anti assignment clause real estate

UNDERSTANDING THE ANTI-ASSIGNMENT CLAUSE IN CONTRACTS

Contracts, generally, are freely assignable i.e., either party can freely transfer one’s obligations or rights to a third party. This is what an assignment clause signifies. An assignment is a transfer of

INTRODUCTION

Contracts, generally, are freely assignable i.e., either party can freely transfer one’s obligations or rights to a third party. This is what an assignment clause signifies. An assignment is a transfer of rights and liabilities that the third party must then discharge to the other party. But sometimes, some contracts include an Anti-assignment clause to obstruct or limit assignment. They prevent either party to contract to transfer contractual obligations and/or rights to a third party.

The early legal system was against assigning contract rights as it considered them highly personal and intelligible. Fear of litigation, fear of maintenance, and champerty are some of the other reasons that many commentators feel led to the development of a non-assignability clause. However, with the passage of time and the development of technology, the work-load increased mani-fold necessitating the assignment of some rights and liabilities to the third party; now assignment of rights has become a general trend and non-assignment has taken a backseat which especially needs to be drafted to forbid assignment.

An anti-assignment clause also referred to as a non-assignment clause is a boilerplate clause that either bar completely or partially either of the party to the contract from transferring their rights and obligations under the contract to a third party without due permission from the non-assigning party.

FORMS OF ANTI-ASSIGNMENT CLAUSE

A non-assignment clause in a contract can be presented to the oblige in varied forms depending on the nature of the contract and its terms and conditions.

It may take the following forms-

• Assignments of contract rights and liabilities may be completely prohibited, or;
• Assignments may be limited to entities within the same group as the assignor.
• The agreement may prohibit any transfers of the obligation without the approval of the obligor, which should not be unreasonably denied.

IMPORTANCE OF ANTI-ASSIGNMENT CLAUSE

A non-assignment clause limits the obligor’s contractual obligations to the obligee. The courts construe the clause in favor of the non-assigning party i.e., the obliger. Since the oblige afterward assigns its rights, the obliger then needs to also cooperate with the assignee i.e., a third-party or a stranger to the contract for the performance of the contract; therefore, the courts assume that only the party that can complain about the assignment is the non-assigning party.

SCOPE OF ANTI-ASSIGNMENT CLAUSE

Anti-assignment clauses in contracts have become a frequent practice because, without them, contracts are freely assignable. However, there are certain contracts where the assignment is excused by the statutes itself, however, the anti-assignment clause is still drafted into the contract for efficient enforcement. For example, Section 37 of the Indian Contract Act [1] prohibits the practice of “offering to perform” where it is against the lex-terrae. Such contracts could be of IPR where the nature of the contract is personal [2] or could be an employment agreement where an assignment without permission would lead to significant and unfavorable consequences for non-assigning parties. For all other contracts, anti-assignment clauses can be used with ease.

Examples of the use of the Anti-Assignment Clause

• In Franchise Agreement, this clause clearly outlines the extent of the permissibility of the assignment of the intellectual property of the franchise.
• In a Purchase and Sale Agreement, the purchaser may need to assign its rights and obligations to be able to obtain financing more easily. Certainly, the seller would need to keep some control over the financing parts of the transaction through a non-assignment clause to be on the safer side and protect himself against dealing with any strange entity.
• In Asset Acquisition Agreement , a purchaser only obtains those assets and liabilities of a target listed in the agreement. In the case of an asset acquisition. In the case of an asset acquisition, any agreement with an anti-assignment clause will be activated. [3]
• In the Stockholders’ Agreement, this clause will kick in (if included), the moment stockholder tries to transfer, assign, hypothecate, mortgage, or alienate any or all stocks in a corporation. This is the case where there is a complete ban on assignment, however the same can be assigned if however, there are exemptions to non-assignment by operation by law. [4]
• Almost in all Commercial Lease Agreements, there is an anti-assignment clause. The transfer of ownership may be forbidden by an anti-assignment clause, so before selling the business, you must seek permission from your proprietor; however, this permission should not be withheld against the interests of the lease.

