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Assignment of Membership Interest: The Ultimate Guide for Your LLC

LegalGPS : November 30, 2023 at 8:16 AM

As a business owner, there may come a time when you need to transfer ownership of your company or acquire additional members. In these situations, an assignment of membership interest is a critical step in the process. This blog post aims to provide you with a comprehensive guide on everything you need to know about the assignment of membership interest and how to navigate the procedure efficiently. So, let's dive into the world of LLC membership interest transfers and learn how to secure your business!

What is an Assignment of Membership Interest?

An assignment of membership interest is a document that allows a member of an LLC to transfer their ownership share in the company to another person or entity. This can be done in the form of a sale or gift, which are two different scenarios that generally require different types of paperwork. An assignment is typically signed by the parties involved and delivered to the Secretary of State's office for filing. However, this process can vary depending on where you live and whether your LLC has members other than yourself as well as additional documents required by state law.

Necessary Approvals and Consent

Before initiating the assignment process, it's essential to review the operating agreement of your LLC, as it may contain specific guidelines on how to assign membership interests.

Often, these agreements require the express consent of the other LLC members before any assignment can take place. To avoid any potential disputes down the line, always seek the required approvals before moving forward with the assignment process.

Impact on Ownership, Voting, and Profit Rights

It's essential to understand that assigning membership interests can affect various aspects of the LLC, including ownership, voting rights, and profit distribution. A complete assignment transfers all ownership rights and obligations to the new member, effectively removing the original member from the LLC. For example, if a member assigns his or her interest, the new member inherits all ownership rights and obligations associated with that interest. This includes any contractual obligations that may be attached to the membership interest (e.g., a mortgage). If there is no assignment of interests clause in your operating agreement, then you will need to get approval from all other members for an assignment to take place.

On the other hand, a partial assignment permits the original member to retain some ownership rights while transferring a portion of their interest to another party. To avoid unintended consequences, it's crucial to clearly define the rights and responsibilities of each party during the assignment process.

Types of Membership Interest Transfers

Membership interest transfers can be either complete or partial, depending on the desired outcome. Understanding the differences between these two types of transfers is crucial in making informed decisions about your LLC.

Complete Assignment

A complete assignment occurs when a member transfers their entire interest in the LLC to another party, effectively relinquishing all ownership rights and obligations. This type of transfer is often used when a member exits the business or when a new individual or entity acquires the LLC.

For example, a member may sell their interest to another party that is interested in purchasing their share of the business. Complete assignment is also used when an individual or entity wants to purchase all of the interests in an LLC. In this case, the seller must receive unanimous approval from the other members before they can transfer their entire interest.

Partial Assignment

Unlike a complete assignment, a partial assignment involves transferring only a portion of a member's interest to another party. This type of assignment enables the member to retain some ownership in the business, sharing rights, and responsibilities proportionately with the new assignee. Partial assignments are often used when adding new members to an LLC or when existing members need to redistribute their interests.

A common real-world example is when a member receives an offer from another company to purchase their interest in the LLC. They might want to keep some ownership so that they can continue to receive profits from the business, but they also may want out of some of the responsibilities. By transferring only a partial interest in their membership share, both parties can benefit: The seller receives a lump sum payment for their share of the LLC and is no longer liable for certain financial obligations or other tasks.

How to Draft an Assignment of Membership Interest Agreement

A well-drafted assignment of membership interest agreement can help ensure a smooth and legally compliant transfer process. Here is a breakdown of the key elements to include in your agreement, followed by a step-by-step guide on drafting the document.

Key elements to include:

The names of the assignor (the person transferring their interest) and assignee (the person receiving the interest)

The name of your LLC and the state where it was formed

A description of the membership interest being transferred (percentage, rights, and obligations)

Any required approvals or consents from other LLC members

Effective date of the assignment

Signatures of all parties involved, including any relevant witnesses or notary public

Step 1: Gather Relevant Information

Before you begin drafting the agreement, gather all pertinent data about the parties involved and the membership interest being transferred. You'll need information such as:

The names and contact information of the assignor (the person transferring their interest) and assignee (the person receiving the interest)

The name and formation details of your LLC, including the state where it was registered

The percentage and value of the membership interest being transferred

Any specific rights and obligations associated with the membership interest

Step 2: Review the LLC's Operating Agreement

Examine your LLC's operating agreement to ensure you adhere to any predetermined guidelines on assigning membership interests. The operating agreement may outline specific procedures, required approvals, or additional documentation necessary to complete the assignment process.

If your LLC doesn't have an operating agreement or if it's silent on this matter, follow your state's default LLC rules and regulations.

Step 3: Obtain Necessary Approvals and Consents

Before drafting the assignment agreement, obtain any necessary approvals or consents from other LLC members as required by the operating agreement or state law. You may need to hold a members' meeting to discuss the proposed assignment and document members' consent in the form of a written resolution.

Step 4: Outline the Membership Interest Being Transferred

Detail the membership interest being transferred in the Assignment of Membership Interest Agreement. Specify whether the transfer is complete or partial, and include:

The percentage of ownership interest being assigned

Allocated profits and losses, if applicable

Voting rights associated with the transferred interest

The assignor's rights and obligations that are being transferred and retained

Any capital contribution requirements

Step 5: Determine the Effective Date of the Assignment

Set an effective date for the assignment, which is when the rights and obligations associated with the membership interest will transfer from the assignor to the assignee.

This date is crucial for legal and tax purposes and helps both parties plan for the transition. If you don’t specify an effective date in the assignment agreement, your state's law may determine when the transfer takes effect.

Step 6: Specify Conditions and Representations

In the agreement, outline any conditions that must be met before the assignment becomes effective. These could include obtaining certain regulatory approvals, fulfilling specific obligations, or making required capital contributions.

Additionally, you may include representations from the assignor attesting that they have the legal authority to execute the assignment. Doing this is important because it can prevent a third party from challenging the assignment on grounds of lack of authority. If the assignor is an LLC or corporation, be sure to specify that it must be in good standing with all necessary state and federal regulatory agencies.

Step 7: Address Tax and Liability Issues

Clearly state that the assignee will assume responsibility for any taxes, liabilities, and obligations attributable to the membership interest being transferred from the effective date of the assignment. You may also include indemnification provisions that protect each party from any potential claims arising from the other party's actions.

For example, you can include a provision that provides the assignor with protection against any claims arising from the transfer of membership interests. This is especially important if your LLC has been sued by a member, visitor, or third party while it was operating under its current management structure.

Step 8: Draft the Entire Agreement and Governing Law Clauses

In the closing sections of the assignment agreement, include clauses stating that the agreement represents the entire understanding between the parties concerning the assignment and supersedes any previous agreements or negotiations. Specify that any modifications to the agreement must be made in writing and signed by both parties. Finally, identify the governing law that will apply to the agreement, which is generally the state law where your LLC is registered.

This would look like this:

Step 9: Review and Sign the Assignment Agreement

Once you've drafted the Assignment of Membership Interest Agreement, ensure that all parties carefully review the document to verify its accuracy and completeness. Request a legal review by an attorney, if necessary. Gather the assignor, assignee, and any necessary witnesses or notary public to sign the agreement, making it legally binding.

Sometimes the assignor and assignee will sign the document at different times. If this is the case, then you should specify when each party must sign in your Assignment Agreement.

Importance of a Professionally-drafted Contract Template

To ensure a smooth and error-free assignment process, it's highly recommended to use a professionally-drafted contract template. While DIY options might seem tempting, utilizing an expertly-crafted template provides several distinct advantages.

Advantages of using a professionally-created template:

Accuracy and Compliance: Professionally-drafted templates are designed with state-specific regulations in mind, ensuring that your agreement complies with all necessary legal requirements.

Time and Cost Savings: With a pre-written template, you save valuable time and resources that can be better spent growing your business.

Reduced Legal Risk: Legal templates created by experienced professionals significantly reduce the likelihood of errors and omissions that could lead to disputes or litigations down the road.

How our contract templates stand out from the rest:

We understand the unique needs of entrepreneurs and business owners. Our contract templates are designed to provide a straightforward, user-friendly experience that empowers you with the knowledge and tools you need to navigate complex legal processes with ease. By choosing our Assignment of Membership Interest Agreement template, you can rest assured that your business is in safe hands. Click here to get started!

Frequently Asked Questions (FAQs) about Assignment of Membership Interest

As you embark on the journey of assigning membership interest in your LLC, here are some frequently asked questions to help address any concerns you may have:

Is an assignment of membership interest the same as a sale of an LLC? No. While both processes involve transferring interests or assets, a sale of an LLC typically entails the sale of the entire business, whereas an assignment of membership interest relates to the transfer of some or all membership interests between parties.

Do I need an attorney to help draft my assignment of membership interest agreement? While not mandatory, seeking legal advice ensures that your agreement complies with all relevant regulations, minimizing potential legal risks. If you prefer a more cost-effective solution, consider using a professionally-drafted contract template like the ones we offer at [Your Company Name].

