What Is A Consent To Assignment Agreement?
A consent to assignment agreement is something that is frequently overlooked but can be extremely important when a party to a contract wishes to assign that contract to another party. Even though "assignment" may seem fairly innocuous, most commercial contracts do not permit or only permit an assignment under certain circumstances and with appropriate disclosure to the other parties to that contract. What this means is that before another party purchases a contract from your company, they may need permission from your company to do so. If the counter-party requires such permission , our team of lawyers has been highly successful in obtaining such permission from the counter-party.
It is also generally required that the new party execute and agree to abide by a "consent to assignment". In a consent to assignment, the other party agrees to the assignment of the contract, typically subject to further specific terms and conditions that may be outlined in the agreement. A consent to assignment is synonymous with an assignment, as a consent to assignment is simply the other party’s consent to the assignment of the contract. In both cases, the terms of the contract do not change, they are merely assigned or that assignment is consented to by the party or parties to the contract.
Legal Consequences of Assigning Contracts
Legal Implications of Assigning Contracts Without Consent
Once a party to a contract determines that its consent is required under the terms of the contract, the first question that is typically answered is whether the party has indeed contracted away its freedom to assign the contract. Some contracts are completely assignable and a party may transfer its rights and obligations to any person or entity without the consent of the other contracting party. In other cases, a contract provides that it cannot be assigned without the consent of the other party to the agreement. Alternatively, the contract may provide that the assignor must obtain consent to assign the contract and the assignee must provide an assumption of the assignor’s obligations under the contract. Alternatively, a contract might provide that it cannot be assigned to affiliates of the original contracting party or to any other specific person or entity. Each of these contractual provisions results in a very different conclusion on the question of whether a proposed assignment may go forward without the consent of the other party. In some cases, the contract may be regarded as conclusively terminated, and the rights of the parties at law and in equity will be presumed to have been settled as a result.
If it is determined that a party has contracted away its ability to assign its rights under a contract, such rights presumably cannot be assigned without the consent of the non-assigning contracting party. A breach of this kind will depend on the specific language of the agreement and other elements. If the contractual provision requiring consent to assign a contract is deemed to be enforceable, the well-established rule is that a breach of contract occurs if the party seeking to assign the contract fails to obtain proper consent, unless the party has an adequate justification for its noncompliance with the contract’s requirements. Depending on the circumstances, non-compliance with the requirement in the contract will void the assignment or award the non-assigning party the right to terminate the contract. Note, however, that accord and satisfaction in some circumstances may allow a contracting party to retain the benefits of an assignment that was not authorized.
The enforceability of consent to assignment clauses may be altered under certain circumstances, but a party seeking to defeat the enforcement of such a contractual provision has a heavy burden to demonstrate the negative economic effect of enforcement of the contractual provision.
Parties to Assignment Agreements
The most common parties to an Assignment Agreement are easily identifiable. For example, if you are the assignor, you are the party assigning rights under an agreement. Likewise, the party receiving those rights is the assignee.
However, if you are not the assignor or the assignee, then you may be the third-party obligor.
A third-party obligor is the party obligated and answerable for the truth of the representations within the Assignment Agreement. This means you are responsible to pay, perform or provide the full performance of all obligations described in the assigned contract. In general, the assignee is the party to benefit from the contract and is obligated to deliver the benefits to the third-party obligor. Thus, the third-party obligor receives a benefit from a third-party contract. Because the performances in the contract benefit more than one party, the third-party obligor is also sometimes referred to as "a co-defendant," or a "remote promisee."
When Will Consent Need to be Provided?
Consent to assignment is commonly required under contracts for the purchase and sale of real property. For example, many contracts for sale of real property require the written consent of the seller as a condition precedent to pre-closing deliverables from the seller. Common contractual provisions requiring consent at an early stage are: "Authorization. If applicable law requires it, Seller shall have obtained, on or before the Closing Date, all necessary approvals and consents of all Governmental Authorities which constitute conditions to the parent co-ownership. If Lender requires it, Buyer shall have obtained, on or before the Closing Date, a written waiver of restrictions in the Loan Documents and the Notes, in each case in form and substance satisfactory to Seller and its counsel, with respect to the sale of the Property and the use of any Net Sale Proceeds received from the sale of the Property."