However, the list is not exhaustive. There are still a lot of businesses where the anti-assignment clause is used including but not limited to joint-venture agreements, partnership agreements, limited liability company operating agreements, real estate contracts, bills of sale, Assignment, and transaction financing agreements, etc.

ENFORCEABILITY OF ANTI-ASSIGNMENT CLAUSE

This restrictive clause’s effect will be triggered the moment there is any breach of this clause. According to the traditional view, a contract is void if this restrictive clause is violated; however, the modern view holds that a breach of it will only result in a claim for damages; the contract is not ipso-facto void unless expressly stated in the contract. Along with this view, the court will consider the relevant law, the jurisdiction that governs the contract, and the language of the contract to enforce this clause.

MERITS OF ANTI-ASSIGNMENT CLAUSE

A contract with an anti-assignment clause thrives with the following advantages-

• The relationship between the assignor and the obligor is preserved, while the connection between the obligor and the assignee is either limited or eliminated.
• The obligor is safeguarded by this, as they may not want to be in a situation where they must mention a set-off defence against one party and a counterclaim against the other or become involved in a disagreement between the assignor and assignee under the contract of assignment. [5]

DEMERITS OF ANTI-ASSIGNMENT CLAUSE

The anti-Assignment clause also suffers from the following disadvantages-

• In cases where this clause is violated, it is extremely difficult to quantify and measure the damages.
• It can be a lengthy and exasperating process for businesses that are on the brink of bankruptcy, such as start-ups, to finalize the closure until they get the approval of all the commercial entities with whom they had a contract that included a non-assignment clause.
• In the event of a change in ownership, such as a merger or acquisition, a business may feel uneasy about the new owner of its partner company. To have a say in the selection of the other party’s owner, the business may include a clause in the agreement that mandates their approval before the change can occur, allowing them to indirectly manage the situation.

In conclusion, an anti-assignment clause is a provision in a contract that prohibits one party from transferring or assigning their rights or obligations under the contract to a third party without the other party’s consent. This clause is commonly used in contracts to protect the interests of the parties involved and to ensure that the original parties to the contract are the ones who will perform the obligations and receive the benefits. Anti-assignment clauses can be beneficial for both parties in a contract. For the party who is providing goods or services, it ensures that they are dealing with the same party throughout the duration of the contract, which can help to maintain consistency and quality. For the party who is receiving the goods or services, it can assure that they are dealing with a party that has the necessary expertise and resources to fulfill the obligations under the contract. However, there are also potential drawbacks to anti-assignment clauses. They can limit a party’s ability to transfer their rights or obligations under the contract, which can be problematic if the party needs to assign the contract due to unforeseen circumstances. Additionally, anti-assignment clauses can make it more difficult for a party to obtain financing or sell their business, as potential buyers or lenders may be hesitant to take on a contract with such a clause. Overall, the use of anti-assignment clauses in contracts should be carefully considered and tailored to the specific needs of the parties involved. It is important to strike a balance between protecting the interests of the parties and allowing for flexibility in the event of unforeseen circumstances.

Author(s) Name: Avee Singh Dalal (Dr B.R. Ambedkar National Law University, Sonipat)

References:

[1] The Indian Contract Act, 1872, Sec. 37, No. 9, Acts of Parliament, 1872 (India)

[2] Kapilaben v. Ashok Kumar Jayantilal Sheth, (2020) 20 SCC 648

[3] Aaron R Katz, A Guide to Understanding Anti-Assignment Clauses, GT ISRAEL LAW BLOG (Feb. 18, 2023, 5:15 PM), https://www.gtlaw-israelpractice.com/2016/02/04/a-guide-to-understanding-anti-assignment-clauses/ .

[4] The Law of Offices of STIMMEL, STIMMEL & ROESER, https://www.stimmel-law.com/en/articles/assignments-basic-law (last visited Feb. 18, 2023).