Can I assign my membership interest without the approval of other LLC members? This depends on your LLC's operating agreement and state laws. It's essential to review these regulations and obtain any necessary approvals or consents before proceeding with the assignment process.

Do you need a lawyer for this?

The biggest question now is, "Do you need to hire a lawyer for help?" Sometimes, yes ( especially if you have multiple owners ). But often for single-owner businesses, you don't   need a lawyer to start your business .

Many business owners instead use tools like  Legal GPS for Business , which includes a step-by-step, interactive platform and 100+ contract templates to help you start and grow your company.

We hope this guide provides valuable insight into the process of assigning membership interest in your LLC. By understanding the legal requirements, implications, and steps involved, you can navigate this essential task with confidence. Ready to secure your business with a professionally-drafted contract template? Visit our website to purchase the reliable and user-friendly Assignment of Membership Interest Agreement template that enables your business success.

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Assignment of Limited Liability Company Interest

By Joe Stone, J.D.

• Do All Members of an LLC Have to Sign the Purchase Contract?

As a limited liability company member, you usually have the right to assign your membership interest in the LLC to a nonmember, subject to the requirements of state LLC law. Typically, the assignment provides the nonmember with the right to receive your share of any LLC profits but does not give the nonmember any of your management rights. The remaining LLC members usually decide whether the nonmember is admitted as a member with management rights.

Assignments

An assignment involving your LLC membership occurs whenever there is a transfer of your property rights in the membership. The transfer of rights can occur voluntarily such as in a sale of your membership to cash out of the LLC. Another type of voluntary transfer involves using your membership to satisfy your personal debts in lieu of bankruptcy, generally referred to as an assignment for the benefit of creditors. A transfer of your membership to your legal heirs or designated beneficiaries occurs by operation of law upon your death. In each situation, the assignment results in a complete transfer of your property rights in your LLC membership.

LLC Membership Interest

An LLC is commonly considered a cross between a corporation and partnership. LLC members enjoy personal liability protection, as do a corporation's shareholders, and the ability to structure the LLC management to suit their own needs, as in a partnership. An LLC is also like a partnership in that the profits and losses of the LLC are passed through to each member just as in a partnership. As a result, your LLC membership consists of two parts: an economic interest -- the right to share in the profits and losses of the LLC; and a control interest -- the right to vote on and manage the affairs of the LLC.

Membership Transfer Rules

If a member assigns his LLC membership to a nonmember without the consent of the other members, state law typically limits the assignment to only economic rights, not control rights. For example, Arizona Revised Statute 29-732 states that “the assignment of an interest in a limited liability company does not…entitle the assignee to participate in the management of the business and affairs of the limited liability company or to become or to exercise the rights of a member.” The Revised Uniform Limited Liability Act, which has been adopted in nine states as of June 2013, contains a similar provision that states, "the transferor retains the rights of a member other than the interest in distributions transferred and retains all duties and obligations of a member." To acquire control rights, the LLC members must consent to extend full membership to the nonmember.

Other Considerations

LLC members usually create an operating agreement to govern their rights and duties to the LLC and each other. Unless specifically prohibited by state law, the members can agree to provisions in the operating agreement that alter the default rules that apply under state law. In anticipation of future assignments, the members can include in an operating agreement the rules for whether control rights can be assigned with economic rights and under what conditions.

• FindLaw: Legal Dictionary -- Assignment
• Texas Secretary of State: Selecting A Business Structure
• The Free Dictionary: Limited Liability Company
• Arizona Legislature: Arizona Revised Statute 29-732
• National Conference of Commissioners on Uniform State Laws: Revised Uniform Limited Liability Act
• National Conference of Commissioners on Uniform State Laws: Enactment Status Map -- RULLCA
• SBA.gov: Operating Agreements; The Basics

Joe Stone is a freelance writer in California who has been writing professionally since 2005. His articles have been published on LIVESTRONG.COM, SFgate.com and Chron.com. He also has experience in background investigations and spent almost two decades in legal practice. Stone received his law degree from Southwestern University School of Law and a Bachelor of Arts in philosophy from California State University, Los Angeles.

Related Articles

• How to Change Ownership of a California LLC
• How Does Equity Work in a Multimember LLC?
• Can an LLC Offer Both Preferred & Common Shares?

General Principles of Assignments in Real Estate Transactions

Assume a seller, ABC Company, enters into a contract to sell a parcel of land (referred to here as “Blackacre”) to Ms. Green. Ms. Green subsequently assigns her interest in the contract to Mr. Smith. Such assignments of contracts of purchase and sale raise a number of practical issues—e.g. notice to the seller, payment for the assignment, and transfer of the deposit—that affect not only the seller but also the original purchaser and the eventual purchaser. A party wishing to assign its interest in a contract of purchase and sale to a new party should not assume that the matter is as simple as entering into an assignment with the new party and then walking away and forgetting about the contract.

A real estate contract will often contain provisions that limit or prohibit an assignment of a party’s interest in the contract. If the contract is silent as to the rights to the parties to assign their interests in the contract, then the rights of the parties, with few exceptions, can be assigned. Normally, assignments of contracts relating to the purchase and sale of real estate involve the purchaser assigning its interest in the contract; however, it is not unheard of to have the seller assign its interest in the contract.

In our scenario, to be binding on it as the seller, ABC Company must be given notice of the assignment, although it does not have to receive a copy of the assignment or the business terms relating to the assignment. If ABC Company has been given notice that Ms. Green’s interest in the contract has been assigned, it may be concerned that she is ‘flipping’ her interest in the contract for a profit. Consequently, ABC Company may wish to seek advice as to whether the contract is enforceable.

Assuming that Mr. Smith is paying Ms. Green a specified amount of money for the assignment, the question arises as to when this money will be paid. Ms. Green will want the money to be paid when they enter into the assignment but Mr. Smith will want to pay at the time that they complete the purchase and sale of Blackacre. In most cases, the latter time period is the norm but, in any case, money paid for an assignment is subject to the Goods and Services Tax.

Ms. Green will likely have paid a deposit to ABC Company pursuant to the contract and will want the deposit to be repaid to her at the time of the assignment rather than having to wait until the purchase and sale of Blackacre is completed. It would not be unusual for Mr. Smith to reimburse the deposit to Ms. Green at the time that they enter into the assignment.

Mr. Smith should look to obtain assurances by way of representations and warranties from Ms. Green that the contract to purchase Blackacre is in full force and effect and that her interest can be assigned to him. In turn, Ms. Green should look to obtain representations and warranties from Mr. Smith that he will fulfill her obligations to complete the purchase of Blackacre since an assignment will not release Ms. Green of her obligations under the contract unless such release is specifically provided for—and has been agreed to by ABC Company.

Frequently, and contrary to the scenario presented here, a contract for a real estate transaction will often limit the right of the purchaser to assign its interest in the contract. A common limitation is that “. . . the purchaser may only assign its interest in the contract with the consent of the seller, such consent not to be unreasonably withheld.” In most cases, it would not be unreasonable for the seller to insist that the assignee contract directly with the seller to fulfill the obligations of the assignor under the contract so that, if there is a default, the seller has the right to seek remedies against both the assignor and the assignee.

So long as all parties to a contract of purchase and sale are aware of their rights and obligations, the completion of a purchase and sale where a contract has been assigned can and should proceed in a straightforward manner.

Learn More About Commercial Real Estate

Our Commercial Real Estate Group has experience in all aspects of the law and practice related to commercial property acquisitions, management, structuring, development and sales. 

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Sale and Assignment of LLC Membership Interests

Transfers from Member to Member or to Non-Member Third Parties by David J. Willis J.D., LL.M.

Introduction

This article addresses legal points to consider when conveying a membership interest in a limited liability company from one individual to another. It does not address the initial issuance of such interests when the LLC is formed, nor sales of membership interests by an existing LLC to incoming members.

Additionally, this article addresses absolute assignments (full and final transfers) rather than collateral assignments (made only as security for a loan) which are a different topic entirely.

Assignments of this type may follow the execution of a letter of intent which provides for a due-diligence period. This article does not cover the contents of such an LOI but does address issues that should be considered by a prospective assignee in conducting due diligence. An LOI will often make reference to specific due diligence steps that a buyer will be permitted to take.

After covering definitions and applicable law, we will turn to principal points that should be considered in negotiating and drafting an assignment of LLC membership interest.

APPLICABLE LAW

Relevant statutory definitions.

Applicable law is found in the Business Organizations Code (BOC):

Bus. Orgs. Code Section 1.002. DEFINITIONS

(7) “Certificated ownership interest” means an ownership interest of a domestic entity represented by a certificate issued in bearer or registered form.

(32) “Fundamental business transaction” means a merger, interest exchange, conversion, or sale of all or substantially all of an entity’s assets.

(35)(A) “Governing authority” means a person or group of persons who are entitled to manage and direct the affairs of an entity under this code and the governing documents of the entity, except that if the governing documents of the entity or this code divide the authority to manage and direct the affairs of the entity among different persons or groups of persons according to different matters, “governing authority” means the person or group of persons entitled to manage and direct the affairs of the entity with respect to a matter under the governing documents of the entity or this code.

