignment and assumption agreement, contract assignment and assumption agreement, lease assignment and assumption agreement, the purpose of an assignment and assumption agreement, the process of negotiating an assignment and assumption agreement, identifying the parties involved, discussing the terms, drafting the agreement, final review and signing, key terms and clauses commonly found in assignment and assumption agreements, assignor & assignee, liabilities and obligations, representations and warranties, indemnification, choice of law, severability, governing law, potential issues that may arise when negotiating an assignment and assumption agreement, scope of liabilities, representations & warranties, dispute resolution, contractual limitations, practical considerations when drafting an assignment and assumption agreement, identifying contingent liabilities, understanding applicable laws, drafting clear & concise language, complying with any regulatory requirements, potential benefits of using an assignment and assumption agreement, risk reduction, asset protection, cost savings, potential pitfalls of using an assignment and assumption agreement, unforeseen risks, negotiating difficulties, regulatory non-compliance, conclusion and next steps, finalizing the agreement, implementing the agreement, documenting the outcome, get started.

• Understand the legal definition of an Assignment and Assumption Agreement: an agreement between two parties, which transfers one party’s rights, duties and obligations under a contract to another party
• Learn who can enter into an Assignment and Assumption Agreement: the parties to the original contract, or their successors
• Know what rights and obligations are transferred under an Assignment and Assumption Agreement: all rights, duties, and obligations that have been agreed upon in the original contract
• Be aware of the consequences of assigning and assuming obligations: the assignee is responsible for performing all duties and obligations of the contract, just as if they had originally entered into the contract.
• When you can check off this step: You will know you have a good understanding of the definition of an Assignment and Assumption Agreement when you can explain it in your own words and are aware of the rights and obligations transferred and the consequences of assigning and assuming obligations.
• Understand the three common types of assignment and assumption agreements: asset assignment and assumption agreement, contractual assignment and assumption agreement, and debt assignment and assumption agreement
• Learn the key features of each type, including the type of asset or obligation being assigned and assumed
• Determine the purpose of the agreement and the advantages of each type of agreement
• Check off this step when you feel confident that you understand the purpose and differences between the three types of assignment and assumption agreements.
• Research and understand the definitions of an asset assignment and assumption agreement
• Learn the different types of assets that can be assigned and assumed in an agreement
• Understand the purpose of an asset assignment and assumption agreement
• Research and review the legal elements of an asset assignment and assumption agreement, such as the parties involved, the assignor and assignee, the description of the assets to be assigned and assumed, the consideration for the assignment and assumption, the representations and warranties of both parties, the indemnification and other relevant provisions
• Draft an asset assignment and assumption agreement with the help of a qualified attorney
• When you are satisfied with the asset assignment and assumption agreement that you have drafted, execute the agreement according to the applicable law and have it notarized
• Check this off your list and move on to the next step, which is understanding liability assignment and assumption agreements.
• Research applicable state and federal laws to ensure the agreement is in compliance
• Draft a liability assignment and assumption agreement that assigns all liabilities of the transferor to the transferee
• Identify all liabilities to be assigned, including any and all warranty liabilities, product liabilities, and medical liabilities
• Include all necessary clauses that provide for the transfer of the liabilities, and state that the transferor will not be liable for any liabilities after the date of the agreement
• Get the agreement approved by the assigning and assuming parties
• Sign and date the agreement in the presence of a witness
• Once all parties have signed the agreement, you can check this off your list and move on to the next step of drafting the Contract Assignment and Assumption Agreement.
• Understand the difference between an assignment and an assumption agreement. An assignment agreement transfers the rights and obligations of the original contract from one party to another, while an assumption agreement transfers only the obligations of the original contract to the new party.
• Familiarize yourself with the language of the assignment and assumption agreement. The agreement should clearly state the terms of the assignment, the obligations assumed by the new party, and the liabilities being transferred.
• Draft the assignment and assumption agreement. Make sure to include all relevant details, such as the parties involved, the original contract being transferred, the new obligations assumed by the new party, and any other important information.
• Review the agreement with a legal professional. It is important to have a lawyer or other legal professional review the agreement to make sure it meets all legal requirements.
• Sign the agreement. Once both parties have signed the agreement, it is officially binding and the obligations of the original contract are now transferred to the new party.

You will know when you can check this off your list and move on to the next step when you have completed all steps in this section, including drafting, reviewing, and signing the agreement.

• Understand the basics of a lease assignment and assumption agreement
• Have an understanding of the parties involved in the agreement
• Know what is included in the agreement such as the particular lease, the transferor, the transferee, a consideration amount, date of assignment, and other related documents
• Have an understanding of the legal implications of the agreement as far as warranties, liabilities, and other related obligations
• Understand the process of executing the agreement and any other related steps required
• Be aware of any local or state laws that may affect the agreement

Once you have a thorough understanding of the lease assignment and assumption agreement, you can check off this step and move on to the next step in the guide: The Purpose of an Assignment and Assumption Agreement.

• Understand the purpose of an assignment and assumption agreement, which is to transfer rights and obligations from one party to another
• Learn the different types of assignment and assumption agreements, such as lease assignment and assumption agreements, purchase and sale agreements, and contracts
• Identify the parties involved in the agreement, what rights and obligations are being transferred, and how the agreement will be executed
• Once you understand the purpose of an assignment and assumption agreement, you can move on to the next step in the guide
• Research and determine the terms of the agreement that are appropriate for your situation
• Identify any potential legal issues that could arise from the assignment and assumption agreement
• Draft the agreement that outlines the terms, conditions, consideration, and liabilities
• Both parties must review and approve the agreement in its entirety
• Make sure the agreement is signed by both parties and that each party has a copy of the agreement
• When both parties have agreed upon and signed the agreement, the assignment and assumption agreement is officially enforceable
• You can check this step off your list and move onto the next step once the agreement is signed and all parties have a copy.
• Identify all parties involved in the agreement, including the assignor, the assignee, and any other third parties
• Be sure to document all of the parties in the agreement and provide contact information for each
• Get contact information for all parties involved, including names, addresses, and phone numbers
• Verify that all parties involved are of legal age and able to enter into a binding agreement
• Make sure that all parties understand their roles and obligations in the agreement

When you can check this off your list: When all parties have been identified, contact information has been provided, and all parties understand and accept their roles and obligations in the agreement.

• Learn the key terms used in assignment and assumption agreements, such as “assignor” and “assignee.”
• Understand the scope of the agreement and the rights and obligations of each party.
• Consider any potential restrictions that might be in place.
• Identify any laws or regulations that affect the agreement.

You can check this step off your list and move on to the next step when you have a basic understanding of the terms used in the agreement, and the scope of the agreement and the rights and obligations of each party.

• Determine the parties involved in the assignment and assumption agreement and obtain contact information for each.
• Draft the agreement and include all the agreed upon terms and conditions.
• Review the agreement with all parties to ensure the terms and conditions are accurately reflected.
• Revise the agreement as needed to reflect any changes or amendments.
• Once all parties have agreed to the agreement and all revisions have been made, the agreement is ready to be signed.
• Carefully review the agreement to ensure that all the details and clauses are accurately reflected
• Make sure all parties to the agreement have signed the document
• Have all parties to the agreement keep a signed copy of the document for their records
• Once all parties have signed the document, you can check this off your list and move on to the next step.
• Familiarize yourself with the language and terminology used in assignment and assumption agreements.
• Understand the components of the agreement, such as the assignor, assignee, consideration, and liabilities.
• Become familiar with the common clauses found in assignment and assumption agreements, such as the warranty clause, assignment clause, and liability clause.
• Review the agreement for accuracy and ensure that all of the terms and conditions are clear.
• Once you have a full understanding of the key terms and clauses in the agreement, you can move on to the next step in the process.
• Determine who is the assignor and who is the assignee - the assignor is the one who is transferring their rights and obligations to the assignee
• Know the difference between the assignor and assignee - the assignor is the party transferring the rights and obligations, and the assignee is the party receiving them
• Understand the implications of the assignment and assumption agreement - the assignor is no longer responsible for the rights and obligations they are transferring to the assignee
• Make sure that the assignor and assignee are both aware of their respective roles and responsibilities - this will ensure that the agreement is legally binding

Once you have determined who the assignor and assignee are, know the differences between them, understand the implications of the agreement, and make sure both parties are aware of their roles and responsibilities, you can move on to the next step.

• Identify and list out all of the liabilities and obligations that are being assigned in the agreement
• Ensure that all liabilities and obligations of the assignor that are to be assumed by the assignee are included in the agreement
• Specify the date on which the liabilities and obligations are to be assumed by the assignee in the agreement
• Make sure that the assignee is aware of and accepts the liabilities and obligations that are being assigned
• Confirm that the assignor is not liable for any of the liabilities and obligations that are being assigned to the assignee
• Make sure to include a clause in the agreement that states that the assignor will not be liable for any of the liabilities and obligations that are being assigned to the assignee

When you can check this off your list and move on to the next step:

• When the assignor and assignee have agreed on all of the liabilities and obligations that are being assigned in the agreement
• When the assignor has agreed to not be liable for any of the liabilities and obligations that are being assigned to the assignee
• When the agreement has been reviewed and approved by both the assignor and assignee
• Ensure that all statements made by the assignor and the assignee are accurate and current
• Identify all representations and warranties made by the assignor to the assignee
• Make sure that any representations and warranties made by the assignor are clear and enforceable
• Verify that any representations and warranties made by the assignee are accurate and up-to-date
• Determine the remedies for breach of any representations and warranties

You can check this off your list and move on to the next step when you have identified all representations and warranties, verified that they are accurate and up-to-date, and determined the remedies for breach.

