If you’re a property developer, a stock market investor, or even a small business owner, you might’ve come across the term ‘assignable contract’.
It’s certainly one that’s worth knowing, regardless of what industry you’re in.
This article is here to explain all about assignable contracts, some examples of where they can be used, and whether or not all contracts are assignable.
Key takeaways
- Assignment of contract is commonly used in real estate and stocks and futures contracts
- Most contracts are assignable, but not all
- It’s important to read contracts carefully to look for terms of assignment
- Building valid assignable contracts is easiest with the right document workflow software
What does an assignment of contract do?
And what does assignable contract mean?
An assignable contract allows you to transfer or give away its rights and obligations to another party or person before the contract expires.
Therefore, an assignment of contract transfers all of the benefits of that contract to an assignee.
It’s not just the benefits that are assigned, however.
The assignee must also fulfill any obligations or requirements laid out by the contract.
Assignability clauses
Assignability clauses are often encountered in real estate contracts, where they allow the transfer of property or leases.
Assignment of contract can also be applied to some options and futures contracts.
Not all contracts have an assignment provision.
If one does, it can be found in the contract’s terms.
Risk and liability
Unfortunately, assigning a contract doesn’t always provide you with complete security and can leave you with a certain amount of risk and liability.
This is because you can’t assign the burden of a contract.
With an assignment of contract, you’ll still remain responsible for any obligations and liabilities incurred before the assignment took place.
If, for some reason, the assignee fails to perform any of their contractual obligations, the other party could turn to you and demand you undertake any outstanding performance responsibilities.
To transfer the burden of a contract, the agreement needs to be novated.
A novation agreement transfers both the benefits and the obligations of a contract to a third party.
What is an assignable contract example?
It’s easier to understand assignable contracts by looking at some examples.
Let’s take a look at a few different scenarios where an assignment of contract may be put to use.
Communications
Pedro signs a contract with a telecommunications provider for his cell phone service over the Internet, using an electronic signature software.
A few months into the contract, the service provider files for bankruptcy. However, before they shut down, they agree to transfer all their ongoing contracts to another service provider.
This new service provider promises to honor the same rate and level of service as the original provider.
Following the contract assignment, Pedro receives the same service for the same price, albeit with a different service provider.
Stocks and futures
Nick is an investor who specializes in futures contracts.
His latest investment is a contract that contains an assignable clause to speculate on the price of crude oil.
Nick is hoping the price of crude oil will rise by year-end.
In July, he bought a December crude oil futures contract at $50. Because oil is traded in increments of 1,000 barrels, his position is worth $50,000.
By November, the price of crude oil had risen to $70. Nick decides to assign the contract to another buyer, Rob, who’s willing to pay $75; $5 above market.
The contract is assigned to the second buyer for $75, and Nick earns a good profit of $20,000 (($70-$50) x 1000).
Rob assumes all responsibilities of the contract.
He, too, can profit if crude oil is trading above $75 by year-end, but there’s also a risk he’ll lose money if crude oil is trading below $75 by year-end.
Either way, Nick’s profit is already secure. He’ll neither profit further nor lose anything if the price of crude oil changes again.
Hospitality
Loretta runs a local businesswomen’s association, which holds a monthly dinner party for all its members.
She has a valid contract with a local catering firm to cater these monthly dinner parties.
The catering firm in question merges with a local hotel, creating a new joint business venture.
As part of the merger, the catering firm transfers all its ongoing contracts to the new business arising from it.
Loretta still has her monthly dinner party catered for the same price and by the same people, but her contract is now with the new joint hotel and catering business.
Retail
Annabel has a contract with a local dairy to have four pints of milk delivered to her house twice a week.
She loves the product and writes on her popular cooking blog about how she’s using it in all her recipes.
Suddenly, demand for milk from the dairy skyrockets, and they can no longer keep up with demand.
The dairy assigns some of its contracts to another local dairy, who fulfill orders for those customers instead.
Annabel is one of the customers who has their contract assigned.
She still receives four pints of milk twice a week and is satisfied with the quality of the product she’s receiving now.