(41) “Interest exchange” means the acquisition of an ownership or membership interest in a domestic entity as provided by Subchapter B, Chapter 10. The term does not include a merger or conversion.

(46) “Limited liability company” means an entity governed as a limited liability company under Title 3 or 7. The term includes a professional limited liability company.

(53) “Member” means: (A) in the case of a limited liability company, a person who has become, and has not ceased to be, a member in the limited liability company as provided by its governing documents or this code. . . .

(54) “Membership interest” means a member’s interest in an entity. With respect to a limited liability company, the term includes a member’s share of profits and losses or similar items and the right to receive distributions, but does not include a member’s right to participate in management.

(64) “Ownership interest” means an owner’s interest in an entity. The term includes the owner’s share of profits and losses or similar items and the right to receive distributions. The term does not include an owner’s right to participate in management.

(69-b) “Person” means an individual or a corporation, partnership, limited liability company, business trust, trust, association, or other organization, estate, government or governmental subdivision or agency, or other legal entity, or a protected series or registered series of a domestic limited liability company or foreign entity.

(87) “Uncertificated ownership interest” means an ownership interest in a domestic entity that is not represented by an instrument and is transferred by: (A) amendment of the governing documents of the entity; or (B) registration on books maintained by or on behalf of the entity for the purpose of registering transfers of ownership interests.

A well-drafted assignment of LLC membership interest will be mindful of and consistent with these statutory terms.

Statute Authorizing LLC Membership Assignments

Foundational to the idea of a sale and assignment of LLC membership interest is the legal authority to enter into such a transaction in the first place:

Bus. Orgs. Code Sec. 101.108. ASSIGNMENT OF MEMBERSHIP INTEREST

(a) A membership interest in a limited liability company may be wholly or partly assigned.

(b) An assignment of a membership interest in a limited liability company: (1) is not an event requiring the winding up of the company; and (2) does not entitle the assignee to: (A) participate in the management and affairs of the company; (B) become a member of the company; or (C) exercise any rights of a member of the company.

Consent by other members is required. BOC Section 101.103(s) states that a “person who, after the formation of a limited liability company, acquires directly or is assigned a membership interest in the company or is admitted as a member of the company without acquiring a membership interest becomes a member of the company on approval or consent of all of the company’s members.” BOC Section 101.105 states that a “limited liability company, after the formation of the company, may: (1) issue membership interests in the company to any person with the approval of all of the members of the company. . . .”

An additional consent requirement is found in BOC Section 101.356(c) which provides that, for the most part, “a fundamental business transaction of a limited liability company, or an action that would make it impossible for a limited liability company to carry out the ordinary business of the company, must be approved by the affirmative vote of the majority of all of the company’s members.”

Accordingly, it is advisable to accompany an assignment of membership interest with a special meeting of members that approves and ratifies the change. One or more LLC resolutions may be produced as well. All affected parties (and their spouses, even if non-members) should sign off.

What category of property is an LLC membership interest?

Regardless of the type of property owner by a limited liability company, a membership interest in the LLC is personal property:

Bus. Orgs. Code Sec. 101.106. NATURE OF MEMBERSHIP INTEREST

(a) A membership interest in a limited liability company is personal property.

(a-1) A membership interest may be community property under applicable law.

(a-2) A member’s right to participate in the management and conduct of the business of the limited liability company is not community property.

(b) A member of a limited liability company or an assignee of a membership interest in a limited liability company does not have an interest in any specific property of the company.

The characterization of an LLC membership interest as personal property is important because it also signifies what it is not . For instance, it is not a real property interest even though the LLC may own real estate. It is not a negotiable instrument subject to the Uniform Commercial Code (found in Texas Business & Commerce Code Section 3.201 et seq.). Nor is a small-business LLC membership interest usually considered to be a security subject to state and federal securities laws: “An interest in a partnership or limited liability company is not a security unless it is dealt in or traded on securities exchanges or in securities markets, [and the company agreement] expressly provide[s] that it is a security . . . or it is an investment company security.” Tex. Bus. & Com. Code Sec. 8.103(c).

The foregoing applies regardless of whether the membership interest is considered certificated or uncertificated.

Statutory Qualifications for LLC Membership

Qualifications and requirements for membership in an LLC are found in the BOC:

Bus. Orgs. Code Sec. 101.102. QUALIFICATION FOR MEMBERSHIP

(a) A person may be a member of or acquire a membership interest in a limited liability company unless the person lacks capacity apart from this code.

(b) A person is not required, as a condition to becoming a member of or acquiring a membership interest in a limited liability company, to:

(1) make a contribution to the company; (2) otherwise pay cash or transfer property to the company; or (3) assume an obligation to make a contribution or otherwise pay cash or transfer property to the company.

(c) If one or more persons own a membership interest in a limited liability company, the company agreement may provide for a person to be admitted to the company as a member without acquiring a membership interest in the company.

Rights and Duties of an Assignee

BOC Sec. 101.109. RIGHTS AND DUTIES OF ASSIGNEE OF MEMBERSHIP INTEREST BEFORE MEMBERSHIP

(a) A person who is assigned a membership interest in a limited liability company is entitled to:

(1) receive any allocation of income, gain, loss, deduction, credit, or a similar item that the assignor is entitled to receive to the extent the allocation of the item is assigned; (2) receive any distribution the assignor is entitled to receive to the extent the distribution is assigned; (3) require, for any proper purpose, reasonable information or a reasonable account of the transactions of the company; and (4) make, for any proper purpose, reasonable inspections of the books and records of the company.

(b) An assignee of a membership interest in a limited liability company is entitled to become a member of the company on the approval of all of the company’s members.

(c) An assignee of a membership interest in a limited liability company is not liable as a member of the company until the assignee becomes a member of the company.

BOC Sec. 101.110. RIGHTS AND LIABILITIES OF ASSIGNEE OF MEMBERSHIP INTEREST AFTER BECOMING MEMBER

(a) An assignee of a membership interest in a limited liability company, after becoming a member of the company, is:

(1) entitled, to the extent assigned, to the same rights and powers granted or provided to a member of the company by the company agreement or this code; (2) subject to the same restrictions and liabilities placed or imposed on a member of the company by the company agreement or this code; and (3) except as provided by Subsection (b), liable for the assignor’s obligation to make contributions to the company.

(b) An assignee of a membership interest in a limited liability company, after becoming a member of the company, is not obligated for a liability of the assignor that:

(1) the assignee did not have knowledge of on the date the assignee became a member of the company; and (2) could not be ascertained from the company agreement.

It is important to note that these statutory rights and duties are subject to “restrictions and liabilities” that may be imposed by the company agreement.

PRELIMINARY CONSIDERATIONS

The company agreement.

When considering a transfer of LLC membership, it is important to first check the company agreement (operating agreement) to determine if there are buy-sell provisions or a right-of-first-refusal clause that must be worked through before the membership interest can be assigned. company agreements often require that before a sale and assignment of a membership interest can occur, the interest must first be offered pro rata to the other members, and/or to the company itself, before a transfer may be made to a person who is not currently a member. Unless waived, such provisions may be accompanied by an offer period of (for example) 10, 30, or 60 days.

Buy-sell and right-of-first-refusal provisions exist so that existing LLC members do not unwillingly find themselves in business with someone they do not know.

Non-Member Spouses

Are non-member spouses involved? Like real estate, personal property in Texas is presumed to be community property. A frequent error in transfers of LLC membership interest is failure to secure the signature of an assignor-seller’s non-member spouse. The result is that the entire interest may not have been conveyed, at least not in Texas. This is no different than if a grantee in a deed accepts the conveyance without requiring execution by the grantor’s spouse; since community property is presumed, the transfer may be incomplete if the spouse does not sign off, at least in a pro forma capacity.

To say that omitting the signature of a non-member spouse can drive subsequent disputes would be an understatement. Even though BOC Section 101.108 provides that a non-member spouse of an assignee may not assert control over the company, the potential for awkward and potentially disastrous disruption remains. Consider the case of a withdrawing member who is contemplating divorce but has not yet revealed this to other members who may want to buy his LLC membership interest. Will the assignment get tangled up in the parties’ divorce?

As is the case in transfers of real estate, it is common for sellers of an LLC membership interest to argue that the spouse should not be required to sign the assignment because the property transferred is a business asset rather than a part of the homestead. Real estate lawyers hear such excuses all the time. Other reasons may be given (“My wife is in China”). None of these excuses should be allowed to carry any weight unless the membership interest has been lawfully converted into separate property by a written partition agreement according to Section 4.102 et seq. of the Family Code.

What will be the accounting consequences? Is timing an issue?

There will likely be accounting consequences as a result of transferring an LLC membership interest. BOC Section 101.201 partially addresses this issue, stating “The profits and losses of a limited liability company shall be allocated to each member of the company on the basis of the agreed value of the contributions made by each member, as stated in the company’s records. . . .” This rule will apply unless the members collectively agree otherwise.

