It is common for people to agree to an “assignment” a contract. However, at law, an “assignment” can only transfer the benefit of a contract and not the burden. The common use of the term “assignment” in these circumstances is not correct.
A contractual benefit, such as a right to receive payment of a debt, can be assigned from one person to another. If the assignment is in writing, the person who owes the debt need not consent. However, the person owing the debt still has to be given notice of the assignment to know that the obligations are now owed to a third party.
By way of example, if A is owed a debt by B, A can transfer the right to be paid to C. This might commonly be done when a business is bought and sold or as part of a factoring arrangement. If B is not notified of the assignment and pays A, C cannot also recover the debt from B. If B has been given notice of the assignment, then B is directly responsible to C.
The assignment of the contractual benefit to be paid the debt does not pass to C any contractual obligations of A. Therefore, if B is only required to pay the debt if A does certain things, then unless A does those things, or C does them for A, the obligation to pay will not arise. B cannot enforce any obligation against C as B and C have not entered into a contract together.
There are other means of transferring contractual rights and obligations other than by assignment.
Subcontracting is a good example of the transfer of contractual rights and obligations through a second contract.The extent to which the original parties are both bound by the subcontracting arrangement will depend upon the terms of the original contract and the subcontract.
Another means of transferring a contract from one person to another is by way of “novation”. “Novation” is a legal term which occurs when a contract between A and B is replaced with a contract between A and C. A’s contractual rights and obligations are unchanged except that the other party to the contract is no longer B, it is C. C has the same rights and obligations as B had under the original contract.
If you are looking at transferring contractual obligations and benefits from yourself to another person or taking on another person’s contractual obligations, you need to be clear about whether both the benefit and the burden is passing from one person to another, who will be able to enforce the contract and who it will be enforced against.
Whilst an “assignment” does not require the other party to the contract to consent or be party to the assignment arrangements, a “novation” does require all parties to consent. That is because a new contract is formed to replace the old one.
If you are owed money and want it paid to someone else, then an assignment of the debt is appropriate and the person owing the money can be informed by notice.
If you want to transfer more complicated rights, or to transfer a contract that has both obligations and benefits attached to it, for example a sale and purchase agreement, you need to transfer or “novate” the whole agreement.
Selling your business or moving premises? Assigning a commercial lease
What are your liabilities when you assign a commercial lease?
If you are part way through a commercial lease and want to arrange for someone else to take over the lease, you will need to “assign” the lease. An assignment of lease is when you assign your obligations to the landlord under the lease, to a new tenant. This new tenant will become responsible for paying the rent, outgoings, renewing the lease, etc.
You might consider this option if you are thinking about selling your business, or moving your business to a new premises. Unfortunately commercial leases do not allow tenants to just cancel the lease part way through a tenancy term unless the landlord agrees (this is unlikely unless you have been a bad tenant), so this is why an assignment is necessary. But, what happens if you have provided a guarantee under your original lease?
What is a guarantor?
A guarantor is the person or persons recorded in the Deed of Lease as guarantor, and who agree to fulfil the obligations of the tenant if they fail to do so. Most of the time, these obligations relate to paying outstanding rent and outgoings due under the lease.
Are you still liable as guarantor when you assign a lease?
The short answer is yes, you are still liable as guarantor of a lease if you assign it. The standard terms of lease state that if the new tenant and their guarantor (if any) aren’t able to pay the rent and outgoings under the lease, the landlord can come back and call on you as guarantor, even though you have assigned the lease, to pay the overdue rents and fix and breaches under the lease.
How long will you be liable for and for how much?
You will be liable for all amounts owing under the lease up until the end of the lease term (including any renewed terms).
How can you limit your liability and avoid this?
Your liability as guarantor can be limited at two stages – although both require consent of the landlord.
Firstly, on entering into the lease you can limit your guarantee to either a certain amount, a certain time frame, or provide a bank bond of a certain amount.
Or, when you assign the lease, you could ask for your existing guarantee to be valid only up until the end of the current term, and not to include any renewed terms granted under the lease.
So if you assigned your lease after the first year of a three year term, and there are two rights of renewal of three years each, you would only be liable for the remaining two years of the existing term, not for the additional 3-6 years if the assignee chose to renew the lease.
As an alternative to assigning your lease, you could suggest to the landlord that they enter into a new lease with the new tenant. Of course the terms of this new lease would have to be favourable to the landlord for them to agree.
Choosing which option is best for you really depends on your circumstances and the terms of your lease at the time you wish to get out.
A skilled commercial property lawyer can review the liabilities you have under your current lease and help negotiate with your current landlord and the new tenant/assignee to reduce your ongoing liability.
If you would like assistance with assigning your commercial lease, contact commercial property lawyer, Wade Hansen on 837 6885 or at email@example.com