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What is an Assignability Clause?

An assignability clause is a specific provision embedded in various types of contracts. It outlines the circumstances under which one party, such as a company or entity, can transfer their contractual rights and obligations under the contract to another party. Essentially, this clause guides the process of how a contract can be reassigned.

In the context of a real estate sale, the assignability clause details whether the buyer  retains the option to transfer the contract to another buyer.  This typically happens in the Wholesaling world. A wholesaler will find a property, get an offer accepted, then run out to his/her investor network, and offer the property to them- and collect a fee for doing so. If the wholesaler finds an investor who wants the deal, then the wholesaler “assigns” the contract to the investor, and the investor then gets to take the property which the wholesaler had originally found and gotten under contract.

How does an Assignability Clause work?

An assignability clause empowers an initial party  to transfer their rights and obligations under a real estate contract to a third party before closing. All of the obligations that the seller had to the buyer, the seller now has those same obligations- to a new party, the assignee. Sellers often hate this, because the assignee is not the person they originally agreed to do business with, and often, if a seller sees an assignability clause in a contact, alarm bells will sound and they will know that they are likely dealing not with the end buyer, but with someone who is going to sell the contract to someone else who the seller does not know from Adam.

 

Why is the assignability clause important in real estate transactions?

The importance of an assignability clause in real estate transactions lies in its ability to transfer contractual rights and obligations from one party to another. By providing a legal framework for such transfers, it adds a layer of flexibility to real estate transactions. For instance, in a sales contract, an original buyer can use this clause to pass on their contractual obligations and performance requirements to a new buyer. This process would involve the title company, tasked with ensuring the legal transfer of the property.

On the other hand, certain contracts such as personal service contracts cannot be assigned due to their inherent association with the individual skills or talents of the contracting parties. For example, an architect hired to design a house can’t transfer his obligation to another without consent. Therefore, the assignability clause plays a crucial role in distinguishing between assignable and non-assignable contracts, thereby making a significant impact in the field of real estate transactions.

What are the limitations of the assignability clause?

Despite its broad utility, there are restrictions in place for the assignability clause in real estate agreements, primarily rooted in public policy and operation of law. There are often laws which control assigning contracts, and in some jurisdictions, it may not even be legal without first disclosing specifically that assigning the contract is the sellers intention.

For more legal details of an assignment clause, a lawyer should be consulted.

 

What are the legal implications of including an assignability clause?

In real estate, the introduction of an assignability clause can have wide-reaching legal implications for all parties involved. For instance, a buyer who wishes to avoid any potential legal complications may insist on an assignability clause. This allows transfer of contractual rights to a successor in case the buyer cannot perform.

More than legal implications though, the real issue of assignability is the red flags that these clauses will often raise with sellers. If they see one of these, they will often want it deleted, because sellers often do not want to deal with people who they never even agreed to sell to in the first place, just because their buyer decided to shuffle the agreement off to a random investor. 

How does the assignability clause impact real estate financing decisions?

In the real estate industry, the assignability clause significantly influences financing decisions. This is primarily due to the clause’s discretion in permitting the transfer of contractual rights to another party. Consequently, these decisions are often shaped by the policy which guides this transfer, ultimately dictating the terms and conditions under which the real estate transaction can be reassigned.

The assignability clause also allows clients to auto-assign their contractual rights and future wages to secure financing. However, many lenders exercise sole discretion to accept or reject the transfer of these rights. Therefore, the typical processing time of financing decisions within business days can be affected by their response to the assignability clause. Setting out clear terms and requirements within the clause can expedite this process, underscoring its role within real estate financing decisions.

 

What are the differences between an assignability clause and a non-assignability clause in real estate?

The differences between an assignability clause and a non-assignability clause in real estate are significant, especially in terms of their impact on the freedom of the parties involved. An assignability clause provides the contract holder the rights to transfer the obligations or benefits of the contract to another party. This flexibility facilitates in decision-making process concerning business opportunities that might arise, such as selling or refinancing. However, this type of clause often contains certain restrictive covenants that outline the stipulations and limitations of transferring the benefits of the property, ensuring that the assignee would not misuse the rights.

On the contrary, a non-assignability clause restricts the contract holder from transferring any rights or obligations to another party without the consent of the other original contract party. This clause protects the interests of the non-assigning party by stipulating that the contract cannot be delegated, creating a defined boundary for operation. Restrictive covenants in this context maintain the originality of the contract conditions regardless of market or personal circumstances, locking the parties into the original agreement. That being said, both the clauses impress upon the significance of protecting the interests of all parties involved, just in differing parameters.

Sources

Maria T. Villalobos (2017). Assignabilty of a Contract Available at: https://www.theorlandolawgroup.com/blog/all/important-clauses-for-a-residential-rental-agreement/https://housing2.lacity.org/residents/rso-overview

Shawn Grimsley. (2023). Contract Assignment vs. Novation in Real Estate. Available at: https://accidentalrental.com/lease-agreement/

Contracts Counsel. (2022). Assignment Clause: Meaning & Samples. Available at: Assignment Clause: Meaning & Samples (2022) (contractscounsel.com)

The Cambridge Law Journal. (2020). Rethinking Assignability. Available at:https://doi.org/10.1017/S0008197314000385https://www.nolo.com/legal-encyclopedia/terms-lease-rental-agreement-29776.html

Afterpattern.com.(2020). Examples of Assignment Clauses in Contracts. Available at: https://afterpattern.com/clauses/assignment#https://www.doorloop.com/blog/27-lease-agreement-clauses-landlords

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