Pitfalls Concerning Assignment of Purchase Agreements
Over the years, we have been contacted by many clients regarding purchase party defaults, after having permitted the initial buyer under a purchase contract to assign the agreement to a newly – created buyer affiliate or unrelated, third party assignee. As a result of not seeking legal advice regarding a buyer’s right to assign purchase agreement prior to the execution of the contract, two problems often result: 1) a shell purchasing entity is substituted as the buyer, and 2) the original buyer, which normally has assets, is now relieved of its obligations under the purchase agreement.
Unfortunately, prior to the close of escrow, if the new shell purchasing entity defaults on its obligations, and the seller seeks to recover the initial deposit based upon breach of contract, the seller is often left with less than a full recovery. When the replacement purchasing entity is a shell company with no assets, the seller may be unable to fully recoup its expenses, including attorney fees and escrow and title cancellation expenses. Furthermore, even if a legal judgment is obtained against the purchasing assignee entity, it is often worthless because the purchaser has no assets.
Why Legal Advice Should be Sought Regarding the Buyer’s Right to Assign the Purchase Agreement
Anticipating that this issue may occur, we draft assignment provisions in the purchase agreement prior to signing that require two things. First, any newly – formed affiliate assignee buyer must expressly assume, in writing, all obligations of the original buyer under the purchase agreement. This includes the obligation to pay all costs and expenses (such as attorneys’ fees and escrow and title cancellation fees) resulting from any pre-closing default by the new assignee purchaser. Second, the provision should state that any such assignment to a new buying entity will NOT relieve the original buyer of its obligations under the purchase contract.
By doing so, the seller will have a remedy against both the newly – formed defaulting assignee and the original purchaser. The seller, therefore, can pursue both entities for the initial deposit and if, upon default, the new buyer refuses to release the initial deposit from escrow, the seller can sue both entities for recovery of the initial deposit and all costs and expenses (including attorneys’ fees, cancellation expenses and interest).
Additionally, the judgment will be “joint and several,” meaning that the seller can recover from either entity, permitting the seller to concentrate its collection efforts against the original purchaser (which has assets), rather than wasting time and money pursuing the shell entity.
The aggrieved seller can also prevent the shell purchaser simply walking away from the transaction without liability for the additional costs and expenses incurred due to the breach of the purchase agreement. The seller can avoid being blackmailed into settling for only a portion of the initial deposit in order to avoid incurring the cost, expense and delay of suing the shell assignee.
Other Benefits of Properly Drafting an Assignment Provision
Proper drafting of the assignment provision also can avoid an even worse scenario: one in which a defaulting assignee buyer files a lis pendens on the property. In such a case the seller could be faced with tremendous legal expenses required to remove the lis pendens – none of which will be recoverable from the newly – formed shell assignee buyer, which has no assets. We also recommend that our clients include an increase in the initial deposit following waiver of contingencies and/or the release of the initial deposit upon the buyer’s waiver of contingencies.
Having provided over three decades of legal advice and counsel to our clients, the lawyers at Narvid Scott are well – versed in avoiding potential pitfalls for the unwary. While we certainly cannot guarantee the elimination of all problems, our experience minimizes our clients’ risk and exposure. By contacting Narvid Scott before the letter of intent or negotiations for the sale or purchase commence, we can better protect our clients.
Remember: Before executing your next purchase agreement (whether as a buyer or purchaser) or better yet, before you even negotiate the Letter of Intent, I would be happy to review your transaction and provide effective and efficient advice and counsel.