Attention should be given to the effective date of the assignment, since the transfer date may have more than one level of significance. It is advisable to select an effective date or record date for the assignment that facilitates easier calculation of profits and losses, or at least does not unduly complicate that calculation.

Will the membership interest pass a due-diligence inspection?

The issues referred to above are part of a larger group of due-diligence considerations that may concern a prospective buyer, which brings us to the due-diligence checklist in the next section.

DUE DILIGENCE BY THE ASSIGNEE-BUYER

Due diligence checklist.

The following is a partial list of items that should be of concern to a prospective assignee-buyer of an LLC Membership Interest:

(1) Valuation . Most small-business assignments of LLC membership interest occur among insiders who are already acquainted with the company’s assets, liabilities, management, and operations. For potential assignees who do not fall in this category, the question of valuation arises—not just valuation of the membership interest itself but valuation of the LLC as a whole, since the two are effectively inseparable.

Several articles could be written on how to evaluate and appraise a business; suffice it to say that there should be some rational basis for the asking price that can be independently confirmed by looking at the company’s finances and assets. Certain numbers will be hard (real property and bank accounts) and others will be soft (marketing strategy, proprietary information, and value of the brand).

If assets include real properties, an evaluation of value may include appraisals by licensed appraisers or the less-formal alternative of a broker price opinion (BPO). It is impressive if a real estate investment firm has an inventory of 30 rental properties; it is less so if half the properties are drowning in deferred maintenance. Numbers guys may be satisfied with financials and a spreadsheet; traditionalists will want to physically inspect the properties as part of the due-diligence process.

(2) Good Standing . It is important to verify that the LLC and the assignor (if a registered entity) are in good standing with the secretary of state and the comptroller. If not, they do not have the legal capacity to do business, which could potentially make execution of an LLC membership assignment invalid.

(3) Core LLC Documents . A prospective assignee-buyer will want to see core LLC documents including the certificate of formation; the certificate of filing (the secretary of state’s approval); the minutes of the first organizational meeting of members along with subsequent minutes of special meetings (if any) and annual meetings; company resolutions or grants of authority; the company agreement, as currently amended or restated; and any membership certificates that may have been issued (or at least a record of same).

Also: where are the official LLC records kept? Who is responsible for keeping them, and is access readily available? Is there a company book, i.e., a binder containing these? Failure of an LLC to keep organized and complete records is a warning sign for a potential assignee. This is true regardless of and aside from any statutory requirements for LLC record keeping.

A vital object of an assignee’s investigation should be the company agreement. The company agreement is essentially a partnership agreement among LLC members, so it will directly bind a prospective assignee . Is it valid? Is it a legal document of substance or is it a three-page printout from the internet that is not even relevant to Texas? Are provisions of the company agreement compatible with the intentions and goals of the assignee? What limitations does the company agreement impose (for example, restrictions on transfer of membership interests)? Can one easily re-sell the membership interest or are there hoops to jump through?

(4) Managers . It is operationally important to determine if the LLC is member-managed or manager-managed and, if the latter, to identity of the managers. Can the assignee work with these persons? Are they professional and competent? What is their track record?

(5) Member List . LLCs are required to keep current lists of members, their respective interests in the company, and a list of all contributions to the company. BOC Sections 101.501(a)(1)-(7). Fellow members of a smaller LLC are effectively your partners in the enterprise. It is good to know to know something about them.

(6) Contracts and Agreements with Third Parties . Any agreements with third parties that affect control, management, or operation of the LLC should be examined. Examples would be contracts with vendors or a property management agreement with a third-party management company. Is the LLC currently part of a joint venture with a different group of investors?

(7) Voting Agreements . These may or may not exist. Any one or more of the members may enter into voting agreements (including but not limited to proxies and pledges) that can affect control of the entity.

(8) Federal Tax Returns. Tax returns are important to verify how the LLC is taxed and how ownership is reported to the IRS. Tax returns and LLC records should be consistent in this respect. It is a good idea for a prospective assignee to have a CPA review the company’s tax returns.

(9) Texas Annual Filings . A prospective assignee should review the franchise tax returns and public information reports (PIRs) that must be annually filed with the comptroller’s office. Do these accurately reflect the LLC’s affairs? Are they diligently prepared and timely filed?

(10) Transactional Records . What property does the LLC own? Are warranty deeds in the name of the LLC duly recorded in the real property records? How are properties managed and who is responsible for doing so? What do the files and records look like—are they orderly or are they a mess? And what about completeness? Do files for rental properties contain all essential documents like warranty deeds, notes and loan agreements, deeds of trust, leases, appraisals, maintenance records, and so on? A specific person should be responsible for keeping such records at a designated location.

(11) Salaries, Draws, and Distributions. These should be examined to discover if there is a pattern of excessive or erratic compensation to managers or distributions to members. Is there a coherent schedule or plan? Are measures in place to insure that the LLC maintains sufficient working capital to fund existing and planned operations?

(12) Bank and Depository Accounts . Current and recent copies of account statements should be examined. Look for any unusual withdrawals or capital flows. Is the LLC adequately capitalized? Does it have an adequate capital reserve? Inadequate capitalization is the number one cause of small business failure.

(13) Records of Pending, Prospective, and Resolved Legal Actions . Is the LLC being sued? Has it been sued in the past? Do the managers have a history of shoddy or deceptive dealings? Is the LLC continually receiving DTPA notice letters from attorneys? Default letters from HOAs or appraisal districts? Does the company charter get periodically revoked (and then have to be reinstated) because the LLC fails to timely file its franchise tax return or PIR? Consider meeting with the LLC’s attorney and CPA. Require that confidentiality be waived in order to get a frank assessment of the situation.

(14) Best Practices Generally . It is important to ascertain whether or not the LLC is run with diligence, integrity, and in compliance with applicable law. What is the company culture with regard to best practices? Does the LLC have a regular business attorney and CPA to advise the managers? Or do the managers wing it on a DIY basis most of the time, counting on a surging market to cover their mistakes?

(15) Reputational Evidence . A prospective assignee may want to do some digging in order to evaluate the business and personal reputations of the managers and members. What is their professional history? The personal lives of the existing members may also be relevant: are any of them getting a divorce from a spouse who might turn into a hostile party? Was one of them just expelled from the country club for non-payment of dues? An internet search is, of course, the bare minimum but it may also be prudent to consider a private investigator (These are not just for the movies).

(16) Company Performance . How have the LLC’s investments fared, particularly over the last three years? What do the company accounts show and are these numbers verifiable? Does the spreadsheet match up with the checkbook?

Trends are an important part of value analysis. Try to reduce the LLC’s quarterly and annual results to line graphs for income and costs. Which way are these factors trending?

(17) Business Plan . Do the managers and members have specific goals or is their strategy more built around finding targets of investment opportunity? Is their plan realistic or pie-in-the-sky? What will the company likely look like in three years? Five years? Is a change in direction required?

The importance of thorough due diligence conducted during an adequate inspection period cannot be understated. Knowledge, as they say, is power. If one must sign a confidentiality or non-disclosure agreement in order to get relevant information on the LLC and its members, then that is what should be done.

CLAUSES AND PROVISIONS OF THE ASSIGNMENT

Assignments of interest generally.

All assignments of interest (regardless of the interest assigned) include—or should include—certain common clauses and provisions. After identifying the parties and the exact interest to be assigned, the document should state the consideration being paid; whether the consideration is nominal, cash, or a financed amount (secured or unsecured); recite both transfer and acceptance language; state whether the assignment is made entirely “as is” or instead with representations and warranties; state whether the assignee will have any recourse in the event certain post-assignment conditions are not met and identify the recourse mechanism; recite covenants and agreements of both parties that will result in the implementation of the transfer along with remedies for default if these measures are not carried out; a mutual indemnity clause; any special provisions agreed to by the parties; an alternative dispute resolution (mandatory mediation) clause; and conclude with various miscellaneous provisions that identify applicable law and venue, advise all parties to consult an attorney, set an effective date, and so forth.

A “Consent of Non-Member Spouses” should be appended if applicable. Exhibits to the assignment (pertaining to company assets and liabilities, for instance) may also be needed.

Representations and Warranties

An assignment may include a full set of representations and warranties (“reps and warranties”), limited reps and warranties, or no reps and warranties at all—in which case the assignment is made entirely as is and (in such cases) is almost always without recourse, meaning there is no defined remedy against the assignor-seller if the LLC membership goes sour for some reason. Representations and warranties may be made by assignor, assignee, both, or neither.

Core reps and warranties are basic assurances to which no reasonable party should object. Reps and warranties can get much more detailed and extensive from there. If attorneys are involved, the reps and warranties section of a contract may be heavily negotiated.

The assignor-seller’s goal is to minimize post-closing liability by transferring the membership interest “as is” to the maximum extent by including only a minimum number of reps and warranties. It should be noted that inclusion of the above-mentioned core items does not impair the ability of an assignor to assign an interest “as is.” For this reason, it is always somewhat suspicious when an assignor refuses to give any reps or warranties at all.

