Assignments of a buyers contractual rights in commercial property

Where a buyer has exchanged contracts with a seller for the purchase of a commercial property, the buyer may be able to transfer their rights and obligations under the contract prior to completion, without incurring liability for breach of contract. This is done by assigning their beneficial interest under the contract to another purchaser.

This would involve the original buyer under the contract entering into a separate contract called a Deed of Assignment, with the new buyer.

The Seller would not be a party to this Deed, but would need to consent to the proposed assignment.

This strategy is popular amongst investors, who can cash in on a development opportunity, by;

Read on to find out more about the process, benefits, and risks involved for a commercial property investor.

By entering the Deed of Assignment, the original buyer transfers the benefit of the contract to the new buyer. This allows the new buyer to step into the shoes of the original buyer (who had contracted to buy the property from the Seller upon exchange of contracts), to complete the contract and thus purchase the property.

On the completion date, the new buyer pays the balance of the purchase price due to the seller to complete the contract, and the original buyer falls away from the transaction.

The new buyer will then apply to register the property in its own name with HM Land Registry and deal with any tax implications (VAT, SDLT, etc.) that the acquisition may have for their business. Meanwhile, the original buyer enjoys a tactical escape from their obligations under the contract, and can apply the funds they have retained from their abortive purchase, towards a more attractive investment.

The benefits of transferring one’s rights and obligations under the contract, is evident for the original buyer.

For the complacent buyer suffering a belated case of buyer’s remorse following exchange of contracts, the assignment mechanism offers them an exit strategy out of the contract. It allows them to walk away from the transaction before completion without facing liability and damages for breach of contracts, provided they find a serious, replacement buyer, to step into their shoes, and complete the contract.

For the savvy property investor, assigning their rights under the contract is a popular business tactic that can be used to capitalise upon a property investment.

The potential impact of an assignment on the original buyer’s pockets, can be summarised as follows:

At worst, the original buyer walks away from the contract at a loss, having paid:

1 – a non-refundable deposit to the seller upon exchange of contracts (although usually the new buyer will agree to repay the original buyer any deposit they paid);

2 – their own legal fees and costs in respect of the transaction;

3 – the seller’s legal costs in respect of the assignment, and

4 – a sum of money to the new buyer called a ‘reverse premium’, to incentivise the new buyer to take over the contract. This is commonly agreed where the value of the property has decreased, since contracts were exchanged.

At best, the original buyer walks away from the contract at a profit, having been paid:

1 – a reimbursement by the new buyer of any deposit they paid the seller upon exchange of contracts;

2 – a costs contribution from the new buyer toward the legal fees they have incurred in respect of the assignment;

3 – a premium by the new buyer, where the value of the property has increased since contracts were exchanged. For example, due to fit-out works at the property having been completed by the original buyer prior to completion of the contract, which have enhanced the marketability of the property. This is typical in large-scale development projects.

The original buyer is only able to transfer their rights and obligations under the contract, if the contract permits this.

Therefore, the original buyer’s solicitor must carefully review the contract at the outset, for either an anti-assignment provision, or, terms restricting an assignment in the form of special conditions. Most commercial property contracts will contain such clauses.

Where the contract contains a term prohibiting a transfer of the contract, the original buyer will only be able to transfer their rights under the contract, if the contract is varied to remove the prohibition. This is done by agreement between the seller and the original buyer, and will involve negotiation and careful drafting skills on the part of their solicitors. Typically, the seller will request a payment from the original buyer, or a contribution toward their legal fees, if they agree to this. A well advised seller will also know that the original buyer will be hoping to make a profit out of the transfer of the contract, so be aware that the seller may try and take advantage of the situation by asking for a share of any profit the original buyer is expecting.

Where the contract contains conditions relating to an assignment, the assignment would only be effective if and until the original buyer complies with each of those conditions. Otherwise, the original buyer will remain liable under the contract to complete, and it would be as though no assignment had taken place. It follows under the usual rules of contract law that if the original buyer does not complete in these circumstances, the seller would be entitled to sue them for breach of contract, serve a notice upon them to complete, and seek damages.

Typical conditions on a prospective assignment, include a requirement that prior to an assignment, the original buyer will:

1 – provide a guarantee to the seller that the new buyer will complete the contract and pay the balance due on completion, and

2 –  agree a deed of covenant to be provided by the new buyer, under which the new buyer will make contractual promises to the seller to comply with all obligations, conditions and requirements on behalf of the original buyer under the contract.

When contemplating an assignment, the original buyer should be aware of the commercial risks involved with transferring their rights and obligations under the contract.

Most significantly, only the benefit of the contract can be transferred by a Deed of Assignment, i.e. and not the burden.

This means that the original buyer will face ongoing liability under the contract (despite having assigned away their rights to the new buyer),and would be required to complete the contract on the contractual completion date, or otherwise be liable for breach of contract, if the new buyer fails to complete.

The original buyer should seek to protect their position, in some of the following ways:

1 – Obtaining an indemnity from the new buyer to ensure they are covered in the event that the new buyer fails to complete the contract. This would enable the old buyer to recover from the new buyer all the costs they have incurred, as a result of the new buyer’s failure to complete, without having to establish the new buyer’s breach of contract; and

2 – Carefully assessing the legitimacy, financial standing and seriousness of the prospective new buyer (known as the ‘covenant strength’ of the new buyer), before any work has been undertaken in respect of the assignment.

The assignment route can be seen as a win-win for all parties.

For the seller, it allows them to dispose of the property on the contractual completion date to a committed third party. This is a considerably better fate than having to sue the original buyer for breach of contracts, in the event that they are no longer able to complete the contract, due to a change in their financial circumstances.

For the original buyer, provided they have obtained the seller’s consent and complied with any terms in the contract, an assignment may be seen as a ‘get out of jail free card’. The original buyer can opt out of the contract and abandon the purchase – often at a profit – after contracts have been exchanged, without incurring liability for breach of contract.

For the new buyer, taking an assignment allows them to acquire property within a relatively quick turnaround time, at a stage in the conveyance, when property searches have been obtained, enquiries have been raised, and development or ‘fit-out works’ at the property have been completed at the original buyer’s expense.

However, given the implications of an assignment, the original buyer and the new buyer should each obtain sound legal advice before embarking upon an assignment. They must ensure they understand exactly what they are entering into, and the full extent of their contractual rights and obligations under the contract, Deed of Assignment and other ancillary documentation they are required to enter, in the context of a commercial property assignment.

When it comes to assignments, our commercial property team have the experience and expertise to ensure you understand what you are entering into. By working with our team we can  advise you on your rights under the contract, negotiate amendments to the contract even after contracts have been exchanged, and guide you through the assignment process to help you avoid breaching your contract.

Please contact our commercial property team if you would like advice on the issues raised in this blog, or assistance with a transfer of a contract to buy a property on +44 (0) 207 228 0017 or via the form below.