[5] Michael Bridge, The nature of assignment and non-assignment clauses, LSE RESEARCH ONLINE (2015), https://eprints.lse.ac.uk/61892/1/The_Nature.pdf .

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An assignment clause (AC) is an important part of many contracts, especially for real estate. In this article we discuss:

• What is an Assignment Clause? (with Example)
• Anti-Assignment Clauses (with Example)
• Non-Assignment Clauses
• Important Considerations
• How Assets America ® Can Help

Frequently Asked Questions

What is an assignment clause.

An AC is part of a contract governing the sale of a property and other transactions. It deals with questions regarding the assignment of the property in the purchase agreement. The thrust of the assignment clause is that the buyer can rent, lease, repair, sell, or assign the property.

To “assign” simply means to hand off the benefits and obligations of a contract from one party to another. In short, it’s the transfer of contractual rights.

In-Depth Definition

Explicitly, an AC expresses the liabilities surrounding the assignment from the assignor to the assignee. The real estate contract assignment clause can take on two different forms, depending on the contract author:

• The AC states that the assignor makes no representations or warranties about the property or the agreement. This makes the assignment “AS IS.”
• The assignee won’t hold the assignor at fault. It protects the assignor from damages, liabilities, costs, claims, or other expenses stemming from the agreement.

The contract’s assignment clause states the “buyer and/or assigns.” In this clause, “assigns” is a noun that means assignees. It refers to anyone you choose to receive your property rights.

The assignment provision establishes the fact that the buyer (who is the assignor) can assign the property to an assignee. Upon assignment, the assignee becomes the new buyer.

The AC conveys to the assignee both the AC’s property rights and the AC’s contract obligations. After an assignment, the assignor is out of the picture.

What is a Lease Assignment?

Assignment Clause Example

This is an example of a real estate contract assignment clause :

“The Buyer reserves the right to assign this contract in whole or in part to any third party without further notice to the Seller; said assignment not to relieve the Buyer from his or her obligation to complete the terms and conditions of this contract should be assigning default.”

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Assignment provision.

An assignment provision is a separate clause that states the assignee’s acceptance of the contract assignment.

Assignment Provision Example

Here is an example of an assignment provision :

“Investor, as Assignee, hereby accepts the above and foregoing Assignment of Contract dated XXXX, XX, 20XX by and between Assignor and ____________________ (seller) and agrees to assume all of the obligations and perform all of the duties of Assignor under the Contract.”

Anti-Assignment Clauses & Non-Assignment Clauses

An anti-assignment clause prevents either party from assigning a contract without the permission of the other party. It typically does so by prohibiting payment for the assignment. A non-assignment clause is another name for an anti-assignment clause.

Anti-Assignment Clause Example

This is an anti-assignment clause example from the AIA Standard Form of Agreement:

” The Party 1 and Party 2, respectively, bind themselves, their partners, successors, assigns, and legal representatives to the other party to this Agreement and to the partners, successors, assigns, and legal representatives of such other party with respect to all covenants of this Agreement. Neither Party 1 nor Party 2 shall assign this Agreement without the written consent of the other.”

Important Considerations for Assignment Contracts

The presence of an AC triggers several important considerations.

Assignment Fee

In essence, the assignor is a broker that brings together a buyer and seller. As such, the assignor collects a fee for this service. Naturally, the assignor doesn’t incur the normal expenses of a buyer.

Rather, the new buyer assumes those expenses. In reality, the assignment fee replaces the fee the realtor or broker would charge in a normal transaction. Frequently, the assignment fee is less than a regular brokerage fee.

For example, compare a 2% assignment fee compared to a 6% brokerage fee. That’s a savings of $200,000 on a $5 million purchase price. Wholesalers are professionals who earn a living through assignments.

Frequently, the assignor will require that the assignee deposit the fee into escrow. Typically, the fee is not refundable, even if the assignee backs out of the deal after signing the assignment provision. In some cases, the assignee will fork over the fee directly to the assignor.

Assignor Intent

Just because the contract contains an AC does not obligate the buyer to assign the contract. The buyer remains the buyer unless it chooses to exercise the AC, at which point it becomes the assignor. It is up to the buyer to decide whether to go through with the purchase or assign the contract.