The assignee-buyer instead prefers a longer and more specific list of reps and warranties on the part of the assignor-seller. One of the goals of the assignee in the due diligence process is to ascertain, to the greatest extent practicable, the accuracy of reps and warranties that have been or will be made by the seller.

Examples of Reps and Warranties

Examples of basic reps and warranties would include assurances that each party, if a registered entity, is in good standing; the party has power and authority to enter into the transaction without joinder of others; and there exists no condition or circumstance that would render the transaction illegal or invalid or place the party in breach of an existing contract. Additional near-core items would include assurances that each party has performed adequate due diligence and has consulted an attorney before signing.

Both assignor and assignee should also want to include a statement that neither party is making or relying upon any reps or warranties that are not expressly set forth in the assignment. The goal is to prevent anyone from assuming anything or alleging that certain assurances were oral or implied.

Reps and Warranties: Duration and Default

Once reps and warranties are negotiated, it must be determined how long they will survive closing—if at all. 30 days? 90 days? Indefinitely?

A final issue in this area has to do with remedies for default in the event of breach. Attorneys frequently include a clause requiring that such default be a material (rather than a trivial) breach in order to be legally actionable. The issue is then raised, how does one define material ? One method is to impose a monetary floor, e.g., by confining assignor liability to issues that result in a loss or cost of (say) $10,000 or more.

Assignments Made “As Is”

As noted, an assignor-seller can include basic (limited) representations and warranties and still convey an LLC membership interest “as is.” Many business persons, including lawyers, do not adequately understand this. For example, stating that one has sufficient power and authority to enter into a transaction does not suggest any representation or warranty as to the item being conveyed. It is a core representation that should probably be included in every assignment.

The key to protecting the assignor is a thorough “as is” clause. Just as is true with real estate conveyances, the more thorough and extensive the “as is” clause, the better. One-liners will generally not do. This is particularly true if there have been oral or email negotiations over a period of weeks or months. The goal should be not only to convey the interest “as is” but also to entirely exclude any statement that cannot be expressly found in writing within the four corners of the assignment instrument.

Covenants and Agreements of the Parties

Covenants and agreements address the legal obligations of the parties going forward—specifically what actions they are required to take in order to implement the assignment. Covenants and agreements of the assignor-seller would include, for example, an obligation to promptly endorse and deliver to the assignee-buyer any certificates evidencing the membership interest in question.

The assignee-buyer should also covenant and agree to abide by the company agreement and other governing documents. Since Texas is a community property state, the spouse of a new assignee should also be asked to sign off on this commitment. The best practice is to secure the signatures of both the new assignee and any non-member spouse not only on the assignment but on the company agreement itself.

Additional covenants and agreements of the parties may be (and usually are) included. This is another area that is subject to extensive negotiation and customization to the circumstances.

Recourse by Assignee upon Occurrence of Specified Conditions

The option for some form of limited or conditional recourse may be included in any assignment of interest. In the case of an LLC membership interest, the assignment could provide that, upon occurrence of certain conditions, the assignee would have the right to re-convey the membership interest and receive return of all or part of the consideration. Examples of such conditions would be any adverse event—a negative outcome in a pending lawsuit or zoning proceeding; condemnation of certain LLC property; failure of a pending joint venture; or the discovery that any representations or warranties of assignor were materially false or deceptive when made. The availability of a recourse mechanism is generally time-limited, say for 90 days after closing. Some assignments might also refer to this recourse mechanism as a right to rescind.

In any assignment instrument, the alternative to full or limited recourse is no recourse at all by the assignee-buyer. For example, real estate notes are often sold without (either full or limited) recourse against the assignor-seller in the event that the borrower on the note defaults. In such a case, absent any provision for recourse, the assignee-buyer of the note would then be in possession of a non-performing asset. The remedy is not against the assignor, but to pursue the debtor directly.

Mutual Indemnity

Ideally, and unless there are special circumstances, the assignor and assignee should release and indemnify one another for LLC-related actions, claims, liabilities, and obligations occurring before and after (respectively) the effective date of the assignment. Indemnity provisions are useful and worthwhile, but one needs to clearly understand their limitations. They are not a covenant not to sue.

Non-Compete and Non-Disclosure Provisions

Sale by a departing LLC member to another member may raise concerns that the departing member will utilize proprietary and confidential information in order to compete with the company in the same line of business within the same geographical area. Agreements regarding intellectual property and non-competition are typically stand-alone full-length contracts; nevertheless, it is possible to include compact and enforceable IP and non-compete provisions that fit smoothly and purposefully into a sale and assignment of LLC membership interest. Failing to do this can be an error with serious consequences.

Corporate Transparency Act and FinCEN Reporting

The Financial Crimes Enforcement Network (FinCEN), an arm of the Treasury Department, is charged with rulemaking to enforce the Corporate Transparency Act which was passed in 2021. The CTA contains sweeping requirements regarding the reporting of beneficial interests in LLCs and corporations.

To the extent that a sale and assignment of LLC membership interest constitutes a change in beneficial ownership, then a report to FinCEN will likely be required. The assignment instrument should expressly address the applicability of the CTA and designate which party (usually the assignee) will be responsible for filing a supplemental FinCEN report.

If the burden of FinCEN reporting falls on the assignee, then the assignor may want to include an indemnity clause for added protection. The assignor may also want to limit liability for past FinCEN reporting.

Alternative Dispute Resolution: Mandatory Mediation

Since we live in a litigation nation, it is highly advisable to include a provision that requires mediation prior to commencing legal action. Approximately 80% of mediations result in a settlement. In other words, mediation works, at least most of the time.

A mediation clause should require the conflicting parties to first confer in good faith and attempt to resolve the dispute in a way that accommodates the legitimate interests of both sides. If agreement is reached, it should be reduced to a signed writing and implemented. If not, the parties should then agree to formally mediate the dispute before a certified mediator prior to resorting to litigation or filing any complaint with a governmental or administrative agency.

A mandatory mediation provision should also state where the mediation will be held (which city or county) and for how long (mediations are usually either a half-day or a full day). Each party should commit to bearing its own fees and costs until the mediation is concluded.

Special Provisions and Stipulations

It is useful to include a catch-all special provisions section that allows room for terms that may be specific to the subject transaction and its unique circumstances. These special agreements and provisions frequently arise and this is the place to insert them.

Stipulations are a slightly different concept. For example, an assignment of LLC membership interest may involve a new list of members. It may also require a re-allocation of percentage interests among the remaining members. So it may be beneficial to include a stipulation that after conclusion of the assignment, the new membership list (with accompanying revised percentage interests) will be as described in Exhibit A. This usefully erases any doubt as to the overall final outcome of the transaction.

As previously noted, a special meeting of members is an important companion document to the assignment of LLC membership interest. The meeting, signed by all affected parties, can not only approve the assignment but mention issues such as record date, a general ratification of the assignment and the new member list, and also authorize issuance of new membership certificates.

No Reliance and No Representation Clauses

The assignor-seller (in particular) may want to make it clear that the assignment is made and accepted by the assignee-buyer only after a proper due-diligence investigation and without reliance on any statements or assurances (especially oral ones) made by the assignor-seller or its agents.

Wrap-Up Provision Relating to Execution and Delivery of Documents and Records

It would be an oversight if an assignment of LLC membership interest failed to mention possession and delivery of company books and records, an omission that has resulted in more than a few lawsuits. An agreement to execute and deliver such additional and further documents as may be reasonably necessary to effectuate the purposes of the assignment should cover and include any affected LLC records, including the company book and accounting records. These may need to be transferred to a new assignee-owner or returned to the assignor-seller after due-diligence inspection.

Clients often do not understand why a sale and assignment of LLC membership interest cannot be a simple, one-page document. It is hoped that this article will clarify the answer to that question.

Information in this article is provided for general informational and educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. No attorney-client relationship is created by the offering of this article. This firm does not represent you unless and until it is expressly retained in writing to do so. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well.

Copyright © 2024 by David J. Willis. All rights reserved. Mr. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his website, www.LoneStarLandLaw.com .

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LLC Membership Interest Assignment

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An LLC Membership Interest Assignment is a document used when one member of an LLC, also known as a limited liability company, wishes to transfer their interest to another party entirely. LLC Membership Interest Assignments are often used where a member in an LLC is leaving or otherwise wants to relinquish the entirety of their interest in the company.

An LLC Membership Interest Assignment normally happens well after the LLC has already been operating . To form a limited liability company in most states, any party must begin with Articles of Organization (sometimes called Certificates of Formation or other varying names). These documents will get the LLC formed and in compliance with state laws.

A limited liability company can operate and be formed for any reason (except illegal ones). For example, even if it is a small business, like dog-walking, the owners might want to have an LLC to protect themselves. If so, and if any owner decided to one day relinquish their interest in the LLC , that owner could use this LLC Membership Interest Assignment to assign it to another person.