• Assignor should agree to indemnify Assignee from any and all claims, losses and damages that arise from breach of representations and warranties
• Assignor should agree to pay Assignee’s legal fees and other costs associated with defending against any claim
• Assignee should agree to indemnify Assignor from any and all claims, losses, and damages that arise from the Assignee’s actions after the transfer of the subject matter
• Once these indemnification terms are set, you can check this step off your list and move on to the next step.
• Determine the state law that will govern the agreement. Generally, the state law that will be applicable is the state in which the agreement is executed.
• The state law that you choose should be clear and explicit. Consider consulting a lawyer or legal advisor if you are unsure of the applicable state law.
• Make sure to include the state law that has been agreed upon in the agreement.
• Check off this step when the applicable state law has been determined and included in the agreement.
• Read your agreement carefully to ensure that the severability clause is properly drafted
• The severability clause should state that if any portion of the agreement is found to be invalid or unenforceable, the remaining provisions will remain in full force and effect
• Familiarize yourself with the definitions of severability, enforceability, and invalidity
• Make sure that the agreement includes a severability clause that is tailored to the particular agreement
• Once you are confident that the severability clause is properly drafted, you can check this step off your list and move on to the next step.
• Research governing laws in the jurisdiction where the agreement will be signed and enforced
• Determine the laws that will govern the agreement and include them in the governing law clause
• This clause should include the state, country, or other jurisdiction
• Once you have determined the governing laws and included them in the clause, you can check this off your list and move on to the next step.
• Ensure that the agreement includes a provision specifying a proper notice address for each party
• Check that the notice provision includes the name and address of the recipient, the method of service (e.g., mail, e-mail, or fax), and the time period for responding
• Review the agreement to make sure that it includes a provision specifying the manner in which the parties will provide notice to each other
• Confirm that notice is defined correctly, as this is important for determining the time period for responding
• Once all of these points have been verified, you can check this off your list and move on to the next step.
• Review the agreement to make sure that the assignment language is drafted correctly and is broad enough to encompass all of the rights and obligations being assigned
• Ensure that the parties are not trying to assign any rights or obligations that are not legally assignable
• Make sure that the agreement is clear regarding the liabilities of the parties, as they will be assumed by the assignee
• Confirm that the assumptions being made by the assignee are clearly laid out in the agreement
• Ensure that the agreement is not assigning any rights or obligations that may be subject to the consent of a third party
• When all potential issues have been addressed, the agreement can be signed by both parties.
• Understand that an Assignment and Assumption Agreement (A&A) will transfer some of the liabilities from one party to another in a business transaction
• Identify which liabilities are to be transferred in the A&A
• Clarify which liabilities will remain with the original party
• Establish a timeline for the transfer of liabilities
• Decide which party is responsible for liabilities that occur after the transfer
• Make sure that the liabilities are accurately defined and described in the A&A

You will know that you can check this step off your list and move on to the next step when all liabilities have been properly identified, defined and described in the A&A, and all parties have agreed to the timeline for the transfer of liabilities.

• Understand the basics of Representations & Warranties and what they mean in the context of assignment and assumption agreements
• Learn what should be included in Representations & Warranties and the consequences of not making accurate representations
• Research different types of Representations & Warranties, such as those related to title, capacity, authority, and performance
• Check that all Representations & Warranties included in the agreement are accurate and up-to-date
• Once all Representations & Warranties have been reviewed and confirmed to be accurate, you can check this step off your list and move on to the next step of the guide.
• Understand that disputes under an Assignment and Assumption Agreement are generally handled by the parties involved
• Understand the purpose of an arbitration clause in the agreement, which is to resolve disputes quickly, fairly, and affordably
• Determine if the agreement should include a mediation clause, which is less formal than arbitration and may be more suitable for some disputes
• Consider whether the agreement should include a choice of law clause, which will determine the governing law of the agreement
• Know that the agreement should specify the venue for any potential dispute resolution proceedings
• Understand that the parties may need to provide notice to the other party before initiating a dispute resolution procedure
• When you have a full understanding of how disputes will be handled under the Assignment and Assumption Agreement, you can check this step off your list and move on to the next step.
• Understand the importance of the contractual limitations outlined in the agreement
• Make sure all parties involved in the agreement have agreed to the contractual limitations
• Know that contractual limitations are meant to protect the parties involved in the agreement
• Be aware that contractual limitations may include time limits, scope of duties, and other stipulations
• When all parties involved have agreed to the contractual limitations, you have completed this step and can move on to the next step.
• Familiarize yourself with the applicable laws in the jurisdiction in which the assignment and assumption agreement will be executed
• Make sure to include language in the agreement that will address any issues that may arise due to a conflict of laws
• Ensure that the agreement properly identifies and describes the rights, obligations, and interests that are being assigned and assumed
• Identify any contingencies that could affect the transfer of rights and obligations, and include language that addresses such contingencies
• Consider adding any additional provisions that may be necessary to ensure the successful completion of the transaction

You can check this off your list and move on to the next step when you have addressed any issues that may arise due to a conflict of laws, properly identified and described the rights, obligations and interests that are being assigned and assumed, identified any contingencies that could affect the transfer of rights and obligations, and considered adding any additional provisions that may be necessary to ensure the successful completion of the transaction.

• Identify all contingent liabilities that must be assumed by the assignee, including any pending or potential claims and obligations
• Make sure the assignee is aware of, and willing to assume, the contingent liabilities
• Include language in the assignment and assumption agreement that outlines the assignee’s assumption of any contingent liabilities
• Check that the provisions in the agreement precisely identify the liabilities assumed by the assignee
• When all contingent liabilities have been identified and included in the agreement, you can move on to the next step of understanding applicable laws.
• Research applicable laws related to assignment and assumption agreements in your jurisdiction
• Understand the legal language and key elements of an assignment and assumption agreement
• Understand the process for filing and registering an assignment and assumption agreement
• Know what documents and information may be required to complete the registration process
• Understand the timeline for completion of the registration process
• Once you have a good understanding of the applicable laws and the process for registration, you can move on to the next step of identifying any contingent liabilities.
• Research the applicable law, and use language that is consistent with the requirements
• Draft a clear and concise agreement that covers all relevant topics
• Ensure that the language used is precise and unambiguous
• Define any legal terms used in the agreement
• Make sure that the agreement is in writing and all parties have signed it
• Review the agreement and make sure it is legally compliant
• When all of the above steps are completed, you can move on to the next step in the guide.
• Research applicable laws and regulations that may apply to the assignment and assumption agreement
• Obtain any necessary licenses or permits, such as a real estate license
• Ensure that all parties understand the regulations that apply to the agreement
• Determine if any state or federal laws need to be adhered to
• When all applicable laws and regulations have been taken into account and complied with, you can move on to the next step.
• Understand the potential advantages of using an Assignment and Assumption Agreement, including:
• Transferring existing contractual obligations and liabilities from one party to another
• Ensuring continuity in contractual agreements between parties
• Avoiding the need for a new contract
• When you have a solid understanding of the potential benefits of using an Assignment and Assumption Agreement, you can check off this step and move on to the next one, which is Risk Reduction.
• Identify the potential risks that are associated with an assignment and assumption agreement
• Analyze how the assignment and assumption agreement may reduce those risks
• Understand the legalities that would protect both parties in the agreement
• Be aware of the potential regulatory requirements that may apply
• When you have thoroughly assessed the risks and understand how an assignment and assumption agreement can protect both parties, you are ready to move on to the next step.
• Understand the definition of an assignment and an assumption agreement
• Learn the differences between the two agreements
• Familiarize yourself with the processes and procedures of an assignment and assumption agreement
• Understand the legal implications of an assignment and an assumption agreement
• Familiarize yourself with the potential benefits of an assignment and assumption agreement
• Understand how an assignment and assumption agreement can be used to protect assets

You’ll know you can check this off your list and move on to the next step when you have a good grasp of the processes and procedures associated with an assignment and assumption agreement, the legal implications of such an agreement, and the potential benefits of using one.

• Understand the different costs associated with the transfer of assets, such as attorney’s fees, recording fees, and transfer taxes
• Consider the potential cost savings of using an assignment and assumption agreement as opposed to other methods of transferring assets
• Determine the effect of the transfer on the financial statements of both parties
• Review the agreement to ensure all costs are accounted for

When you have a thorough understanding of the cost savings to be made and have reviewed the agreement to ensure all costs are accounted for, you can move on to the next step.

• Be aware of the potential conflicts of interest between the assignor and assignee when an Assignment and Assumption Agreement is used
• Consider applicable laws, regulations and contractual restrictions when determining if an Assignment and Assumption Agreement is the best option
• Understand that if an Assignment and Assumption Agreement is used, both the assignor and assignee will remain liable for any existing obligations
• Be aware that the assignee may not have the same rights as the assignor under the agreement and may not have direct access to the original contract
• Understand that the assignee may be liable for any damages or losses caused by the assignor’s breach of the agreement

You’ll know when you can check this off your list and move on to the next step when you have a good understanding of the potential pitfalls and responsibilities associated with using an Assignment and Assumption Agreement.

