Assignment of Real Estate Contracts

This article continues the discussion of assignments of contracts  from our last issue.  Specifically, this article addresses assignment of real estate sales contracts, where the ability to assign and the effects of assigning are sometimes crucial.  Following are some aspects of assignments of real property purchase and sale agreements.

         Are real estate contracts freely assignable?  Maybe. This depends on the agreement that the buyer and seller negotiated.  Typically a seller reaches a level of comfort with regard to the trustworthiness and financial wherewithal of a particular buyer prior to signing an agreement. This expectation can be defeated if the buyer can simply assign its rights to buy the property to a third party who is a “stranger” to the seller.  As a result, sellers attempt to restrict assignments of real estate agreements.  For example, the agreement might say that it can be assigned only with the express written consent of seller, which cannot be unreasonably withheld.  Whether a party acts “reasonably” is subjective, and thus, this approach can cause problems. A second approach might be to deny the buyer’s right to assign the property unless it is to an affiliate or subsidiary of the buyer.  This approach allows a buyer to use a particular entity often times a so-called “single purpose entity” to buy the property.  From the seller’s standpoint, this is often acceptable because the seller is generally still dealing with the same principals; the owners behind the assignee are generally the same owners behind the original buyer. 

If the agreement is silent on matters of assignment it is freely assignable provided the transaction is an all cash deal to the seller.  If the agreement calls for a mortgage from the buyer to the seller or if the property is to be bought by the buyer subject to a mortgage, then the seller is only obligated to make the deed out to that original buyer, effectively nullifying any assignment.  This is an old rule but it remains sensible because when the seller signs the agreement he is relying on the credit-worthiness of a particular buyer to either make good on mortgage payments to the seller or to make payments on a mortgage loan upon which the seller is probably still a borrower. 

Is the buyer liable on the agreement after he assigns it?  Generally, yes.  Unless the agreement of sale or an assignment document that is signed by all parties including the Seller expressly relieves the assignor of liability, the assignor remains bound and liable for financial obligations under the agreement.  For this reason, it is a good idea for the assignor to get a written indemnity from its assignee as part of the assignment. 

What about realty transfer taxes?  It was once commonplace in commercial transactions in Pennsylvania for a buyer to sign an agreement to get a property “under contract”, and afterward set up an affiliate or a subsidiary which the buyer would assign the agreement to at closing.  This is less common now as the Pennsylvania Department of Revenue now generally taxes assignments of agreements of sale.  To avoid such taxes buyers now often avoid assignments by setting up and capitalizing the buyer (by contributing deposit money to the buyer) at the time the agreement is entered into rather than signing an agreement and then subsequently assigning it to a later formed entity.   Other approaches are possible, including the use of so-called “novation agreements”, but in general buyers seem to be taking the simpler route of setting up the buying entity at the start of the transaction and skipping the assignment of the agreement altogether.  

If you are a seller an assignment restriction should be included in your agreement of sale.  If you are a buyer the substance of these restrictions should be reviewed and, if needed, negotiated.  Realty transfer tax liability should also be considered. 

       —  Rod Fluck

Posted in Newsletters, Real Estate / Property