Nonetheless, the AC signals the seller of your possible intent to assign the purchase contract to someone else. For one thing, the seller might object if you try to assign the property without an AC.

You can have serious problems at closing if you show up with a surprise assignee. In fact, you could jeopardize the entire deal.

Another thing to consider is whether the buyer’s desire for an AC in the contract will frighten the seller. Perhaps the seller is very picky about the type of buyer to whom it will sell.

Or perhaps the seller has heard horror stories, real or fake, about assignments. Whatever the reason, the real estate contract assignment clause might put a possible deal in jeopardy.

Chain of Title

If you assign a property before the closing, you will not be in the chain of title. Obviously, this differs from the case in which you sell the property five minutes after buying it.

In the latter case, your name will appear in the chain of title twice, once as the buyer and again as the seller. In addition, the latter case would involve two sets of closing costs, whereas there would only one be for the assignment case. This includes back-to-back (or double) closings.

Enforceability

Assignment might not be enforceable in all situations, such as when:

• State law or public policy prohibits it.
• The contract prohibits it.
• The assignment significantly changes the expectations of the seller. Those expectations can include decreasing the value of the property or increasing the risk of default.

Also note that REO (real estate owned) properties, HUD properties, and listed properties usually don’t permit assignment contracts. An REO property is real estate owned by a bank after foreclosure. Typically, these require a 90-day period before a property can be resold.

How Assets America Can Help

The AC is a portion of a purchase agreement. When a purchase involves a commercial property requiring a loan of $10 million or greater, Assets America ® can arrange your financing.

We can finance wholesalers who decide to go through with a purchase. Alternatively, we can finance assignees as well. In either case, we offer expedient, professional financing and many supporting services. Contact us today for a confidential consultation.

What rights can you assign despite a contract clause expressly prohibiting assignment?

Normally, a prohibition against assignment does not curb the right to receive payments due. However, circumstances may cause the opposite outcome. Additionally, prohibition doesn’t prevent the right to money that the contract specifies is due.

What is the purpose of an assignment of rents clause in a deed of trust and who benefits?

The assignment of rents clause is a provision in a mortgage or deed of trust. It gives the lender the right to collect rents from mortgaged properties if the borrower defaults. All incomes and rents from a secured property flow to the lender and offset the outstanding debt. Clearly, this benefits the lender.

What is in assignment clause in a health insurance contract?

Commonly, health insurance policies contain assignment of benefits (AOB) clauses. These clauses allow the insurer to pay benefits directly to health care providers instead of the patient. In some cases, the provider has the patient sign an assignment agreement that accomplishes the same outcome. The provider submits the AOB agreement along with the insurance claim.

What does “assignment clause” mean for liability insurance?

The clause would allow the assignment of proceeds from a liability award payable to a third party. However, the insured must consent to the clause or else it isn’t binding. This restriction applies only before a loss. After a first party loss, the insurer’s consent no longer matters.

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Questionnaire

Anti-Assignment Clause: Everything You Need To Know

An anti-assignment clause prevents either of the parties to a contract from assigning tasks to a third party without the consent of the non-assigning party. 3 min read updated on September 19, 2022

An anti-assignment clause prevents either of the parties to a contract from assigning tasks to a third party without the consent of the non-assigning party.

Anti-assignment clauses are of two types:

One that prohibits the assignment of work or service pursuant to the contract.

One that prohibits the assignment of payment under the contract.

The clause that prohibits the assignment of work or service is a valid clause, completely enforceable and does not bear much importance. However, the clause that prohibits the assignment of payment is a more complex clause that affects crucial buying and selling decisions.

Are Anti-Assignment Clauses That Prohibit Assigning Payments Enforceable?

As an anti-assignment clause prohibits the assignment of payment, it affects business and thus is unenforceable and ineffective under Section 9-406 of the Uniform Commercial Code. The code clearly states that clauses pertaining to "Discharge of Account Debtor, Notification of Assignment, Identification and Proof of Assignment, Restriction on Assignment of Account, Chattel Paper, Payment Intangibles and Promissory Notes" are ineffective and void.