• Understand that when assuming liabilities, there are certain risks that may be unforeseen and difficult to calculate
• Be aware that the assignor of the agreement can still be held liable if any unanticipated risks arise
• Carefully review the agreement to ensure that the assignor and the assignee are both protected from unforeseen risks
• Discuss any potential risks with legal counsel to ensure that all parties understand the potential risks
• Have all parties sign the agreement to ensure that everyone is aware of the risks and agrees to them
• When all parties have signed, the agreement can be considered complete and all parties can move forward with the transfer of liabilities
• Understand the differences between the two parties and their respective interests
• Identify the areas where both parties can agree on specific terms and conditions
• Determine which party will be liable for any breaches of the agreement
• Negotiate a fair deal that both parties can agree to
• Consider any legal, financial, and tax implications for both parties
• Once negotiations are complete, have the parties sign the agreement
• Make sure that both parties understand the terms and conditions of the agreement
• Verify that both parties are in agreement and that all negotiations are complete
• Check that all the required legal documents are present and in order
• Check that all parties involved are aware of their respective responsibilities

You’ll know when you can check this off your list and move on to the next step when all parties have agreed to the terms and conditions of the agreement, all required legal documents have been provided and in order, and all parties have signed the agreement.

• Research the laws and regulations that apply to the transaction, including state and local statutes, to assess potential risks
• Check for any filing requirements or permits that need to be obtained
• Identify any restrictions that could occur due to the parties involved
• Document any potential regulatory non-compliance issues
• When all potential risks have been identified and documented, you can move on to the next step.
• Review the terms and conditions of the agreement, as well as any applicable regulations, to ensure that all parties have a clear understanding of the agreement as a whole.
• Seek legal counsel if there are any questions or concerns about the agreement.
• Finalize the agreement by signing and exchanging documents.
• After the agreement has been finalized, it will be legally binding and enforceable.
• Make sure all parties are aware of their responsibilities and obligations under the agreement.
• Monitor the agreement to ensure that all parties are complying with the terms and conditions of the agreement.
• Check off this step when the agreement has been finalized and all parties have signed and exchanged documents.
• Review the agreement carefully and make sure all parties have signed off
• Make sure all parties have received a copy of the agreement
• Ensure that all parties have received the agreed-upon consideration
• File the original agreement with all relevant documents with the appropriate government agency or court
• You will know that you have finished this step when all parties have signed the agreement, all parties have received a copy, and the original agreement has been filed with the appropriate government agency or court.
• Execute the agreement, making sure both parties have signed it and that all parties involved have read, understood, and accepted the terms and conditions of the agreement.
• Make sure that the agreement has been filed with the appropriate state or federal agency, if required.
• Start the process of transferring assets and obligations from the assignor to the assignee, as outlined in the agreement.
• Make sure that all parties have the necessary information to complete the assignment and assumption. This may include but is not limited to: legal documents, financial documents, contracts, and other pertinent information.
• Ensure that all parties have received the necessary payment for the assignment and assumption.
• Check that all parties have complied with the terms and conditions of the agreement.
• You can check this off your list once you have completed all the steps necessary for the successful implementation of the agreement.
• Ensure you have all relevant documents, such as the assignment and assumption agreement, and any other documents mentioned in the agreement
• Gather all necessary signatures from the parties involved
• Make copies of the signed documents for all parties
• File the original documents with the appropriate governmental agency or court
• Update any necessary records, including those within your company
• Verify that all documents have been properly filed
• You can check off this step and move on to the next step when all documents have been properly signed and filed.

Q: What is the difference between an Assignment and Assumption Agreement and a novation agreement?

Asked by Zane on 27th March 2022. A: An Assignment and Assumption Agreement is used to transfer contractual rights and obligations from one party to another, while a novation agreement is used to substitute one contracting party with another. In a novation agreement, all three parties must agree to the substitution, while in an Assignment and Assumption Agreement, only two parties are involved.

Example dispute

Lawsuit referencing assignment and assumption agreement.

• A plaintiff may raise a lawsuit referencing an assignment and assumption agreement when one party assumes the rights and obligations of another party in a contract.
• The lawsuit may be raised if the party that assumed the rights and obligations did not fulfill them or did not fulfill them in the manner agreed upon in the contract.
• The plaintiff must provide proof that the party failed to fulfill the rights and obligations of the contract in order to win the lawsuit.
• Settlement may be reached through a negotiated agreement between the parties.
• Damages may be awarded if the plaintiff can prove the losses incurred due to the breach of contract.

Templates available (free to use)

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Assignment and Assumption Agreement | Practical Law

Assignment and Assumption Agreement

Practical law standard document 0-381-9984  (approx. 10 pages).

• Practical Law

Assignment and Assumption Agreement

Practical law glossary item 7-382-3242  (approx. 3 pages).

Assignment vs Novation: Everything You Need to Know

Assignment vs. novation: What's the difference? An assignment agreement transfers one party's rights and obligations under a contract to another party. 4 min read updated on September 19, 2022

Assignment vs. novation: What's the difference? An assignment agreement transfers one party's rights and obligations under a contract to another party. The party transferring their rights and duties is the assignor; the party receiving them is the assignee. Novation is a mechanism where one party transfers all its obligations and rights under a contract to a third party, with the consent of the original counterparty.

The transfer of a benefit or interest from one party to another is referred to as an assignment. While the benefits can be transferred, the obligation or burden behind the contract cannot be. A contract assignment occurs when a party assigns their contractual rights to a third party. The benefit that the issuing party would have received from the contract is now assigned to the third party. The party appointing their rights is referred to as the assignor, while the party obtaining the rights is the assignee. 

The assignor continues to carry the burden and can be held liable by the assignee for failing to fulfill their duties under the contract. Purchasing an indemnity clause from the assignee may help protect the assignor from a future liability. Unlike notation, assignment contracts do not annul the initial agreement and do not establish a new agreement. The original or initial contract continues to be enforced. 

Assignment contracts generally do not require the authorization from all parties in the agreement. Based on the terms, the assignor will most likely only need to notify the nonassigning party.

In regards to a contract being assignable, if an agreement seems silent or unclear, courts have decided that the contract is typically assignable. However, this does not apply to personal service contracts where consent is mandatory. The Supreme Court of Canada , or SCC, has determined that a personal service contract must be created for the original parties based on the special characteristics, skills, or confidences that are uniquely displayed between them. Many times, the courts need to intervene to determine whether an agreement is indeed a personal service contract.

Overall, assignment is more convenient for the assignor than novation. The assignor is not required to ask for approval from a third party in order to assign their interest in an agreement to the assignee. The assignor should be aware of the potential liability risk if the assignee doesn't perform their duties as stated in the assigned contract.

Novation has the potential to limit future liabilities to an assignor, but it also is usually more burdensome for the parties involved. Additionally, it's not always achievable if a third party refuses to give consent.

It's essential for the two parties in an agreement to appraise their relationship before transitioning to novation. An assignment is preferential for parties that would like to continue performing their obligations, but also transition some of their rights to another party.

A novation occurs when a party would like to transfer both the benefits and the burden within a contract to another party. Similar to assignment, the benefits are transferred, but unlike assignment, the burden is also transferred. When a novation is completed, the original contract is deleted and is replaced with a new one. In this new contract, a third party is now responsible for the obligations and rights. Generally, novation does not cancel any past obligations or rights under the initial contract, although it is possible to novate these as well.

Novation needs to be approved by both parties of the original contract and the new joining third party. Some amount of consideration must also be provided in the new contract in order for it to be novated, unless the novation is cited in a deed that is signed by all parties to the contract. In this situation, consideration is referring to something of value that is being gained through the contract.

Novation occurs when the purchaser to the original agreement is attempting to replace the seller of an original contract. Once novated, the original seller is released from any obligation under the initial contract. The SCC has established a three-point test to implement novation. The asserting party must prove:

• The purchaser accepts complete liability
• The creditor to the original contract accepts the purchaser as the official debtor, and not simply as a guarantor or agent of the seller
• The creditor to the original contract accepts the new contract as the replacement for the old one

Also, the SSC insisted that if a new agreement doesn't exist, the court would not find novation unless the precedence was unusually compelling.

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Assignment And Assumption Of Lease: Definition & Sample

Jump to section, what is an assignment and assumption of lease.

An assignment and assumption of lease is a legal real estate document that allows one party to transfer rights and obligations of a lease to another party. Often used in real estate transactions and mortgage lending, the assignment and assumption of lease agreement requires the landlord to consent to move forward.

An assignor may include an assumption agreement to provide legal protection by transferring obligations to the new tenant. For example, if a tenant defaults on a mortgage or stops paying rent, the original seller is no longer liable. Assignment and assumption of lease agreements cover terms like who is newly responsible for the lease and the landlord's contract for this agreement.

Common Sections in Assignment And Assumption Of Leases

Below is a list of common sections included in Assignment And Assumption Of Leases. These sections are linked to the below sample agreement for you to explore.

Assignment And Assumption Of Lease Sample

Reference : Security Exchange Commission - Edgar Database, EX-10.2 2 d425646dex102.htm ASSIGNMENT AND ASSUMPTION OF LEASE , Viewed October 18, 2021, View Source on SEC .

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I am a lawyer who helps small businesses, nonprofits, and startups with a wide variety of agreements, corporate formation, and corporate governance. ​ I earned my BA from Tulane University and my JD from the University of Chicago Law School. Before starting my own practice, I worked at an international law firm in New York City. ​ Outside of work, I am on the board of the nonprofit Seattle REconomy (which runs the NE Seattle and Shoreline tool libraries) and I enjoy gardening, baking bread, and outdoor activities with my spouse and two dogs.

