What is an Assignment and Assumption Agreement?
An assignment and assumption agreement is the legal mechanism used in business deals to transfer rights and obligations from one party to the other. It is typically the closing document in a deal where at least one of the parties has obligations to perform something.
In the context of a software license, for example, at least one of the parties to the license agreement has to perform the activities necessary to provide the software to the receiving party (i.e., install , configure, maintain, etc.). The parties will not want to transfer the obligations of that agreement to a third party without the receiving party’s agreement to a similar transfer.
The assignment and assumption agreement also serves as an assurance to the transferring party that the other party has the capacity and capability to execute its obligations under the agreement. Without this assurance, the transferor may remain on the hook for the other party’s obligations.
The Main Parts of an Assignment and Assumption Agreement
Parties: The names and addresses of both the assignor (the company being acquired) and the assignee (the buyer) should be stated. The parties may also include any guarantees that the assignment may require of them in the future.
Agreement: This portion states the intent of the parties to transfer rights and obligations from one entity to another. It typically includes a clause explaining that the agreement is contingent upon other elements, such as financing.
Assigned Rights: Once the transfer is taking place, the designated rights of the assignor must be listed. This is possibly the most important part of the document, as it is what will affect the financial outcome of the deal. These rights may include access to and use of intellectual property, as an example.
Assumed Liabilities and Obligations: The transaction should explicitly list which liabilities are being transferred to the purchaser. Any exceptions should be outlined here so there is no confusion later.
Legal Compliance: The obligations of the deal must be compliant with local laws in order for the transaction to be enforceable. A legal team can ensure that state and federal laws are being followed.
The Effective Date: This is the official date of the contract, and it is often a date preceding the actual signing. It allows for tasks to be completed before the deal is made final, as well as assigned entity rights.
Why You Should Use an Assignment and Assumption Template
In addition to the reasons referenced above [in the previous section], the primary advantage to a standardized contract template is the efficient manner in which it can be used for multiple assignments. By using a consistent form across transfers, the administrative burdens can be reduced and the euphoria a seller may feel upon closing can be utilized on other matters rather than open with the need to review and negotiate a form agreement.
A template can also be a big help in ensuring that the appropriate legal boilerplate is included. Frequently, practitioners insert different language in the representations and warranties, covenants, conditions, general terms, etc., depending on the transaction. While this may not be a problem if you have five assignments in a month, it is less practical for larger companies that may make dozens of assignments in a month.
The use of a standardized template provides the ability to universally apply forms to all similar transactions or to easily modify the form to account for differing circumstances. Using standardized forms also allows consistency in the types of provisions included across all transactions. By having the form to use as a basis, counsel will not need to dust off old forms from previous assignments as often, which may have been a "close enough" match for the current situation. Instead, counsel can use the approved template and modify it to suit the particular transaction.
Common Situations for Assignment and Assumption Templates
Common Scenarios for Using Assignment and Assumption Agreement Templates
There are many business situations where a company will need to assign the rights and obligations under a contract to another business. To affect such an assignment, the company will need an assignment and assumption agreement. A few common examples are:
- Asset and Equity Sales and Purchases. Companies regularly buy and sell assets, and sometimes entire businesses. This will often include contracts that the selling company wishes to keep in place after closing, such as leases, vendor agreements, or customer contracts. In such circumstances the buyer will enter into an assignment and assumption agreement with the seller and the counterparty to the contract. The assignor will assign to the assignee the rights and benefits under the contract, and the assignee will assume the obligations of the assignor.
- Transfers in Bankruptcy. Contracts will sometimes be assigned or assigned in the event a company files for bankruptcy. For example, a debtor may sell some (but not all) of its assets during a bankruptcy proceeding. Many times that sale includes an assignment of contracts in which the buyer (often an affiliate or member of the debtor’s management) as part of the transaction will take over existing contracts of the debtor. The buyer will then assume the obligations of the debtor under the contract. On top of those assigned contracts, the debtor may also have additional contracts that it wishes to assume under the bankruptcy code. In such a situation the debtor would enter into an assignment and assumption agreement with the counterparty to the contract. Typically such an assignment would require the debtor to cure any defaults under the contract prior to the debtor’s assumption. The counterparty would then clear out of its books any obligations of the debtor (that already existed at the time of the filing of the bankruptcy) and show the debtor’s company name as the obligor to the contract.