What Should a Factor Do If a Client's Contract Contains an Anti-Assignment Clause?

Most factors prefer not to enter into an agreement with a client whose contract contains any anti-assignment clause to avoid hassle in the future. However, legal experts suggest that factors should ignore the anti-assignment clauses in the contract and proceed with business as usual along with providing a Notice of Assignment to the account debtor.

Even if the factor decides to proceed with the business decision with the said client, he should be aware that the account debtor may not want to engage in commercial activities with the factor, and may even create difficulties in dealings and collection. Though an anti-assignment clause does not deter the factor's decision to enter into a business arrangement with an account debtor or his ability to be paid given the issuance of a Notice of Assignment, it is for him to decide if the efforts are worth the business. However, to ensure a fool-proof commercial and business dealing, the factor can obtain a signed Estoppel Letter from the account debtor to avoid all future disputes.

What Are the Anti-assignment Provisions and Their Effect on Transaction Structures?

Most commercial contracts end with a clause, ”Neither this Agreement nor any of the rights, interests or obligations under the Agreement shall be assigned, in whole or in part, by operation of law or otherwise by either party without the prior written consent of the other party.” This is the anti-assignment clause that ensures the interest of both the parties and that none of the two parties transfer any rights to any other individual with our prior consent of the other main party.

Often, a contract assignment issue plays an important factor in merger and acquisition prospects as buyers want to acquire all customer and vendor contracts. However, if any of the contracts bound by the anti-assignment clause need the approval of the other party, it could lead to additional costs for the buyer, which may affect the decision. The general notion is that most contracts are assignable unless categorically included anti-assignment clauses .

What Is the Typical Anti-assignment Language to Look Out For?

There are numerous ways of including an anti-assignment provision in the contract. However, the AIA Standard Form of Agreement contains the following anti-assignment provision:

• The Party 1 and Party 2, respectively, bind themselves, their partners, successors, assigns, and legal representatives to the other party to this Agreement and to the partners, successors, assigns, and legal representatives of such other party with respect to all covenants of this Agreement. Neither Party 1 nor Party 2 shall assign this Agreement without the written consent of the other.

What Are the Recommendations for Parties Entering Into Construction Contracts?

Usually, when commercial agreements are drawn, parties tend to focus on the key business aspects but pay no heed to anti-assignment provisions. It is thus the main responsibility of a corporate lawyer to study, analyze, and dissect agreements to ensure the best for their clients.

• Check the miscellaneous sections of any agreement to rule out any anti-assignment clause in the contract.
• Read and understand the finer points of the anti-assignment clause in the contract, if any.
• Negotiate changes in the anti-assignment clause prior to signing the contract.

If you need help with an anti-assignment clause, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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Can the buyer assign the purchase agreement to another party.

Real Estate Law: Can the Buyer Assign the Purchase Agreement to Another Party?

In the world of real estate transactions, flexibility is often essential to accommodate the changing needs and circumstances of buyers and sellers. One way this flexibility is achieved is through the practice of assignment of purchase agreements. An assignment allows a party to transfer their rights and obligations under a contract to another party. But can the buyer assign the purchase agreement to another party in a real estate transaction? In this article, we will explore the concept of assignment of purchase agreements, its implications for buyers, sellers, and real estate agents, and the legal considerations surrounding this practice.

Understanding Assignment of Purchase Agreements:

An assignment of a purchase agreement is a contractual arrangement where one party (the assignor) transfers their rights and obligations as a buyer under a purchase agreement to another party (the assignee). The assignor essentially steps aside and allows the assignee to step into their shoes, assuming the rights and responsibilities outlined in the original purchase agreement. In essence, the assignee takes over the contract and becomes the new buyer.

