What Is a Consent to Assignment?
Consent to Assignment of an agreement refers to the act of obtaining permission from one (or more) parties to an agreement to transfer its obligations or benefits (sometimes known as "rights") under that agreement to another person (sometimes known as an "assignee"). Consent to Assignment differs from the third-party rights set out above in three important respects:
Consent to Assignment is all about providing an agreement with a sanction against assignment that is of limited effect, often in day-to-day terms giving rise to the right to withhold consent to a proposed assignment. In legal terms though, it represents the principal protection for the parties who wish to restrict the rights and/or obligations of a contract being transferred to another party. That said, the restriction is usually an absolute one, meaning that no assignment of the contract will take place unless and until they agree to the proposed assignment in writing – therefore taking on the protection of a fairly substantial sanction to bear (refusing to consent to an assignment sought by someone with whom you are dealing, could have serious consequences if that person relied upon the proposed assignment) . It is a fairly common practice for such a requirement to appear in contracts, usually within the context of the "change in control of" a party (see more on this below).
Consent to Assignment is not, in UK law, a term to which general legal significance can be ascribed. However, it does have some effect under certain types of agreement. In particular, the real property development field (often referred to as "real estate development"), it is common to use the document called a "licence to carry out works" to obtain consent to take steps which would otherwise affect the property without the permission of the landlord. For example, an assignment of a property would generally be prohibited without the permission of the landlord, and therefore a rent deposit deed may provide for the landlord to give its consent to such matters on payment of a deposit by the tenant. If the tenant did not pay the deposit, the landlord would not have to give its consent to an assignment where a deposit had not been paid. Since the licence provides for the landlord to grant its consent to the works sought by the tenant (without requiring the tenant to pay a deposit), the use of a licence to that end is a common commercial practice, although other documents may be registered in a registered land, for example.
Importance of Consent to Assignment
Consent is paramount to the negotiation and enforcement of agreements. Consent to assignment clauses are nevertheless overlooked or disregarded at our peril. You must not only have the consent of the entity you are going to be assigning rights under the agreement to, the other parties to the agreement must also consent. Assignment exposes an agreement to further negotiations because, often, when companies change hands (or when a company decides it wants to sell its assets to another company) the acquiring company’s shareholders receive or want different terms from the transferring company’s shareholders. If the agreement has been assigned without consent, assignment is vulnerable to challenge by the third party. Not obtaining consent can result in the invalidation of a binding agreement, which may subject the assigning company to significant legal liability. Even more perniciously, if consent is needed and not obtained, the non-assigning party may be angry with the assignor, and that could damage the assignor’s relationship with the non-assigning party for years and might have a negative impact on other business opportunities as well.
However, whether or not an agreement is assignable will turn on the nature and character of the rights conferred or made subject to the agreement. For example, obligations that are of a purely personal nature cannot be assigned. A contract may also specifically place limits on its assignability. However, even if consent to assignment is not required by the agreement, it may still be prudent to obtain it. Not all contracts need consent, but not all contracts are free and clear of restrictions on assignment.
Key Components of a Consent to Assignment Clause
Consideration of the following key elements may assist in the negotiation, especially where a Landlord is required to consider granting consent and in the context of a Tenant proposal or a swapping of tenants:
Scope of Consent
The clause may provide a blanket permission for assignment with no specific conditions so long as all legislative requirements for assignment are complied with. In some cases, a specific list of items may require prior written approval, but otherwise no consent is required. These clauses may provide for a broader range of use for the property, and that rental increases can take place more frequently within the tenancies. An example of such a wider scope of consent includes the right for a sub-lease without further consent.
Limitations
The clause may define certain items for which no consent is necessary or which are specifically subject to consent. This is often a direct response to legislation or regulation that requires consent for a specific item under certain circumstances. It may also include restrictions in respect of a change in the nature of the tenant’s business. An example of limitations may be a requirement that consent may not be unreasonably withheld and/ or in a timely and reasonable manner.
Conditions
If consent to assignment is granted, there may be an overriding condition that such assignment is in compliance with legislative requirements. There also may be a requirement for rental to be paid up to date.
The clause should provide that the consent is not to be unreasonably withheld by the granting Party. There should be a clear mechanism for dealing with a request for consent that provides certainty as to the procedures to be followed when a request for consent is made.