"Assignments and Transfers; Successors. (a) No Assignment. Except as otherwise provided in Section 23(b) and notwithstanding anything to the contrary in this Lease, without at least thirty (30) days prior notice to Landlord (with concurrent delivery of acceptable evidence of such assignment, transfer or encumbrance (in accordance with the provisions of this Lease or with respect to permitted mortgages and deeds of trust, such acknowledgment of Landlord in a form reasonably requested by the lender)), Tenant must not sell, assign, convey, mortgage, sublet, license, franchise or grant any concession or concession agreement in connection with the use of the Building or the Leased Premises or the interest of Tenant under this Lease (each an "Transfer") or otherwise permit or suffer any Transfer, whether by operation of law or otherwise of (i) any part of Tenant’s interest or estate in the Leased Premises or the Building, or (ii) any part of Tenant’s estate or interest in the Leased Premises or the Building to be vested in, any Person other than Tenant (any of the foregoing being a "Transferee"), unless, in each case, Tenant obtains Landlord’s prior written consent to such Transfer. Landlord will not unreasonably withhold or delay its consent to any proposed Transfer except that Landlord may withhold its consent in connection with any Transfer of less than all of the Leased Premises to a Transferee that is not a Related Entity and has not owned or operated a shopping center in the State of Texas within the five (5) year period immediately preceding the Date of Acquisition. Notwithstanding the provisions of the preceding sentence, the following Transfers will be permitted without prior consent from Landlord: (I) transfers to Tenants affiliates (the "Affiliate Transfers") (II) mortgages, deeds of trust, liens and encumbrances of Tenant’s leasehold interest and other mortgage liens on Tenant’s property only, (III) leasing or subleasing to a Related Entity or a Related Entity’s affiliate, and (IV) leasing or subleasing in a sublease covering a period of four (4) months or less.
How to Ensure Effective Consent to Assignment Language
An effective consent to assignment provision should clearly delineate the conditions to be met in order for an assignment to become effective. Certain provisions, while standard in form, should always be avoided. For example, a blanket consent provision that references an assignment in "any manner and for any purpose whatsoever" should be avoided because it is overly broad in scope. Instead, clarifying language such as "the assignment of rent or the subletting of all or a portion of the demised premises," coupled with a list of conditions precedent is best practice.
A well drafted language should also articulate the type of assignee that will be deemed acceptable. Specific statement should be included if the landlord places limitations on the transferee, based upon a tiered hierarchy (i.e., corporations, subsidiaries, affiliates, newly created entities). A specific threshold pertaining to the transferee’s net worth may also be stated.
Another important drafting consideration relates to the circumstances in which a transfer will be granted by the landlord in its "sole discretion." In New Jersey, an obligation to act in good faith or a qualified requirement does not impose a freestanding duty on parties to a contract to refrain from arbitrary or capricious conduct . It is better to say that a party will only be permitted to exercise its discretion reasonably, then to say that a party must act in good faith. The former conveys the duty that a party must act reasonably in exercising discretion, while the latter fails to delineate what standard of reasonableness is required. To clarify what is reasonable, it is advisable to affix a covenant to the provision that either clearly outlines the types of factors that can be considered in withholding consent, or alternatively states the exception to a prohibition on withholding consent with respect to a sale, merger or other transaction involving a change of ownership. Such examples are usually limited to use in the context of equity financing of a business, provided the assignable interest has not substantially changed.
Lastly, The Uniform Commercial Code ("UCC") provides rights to the assignee of a commercial lease, notwithstanding the presence of a consent provision or a prohibition on assignments. In fact, the UCC’s provisions supersede many of the provisions which would otherwise be available to the landlord in a non-commercial lease.