Legal Considerations for Assignment:

Whether a buyer can assign a purchase agreement depends on the specific terms and conditions outlined in the original contract and applicable state laws. Some contracts expressly prohibit or restrict assignments, while others may allow it with certain conditions. Additionally, state laws can vary on the enforceability of assignment clauses.

In many real estate transactions, the inclusion of an assignment clause in the purchase agreement is standard. This clause addresses the parties’ rights and obligations regarding assignment and typically includes specific conditions or restrictions on whether and how assignments can take place.

Implications for the Buyer:

For a buyer, the ability to assign the purchase agreement can offer various advantages:

Flexibility: Assignment allows the buyer to enter into a purchase agreement with the intention of transferring the rights and obligations to another party. This flexibility can be valuable in situations where the buyer’s circumstances change or they are acting as an intermediary in the transaction.

Profit Potential: Some buyers enter into purchase agreements with the intention of assigning the contract to another party for a fee. This practice, known as wholesaling, can be a lucrative strategy for investors seeking to make a profit without taking ownership of the property.

Avoiding Liability: By assigning the contract, the buyer can transfer potential liability associated with the property to the assignee. This can be particularly advantageous if the buyer identifies unforeseen risks or issues after the contract is executed.

Implications for the Seller:

For a seller, the assignment of the purchase agreement can have both benefits and potential challenges:

Expedited Closing: If the seller is motivated to close the transaction quickly, accepting an assignment from a new buyer may speed up the process, as the original buyer steps aside.

Potential Changes to Contract Terms: Depending on the assignment agreement, the new buyer (assignee) may negotiate different terms, such as the purchase price or contingencies. This can present a challenge for the seller if the new terms are not favorable.

Understanding the New Buyer: Sellers should conduct due diligence on the new buyer (assignee) to ensure they are financially capable and qualified to complete the transaction.

Implications for Real Estate Agents:

For real estate agents, handling an assignment can add complexity to the transaction:

Disclosure and Communication: Real estate agents must ensure that all parties involved in the transaction are aware of the assignment and its implications. Clear communication and disclosure are essential to avoid misunderstandings and potential disputes.

Documentation: Agents should ensure that all assignment agreements are properly documented and executed in accordance with state laws and the original purchase agreement.

Timing and Contingencies: Agents need to be mindful of any time-sensitive contingencies, such as the loan contingency, to avoid delays in the closing process.

Limitations on Assignment:

While assignment can offer flexibility and convenience, it may not always be permissible or straightforward. Some factors that can limit or restrict the assignment of purchase agreements include:

Anti-Assignment Clauses: Some purchase agreements may include anti-assignment clauses, explicitly prohibiting or restricting assignments without the written consent of all parties involved.

Specific Performance: In some jurisdictions, the legal doctrine of specific performance may come into play, making it difficult or impossible for a buyer to assign a purchase agreement. Specific performance requires parties to fulfill their contractual obligations, and assignment may be seen as a way to avoid this obligation.

Non-Assignable Contracts: Certain contracts, particularly those involving personal services or unique considerations, may not be assignable by default.

Proper Procedure for Assignment:

If the original purchase agreement allows for assignment, the parties should follow the proper procedure to ensure the assignment is valid and legally enforceable:

Written Assignment Agreement: The buyer (assignor) and the new buyer (assignee) should enter into a written assignment agreement that clearly outlines the terms and conditions of the assignment, including any changes to the original contract.

Consent of All Parties: If the purchase agreement includes an anti-assignment clause, the buyer (assignor) must obtain the written consent of all parties involved in the transaction, including the seller.

Notice to the Seller: The buyer (assignor) should provide the seller with written notice of the assignment, notifying them of the new buyer (assignee) and the intention to assign the contract.

Earnest Money Deposit: The assignee should typically provide an earnest money deposit to the seller as a show of good faith and commitment to the transaction.

Conclusion:

The assignment of a purchase agreement can offer flexibility and convenience for buyers, sellers, and real estate agents in certain real estate transactions. However, whether a buyer can assign the purchase agreement depends on the specific terms and conditions outlined in the original contract and applicable state laws. If the purchase agreement allows for assignment, proper procedures must be followed to ensure the assignment is valid and legally enforceable.