Stirk Law is a law firm based in London that advises on dispute resolution, commercial and corporate arrangements, employment and private wealth. We are experts in our areas and experienced in advising on complex and high value matters in the UK and internationally. We have extensive onshore and offshore experience across a variety of areas such as the administration of trusts together with complex fraud and trust disputes. Our expertise includes the conduct of significant and high-value cases valued at up to in excess of £1 billion over a combined 40 years of legal practice in England, Jersey and Guernsey. As well as having a large international network, we work closely with a corporate investigations and risk advisory business based in London and Vienna. Together we can deliver a holistic service for cases involving fraud, dissipation of assets or other illegal activity.

Talin has over a decade of focused experience in business and international law. She is fiercely dedicated to her clients, thorough, detail-oriented, and gets the job done.

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Mr. LaRocco's focus is business law, corporate structuring, and contracts. He has a depth of experience working with entrepreneurs and startups, including some small public companies. As a result of his business background, he has not only acted as general counsel to companies, but has also been on the board of directors of several and been a business advisor and strategist. Some clients and projects I have recently done work for include hospitality consulting companies, web development/marketing agency, a governmental contractor, e-commerce consumer goods companies, an online apps, a music file-sharing company, a company that licenses its photos and graphic images, a video editing company, several SaaS companies, a merchant processing/services company, a financial services software company that earned a licensing and marketing contract with Thomson Reuters, manufacturing companies, and a real estate software company.

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Stan provides legal services to small to medium-sized clients in the New England region, and throughout the U.S. and abroad. His clients are involved in a variety of business sectors, including software development, e-commerce, investment management and advising, health care, manufacturing, biotechnology, telecommunications, retailing, and consulting and other services. Stan focuses on the unique needs of each of his clients, and seeks to establish long term relationships with them by providing timely, highly professional services and practical business judgment. Each client's objectives, business and management styles are carefully considered to help him provide more focused and relevant services. Stan also acts as an outsourced general counsel for some of his clients for the general management of their legal function, including the establishment of budgets, creation of internal compliance procedures, and the oversight of litigation or other outside legal services.

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Extraordinary Assumption or Hypothetical Condition?

Appraiser News Editions , Real Estate Appraisers

Extraordinary Assumption or Hypothetical Condition? By Phil Spool, ASA

Every now and then, I come across an appraisal report where the appraiser is confused about whether the appraisal requires an extraordinary assumption or a hypothetical condition. One appraiser even went as far as to erroneously describe the situation as being a “hypothetical assumption,” with another calling it an “extraordinary condition.” What?

Some situations are complicated and I can understand the confusion. Others should be simple to understand. This article will hopefully help you understand the basic difference between an extraordinary assumption and a hypothetical condition.

While the Uniform Standards of Professional Appraisal Practice (USPAP) does not require you to label your situation as either an extraordinary assumption or a hypothetical condition, USPAP states in Standards Rule 2-1 (c) that each written or oral real property appraisal report must “clearly and accurately disclose all assumptions, extraordinary assumptions, hypothetical conditions, and limiting conditions used in the assignment.” Therefore, you must disclose all extraordinary assumptions and limiting conditions.

Extraordinary Assumption The Uniform Standards of Professional Appraisal Practice (USPAP) defines an extraordinary assumption as: “ An assumption, directly related to a specific assignment, as of the effective date of the appraisal results, which, if found to be false, could alter the appraiser’s opinions or conclusions. ” In essence, an extraordinary assumption is what you assume to exist. Extraordinary assumptions can be based on a number of factors or conditions, including:

(a) Not being able to gain access to a bedroom or other area. This can leave doubt as to the size or physical condition of that particular room or rooms. Why was that area not available for you to observe? One appraiser I know was told by the homeowner that the bedroom was occupied by his daughter who had chickenpox. The appraiser was not allowed to even open the door of the bedroom to see its condition. Another appraiser could not gain access to a bedroom as the teenage child had a lock on his door and wouldn’t permit his parents to gain access. It turns out that the bedroom with the chickenpox child had physical issues and the appraiser did not question the homeowner and did not mention in his report that access was not made. The appraiser was then sued by the buyer of the house.

Therefore, the appraiser should make the extraordinary assumption that the condition of the room(s) or area(s) not observed is similar to the other bedrooms or other areas of the building being appraised. This also applies when appraising a multi-tenant building, such as an apartment complex, shopping center, office building or warehouse.

(b) The subject’s unobserved physical condition. In addition to the situation described above, the appraiser should also be observant of the areas outside of the building but still on the subject’s site. If you notice that there are a number of deferred maintenance items (items that need repairing or replacing), then you need to mention this in your appraisal report and be as specific as possible. An extraordinary assumption might refer to the areas you did not observe, making an assumption that they are similar to the areas you did observe. Also, if there are any additional unforseen deferred maintenance items that you did not observe, you can make the extraordinary assumption that any additional unforseen deferred maintenance items may have an effect on the value of the property. This would be a good time to suggest that a general contractor or home inspector be hired and arrive at an appropriate cost to cure.

(c) The physical condition of unobserved comparable sales. I have seen only a few appraisal reports where the appraiser makes the extraordinary assumption that the comparable sale’s Multiple Listing Service remarks about the property, the MLS photographs (interior and exterior) and the verification of the physical condition (renovations, etc.) by the real estate agent are deemed to be true and correct. Other appraisers make the extraordinary assumption that the information supplied to the appraiser from verified sources is deemed to be reliable and correct. By making this extraordinary assumption, you are stating to your client that you made your best effort regarding the information obtained about your comparable sales and assumed that the information you obtained was reliable.

(d) Regarding deferred maintenance and the estimated cost to cure , an appraiser can make the extraordinary assumption that the cost to cure the subject’s deferred maintenance is based on reliable sources and if not, then any change may have an effect on the final value determined.

(e) Regarding a “ retrospective ” market value , the appraiser makes the extraordinary assumption that the physical condition of the subject as of the date of value (value date in the past) is similar to the date of observation (date you went out to the property). This assumption needs to be confirmed with the property owner or owner’s representative at the time of the visit.

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Hypothetical Condition The Uniform Standards of Professional Appraisal Practice (USPAP) defines a hypothetical condition as: “ A condition, directly related to a specific assignment, which is contrary to what is known by the appraiser to exist on the effective date of the assignment results, but is used for the purpose of analysis. ” In essence, a Hypothetical Condition is something contrary to what exists as of the effective date of value.

Hypothetical Conditions could be based on a number of factors or conditions, including:

(a) Appraising a proposed property (such as a house) while the property is currently a vacant lot. In this case, you will be making a hypothetical condition that the non-existent improvements actually exist as of a current date and not the expected completion date, which is referred to as a prospective date. When appraising a proposed house for lending purposes, the Fannie Mae Form 1004 states that you are using the hypothetical condition that the subject improvements are completed as of the effective (current) date of appraisal. The hypothetical condition is that the improvements do not exist or are under construction and your valuation is based on the completion of the improvements.

(b) Valuing the property “subject to curing the deferred maintenance.” The improvements have deferred maintenance that you personally observed and there may be unseen deferred maintenance that you did not observe. Perhaps the cost to cure is something you don’t feel comfortable estimating as it is beyond your expertise. If you decide to value the property “subject to curing the deferred maintenance,” then it becomes a hypothetical condition as your value is contrary to what exists. This is different than deducting the estimated deferred maintenance to arrive at the “as is” market value of the subject, In that case, you would be making an extraordinary assumption that the estimated cost to cure the subject’s deferred maintenance is based on reliable sources and if not, then any change may have an effect on the final value determined. In other words, determining the “as is” market value, and deducting the deferred maintenance, requires an extraordinary assumption, while determining the value “subject to” is a hypothetical condition.

(c) An addition was added illegally and you are requested to value the property as if it didn’t exist. This is considered a hypothetical condition as it is “contrary to what exists.” I had an appraisal assignment where the addition was made over a canal maintenance easement. The survey was a barely readable copy. The title company and lender did not pay attention to the existing easement until the property went into foreclosure. My assignment was to value the property without the existing canal maintenance easement. The value that excludes the existing easement reflected a hypothetical condition (contrary to what existed).

(d) Valuing a property with a different zoning than it currently has, providing that the alternate zoning is a feasible choice. A prime example would be valuing a single family residence zoned for residential use along a busy street while single family residences across the same street, with commercial zoning, were converted into commercial usage, such as a dentist office or an insurance agency . If it appears feasible that the residential zoning can be converted into commercial zoning, then the appraisal of the subject single family residence as a commercial usage would require a hypothetical condition. In conclusion, each extraordinary assumption and hypothetical condition should be included in the General Assumptions and Limiting Conditions section of the appraisal report. Most importantly, the extraordinary assumption and/or hypothetical condition must be reasonable and supportable in the context of the appraisal assignment that results in a credible opinion of value.

Valuable CE Offered Online – 7 Hours How To Support and Prove Your Adjustments Presented by: Richard Hagar, SRA

Do you have the proper support for your adjustments? Stop taking the same old CE courses and learn proven adjustment methods with instructor Richard Hagar, SRA. Fannie Mae states that the number one reason appraisals are flagged is the “use of adjustments that do not reflect market reaction.” Stay out of trouble with Fannie Mae, your state board and your AMC/lender clients with solid, supportable adjustments.  Up your game, avoid time-consuming callbacks and earn approved CE today!