Assignment Related Disputes
It is important for parties to a consent to assignment agreement to decide how any disputes will be resolved should they arise. Typically, these agreements often restrict the assignment or transfer of rights and obligations to a third party without the prior consent of the licensor.
Disputes that commonly arise within a consent to assignment agreement tend to concern whether a third party may be considered a "competitor" for the purpose of a restriction on assignments. Such issues often arise where:
Each of these parties would have a difference of opinion as to whether it is an "affiliate," "subsidiary" or "sister company" of the parent company and, therefore, would argue that the consent to assignment agreement either does, or does not, apply to its circumstances.
Another common dispute that may occur within the scope of a consent to assignment agreement concerns whether a third party, which the parties consider to be a competitor, is nevertheless an affiliate of the licensor and is therefore symbiotically connected to the licensor.
Consent to assignment agreements are drafted in various ways. Not only can they differ in their scope, but they can also differ in their terminology. In order to avoid time-consuming and costly conflicts, a resolution plan should be put in place at the outset of any consent to assignment agreement.
If both parties agree, an amicable solution should be possible and the consent to assignment agreement can be amended at any time in order to deal with unforeseen circumstances arising (e.g. where a competitor of the licensor becomes a majority shareholder of the assignee).
Consent to Assignment Examples
The language used in these provisions may vary, but the general concept remains a constant. A sampling of typical provisions follows.
Lease Agreements
A lease provision may require the landlord’s consent, but can also provide that such consent "may not be unreasonably withheld."
License and Distribution Agreements
License or distribution agreements may include a term that assigns various rights and obligations to the licensee or distributor upon certain events. For example:
Employment Agreements
A consent to assignment provision in an employment contract may provide that the employment contract is assignable to a successor to the employer upon a merger that results in a change in the ownership of all or substantially all of the assets of the employer. The provision may also specify that the consent of the employee is not required. Conversely, an employer, employee, or shareholder in a closely held company may refuse to consent if the employee does not meet the employer’s standards or the prospective employer does not meet certain creditworthiness, experience, or other standards required by the company.
Promissory Notes
A bank’s form promissory note for a commercial loan may have a consent to assignment provision that gives the bank the right to assign the loan to another party without the borrower’s consent. The note becomes a new obligation of any subsequent lender with the same time and payment terms as any existing promissory notes. The borrower is bound by the original obligation and the document evidences the obligation that runs with the promissory notes until paid in full.
Service Contracts
Service contracts may include a provision that the service provider can assign the contract to its owner, manager, or other affiliate without notice to or consent from the other parties to the contract.
Conclusion: Consent to Assignment Best Practices
An assignment of a contract can be a complex process and failure to follow those requirements can result in significant consequences, including deemed approval of the assignment or even liability. To avoid these issues, the following best practices are recommended: Whether you are assigning your interest in the contract or receiving an assignment of your counterparty’s interest, it is important that you understand the contract terms that govern assignments. This includes defining how assignments should be made, who has the authority to consent to an assignment, and what conditions precedent must be satisfied prior to assignment. Additionally, it is critical to understand the obligations of parties receiving an assignment.
A party seeking assignment of another’s interest in a contract should always review the requirements of the underlying contract prior to completing the assignment . Where consent of the other contracting party is required, the assignee should be sure to execute the assignment in accordance with the terms of the contract, including obtaining all necessary consents. For contracts with agreements to agree, such as an Option and Assignment Guarantee Agreement, the agreement should be reviewed for all requirements including conditions precedent to assignment. Without proper review of the underlying contract and substantial compliance with its terms, an assignment may, in fact, only be a nullity.
Best practices for managing assignments include having a checklist specifying each step to be followed when entering into an assignment, including being clear on the requirements for the way the assignment is to be executed, the routing of the assignment for signature by parties, including having the assignment signed by the correct person including signatories that are empowered by authority or resolution to bind the parties, and permitting as many parties as possible to sign an assignment.