Why Assign the Contract?

Why Assign the Contract?

In real estate deals, the original parties to a purchase and sale agreement (the “PSA”) may not always be the same when the property is sold.  It is common to see an assignment of a PSA in commercial transactions, but assignments do appear in residential deals too. In practice, PSAs are generally assignable, but it must state so in the agreement.

Allowing a PSA to be assigned means that a party assigns (the “Assignor”) his/her/its rights to another party (the “Assignee”). It is most common, in the context of a PSA, that the buyer is the Assignor. There are a few instances in which the seller will assign, but that is rare. The Assignee is not an original party to the PSA, but, rather, the Assignee comes in after the PSA is executed. The Assignee assumes the rights and obligations of the Assignor. It is important to note that unless the PSA states otherwise, the original Assignor may still remain obligated to the other party to the agreement (generally the seller). One of the reasons that an Assignor may want to assign his/her/its rights to an unrelated third party is because he/she/it see an opportunity to make profit. If the purpose of assigning the PSA is to make a profit, in that case, the Assignor simply finds the property, ties it up using the PSA, and then transfers the rights to purchase to the Assignee. The Assignor may get paid as soon as the assignment of the rights and obligation happens (or when the Assignee purchases the property). It is common that the Assignor assigns his/her/its interest to a related  party; in which case, it may not be done to generate a profit (but this is not out of the question). An assignment to a related party is generally done because the Assignee may not yet exist (e.g. forming a new entity) at the time the PSA is executed.

In most cases, a seller is not inclined to permit an assignment of the PSA. That is especially true if the Assignor would be released from their obligation under the PSA. A seller wants to make sure that the buyer can close the transaction. The concern is that the buyer has the capacity and ability to comply with the terms of the PSA. If the Assignor is not released and there are no additional burdens placed on the seller, then it may not be an issue. However, a seller should not be too quick to permit an assignment of the PSA. On the other hand, a buyer would be interested in having the right to assign the PSA to another party. That gives the Assignor the right to assign his/her/its rights and obligations to another person, which may or may not happen. With that said, if the assignment happens, the ideal situation is for the Assignor to be released from further obligations under the PSA.

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