Buyers interested in assigning a purchase agreement should carefully review the contract and consult with their real estate agent to understand any limitations or restrictions on assignment. Sellers should be aware of the potential implications of accepting an assignment, including changes to contract terms and the need to conduct due diligence on the new buyer.

Real estate agents play a crucial role in facilitating assignments, ensuring clear communication among all parties, and handling the necessary documentation. To navigate the complexities of assignment effectively, buyers, sellers, and real estate agents should seek legal advice and ensure compliance with all applicable laws and contractual obligations.

Disclaimer: The information provided in this article is for general informational purposes only and should not be construed as legal advice. Real estate laws and regulations may vary by jurisdiction, and buyers and sellers should consult with a qualified real estate attorney for advice specific to their circumstances.

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ANTI-ASSIGNMENT PROVISIONS: ARE THEY ENFORCEABLE AND WHAT TO DO IF YOUR CLIENT’S CONTRACT CONTAINS ONE

Allen J. Heffner and Bruce E. Loren Apr 23, 2024

While many Account Debtors recognize the value of services provided by Factors and will gladly comply with Notices of Assignment in exchange for smooth transactions with the Client, some Account Debtors have negative views of Factors and have included language in their underlying contracts prohibiting the assignment of the Client’s receivables. Our clients have expressed concern as to how such language affects their factoring agreement with the Client and the effectiveness of the Notice of Assignment sent by the Factor to the Account Debtor. This article explains why these restrictive clauses are unenforceable and what to do if your Client has one of these provisions in their contract.

Factors should review their Client’s contracts.

Far too often, Factors do not review the contract between their Client and the Account Debtor, assuming that its relationship with the Account Debtor is separate and apart from the Client’s. Unless a Factor is confident that it will receive an executed Estoppel Letter from the Account Debtor, the Factor should be familiar with the terms and conditions of the contract between the Client and the Account Debtor because the Factor takes the assignment of the receivables subject to the terms and conditions of that contract. These contracts contain important information that the Factor needs to be aware of such as payment terms, jurisdictional clauses, attorneys’ fees provisions and Anti-Assignment Clauses. Factors should include a detailed review of their Client’s contracts into any due diligence performed on the Client and should consult with their attorney if they have any questions or concerns.

What is an Anti-Assignment Clause?

Generally, there are two types of Anti-Assignment Clauses: (i) one that prohibits the assignment of the contract or the work or services to be provided pursuant to the contract; and (ii) one that prohibits the assignment of the right to payment under the contract. The first type of restriction on assignments is valid, enforceable and generally unimportant to a Factor. If an Account Debtor hires the Client to dig a hole, the fact that the Client cannot assign the right to dig that hole to someone else is immaterial to the Factor. However, the second type of restriction on assignments is much more important to Factors deciding whether or not to purchase a prospective Client’s receivables. Here is an example of this type of Anti-Assignment Clause that our clients have come across:

[CLIENT] shall not factor or assign any sums claimed due under this Agreement without the express written authorization of an officer of [Account Debtor]. Any such attempt to factor or assign payment obligations without such express written authorization shall be considered null and void; such purported assignee shall be charged with knowledge of this prohibition and deemed to have waived the right to receive such payment from [Account Debtor].

Are Anti-Assignment Clauses that prohibit assigning receivables enforceable?

Anti-Assignment Clauses that restrict the Client’s right to assign payment obligations are unenforceable. Pursuant to Section 9-406 of the Uniform Commercial Code, contract terms that restrict the assignment of payment obligations are ineffective. By including this language into Section 9-406, the Uniform Commercial Code has voided contractual attempts to limit assignability of payment.

What should a Factor do if its Client’s contract contains this type of Anti-Assignment Clause?

