Assigning Contracts: Making Sure Third Parties Know Who You Are

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A conveyance of commercial real estate involves the same basic principles as the conveyance of residential real estate. Despite the agreements being for a larger value, closing dates, title searches, requisitions, and many other factors relevant to residential transactions apply equally to commercial transactions.

There are however additional considerations that both the purchaser and seller must turn their mind to when dealing with commercial real estate. For example, the tax implications of the transaction should be considered by both sides and the purchase price should be properly allocated among the depreciable assets in order to take advantage of tax planning opportunities. In addition, both parties should turn their mind to the assignment of existing contracts. The purchaser will want to know which obligations it will have to continue with and the vendor will want to know if all their contracts can be assigned or terminated without incurring additional costs.

Know Who You Are Dealing With

The agreement of purchase and sale should specifically spell out which party will be responsible for assigning the individual contracts to the purchaser.

The individual contracts will need to be examined to see if they are assignable and to determine if the third party’s consent is required for assignment. If consent is needed, the vendor and purchaser must determine who will be responsible for obtaining that consent. Even if consent is not required it may be prudent to advise the third party that a new entity will be dealing with their contract.

Addressing Third Parties Early

If contracts need to be cancelled this could add additional time which could impact your closing date. Therefore, the parties should turn their mind to these issues early in order to avoid any penalties for cancelation of these contracts on short notice. If the closing date does have to be extended or abridged, these third parties should be notified of this.

Don’t Wait

The vendor and purchaser should not wait until closing to determine these issues and to determine who is responsible for addressing these issues. Costly delays can be avoided if the parties turn their mind to this issue when drafting the agreement of purchase and sale and address these issues with their lawyers.

A lawyer can help determine which contracts should be transferred or cancelled and can assist in properly assigning the contract to the new party and obtaining consent from the third party.

Addressing these issues early can help to make closing process more efficient and less stressful for both parties.

 

Topics:  Assignments, Contract Formation, Third-Party Relationships

Published In: General Business Updates, Commercial Real Estate Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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