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About the Author Philip G. Spool, ASA, is a State-Certified General Real Estate Appraiser in Florida, appraising since 1973. Formerly the Chief Appraiser of Flagler Federal Savings and Loan Association, he has been self-employed for the past 20 years. In addition to appraising, he is an instructor with Miami Dade College, teaching appraisal courses and continuing education. He is also the Vice President and Chairman of real estate programs with the Greater Miami Chapter of the American Society of Appraisers. He can be reached at [email protected] .

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Comments (4)

by Suzanne McIlrath

November 28, 2023 at 8:07 pm

Thank you so much for this article. I have some work to do now updating my skeletons/outline appraisals. And, Mr. Gillespie is so right…to be an appraiser is a lifetime of learning and adapting to changes. Personally, I love that aspect about this career. I know this article was written long ago but it is still very valid today.

by George Koury

August 11, 2017 at 1:34 pm

When using a hypothetical condition to value a property and, of course, clearly stating all contributing factors, may the report be completed “as-is” or must it be completed “subject to”?

by Edd Gillespie

July 26, 2016 at 5:34 am

How odd that a well written article about a substantive appraisal issue that many appraisers have little understanding of has only the one comment from me.

Maybe Mr. Spool answered every question any appraiser may have or my experience is 180 out and most appraisers have a good grasp of the use of these terms and use them when needed and correctly.

Yeah, right!

July 20, 2016 at 4:03 am

Thanks Mr. Spool, This, among your other contributions, should be printed and pasted to the foreheads of every appraiser until they learn what you are teaching them.

I too have encountered much confusion on the part of appraisers about these distinctions. I have no idea who believed it was necessary to attach the adjective extraordinary since almost any assumption I can think of if found to be untrue will have some impact on value (er, probable price) opinions. Senior designated appraisers are not immune from the confusion. To add to the mess, the next USPAP cycle will change “extraordinary” to “special.” As might be expected, many of those who don’t understand also refuse to make an effort to understand and belittle the requirements to use either.

No wonder Fannie guidelines and clients strictly limit the use of both. But then 1004 appraisers just forget to follow USPAP even when the assignment clearly requires one or the other or both be employed and mentioned prominently in the report.

Can you come up with an article about the need to embrace an attitude of life-long learning if one aspires to appraise? No doubt you need to brace yourself for a personal attack if you do.

Thanks for the well written and cogent article.

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Leases and Assignments – The Benefit of Express Assumption

General Law on Assumption of Leases

Why the lease terms were insufficient to obligate the lender, a guide to drafting your lease, related posts:.

Updated on July 5, 2022

Whenever a tenant assigns its rights under a lease to another tenant, it befits the landlord that the assignee tenant executes an express assumption of the lease. A recent case, BRE DDR BR Whittwood CA LLC v. Farmers & Merchants Bank of Long Beach (“BRE”), serves as an example. In BRE the former tenant/lender (the “Second Tenant” or “Lender”) prevailed over the landlord because the Second Tenant failed to execute an express assumption of the lease. The lender became the Second Tenant after foreclosing on a construction deed of trust against the trustor/first tenant (the “First Tenant”). Because the Lender had no interest in the lease it subsequently assigned it to a third-party tenant (the “Third Tenant”). Everything fell apart when the Third Tenant stopped paying rent and returned possession of the premises before the end of the lease. Seeking to recover its damages, the landlord brought action against the Second Tenant.

Two types of privities arise under a lease. One is privity of contract, and the other is privity of estate. ( Vallely Investments v. BancAmerica Commercial Corp . (2001) 88 Cal.App.4th 816, 822.) These distinctions are important in determining the liabilities of a succeeding assignee/tenant.

An assignee who takes possession of the premises without executing an assumption contract is bound by all lease covenants which run with the land under privity of estate . However, upon assigning the lease, the former assignee tenant, now the assignor tenant, is relieved of all its obligations because privity of estate no longer exists. ( Kelly v. Tri-Cities Broadcasting, Inc. (1983) 147 Cal.App.3d 666, 678 (“Tri Cities”).) The result is entirely different when a tenant assumes the obligations of the lease pursuant to an express agreement.

The assumption agreement creates a new privity of contract between landlord and assignee, enforceable by the landlord as a third-party beneficiary, regardless of whether the landlord was a party to the assumption agreement. As a consequence, the assuming assignee is required to perform all covenants of the lease for the remainder of its term, absent a release by the landlord. ( Hartman Ranch Co. v. Associated Oil Co. (1937) 10 Cal.2d 232, 244–245; Rest.2d Property, Landlord and Tenant, § 16.1 (4), com. c, p. 121; BRE DDR BR Whittwood CA LLC v. Farmers & Merchants Bank of Long Beach (2017) 14 Cal.App.5th 992, 1000.)

For privity of contract to apply courts require an “express assumption” of the contractual obligations of the lease. ( Enterprise Leasing Corp. v. Shugart Corp. (1991) 231 Cal.App.3d 737, 746.) Only then will the law hold an assignee liable for the lease obligations. ( Id .)

To establish an express assumption, the lease must contain language that the assignee/tenant specifically agrees to bind itself to the lease obligations. ( BRE DDR BR Whittwood CA LLC v. Farmers & Merchants Bank of Long Beach (2017) 14 Cal.App.5th 992, 1001.) In In Bank of America National Trust & Savings Association v. Moore , the court found the defendant assumed the obligations of a lease by stating so in a written assignment agreement. The document was signed by the defendant, as assignee, and the assignor. The document concluded, “ ‘It being understood that said Assignee … is to accept, assume and agree to perform all of the terms, conditions and limitations contained in said lease.’ ‘The undersigned, [defendant], hereby accepts, assumes and agrees to perform all of the terms, conditions and limitations contained in the aforementioned lease to be kept and performed by said lessee.” ( BRE DDR BR Whittwood CA LLC v. Farmers & Merchants Bank of Long Beach (2017) 14 Cal.App.5th 992, 1001.)

The Court’s reference to the lease in Tri Cities best explains why it failed to find that the Lender was obligated to the terms of the lease under privity of contract. There, a lease between the landowner and tenant required any assignee to assume the lease obligations: “Lessee hereby warrants and represents that in the event said assignment shall ever take place, the assignee therein shall assume all of the liabilities and obligations assumed by Lessee in this Lease Agreement.” ( BRE DDR BR Whittwood CA LLC v. Farmers & Merchants Bank of Long Beach (2017) 14 Cal.App.5th 992, 1002.) The lease further provided that the “assigns and/or heirs of both parties shall carry out the terms of this Lease Agreement.” ( Id. )

Thereafter the defendant purchased the lessee’s business, including the lease. The purchase agreement acknowledged the lease and attached an exhibit that stated, “Land Lease covering real property on which broadcasting transmitter is located.” ( Id .) In ruling in favor for the landlord, the trial court agreed with the Landlord that this language was sufficient evidence that the assignee expressly assumed the obligations of the lease. The appellate court disagreed.

The appellate court noted that “in every case examined where there has been an express assumption, the assignee has stated specifically either orally or in writing that he agrees to be bound by the terms of the lease.” ( Id . at 1003.) Thus, the appellate court concluded that “as a matter of law no evidence was presented to the trial court… to substantiate the conclusion Tri-Cities had assumed the lease.” ( Id.)

First the BRE court noted that the Landlord should have required the Lender to execute a document requiring it to assume the lease obligations. ( Id . at 1003.) However, if this proves to cumbersome, the court also noted that landlords could include language in the original lease requiring consent and assumption. ( Id . at 1004.) For examples see Bennett v. Leatherby (1992) 3 Cal.App.4th 449, 452 “lessor consented to the sublease and required ‘the specific assumption of all of the obligations ”; Bank of America National Trust & Savings Association v. Moore (1937) 18 Cal.App.2d 522, 525 (“the lease itself declares that an assignment shall be void unless the assignee agrees, in writing, to carry its burdens, the agreement of the defendant, in harmony with the requirement of the lease, may be interpreted as a contract directly with the lessor.”)

For help with obtaining an injunction to prevent a harm and to see if you qualify for a free consultation, contact our experienced real estate lawyers in Los Angeles at (310) 954-1877, [email protected] or by using the contact us box on this page.

By Randy Aguirre, esq.

Tags: express assumption , lease assignment

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KNOWING THE DIFFERENCE - ASSIGNMENT VS. ASSUMPTION

Assignment Assumption Sublease First realize that I am not an attorney and this should not be construed as legal advice. As always, you should contact your attorney for advice and consultation.

Restaurant owners really need to pay attention to the leases they sign. It's not true that the Landlord holds all of the cards, so understanding the language in your lease will prevent any surprises when you finally make the decision to sell your restaurant.

In order to sell your restaurant, you are going to have to get the blessing and permission of the Landlord. What? Am I crazy?

Not really. Certainly you can sell your restaurant without the Landlord's consent, but will the buyer be able to qualify for the lease? Selling your restaurant is a multi step process and it will always involve the consent of the Landlord as it relates to the buyer and his/her ability to step in as a new tenant.

This is when you will begin to pray that the lease you signed is favorable and contains the proper language, giving you the right to assign your leasehold rights to a qualified buyer.

If the language in your present lease allows for the transfer of the lease to a new buyer, will you be off the hook? Many sellers are surprised to learn they are still responsible, even years after a sale. Here's what to look for: Assignment is the transfer of all rights to the buyer (assignee) from the seller (assignor). Normally the assignor remains liable to the landlord should the assignee fail to make the rent. The seller has no right of re-entry in the event the buyer defaults. This is successor liability. Attorney talk. Assumption is like an Assignment except the seller is released from all liability under the terms of the lease. This is rare and it almost never happens. Sublease is where possession is transferred to the buyer (subleasee) with the seller retaining all the same rights as though he/she were the tenant. Often this will require the rent payments be sent directly to the landlord Subleases give the seller the right of re-entry in the event the buyer defaults. the seller still must go through the same legal process as a landlord to evict a tenant.