LLC Membership Interest Assignments are short, relatively easy documents which contain all the information needed to transfer an interest in an LLC.They contain a place for both the person transferring the interest (called the Assignor) and the person receiving the interest (called the Assignee) to execute the document.

How to use this document

This document can be used when any party would like to transfer the ownership of an interest in an LLC or when any party would like a membership interest in an LLC transferred to them, as long as the current owner of the membership interest agrees. It should be used it when both parties understand that the membership interest will be completely assigned and wish to create a record of their agreement, as well as a document that the LLC will likely keep on file.

This document will allow the form-filler to input details of the identities of both parties, as well as the details of the membership interest, such as percentage and whether or not it comes with voting rights . It also has an optional addendum at the end, in case full consent is needed from all the rest of the members of the LLC .

Please keep in mind that this form requires both signatures , from the party assigning the interest and the party receiving it.

Applicable law

LLC Membership Interest Assignments are subject to the laws of individual states . There is no one federal law covering these documents, because each individual state governs the businesses formed within that state.

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Other names for the document:

Assignment of Interest for LLC Member, Interest Assignment for LLC Membership, LLC Interest Assignment Agreement, Member Interest Transfer for LLC, Membership Assignment for LLC

Country: United States

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• Assigning an Agreement of Purchase and Sale (Prior to Closing)
• Marty's Musings

By   Martin Rumack

September 3, 2016

What is an Assignment of an Agreement of Purchase and sale?

At its essence, an Assignment of an Agreement of Purchase and Sale – informally known as “flipping a home” – is a simple concept:  A buyer of a new home allows someone else to take over the purchase contract, which allows that person to buy that same home him or herself.   

More specifically, the original buyer enters into a formal Agreement of Purchase and Sale with a Builder, and then allows another person – who we will call the “new buyer” – to step into his or her shoes through what is legally known as an “Assignment” of that original Agreement or Offer to buy.  The new buyer pays the original buyer a higher price than what was set out in that original Agreement, with the difference begin the original buyer’s profit. All of this takes place after the original buyer has agreed to buy from the Builder, but  before the deal closes ; the original buyer never takes title to the property.   

This arises primarily with homes: For newly-built homes with typically long closing dates (e.g. often 18 months or more), an Assignment is particularly attractive in situations where the Builder has already sold all of the units in the development early on, but where there is still demand for soon-to-be-completed homes and new condominium units in the development.  The assignment of a new condominium unit is also interesting for similar reasons, although the time frame may be significantly longer depending on when the assignment occurs.  This puts the original buyer in position to make a profit by inflating the new price well above what he or she agreed to pay the Builder in the first place.   

And what is the benefit to the new buyer?  There can be several:

• The new buyer may be able to buy into a desirable neighbourhood at a time when there are no more units available to be purchased directly from the Builder;
• Even taking the original buyer’s profit into account, the assignment may give the new buyer a price advantage over other properties that are currently on the market; and
• Depending on the timing of the assignment, the new buyer may be position to choose finishes and make minor changes to the yet-to-be-built home.

Whatever the respective motivations of the original and new buyer, the assignment of an Agreement of Purchase and Sale has many specific features – and just as many potential pitfalls.  What follows is a discussion of some of the key points.

When Can An Agreement of Purchase and Sale Be Assigned?

Unlike the standard Toronto Real Estate Board (TREB) or Ontario Real Estate Association (OREA) agreements, many Builders’ own ( i.e.  customized) Agreements of Purchase and Sale contain a clause that generally prohibits the assignment of the contract outright – or else allows it only certain very strict conditions and in exchange for a significant fee payable to the Builder.     

In fact, the vast majority of new home or condominium-purchase agreements do not allow the original buyer to assign the contract to someone else and stipulate that any attempt by the buyer to do so, or to list the home for sale on the Multiple Listing Service (MLS) or otherwise, or else list the property for rent, will put the original buyer in breach of the Agreement.   This triggers the Builder’s right, with notice, to terminate the original Agreement, keep the original buyer’s deposit, and seek additional damages from him or her.  (And in most cases, the original buyer’s Agreement is “dead”;  i.e.  he or she cannot go back and try to complete the transaction as if no assignment had taken place).

All of this means that anyone who has agreed to purchase a home from a Builder should give careful consideration to, and should seek legal advice prior to signing the Agreement, or in the case of condominium units during the 10-day cooling-off period in order to determine whether it’s possible to assign the Agreement in the first place.

This in turn involves a careful review of the clauses in that Agreement.

Typical (and Not-So-Typical) Provisions:

As a practical matter, there are as many variations in these types of provisions as there are Builders.    

Many Agreements of Purchase and Sale will include a largely-standard “No Assignment” clause, which disentitles the original buyer from “directly or indirectly” taking any steps to “lease, list for sale, advertise for sale, assign, convey, sell, transfer or otherwise dispose of” the property or any interest in it.     

A potential exception – and this is important – arises if the Builder gives  prior written consent , although in the more draconian version of these kinds of contract, that consent may be “unreasonably and arbitrarily withheld” by the Builder, essentially on its whim.   In other words, the buyer is not allowed to deal with the property,  unless  the Builder pre-approves it in writing, but in many cases the Builder has no obligation to give that approval and may withhold it for any reason whatsoever, including unreasonable and arbitrary ones.

(With that said, the “No Assignment” clause in some Agreements will allow for express exceptions or situations where the Builder will not withhold consent, for example:  a) Assignments made to a member of the original buyer’s immediate family; or b) where the Builder has determined that a sufficient and satisfactory percentage of the available units have already been sold).

The bottom line is that the basic clause in an Agreement of Purchase and Sale may or may not allow for the assignment of the Agreement to a new buyer, and if it is allowed, it will be subject to specified conditions such as obtaining the Builder’s written consent.  Most Agreements will embellish this basic clause by adding further written stipulations such as:

• Having both the original buyer and the new buyer sign an Assignment Agreement that has been drafted by the Builder;
• Mandating the original buyer will not assign the Agreement until the Builder has managed to sell a certain percentage of the units in the overall development (e.g. 85 or 90%), and even then it must be with the Builder’s written consent as usual;
• Requiring the original buyer to pay a fee to the Builder of (for example) $5,000 plus taxes as part of obtaining the Builder’s consent to the assignment;
• Requiring the original buyer to pay another fee plus taxes to the Builder’s lawyer (ostensibly as a sort of “legal processing fee”);
• Getting the pre-approval of any lending institution or mortgagee that is providing funding to the Builder for construction or otherwise;
• Assuming the Builder agrees to the assignment in the first place, prohibiting any further assignments of the offer by the new buyer to any subsequent party;
• Confirming that the breach of any of the original buyer’s promises in relation to how and when an assignment can occur will be considered a breach of the whole agreement (and one that cannot be remedied); and
• Requiring the original buyer to confirm in writing that the property is not being purchased for short-term speculative purposes.
• Note that even if the Agreement of Purchase and Sale does not expressly allow or provide for it in writing, some Builders will permit an original buyer to make an assignment nonetheless.  This is because it is always in the Builder’s discretion to give up (usually for a fee) its right to technically insist on the purchase going ahead with the original buyer.

Getting the Builder’s Consent

It’s important to remember that, initially, the original buyer and the Builder had a valid legal contract in place that obliged the buyer to purchase a home or condominium unit from the Builder.    That original buyer, for whatever reason – whether it’s a change of circumstances (such as a change in a marital situation, job transfer to another city, province or country; birth of children resulting in a home/condominium unit being too small for the buyer), cold feet, or simply the desire to make a profit – has subsequently decided to “sell” that right to buy to the new buyer.    

To protect the Builder, the Assignment will contain clauses that are designed to safeguard the Builder’s rights.  The most important one is that, as discussed, the Builder must give its written consent to the Assignment.  This will often involve specific Builder-imposed requirements, fees and forms which must be completed.

Once consent has been obtained, there may be additional restrictions on the manner in which the original owner can market the property.  For example, some Builders will insist that the property is not to be listed on MLS (where it may be competing with the Builder’s own listings for still-unsold home and units in the same development); if the original owner does so nonetheless, it will be tantamount to a breach of the Agreement of Purchase and Sale which could entitle the Builder to damages, or rescission of the Agreement of the Purchase and Sale while retaining the deposits paid, as well as the monies paid for extras.

However, aside from any marketing / advertising restrictions that may be imposed, the original buyer must clearly indicate in any listing that it is an assignment of an Agreement of Purchase and Sale, not merely an ostensible sale from the original buyer.

Continuing Liability After Assignment

One key provisions in the Agreement of Purchase and Sale – and one that is easy to overlook – may significantly impact whether an original buyer will want to assign his or her agreement at all.

Even though the original buyer has essentially transferred his or her right to buy the property to the new buyer, the original buyer is not fully off-the-hook.  Rather, under the terms of the Assignment document, the original buyer can remain liable to go through with the contract if the new buyer does not complete the transaction with the Builder.