However, one week, the dairy fails to deliver any milk.
Annabel checks her original contract and sees a clause stating that, in the event of an assignment of contract, the original dairy is responsible for ensuring a smooth transition of her service.
She contacts the original dairy, who agrees to deliver her missing milk for the week.
Under the terms of the contract they signed with Annabel, they’re obligated to ensure she receives adequate service from the new dairy.
Are all contracts assignable?
Most contracts are assignable, but not all.
Reasons that a contract can’t be assigned can include:
- The contract contains an anti-assignment clause. This is a clause in the contract which specifically prohibits assignment. An example of an anti-assignment clause could be as simple as “this Agreement may not be assigned by either party.”
- If the assignment lowers the value of returns or anticipated returns, affects the expected performance outlined in the contract, or increases potential risks for the other contract party.
- The assignment would violate public policy or the law. For instance, the federal government prohibits certain claim assignments against the government.
Other examples of contract assignment may not be illegal, but they could still violate public policy. For example, personal injury claims can’t be assigned because doing so might encourage litigation.
Some contracts can only be assigned after obtaining explicit permission from the other parties to the contract. An example of such a clause in a contract would be “this Agreement may not be assigned by either party without the express written consent of the other party.”
If the contract requires that consent is given, not obtaining that consent is likely to constitute a contract breach and lead to an invalid, ineffective transfer.
If a contract is for a unique personal service, it typically won’t be assignable.
For example, if you sign a contract with a painter to paint your portrait, they wouldn’t be able to assign the contract to another painter, as the contract you signed relies on their unique talent and skill.
What are the effects of assignability in real estate contracts?
A bank or a mortgage company may assign an outstanding mortgage loan to a third party.
The mortgage terms, such as interest rate and duration, remain the same for the borrower.
The new bank receives all of the interest and mortgage payments.
Banks and other mortgage providers often assign loans to remove them as a liability on their balance sheets.
This allows them to then underwrite new or additional loans.
Top tool for property investors
Assignable real estate contracts can also be a great tool for property investors.
They allow investors to pass their purchase rights along to another party of their choosing.
A typical purchase contract usually involves rehabbing, renting, or flipping a property. All these strategies involve assuming ownership of the home.
With an assignable contract, however, an investor can immediately pass ownership to someone else without ever technically buying the property.
This process means that the purchasing rights, as well as any obligations outlined in the initial purchase contract, are passed along to another investor.
They’ll be in charge of ensuring the deal closes and making any claims against the seller if there are problems.
This is a beneficial process for the assignor, as they’ll never have to put up any collateral or a down payment for the mortgage.
All that’s needed is a deposit for the initial contract to go through.
The only downside for the assignor is that they’ll have to wait until the deal closes to collect a fee.
It’s easy to convert a normal real estate purchase contract into an assignable one.
All that’s needed are a few extra words to indicate the nature of the contract.
For instance, under the “Buyer” part, where the assignor’s name would typically be listed, the phrase “and/or assignees” can be added.
The investor should then be able to transfer ownership without having to alter or rewrite the contract.
Manage all your contracts easily with PandaDoc
Assignable contracts have a wide variety of uses across many industries.
Property developers, stock market investors, and small business owners can all assign contracts to make their lives easier and maximize their profits.
If you need to create assignable contracts quickly and easily, it’s worth investing in document workflow software.
PandaDoc’s contract management platform allows you to create, manage, collaborate on, and e-sign a wide range of contracts, even assignable ones.
Using PandaDoc, you’ll be able to increase the speed and accuracy with which you close deals thanks to the intuitive contract builder.
A wide range of pre-approved content can be added to fully customizable templates, allowing you to build error-free, legally binding contracts in no time.
Disclaimer
PandaDoc is not a law firm, or a substitute for an attorney or law firm. This page is not intended to and does not provide legal advice. Should you have legal questions on the validity of e-signatures or digital signatures and the enforceability thereof, please consult with an attorney or law firm. Use of PandaDoc services are governed by our Terms of Use and Privacy Policy.