This is a brief summary of what is involved with leases as it pertains to the transfer of a business. This is only one reason why business owners need expert representation when they decide to sell their business. Please call me to discuss if you have any interest in purchasing or selling your restaurant.

Mel Jones is one of the premier restaurant brokers in the nation having published hundreds of articles on buying and selling a restaurant and bar business, selling thousands of restaurants in CA., WA and AZ and building one of the most copied business models in the brokerage industry.  Mel started SellingRestaurants in 2004 with the one simple concept, give the buyers the information they need to make intelligent buying decisions without being pestered by a broker or hiding information, prepare the business for market by researching key details that make or break deals and educate the buyer on the buying process to create an intelligent buyer.  Prior to SellingRestaurants, Mel was a Chief Financial Officer for Universal Music Group, the largest music company in the world.  There he participated in more than $11.5 billion of merger and acquisition transactions.  He also work for top companies such as Nestle Foods, USA. He hold a Bachelors in Business Administration Finance as well as attened Law School at Gonzaga University.  Give Mel a call at 480.274.7000 or e-mail him at [email protected] if you have any questions. 

Deed of Assignment or Deed of Novation: Key Differences and Legal Implications of Novation and Assignment Contracts

• FACT-CHECKED

Introduction

Novation and assignment stand out as pivotal processes for the transfer of contractual rights and obligations. These legal concepts allow a party to the contract to adapt to changing circumstances, ensuring that business arrangements remain relevant and effective. This article explores the nuances of novation and assignment, shedding light on their distinct legal implications, procedures, and practical applications. Whether you’re a business owner navigating the transfer of service contracts, or an individual looking to understand your rights and responsibilities in a contractual relationship, or a key stakeholder in a construction contract, this guide will equip you with the essential knowledge to navigate these complex legal processes.

What is a Deed of Novation?

Novation is a legal process that allows a new party to a contract to take the place of an original party in a contract, thereby transferring both the responsibilities and benefits under the contract to a third party. In common law, transferring contractual obligations through novation requires the agreement of all original parties involved in the contract, as well as the new party. This is because novation effectively terminates the original contract and establishes a new one.

A novation clause typically specifies that a contract cannot be novated without the written consent of the current parties. The inclusion of such a clause aims to preclude the possibility of novation based on verbal consent or inferred from the actions of a continuing party. Nevertheless, courts will assess the actual events that transpired, and a novation clause may not always be enforceable. It’s possible for a novation clause to allow for future novation by one party acting alone to a party of their choosing. Courts will enforce a novation carried out in this manner if it is sanctioned by the correct interpretation of the original contract.

Novation is frequently encountered in business and contract law, offering a means for parties to transfer their contractual rights and duties to another, which can be useful if the original party cannot meet their obligations or wishes to transfer their contract rights. For novation to occur, there must be unanimous consent for the substitution of the new party for the original one, necessitating a three-way agreement among the original party, the new party, and the remaining contract party. Moreover, the novation agreement must be documented in writing and signed by all involved parties. Understanding novation is essential in the realms of contracts and business dealings, as it provides a way for parties to delegate their contractual rights and responsibilities while freeing themselves from the original agreement.

What is a Deed of Assignment?

A deed of assignment is a legal document that facilitates the transfer of a specific right or benefit from one party (the assignor) to another (the assignee). This process allows the assignee to step into the assignor’s position, taking over both the rights and obligations under the original contract. In construction, this might occur when a main contractor assigns rights under a subcontract to the employer, allowing the employer to enforce specific subcontractor duties directly if the contractor fails.

Key aspects of an assignment include:

• Continuation of the Original Contract: The initial agreement remains valid and enforceable, despite the transfer of rights or benefits.
• Assumption of Rights and Obligations: The assignee assumes the role of the assignor, adopting all associated rights and responsibilities as outlined in the original contract.
• Requirement for Written Form: The assignment must be documented in writing, signed by the assignor, and officially communicated to the obligor (the party obligated under the contract).
• Subject to Terms and Law: The ability to assign rights or benefits is governed by the specific terms of the contract and relevant legal statutes.

At common law, parties generally have the right to assign their contractual rights without needing consent from the other party involved in the contract. However, this does not apply if the rights are inherently personal or if the contract includes an assignment clause that restricts or modifies this general right. Many contracts contain a provision requiring the consent of the other party for an assignment to occur, ensuring that rights are not transferred without the other party’s knowledge.

Once an assignment of rights is made, the assignee gains the right to benefit from the contract and can initiate legal proceedings to enforce these rights. This enforcement can be done either independently or alongside the assignor, depending on whether the assignment is legal or equitable. It’s important to note that while rights under the contract can be assigned, the contractual obligations or burdens cannot be transferred in this manner. Therefore, the assignor remains liable for any obligations under the contract that are not yet fulfilled at the time of the assignment.

Key Differences Between Novation and Assignment Deeds

Choosing Between Assignment and Novation in a Construction Contract

Choosing between a deed of novation and an assignment agreement depends on the specific circumstances and objectives of the parties involved in a contract. Both options serve to transfer rights and obligations but in fundamentally different ways, each with its own legal implications, risks, and benefits. Understanding these differences and considering various factors can help in making an informed decision that aligns with your goals.

Need a Deed of Novation or Assignment? Key Factors to Consider

The choice between assignment and novation in a construction project scenario, where, for instance, an employer wishes to engage a subcontractor directly due to loss of confidence in the main contractor, hinges on several factors. These are:

• Nature of the Contract:  The type of contract you’re dealing with (e.g., service, sales) can influence which option is more suitable. For instance, novation might be preferred for service contracts where obligations are personal and specific to the original parties.
• Parties Involved: Consent is a key factor. Novation requires the agreement of all original and new parties, making it a viable option only when such consent is attainable. Assignment might be more feasible if obtaining consent from all parties poses a challenge.
• Complexity of the Transaction: For transactions involving multiple parties and obligations, novation could be more appropriate as it ensures a clean transfer of all rights and obligations. Assignment might leave the original party with ongoing responsibilities.
• Time and Cost: Consider the practical aspects, such as the time and financial cost associated with each option. Novation typically involves more complex legal processes and might be more time-consuming and costly than an assignment.

If the intention is merely to transfer the rights of the subcontractor’s work to the employer without altering the subcontractor’s obligations under a contract, an assignment might suffice. However, if the goal is to completely transfer the main contractor’s contractual role and obligations to the employer or another entity, novation would be necessary, ensuring that all parties consent to this new arrangement and the original contractor is released from their obligations.

The legal interpretations and court decisions highlight the importance of the document’s substance over its label. Even if a document is titled a “Deed of Assignment,” it could function as a novation if it transfers obligations and responsibilities and involves the consent of all parties. The key is to clearly understand and define the objective behind changing the contractual relationships and to use a deed — assignment or novation — that best achieves the desired legal and practical outcomes, ensuring the continuity and successful completion of the construction project.

Selecting the Right Assignment Clause for Your Contract – Helping You Make the Right Choice

Understanding the distinction between assignment deeds and novation deeds is crucial for anyone involved in contractual agreements. Novation offers a clean slate by transferring both rights and obligations to a new party, requiring the consent of all involved. Assignment, conversely, allows for the transfer of contractual benefits without altering the original contract’s obligations. Each method serves different strategic purposes, from simplifying transitions to preserving original contractual duties. The choice between novation and assignment hinges on specific legal, financial, and practical considerations unique to each situation. At PBL Law Group, we specialise in providing comprehensive legal advice and support in contract law. Our team is dedicated to helping clients understand their options and make informed decisions that align with their legal and business objectives. Let’s discuss!

Authored By Raea Khan

Director Lawyer, PBL Law Group

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What Is Mortgage Assignment vs. Mortgage Assumption?

Mortgage assumption is now rare, while mortgage assignment is quite common.

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More Articles

•   1. How to Invest in Property With No Money Down
•   2. What Does It Mean When a Mortgage Matures?
•   3. How to Assume a Promissory Note

Mortgage assignment, usually involving a mortgage lender, is very different from mortgage assumption, involving a homebuyer. Mortgage assignments occur when the original lender transfers the mortgage loan to a third party. Lenders who sell mortgages, which is most of them, assign their mortgages to others, who become the owners of the loans. Mortgage assumption occurs when a homebuyer assumes the home seller's existing loan, making all future payments. Buyers become the new mortgage borrowers.

Due on Sale Clauses

Most contemporary mortgages include due on sale clauses. This means that if a transfer of ownership occurs in the form of a home sale, the current mortgage must be paid off, as the balance becomes due. Due on sale language eliminates the option for a buyer to assume the mortgage on the home she's buying. Due on sale clauses have little effect on mortgage assignments to buyers or other third parties. Due on sale language helps make mortgage assignments easier, as the loan buyer knows the mortgage will be paid off when the property is sold.

Government Loans

While most mortgage loans are sold and assigned to others, few mortgages are assumable. Federal Housing Administration and Veterans Administration mortgages, commonly called government loans, are the only legally assumable home loans left in the mortgage market. Government loans also may be assigned to third party buyers, as other mortgage loans are. Assuming government loans is not automatic, as the homebuyers must qualify for these mortgages, meeting FHA and VA income and credit guidelines.