This written obligation appears in the original buyer’s Agreement of Purchase and Sale, and is couched in phrases that give the buyer continuing liability for the “covenants, agreements, and obligations” contained the original agreement.  But the net effect is that the original buyer remains fully liable should the agreement between the Builder and the new buyer collapse.  The Agreement may also stipulate that the assignee, meaning the person receiving the benefit of the assignment (i.e. the new buyer) must sign an “assumption covenant” which creates a binding contract between the new buyer and the Builder.

(Incidentally, in contrast some Builder’s agreements quite conveniently allow the Builder itself to freely assign the agreement to any other Builder registered with Tarion, which assignment completely releases the Builder from its obligations.)

The original buyer’s continuing liability under the Assignment Agreement is a major drawback in these types of arrangements.   The original buyer always has to balance the risks and rewards inherent in this scenario.

Documenting the Transaction

Assuming that the assignment of an offer is even permitted by the Builder, then (as with all contracts) it must be documented to reflect and protect the legal right of the parties.

The technical aspects of an assignment require more than simply taking the original buyer’s Agreement of Purchase and Sale with the Builder, scratching out his or her name, and replacing it with the new buyer.   (Although, in some cases people do try to “squeeze in” assignment-of-offer terminology into a new Agreement of Purchase and Sale made out in the new buyer’s name – but this is definitely NOT recommended).

Rather, a properly-documented transaction makes reference to the Agreement of Purchase and Sale between the original buyer and the Builder, but adds a separate document called an “Assignment of Agreement of Purchase and Sale.”  The Ontario Real Estate Association (OREA) provides a standard form that can be used, although in many cases those Builders who permit Assignments will insist that the original buyer and the new buyer use the Builder’s customized assignment forms, rather than the OREA standardized version.

The Specifics of the Deal –Who Pays What?

Recouping the Original Buyer’s Costs

At the point where the Assignment is being negotiated, the original buyer has typically paid a deposit to the Builder, may have pre-paid for certain upgrades and extras, and has a large balance owing.  This means that in the course of striking a deal to achieve the assignment, the original buyer should give some serious thought to the various costs, fees, pre-paid deposits, and tax repercussions of the deal, and how these should be reflected in the price that he or she will want the new buyer to pay under the Assignment Agreement.   The timing of the payment(s) will also be a consideration.

For both original buyer and new buyer who are considering an assignment arrangement, here are some of the questions to ask:

• Does the price to be paid by the new buyer include any fee that the Builder is charging in exchange for the original buyer’s right to assign the Agreement of Purchase and Sale?
• Does it include any deposits paid by the original buyer to the Builder, after the Agreement was signed?  Does it include any interest that has been earned on those deposits?
• Does it clearly state that the new buyer will take over the entire contract, including the adjustments that are to be paid to the Builder on closing?  Or are those adjustments to be split between new and original buyer?
• Does the price include money paid by the original buyer for extras and upgrades?
• Are there any additional deposits that are still owing to the Builder, under the original agreement?
• Who is responsible to pay the additional fee ( i.e.  the Builder-imposed fee) in exchange for the Builder giving consent?  Usually, this will be the original buyer, but the parties may negotiate otherwise.
• Does the new buyer agree to take on responsibility under the original Agreement for making additional deposit payments until the final closing date (which may still be months or even years away)?
• Does the new buyer have a full understanding of the amount of all the adjustments that must be paid to the Builder pursuant to the original Agreement?
• If the original buyer has negotiated any special financial incentives into the Agreement of Purchase and Sale that has been reached with the Builder, have these been addressed in terms of whether the new buyer will receive the benefit of them?

In any case, the final purchase price payable from the new buyer to the original buyer will typically be made up of:

• The outstanding balance owed to the Builder by the original buyer, that will now be payable by the new buyer;
• The total deposits already paid by the original buyer to the Builder;
• The total payments already paid by the original buyer to the Builder for any upgrades, extras, etc.; and
• The profit that the original buyer stands to make in the deal.

Deposits, and Interest on Deposits

The treatment of deposits, and the interest they may have earned, merits a brief separate discussion.

Under virtually all Agreements of Purchase and Sale with Builders, the original buyer will be required to pay a series of deposits to the Builder, starting with the initial deposit paid when the Agreement is signed, and on a set payment schedule thereafter.   The total of those deposits can be significant.

Once the Agreement has been assigned to the new buyer, how those deposits are treated will form part of the negotiations.  Typically, the original buyer will get those deposits back from the new buyer as part of the overall purchase price of the assignment transaction; he or she will usually receive them at the time the assignment agreement is entered into and the Builder has consented to the assignment.

The potential problem with an Assignment Agreement is financing. The original buyer will want his deposit funds returned before closing, but if the new buyer does not have funds on-hand, he or she may find that financing is very difficult to obtain because banks do not advance mortgage funds at the time an Assignment Agreement is entered into; rather, the financial institution will provide funds only on final closing.  This can serve as a roadblock to the new buyer’s ability to repay the deposits and potentially to embark on the transaction at all.

The question of who is entitled to the Interest on any deposits pre-paid to the Builder is also a topic for the original and new buyers to discuss.    In many cases, the interest will be only a small amount (if any) and may be credited to the new buyer, rather than the original one.  However, in cases where the original buyer has paid significant deposits over time, and where larger interest amounts have accrued, the parties may want to negotiate a different outcome.

Land Transfer Tax

Land Transfer Tax is also an important consideration in Assignment Agreement arrangements.

When negotiating the deal, the original buyer and the new buyer must discuss the structure of the deal between them, to ascertain the exact selling price on which the Land Transfer Tax (and any Municipal Land Transfer Tax) should be payable  i.e . whether it is the original buyer’s price with the Builder (net of HST and the HST New Housing Rebate, which is discussed below), or whether it’s the newly-inflated price being paid by the new buyer under the Assignment.

Generally speaking, it will be the latter, although in some assignment arrangements the parties have attempted to structure it so that they pay the Land Transfer Tax based on the lower initial price asked by the Builder, while taking the position that difference between that and the increased price is merely the “fee” paid to acquire the original Agreement of Purchase and Sale entered into with the Builder (thus avoiding having the tax calculated on the higher sale price).

In any case, once the Assignment Agreement is reached, it will be the new buyer who is obliged to pay Land Transfer Tax and any Municipal Land Transfer Tax on closing, not the original buyer.

HST and the HST New Housing Rebate

The issue of how HST is to be treated in an assignment scenario is a crucial one, but is fraught with pitfalls.

The first issue is how HST on the transaction should be calculated.   Because the new buyer’s price will inevitably be higher than the one the original buyer agreed to pay to the Builder, there is an important issue as to whether the difference – meaning the original buyer’s profit – should be subject to HST (and if so, who will pay it in the transaction).

This determination hinges on whether the assignment is a “taxable supply” under the tax legislation, and on whether the original buyer can be considered or deemed a so-called “builder” of the home for HST purposes.    This, in turn, involves a number of complex legal concepts and factual findings – including the intentions of the original buyer as to whether the home is going to be a primary residence.

Next, there is the issue of the HST New Housing Rebate.   In a typical scenario, the original buyer may have been entitled to the HST New Housing Rebate, based on meeting numerous qualifying requirements and stipulations. However, once he or she assigns the Agreement, that eligibility is obviously lost because he or she is no longer taking title to the home on closing.   Only one HST New Housing Rebate application per dwelling can be filed.

But once there has been an assignment, it is the new buyer’s circumstances that will determine whether the opportunity for an HST Rebate exists.   He or she will have to meet the stipulated legislated requirements, and may either apply directly to the Canada Revenue Agency (CRA), or arrange with the Builder to have the rebate amount credited right at closing.

(Note that the new buyer may want to take steps to protect his or her position in this regard.  For example, when negotiating the Assignment Agreement, the new buyer should make the agreement conditional on receiving written confirmation from the Builder that any HST New Housing Rebate will be credited to him or her on closing (assuming that the qualifying requirements are otherwise met).    Otherwise, if this commitment is not in writing then the Builder, being entitled to exercise its discretion on whether to credit the buyer with the rebate amount on Final Closing, can withhold it and force the new buyer to apply to CRA directly after closing.  Obtaining this commitment in writing is especially important given the likely lack of prior dealing between the Builder and the new buyer.

Other Things To Consider

Who is Responsible for the Documentation?

In addition to ascertaining whether the original buyer or the new buyer will pay for certain items, it is also important to determine – in advance – which of them will take care of arranging the documentation.  The questions to ask:

• Who will prepare the documents needed to achieve the Assignment?  And who will bear the cost?
• Will the Builder’s lawyer prepare the Builder’s needed consent to the Assignment?
• Since the new buyer cannot renegotiate any of the provisions of the Agreement that the original buyer entered into with the Builder, are any of those terms objectionable, and if so, how will they be resolved and who will bear the cost?

As discussed, the Assignment Agreement will be conditional on the Builder giving its consent.  From the new buyer’s standpoint, it should also be made conditional on him or her giving close review to the original Agreement of Purchase and Sale (as signed by the original buyer), the Assignment Agreement, as well as any amendments, waivers, notices (and for condominium purchases, the Disclosure Statement) etc.  If for no other reason, it will give the new buyer a chance to consider the specific list of adjustments for which he or she will be responsible to pay on closing.  Needless to say, this review should be undertaken with the guidance of an experienced lawyer.