Requesting Consent to Assignment
For the purposes of this article, the entity making a request to assign a lease to a new tenant shall be referred to as the "Assignor" and the target entity for the assignment shall be referred to as the "Assignee", and together the "Parties". When the Assignor wants to assign the lease to the Assignee, the Assignor should send a letter to the existing landlord (the "Landlord") that is the current owner of the assignment lease. The request shall include information about the business and the business person of record. The request should contain:
• A description of the business, (generally the Landlord may want to know the type of business and the square footage of business).
• The Assignee’s qualifications to operate a business in the premises similar to those of the Assignor. (this is to ensure that the Assignee is adequately qualified to be a tenant on the property).
• Information on the Assignee’s ability to pay the ongoing fees per the lease and any other lease obligations. (generally, most Landlords will appreciate the assurances that the Assignee’s, and/or business has the finances to pay its fees, and if the Assignee has a business history, often times it will be good enough to move the new lease forward to the Assignee).
• Other financial information important to the Landlord’s due diligence process. (generally, if the Assignee has a business history it will be sufficient for the Landlord to have sufficient information to forgo further inquiries).
After providing the information above, which the Landlord shall review and respond within 30 days of receipt, the Assignor is advised to follow up with the Landlord to gauge whether there is anything additional that the Landlord(s) has requested to get a clear understanding of what else is expected by the Landlord. Following up with a phone call or email to ensure that the Landlord has the necessary information, and to put the Landlord on notice to the acceptance of the Assignee’s assumption of the lease is necessary to ensure that the assignment of the lease is proceeding. Generally, this notice will be the best evidence of the assignment to the new tenant of the property between the Assignor and the Landlord.
Consequences of Failing to Obtain Consent
In the event an assignment is to be made without obtaining consent, the rejected party may have legal recourse against the assignor for breach of contract. Where one party is seeking an injunction against an assignor to restrain the assignment, it is necessary that the party seeking the injunction show that it will suffer irreparable harm that cannot be compensated in damages in the absence of the injunction.
Where one party is seeking an injunction against a third-party assignee, a party must show that it is likely to prevail on the merits. A party must show that the assignment was made for an improper purpose if some purpose of the assignment was to avoid a contractual prohibition against assigning or transferring rights or duties.
In the context of contracts in which consent to assignment is required, courts generally have considered that the prohibition clause is included for the protection of both parties to the contract. This means that if one party does not comply with the terms of the no assignment clause, the other party is entitled to seek a judgment entitling them to be relieved of its obligations under the contract. The assignment of interest under a contract that contains a prohibition clause has been held to constitute a breach of the contract giving rise of a right of action to the other party for damages.
Lone Mountain Processing, Inc. v. California Federal Bank, 1 P.3d 63 (1999) (absent language providing otherwise, a "no assignment" clause in a contract prevents the parties from substituting the parties to the contract, but does not prevent the "assignment of the contract within the limits of the adopted plan for the corporation’s capital reorganization"); see also, Thomas J. McCarthy, "An Appellate View of IP Assignment and Related Issues," 94 Trademark Rep. 960 (2004). In addition to the right to seek a judgment for breach of contract, severance of the contract is also an available remedy. In the context of the breach of contract, the court can terminate the contract where there has been a fundamental breach. Lundgren v. Freedom, 903 S.E.2d 297 (2015).
Moreover, the assignment of a contract by one party and the acceptance of performance by the other party does not constitute a novation as to the original party unless such is the intent of the parties. See Johnson v. Hospital Board of Walker County , 254 F. Supp. 2d 1169 (U.S. D.C. Alabama 2003). In rejecting the argument that an unconsented to assignment was a novation, the court in favor of the assignor stated: "Notably, plaintiff nowhere alleges that she requested defendant Freedom Population Healthcare, LLC to substitute for the ‘defendant,’ Freedom Health, Inc. in its place, nor has she alleged that the parties intended to make a new contract; rather, she alleges that Freedom Population Healthcare, LLC was substituted in place of Freedom Health, Inc. without her consent. This failure to allege intent to enter into a new contract is fatal to her claim for treatment as a novation."
As a result of a breach of a no assignment clause, the other party is entitled to rescission of the contract, including dissolution of any trust created. Lundgren v. Freedom, 903 S.E.2d 297 (2015). In Lundgren, the contract provided "the funds held under the terms of this subtrade agreement and of the subcontractor payment trust shall not be assigned, transferred or otherwise encumbered in any manner." The court determined that as a result of the breach of the no assignment clause, the trust created by the contracts was dissolved, and the funds deposited by the contract data owners were subject to immediate return to the data owners. Id.