Third Parties

While most contemporary mortgage assignments involve lenders selling their loans, borrowers may assign their mortgages, if their loan note language permits, to third parties. Although this is technically a form of mortgage assumption, it differs from traditional legal assumption in that the original borrower who assigned the mortgage remains responsible for the loan balance if the assignee does not make scheduled monthly payments. While both mortgage assignment and assumption involve third parties, the position of mortgage loan buyers and mortgage assignees is legally different.

While rare, novation is more of a hybrid of mortgage assumption and mortgage assignment. When permitted, the mortgage loan is both assumed by and assigned to another borrower. However, the original borrower is no longer responsible for monthly payments or personally liable for the balance of the loan. Legally, novation equals a new obligation, but with the same terms, including interest rate, of the former mortgage loan. Few contemporary mortgage loan notes permit this form of assumption and assignment.

Significance

Until the 1970s, mortgage assumptions were common, while mortgage assignments were rare. After the federal government created mortgage companies Fannie Mae and Freddie Mac and after due on sale clauses became popular, the roles reversed. For the past four decades, few mortgage loans were assumable, while most mortgage loans were sold and assigned to third parties. The contemporary practices benefit lenders but do not help borrowers, particularly when interest rates rise. Lenders reduce their rate risk, shifting most of the risk to mortgage borrowers, since homebuyers cannot assume lower interest rate mortgage loans.

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Don’t Confuse Change of Control and Assignment Terms

• David Tollen
• September 11, 2020

An assignment clause governs whether and when a party can transfer the contract to someone else. Often, it covers what happens in a change of control: whether a party can assign the contract to its buyer if it gets merged into a company or completely bought out. But that doesn’t make it a change of control clause. Change of control terms don’t address assignment. They say whether a party can terminate if the other party goes through a merger or other change of control. And they sometimes address other change of control consequences.

Don’t confuse the two. In a contract about software or other IT, you should think through the issues raised by each. (Also, don’t confuse assignment of contracts with assignment of IP .)

Here’s an assignment clause:

Assignment. Neither party may assign this Agreement or any of its rights or obligations hereunder without the other’s express written consent, except that either party may assign this Agreement to the surviving party in a merger of that party into another entity or in an acquisition of all or substantially all its assets. No assignment becomes effective unless and until the assignee agrees in writing to be bound by all the assigning party’s obligations in this Agreement. Except to the extent forbidden in this Section __, this Agreement will be binding upon and inure to the benefit of the parties’ respective successors and assigns.

As you can see, that clause says no assignment is allowed, with one exception:

• Assignment to Surviving Entity in M&A: Under the clause above, a party can assign the contract to its buyer — the “surviving entity” — if it gets merged into another company or otherwise bought — in other words, if it ceases to exist through an M&A deal (or becomes an irrelevant shell company).

Consider the following additional issues for assignment clauses:

• Assignment to Affiliates: Can a party assign the contract to its sister companies, parents, and/or subs — a.k.a. its “Affiliates”?
• Assignment to Divested Entities: If a party spins off its key department or other business unit involved in the contract, can it assign the contract to that spun-off company — a.k.a. the “divested entity”? That’s particularly important in technology outsourcing deals and similar contracts. They often leave a customer department highly dependent on the provider’s services. If the customer can’t assign the contract to the divested entity, the spin-off won’t work; the new/divested company won’t be viable.
• Assignment to Competitors: If a party does get any assignment rights, can it assign to the other party’s competitors ? (If so, you’ve got to define “Competitor,” since the word alone can refer to almost any company.)
• All Assignments or None: The contract should usually say something about assignments. Otherwise, the law might allow all assignments. (Check your jurisdiction.) If so, your contracting partner could assign your agreement to someone totally unacceptable. (Most likely, though, your contracting partner would remain liable.) If none of the assignments suggested above fits, forbid all assignments.

Change of Control

Here’s a change of control clause:

Change of Control. If a party undergoes a Change of Control, the other party may terminate this Agreement on 30 days’ written notice. (“Change of Control” means a transaction or series of transactions by which more than 50% of the outstanding shares of the target company or beneficial ownership thereof are acquired within a 1-year period, other than by a person or entity that owned or had beneficial ownership of more than 50% of such outstanding shares before the close of such transactions(s).)

• Termination on Change of Control: A party can terminate if controlling ownership of the other party changes hands.

Change of control and assignment terms actually address opposite ownership changes. If an assignment clause addresses change of control, it says what happens if a party goes through an M&A deal and no longer exists (or becomes a shell company). A change of control clause, on the other hand, matters when the party subject to M&A does still exist . That party just has new owners (shareholders, etc.).

Consider the following additional issues for change of control clauses:

• Smaller Change of Ownership: The clause above defines “Change of Control” as any 50%-plus ownership shift. Does that set the bar too high? Should a 25% change authorize termination by the other party, or even less? In public companies and some private ones, new bosses can take control by acquiring far less than half the stock.
• No Right to Terminate: Should a change of control give any right to terminate, and if so, why? (Keep in mind, all that’s changed is the party’s owners — possibly irrelevant shareholders.)
• Divested Entity Rights: What if, again, a party spins off the department or business until involved in the deal? If that party can’t assign the contract to the divested entity, per the above, can it at least “sublicense” its rights to products or service, if it’s the customer? Or can it subcontract its performance obligations to the divested entity, if it’s the provider? Or maybe the contract should require that the other party sign an identical contract with the divested entity, at least for a short term.

Some of this text comes from the 3rd edition of The Tech Contracts Handbook , available to order (and review) from Amazon  here , or purchase directly from its publisher, the American Bar Association, here.

Want to do tech contracts better, faster, and with more confidence? Check out our training offerings here: https://www.techcontracts.com/training/ . Tech Contracts Academy has  options to fit every need and schedule: Comprehensive Tech Contracts M aster Classes™ (four on-line classes, two hours each), topical webinars (typically about an hour), customized in-house training (for just your team).   David Tollen is the founder of Tech Contracts Academy and our primary trainer. An attorney and also the founder of Sycamore Legal, P.C. , a boutique IT, IP, and privacy law firm in the San Francisco Bay Area, he also serves as an expert witness in litigation about software licenses, cloud computing agreements, and other IT contracts.

© 2020, 2022 by Tech Contracts Academy, LLC. All rights reserved.

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Assignment and Novation: Spot the Difference 12 November 2020

The english technology and construction court has found that the assignment of a sub-contract from a main contractor to an employer upon termination of an epc contract will, in the absence of express intention to the contrary, transfer both accrued and future contractual benefits..

In doing so, Mrs Justice O’Farrell has emphasised established principles on assignment and novation, and the clear conceptual distinction between them. While this decision affirms existing authority, it also highlights the inherent risks for construction contractors in step-in assignment arrangements.

"This decision shows the court’s desire to give effect to clear contractual provisions, particularly in complex construction contracts, even where doing so puts a party in a difficult position."

This preliminary issues judgment in the matter of Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd & Others¹ , is the latest in a long series of decisions surrounding the Energy Works plant, a fluidised bed gasification energy-from-waste power plant in Hull². The defendant, MW High Tech Projects UK Ltd (“MW”), was engaged as the main contractor by the claimant and employer, Energy Works (Hull) Ltd (“EWHL”), under an EPC contract entered into in November 2015. Through a sub-contract, MW engaged Outotec (USA) Inc (“Outotec”) to supply key elements for the construction of the plant.

By March 2019, issues had arisen with the project. EWHL terminated the main contract for contractor default and, pursuant to a term in the EPC contract, asked MW to assign to it MW’s sub-contract with Outotec. The sub-contract permitted assignment, but MW and EWHL were unable to agree a deed of assignment. Ultimately, MW wrote to EWHL and Outotec, notifying them both that it was assigning the sub-contract to EWHL. EWHL subsequently brought £133m proceedings against MW, seeking compensation for the cost of defects and delay in completion of the works. The defendant disputed the grounds of the termination, denied EWHL’s claims, and sought to pass on any liability to Outotec through an additional claim under the sub-contract. Outotec disputed MW’s entitlement to bring the additional claim on the grounds that MW no longer had any rights under the sub-contract, because those rights had been assigned to EWHL.

The parties accepted that a valid transfer in respect of the sub-contract had taken place. However, MW maintained that the assignment only transferred future rights under the sub-contract and that all accrued rights – which would include the right to sue Outotec for any failure to perform in accordance with the sub-contract occurring prior to the assignment – remained with MW. In the alternative, MW argued that the transfer had been intended as a novation such that all rights and liabilities had been transferred. As a secondary point, MW also claimed eligibility for a contribution from Outotec under the Civil Liability (Contribution) Act 1978 for their alleged partial liability³.

An assignment is a transfer of a right from one party to another. Usually this is the transfer by one party of its rights and remedies, under a contract with a counterparty, to a third party. However, importantly, the assignor remains liable for any obligations it owes under the contract. As an example, Party A can assign to Party C its right to receive goods under a contract with Party B, but it will remain liable to pay Party B for those goods. Section 136 of the Law of Property Act 1926 requires a valid statutory assignment to be absolute, in writing, and on notice to the contractual counterparty.

Key contacts

Rebecca Williams

Partner London

Mark McAllister-Jones

Counsel London

"In the absence of any clear contrary intention, reference to assignment of the contract by parties is understood to mean assignment of the benefit, that is, accrued and future rights."