Understandably, Factors are wary about entering into a factoring relationship with a Client whose contract contains this type of Anti-Assignment Clause. However, Factors can simply ignore this contractual language and proceed to purchase the receivables and deliver a Notice of Assignment to the Account Debtor as it normally would. Nevertheless, the inclusion of these Anti-Assignment Clauses should alert the Factor that the Account Debtor may not be comfortable or want to deal with a Factor, despite the Account Debtor’s legal obligations. The Factor should be aware that the Account Debtor may choose to ignore the Notice of Assignment, believing that its Anti-Assignment clause negates the Account Debtor’s obligations to comply with such a Notice. To be safe, if a Factor sees such a clause in the Client’s underlying contract, it should reach out to the Account Debtor to discuss the assignment, why the Factor will be helpful, and if necessary, explain the legal ineffectiveness of such language. At that point, the Factor can determine whether it is comfortable proceeding with the underlying transaction and factoring the Client’s receivables. No matter what the Account Debtor says, the Factor should always deliver a Notice of Assignment to the Account Debtor prior to making any advancements to the Client.

While Anti-Assignment Clauses will not ultimately inhibit the Factor’s ability to be paid from the Account Debtor if there is a valid Notice of Assignment, the Factor should decide whether or not the potential aggravation in dealing with an unfriendly Account Debtor is worth the expected profit. As always, a signed Estoppel Letter from the Account Debtor avoids almost all of the defenses that an Account Debtor can legitimately raise.

Bruce Loren and Allen Heffner of the Loren & Kean Law Firm are based in Palm Beach Gardens and Fort Lauderdale. For over 25 years, Mr. Loren has focused his practice on construction law and factoring law.  Mr. Loren has achieved the title of “Certified in Construction Law” by the Florida Bar. The Firm represents factoring companies in a wide range of industries, including construction, regarding all aspects of litigation and dispute resolution. Mr. Loren and Mr. Heffner can be reached at [email protected] or [email protected] or 561-615-5701.

Bruce E. Loren · Michael I. Kean · Allen J. Heffner · Kyle W. Ohlenschlaeger · Frank Sardinha, III

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Making a Lease’s Anti-Assignment Clause Enforceable

Connecticut supreme court: lease terms.

Most commercial real estate leases contain an anti-assignment clause.  Such provisions prohibit any assignment of the lease without the permission of the landlord.  Often the lease will state that the requisite permission will not be unreasonably withheld; other times, the granting of permission remains in the sole discretion of the landlord.  A decision of the Connecticut Supreme Court has placed a significant judicial gloss on the effect of these traditional lease terms and commercial landlords and tenants should be aware of the new rules of the game.

David Caron Chrysler Motors LLC v. Goodhall’s, Inc., 304 Conn. 738 (2012)

In   David Caron Chrysler Motors LLC v. Goodhall’s, Inc., 304 Conn. 738 (2012),   a landlord leased commercial property to a limited liability company tenant.  The lease contained the typical “no assignment without landlord consent which will not be unreasonably withheld” language.  The tenant assigned the lease to the plaintiff without the landlord’s consent.

The plaintiff brought suit claiming that the landlord had violated the lease.  The trial court found that the absence of landlord consent to the earlier assignment of the lease precluded a finding of an enforceable contract (i.e., lease) between the parties.  The Connecticut Supreme Court reversed the decision below.  It found that because the particular anti-assignment clause did not also state that any assignment would be rendered void or invalid, the challenged assignment was merely “voidable.”  The court found significant the fact that the landlord never sought to invoke its option to void the lease, post assignment.  Thus, the landlord remained bound by the lease, albeit with a new, assignee tenant.

The take-away from   David Caron Chrysler Motors, LLC , is that landlords should adopt a “belt and suspenders” approach to drafting anti-assignment clauses.  The lease should expressly state that (a) there is to be no assignment of the lease without landlord consent, and (b) any purported assignment of the lease in violation of such provision shall be void.  The absence of such additional, clarifying language can result in a landlord having to accept a previously unacceptable assignee tenant.

If you have any questions regarding the content above, please do not hesitate to contact Joseph Maya and the other experienced attorneys at Maya Murphy, P.C. at (203) 221-3100 or [email protected] to schedule a consultation today.

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