A court may determine that a third party to the contract is a third-party beneficiary of a contract and therefore may have the right to sue on the contract. See, e.g., Metrin v. State Farm Insurance Company, 731 So.2d 15 (Miss. 1999). If a non-consenting party can establish that it was a third-party beneficiary of the contract, it could be entitled to enforce a contract that it did not sign. If the non-consenting party is a third-party beneficiary, it would be able to enforce the contract irrespective of any assignment. In determining whether a third party is entitled to recover, it is necessary that the intention of parties to the contract be considered. In addition to such intention, other questions may be posed, having reference to controlling law. See, e.g., Combs & Assoc., Inc. v. City of Burlington, 215 P.3d 1244 (Colo. 2009) (a municipality is presumed to intend to grant enforceable contractual rights to third-party beneficiaries when it specifically so provides in its ordinance; therefore, the town was liable to an employee for wrongful termination based upon an ordinance cited to be breach of contract).
Best Practices for Assignment Clauses
Best practices for drafting assignment clauses that include consent provisions usually include at least the following:
• Clear language. The consent clause should be clearly worded, hard-nosed, unambiguous, and specific. "Consent not unreasonably withheld" is ambiguous at best and in most instances it will not yield a specific answer to every assignment-related question.
• An area where the issue comes up expressly is frequently in restaurant leases in regard to the licensing of a franchise. In those situations, there can be two different questions: whether the landlord will consent to the franchise and whether that consent is unreasonably withheld. For example, a restaurant chain may want to assign its lease to a new franchisee and wants the landlord to consent to the franchisee’s proposed use in the space. While in theory landlords may be comfortable unreasonably withholding their consent, this does not, in practice, often happen (or at least landlords are typically more comfortable with the business facets of the tenant and therefore the business-related issues of a potential lease assignment are less prevalent); therefore adding "unreasonably withheld" to a clause is really unnecessary.
• As with every issue, there are typically exceptions to these best practices. Often a higher level of specificity is required by a lender if the consent to assignment relates to a loan covenant. Even here, however, the work done on the commercial transaction at the stage of negotiation and drafting the lease will be better than trying to put out a fire after everything has closed and a potential issue arises.
• In that vein, the wise attorney would always counsel someone involved in a deal of this sort that they shouldn’t get to the closing and start quibbling about how to define what "consent not to be unreasonably withheld" means, if they don’t already have a grasp of that, having done their due diligence beforehand.
Examples and Case Analysis
Typically, the consent to assignment of an agreement is required in these common scenarios:
Sale of Business
In any transaction involving the sale of all or a portion of the assets of a business, the buyer may need to assume and continue with existing agreements of the seller. Examples of such agreements include:
- Licenses
- Distribution agreements
- Supply agreements
- Employment agreements
- Office space leases
Unless the seller is required to assign these agreements to the buyer, the consent of the other parties to the agreement is required for it to be assigned to the buyer. Buyers will want to ensure that all necessary consents are received because failure to obtain consent could result in the loss of material agreements following completion of the transaction.
Joint Venture
A joint venture is an agreement between two or more parties to undertake a specific activity and share the profits related to that activity. Common examples include business joint ventures established to raise funds to create a new product, or real estate joint ventures to purchase or construct a new building, even if it is not the first party’s principal business. For example, the parties to a joint venture may be an investment firm and a real estate developer, or an investor, builder and an architect.
The joint venture itself may require the approval of the third parties to be assigned to it. In such cases, in addition to negotiating a joint venture agreement, consents from the third parties must be acquired. Such consents will usually be acquired by the third party that is intended to receive the new activity (e.g. , the investment firm or the real estate developer).
Licensed Software
Software agreements or licenses almost always contain express provisions prohibiting, or requiring the consent of the licensor to, the assignment of the product and/or the rights and obligations created by the agreement. For instance, many software licenses provide that a licensee may only grant a sublicenses to its employees provided that employees are notified of and agree to be bound by the terms of the license agreement. A similar clause may be incorporated into a confidentiality agreement permitting a party to disclose confidential information to its employees and/or contractors, provided each employee or contractor has been made aware of, and agrees to be bound by, the confidentiality agreement.
Construction Contracts
Construction and engineering contracts typically give the other parties to the contract the right to assign their rights and responsibilities to an affiliate, without the consent of the other parties. However, the parties may not be permitted to assign the rights and responsibilities to a non-affiliated entity, without the consent of the other parties.
Therefore, construction contracts may require the consent of each party to the contract in order for one of the parties to be allowed to transfer its rights and obligations to a non-affiliated third party. Depending on the nature of the work being performed, the consent of any subcontractors, suppliers, or other parties to the contract, may also be needed, or required.