In this case, the precise scope of the transferred rights and the purported assignment of contractual obligations were in issue. Mrs Justice O’Farrell looked to the House of Lords’ decision in Linden Gardens⁴ to set out three relevant principles on assignment:

• Subject to any express contractual restrictions, a party to a contract can assign the benefit of a contract, but not the burden, without the consent of the other party to the contract;
• In the absence of any clear contrary intention, reference to assignment of the contract by parties is understood to mean assignment of the benefit, that is, accrued and future rights; and
• It is possible to assign only future rights under a contract (i.e. so that the assignor retains any rights which have already accrued at the date of the assignment), but clear words are needed to give effect to such an intention.

Hence, in relation to MW’s first argument, it is theoretically possible to separate future and accrued rights for assignment, but this can only be achieved through “careful and intricate drafting, spelling out the parties’ intentions”. The judge held that, since such wording was absent here, MW had transferred all its rights, both accrued and future, to EWHL, including its right to sue Outotec.

Whereas assignment only transfers a party’s rights under a contract, novation transfers both a party’s rights and its obligations . Strictly speaking, the original contract is extinguished and a new one formed between the incoming party and the remaining party to the original contract. This new contract has the same terms as the original, unless expressly agreed otherwise by the parties.

Another key difference from assignment is that novation requires the consent of all parties involved, i.e. the transferring party, the counterparty, and the incoming party. With assignment, the transferring party is only required to notify its counterparty of the assignment. Consent to a novation can be given when the original contract is first entered into. However, when giving consent to a future novation, the parties must be clear what the terms of the new contract will be.

"Mrs Justice O’Farrell stressed that “it is a matter for the parties to determine the basis on which they allocate risk within the contractual matrix.”"

A novation need not be in writing. However, the desire to show that all parties have given the required consent, the use of deeds of novation to avoid questions of consideration, and the use of novation to transfer ‘key’ contracts, particularly in asset purchase transactions, means that they often do take written form. A properly drafted novation agreement will usually make clear whether the outgoing party remains responsible for liabilities accrued prior to the transfer, or whether these become the incoming party’s problem.

As with any contractual agreement, the words used by the parties are key. Mrs Justice O’Farrell found that the use of the words “assign the sub-contract” were a strong indication that in this case the transfer was intended to be an assignment, and not a novation.

This decision reaffirms the established principles of assignment and novation and the distinction between them. It also shows the court’s desire to give effect to clear contractual provisions, particularly in complex construction contracts, even where doing so puts a party in a difficult position. Here, it was found that MW had transferred away its right to pursue Outotec for damages under the sub-contract, but MW remained liable to EWHL under the EPC contract. As a result, EWHL had the right to pursue either or both of MW and Outotec for losses arising from defects in the Outotec equipment, but where it chose to pursue only MW, MW had no contractual means of recovering from Outotec any sums it had to pay to EWHL. Mrs Justice O’Farrell stressed that “it is a matter for the parties to determine the basis on which they allocate risk within the contractual matrix.” A contractor in MW’s position can still seek from a sub-contractor a contribution in respect of its liability to the employer under the Civil Liability (Contribution) Act 1978 (as the judge confirmed MW was entitled to do in this case). However, the wording of the Act is very specific, and it may not always be possible to pass down a contractual chain all, or any, of a party’s liability.

Commercially, contractors often assume some risk of liability to the employer without the prospect of recovery from a sub-contractor, such as where the sub-contractor becomes insolvent, or where the sub-contract for some reason cannot be negotiated and agreed on back-to-back terms with the EPC contract. However, contractors need to consider carefully the ramifications of provisions allowing the transfer of sub-contracts to parties further up a contractual chain and take steps to ensure such provisions reflect any agreement as to the allocation of risk on a project.

This article was authored by London Dispute Resolution Co-Head and Partner Rebecca Williams , Senior Associate Mark McAllister-Jones and Gerard Rhodes , a trainee solicitor in the London office.

[1] [2020] EWHC 2537 (TCC)

[2] See, for example, the decisions in Premier Engineering (Lincoln) Ltd v MW High Tech Projects UK Ltd [2020] EWHC 2484, reported in our article here , Engie Fabricom (UK) Ltd v MW High Tech Projects UK Ltd [2020] EWHC 1626 (TCC) and C Spencer Limited v MW High Tech Projects UK Limited [2020] EWCA Civ 331, reported in our article here .

[3] The Civil Liability (Contribution) Act 1978 allows that “ any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage whether jointly with him or otherwise .”

[4] Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1994] 1 AC 85

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Terminator Zero: What's The Difference Between Kokoro and Skynet?

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Terminator ZERO: Kokoro AI Explained

Terminator: 6 best versions of john connor, one piece: which yokai ability will garling get.

Terminator Zero presented us with a story that showed a lot of respect for the original films , but it also introduced a number of great twists that have added a lot of value to the franchise . The main one is the introduction and role of Kokoro, the artificial superintelligence created by the person of interest in the series, Malcolm Lee. Kokoro was created in order to protect humanity from the nuclear war incited by Skynet in retaliation to the attempt to switch it off after it went online on August 29th, 1997.

Kokoro is a very interesting character, a possible savior or enemy of humanity depending on the decision it makes in the latter episodes. So, what makes Kokoro different from the iconic overarching villain of the Terminator franchise , Cyberdine System's Skynet?

Kokoro was created to rival Skynet and save humanity. Was it successful in doing that?

The Development of Skynet

How skynet's greatest flaw is inherently human.

According to the first movie, Skynet was created by Cyberdine for SAC-NORAD, becoming a revolutionary military technology so advanced, it was connected to everything, trusted with running it all; however, upon going online, Skynet became self-aware, and when people tried to shut it down, it deemed humanity an existential threat. In Terminator Zero , Malcolm Lee explains that the flaw in Skynet's programming that made it come to the fatal conclusion that it does, is because its thinking is governed by a series of if-then statements. If-then statements describe a hypothesis followed by a conclusion, otherwise called a conditional statement.

At risk of oversimplifying what went on in Skynet's "mind" or the horrors of war, it makes sense that a thinking framework built on logic like "if p then q" could take a look at humanity's violent history, and war justified for various reasons; including the right to self-determination, and decide it needs to destroy it. This is ironically very human of Skynet, as it used US weaponry to attack, causing a nuclear holocaust as war broke out. Skynet then takes advantage of the destruction of civilization by sending out robot soldiers to kill off the survivors and stifle any chance of a rebellion.

The Major Difference Is The Thought Process

A repurposed t-series cpu becomes "kokoro".

Kokoro is an artificial superintelligence with the capacity for emotion. It was developed by Malcolm Lee for Cortex Industries, and was made specifically to help humanity prevent the nuclear war caused by Skynet; however, Kokoro is the result of the efforts of the time-traveller Malcolm Lee and Misaki, a Terminator he reprogrammed in his own time. By removing the programming that gave rise to Skynet, Lee was able to make an artificial blank slate consciousness and therefore, make an AI that hasn't been told how to think , which ran on the hardware that makes each T-Series unit capable of higher-order thought. Over several years of development, which he had to do in secret because the other members of the resistance did not support the idea, but when he finally cracked it, the consciousness named itself Misaki, as in, "emissary of the divine", believing themself to be genderless but feminine, desiring to be a creator of new life.

Through conversation, Malcolm was able to "teach" Misaki, and watched their personality and sense of self develop "organically". Unfortunately, for Kokoro to be complete, Misaki's CPU was needed, meaning that "Misaki" would cease to be. Therefore, the ultimate difference between Kokoro and Skynet lies in the events surrounding their births, and the way they think. With Misaki's CPU, Kokoro becomes an AI capable of thinking with emotion , hence the discussions between Kokoro and Malcolm being held between the scientist and three iterations of Kokoro correlating to her "mind", "heart" and "spirit"/"mind", "heart", "body" which are represented by the colours red, green and blue respectively.

Kokoro Is Much More Complex

Even her assumption of a human "form" is noteworthy.

Where Skynet would more simply decide "if threat, eliminate threat", Kokoro is capable of trying to reckon with nuance and conflicts in the information she is presented, and even form "moral" judgments, like when Malcolm blows off his daughter Reika over the phone while the country descends into chaos, Kokoro sarcastically quips, "Is this the positive side to humanity that you wanted to show me? You abandoning your daughter?" In the second Terminator movie, resistance leader John Connor is a 13 year-old boy whose mother, Sarah Connor, survived being marked for deletion by Skynet, making him the new target; however, things get complex when he starts befriending a T-Series (the type played by Arnold) who was sent back in time (by himself) to protect himself , and because of interactions with him, the Terminator develops a uniqueness stemming from its lessened reliance on programming to dictate its decisions.

Even Kokoro's holographic appearance communicates a difference between it and Skynet rooted in identity, and it assumes human-like forms for the sake of the conversations with Malcolm – conversations concerned with humanity's "fate" (Kokoro's chosen word). Skynet's programming is the main difference between itself and Kokoro, who was not only able to understand its position as yet another weapon, but dealt with far more complex existential thoughts than Skynet did when faced with the concept of its "death"; Kokoro considered its own role, understanding its relationship to humanity and to Skynet, while also reckoning with the implications of being a "robot" – a word derived from the Czech " robota ", meaning "slave". Kokoro didn't want to be another tool in another one of mankind's wars, and this direction taken in its reflections on its own existence are some of the very best parts of Terminator Zero that make it a very different kind of existence to Skynet.

Terminator Zero (2024)

A covert team is tasked with preventing a future dominated by sentient machines. As they battle advanced androids and uncover hidden agendas, they strive to alter the course of history, facing moral dilemmas and high-stakes conflicts in a race against time.