- Corporate Dissolutions and Acquisitions. When a company (or some entity) dissolves, the various contracts that the company has with third parties will often need to be assigned to another entity. The remaining entity (usually the main company or successor entity) will want to have the rights and obligations of the dissolved entity assigned to it. If the dissolved company was a subsidiary of the remaining entity, the contract may provide that the contract will automatically be assigned to the remaining entity and that the counterparty will have no obligation to consent to the assignment. Where the contract does not have that automatic assignment provision, the remaining entity would need to enter into an assignment and assumption agreement with the counterparty.
How to Edit Your Assignment and Assumption Agreement Template
Once you identify a compatible template, you must alter it to fit your particular deal. In nearly all cases, you’ll have to make at least some changes to the identified template before you can even consider it coherent. To accomplish this, most people either modify it themselves or hire an attorney (with or without other employees providing input). Regardless of the method, however, there are a few best practices to keep in mind:
1. Seek professional advice when necessary. To that end, you should absolutely hire a lawyer to draft or at least review the assignment and assumption agreement template before you sign it. If you and a person who may or may not have an interest in the asset in question exchange the wrong agreement terms , it can be quite difficult to disentangle the transaction later on. By hiring a lawyer, you can ensure that the contract complies with all jurisdictional laws and both party’s best interests are protected.
2. Highlight the most important provisions. You can enhance a proper implementation of the Assignment and Assumption Agreement Template by marking what the most critical terms are for you. For example, make sure that the following issues are clear to both parties:
You can comment on any of the other provisions in the agreement as necessary, using symbols such as "add," "delete" or "disagree" to ensure that everyone involved is aware of its current status.
Mistakes To Avoid and How to Prevent Them
Common pitfalls with assignment and assumption agreement templates include:
- Inadequate description of the Assignor’s property to be assigned and the Assumption of liabilities and Obligations that the Assignee is assuming.
- Recitals to which none of the parties are a party (the recitals to an original contract).
- Assumptions used in the past and migration into the assignment and assumption agreement (e.g., "The parties hereto have decided to change the calculations underpinning rental escalations"). If this is truly the case the parties should be careful not to allow the old rental escalation calculations (if it is historic) or the new calculations (if it is future).
- The Assignment portion of the document behind an acronym other than Assignment, such as "SPOA" or Special Power of Attorney. If that is the case, we suggest that language be changed to avoid confusion as to what document the parties are referencing.
- The definition of obligations.
- The inaccuracy of the description in the consent or the attachment of the consent as it relates to the subject of the Assignment and Assumption. In such cases, it may be advisable to have the consent specifically list the subject of the assignment.
- Ambiguity as to whether the consent referred to in the recitals must be obtained prior to the execution of the assignment and assumption agreement.
- Ambiguity as to whether the "parties" refer to the assignor and assignee or all of the parties to the initial document.
- The recapture or exclusion of costs of renovating or improving the premises.
- If applicable, the recapture or exclusion of taxes or charges that are over and above the tenant’s base year taxes and charges.
- The inclusion of indemnities
- The inclusion of Lien free language.
FAQs About Assignment and Assumption Agreements
What is the difference between an assignment and an assumption?
An assignment is a transfer of a party’s rights under a contract while an assumption is a transfer of a party’s obligations. For a contract to be validly assigned, however, the assignee must assume the obligations of the assignor.
Are assignment and assumption agreements enforceable?
Generally, assignment and assumption agreements are fully enforceable so long as they do not violate the statute of frauds, public policy or the terms of the contract. Also, you must obtain consent from the nonassigning party if the contract prohibits assignments or creates a duty that benefits the other party , such as requiring the personal qualifications of the assigning party.
Will my state court enforce an assignment and assumption agreement?
Yes. Especially in finance agreements, courts are likely to rule that, absent fraud or duress, breaches of contract statements like "any assignment without our consent shall be void" means that the parties are voiding all assignment and assumption agreements. Generally, courts also rule that any assignments and assumptions already executed shall remain valid.
Can I revise an assignment and assumption agreement template from the internet?
Generally, it is safe to edit and revise an assignment and assumption agreement from the internet to your liking. However, it is always a good idea to seek legal advice or assistance before doing so.