Once the terms of the assignment are settled and the Builder’s written consent has been obtained, the Assignment Agreement must be drafted and is attached to the original Agreement of Purchase and Sale that the original buyer entered into with the Builder.   

Incidentally, the Builder may have certain requirements that must be incorporated into the process and accommodated as well.    For example, the Builder will require the new buyer to provide I.D., and will need confirmation that he or she has the financing required to close in place.

Tarion Registration

When negotiating the assignment arrangement, the original and new buyers must be aware of the impact of the New Home Warranty Program as administered by Tarion, particularly if the home being “flipped” is a condominium unit.

There may be financial issues for the new buyer to work out before the deal can go ahead.

As usual, the transaction may be conditional on financing, which will be arranged on the higher price that the new buyer has agreed to pay.   However, since some mortgage brokers may be unfamiliar with financing an assignment transaction, getting approval for the new buyer’s purchase may be challenging.   This is something that needs to be investigated long before the original buyer and the new buyer start their negotiations in earnest.

A final issue to be negotiated is who is paying the commission with respect to the Assignment Agreement transaction.  This includes consideration of the specific commission rate, together with the details on how and when the commission gets paid.

While an Assignment Agreement can be beneficial to both the original and the new buyer – and even to the Builder (in extra fees) there are many issues to be addressed and negotiate.

As an agent, make sure your client obtains legal advice prior to finalizing any agreement to assign the original Agreement of Purchase and Sale.

Be careful… be aware… and think!”

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Assignment of Interest Form: Everything You Need to Know

An assignment of interest form allows a limited liability company (LLC) member to assign their interest or ownership stake in the company to another person. 3 min read updated on January 01, 2024

Updated November 25, 2020:

An assignment of interest form allows a limited liability company (LLC) member to assign their interest or ownership stake in the company to another person. The information that you will need to include in this form depends on the laws governing LLCs in your state.

Assigning LLC Interest

LLCs are a popular business structure that offers certain features of both corporations and partnerships. Owners of a limited liability company are members, and each member's stake in the company is their interest. LLC members have the ability to transfer their interest by making an assignment of interest.

An LLC's operating agreement describes how the company will be run and dictates the requirements and limitations of members' interests in the company. If this agreement allows members to transfer their company interests, they can do so with an assignment of interest form. Every state will have specific rules for what you must include in this form before a member's interest can be assigned.

In most cases, an assignment of interest does not constitute a sale of a member's LLC interest. In many states, an assignment of interest only transfers the financial advantage of the stake or share, so the member who initially possessed the interest still retains his or her voting and managerial rights in the company while the assignee will not. Assignments of interest are commonly used as loan collateral, and once the loan is paid off, the assignment ends.

Furthermore, an assignment will only transfer a percentage of an LLC member's interest. You are not required to assign all of your stakes' financial benefits. Having the ability to transfer a portion of interest allows members of an LLC to use their ownership stake very flexibly. However, partial assignments can only be made if the LLC's operating agreement allows them.

Assignments and Partnerships

An assignment of partnership interest is similar to an assignment of LLC interest. Assigning a partnership interest involves a business partner assigning their right to financially benefit from the partnership to a new partner.

When writing an assignment of partnership interest form, you should be sure to include the correct information:

• Details about the partnership, including the business's legal name and its formation date.
• Contact information of the new partner who is receiving the partnership interest.
• Contact information of the old partner who is assigning their interest.
• Contact information of the other business partners.
• The monetary amount being exchanged for the partnership interest.
• The date where the assignment will be revoked.
• Signatures of all parties, including the assignor, assignee, and remaining partners.

The main purpose of this legal document is to record the assignment of the partnership interest.

Without a valid assignment of interest form, the new partner would have no way to force the old partner to fulfill the terms of the assignment. In addition to making sure that the assignment is enforceable, this document outlines what role the new partner will play in the business. For instance, the assignment of partnership interest form can dictate if the new partner will have any management or financial responsibilities in the business. Full partners, for instance, can usually make decisions for the business and will also have access to the business's financial records.

There are countless reasons that a business partner may wish to assign their partnership interest to a new partner:

• The business's needed cash flow has changed.
• A change has occurred in how the business allocates its assets.
• Implementation of a new partnership strategy.
• New regulations pose challenges for the business.

When assigning a partnership interest, there are several issues you must address:

• Which partner will assign their interest and who will receive the assignment.
• The rights of the assignee to participate in managing or operating the business.
• The location of the business partnership.
• The establishment date of the partnership.
• What the assigning partner will receive in exchange for assigning their partnership interest.

Whether you are a partner in a business or a member of an LLC, your ownership stake in the business entity likely provides you with a variety of rights. For instance, you may have the right to receive profits from the business and the right to receive business assets after the company dissolves. Depending on your operating or partnership agreement , you may be able to transfer these rights to another party in exchange for consideration.

If you need help with an assignment of interest form, you can post your legal needs on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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Home Business Assignment Agreement Partnership Interest

Assignment of Partnership Interest Form

Use our free Assignment of Partnership Interest to sell a stake in a partnership to a new partner.

Updated February 5, 2024 Reviewed by Brooke Davis

A partner uses an Assignment of Partnership Interest form to sell their interest in the partnership to a new partner. Through the Assignment of Partnership Interest, the potential new partner (known as “the assignee”) agrees to pay the current partner (known as “the assignor”) in exchange for all the financial interests and obligations included in the partnership rights.

Keep in mind that in some cases, full partnership rights cannot be sold to the new partner unless all current partners also agree. Economic partnership rights, however, can still be sold without the agreement of all partners.

What is an Assignment of Partnership Interest?

When is a partnership assignment needed, the consequences of not having a partnership assignment, common uses for an assignment of partnership interest, what should be included in a partnership assignment, assignment of partnership interests sample.

An Assignment of Partnership Interest is a legal document that transfers the rights to receive benefits from an original business partner (“Assignor”) to a new business partner (“Assignee”).

It’s essential to learn about the types of partnerships and potential advantages and disadvantages of a partnership before entering into this business relationship.

This document will identify the following essential elements:

• Partnership Details : legal name of the business, its purpose, and date established
• Assignee : name and address of the new partner receiving the business interest
• Assignor : name and address of the old partner giving the business interest
• Partners : name and address of the remaining partners of the business
• Consideration : the amount of money exchanged for the business transfer
• Closing Date : when the assignment will end
• Signatures : all members of the original partnership and the assignee must sign

This document is needed to formally document a business transaction between the old and new partners.

Some partnership agreements contain a right of first refusal so that the original partners have a right to purchase the interest before an outside party. [1]

What happens if I do not have one?

Without this document, neither the old nor new partners are legally obligated to follow through with their promises to buy or sell the business’s shares. The Assignment may also clarify whether the new partner has the right to participate in the business’s operation, finances, or management.

For example, a full-fledged partner usually has the right to inspect the books, take possession of partnership property, and make decisions with other partners.

Otherwise, the new partner only has the right to receive a share of the profits and any distributions if the partnership ends.

Most partnership agreements only allow the transfer of the partner’s interest in the business so that the new partner can only receive the old partner’s share of the money but not have a say in the business operations or finances.

An Assignment of Partnership Interest is usually just one of several legal documents needed during the sale process. A Confidentiality Agreement plus a Purchase Order are also used to complete the transaction.

Here are just a few of the situations when this document is commonly used:

• Cash flow needs of the business change [2]
• Business assets are allocated differently
• The strategy of the partnership changes
• The regulatory environment presents new challenges

An Assignment of Partnership Interest should generally address the following:

• Who will be giving and receiving the business interest
• What rights does the assignee have in terms of operation or management
• Where is the business partnership located
• When was the partnership first established
• How much will the old partner receive in return for giving a part of their interests

Here’s what an assignment of partnership interests typically looks like:

Use can download the free template in PDF & Word format or use our document builder to help guide you through the writing process.

Legal Templates uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial guidelines to learn more about how we keep our content accurate, reliable and trustworthy.

• Assignment of Partnership Interests. http://delcode.delaware.gov/title6/c017/sc07/index.shtml
• ADAM HAYES. Cash Flow. https://www.investopedia.com/terms/c/cashflow.asp

Related Documents

• Purchase Agreement : Outlines the terms and conditions of an item sale.
• Business Purchase Agreement : A legally enforceable contract that documents the sale of a business.
• Stock Purchase Agreement : Record the purchase of stock and protect the buying and selling parties.
• Shareholder Agreement : Use this document to explain the structure and nature of shareholders' relationships to the corporation and to one another.
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Assignment Of Purchase Agreement

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What is an assignment of purchase agreement.

An assignment of purchase agreement is a contract between an assignor and assignee where the latter transfers certain interests to the former. This type of agreement is most commonly used in real estate to transfer one party's interest buying a property to someone else. The contract includes detailed information about the property, who the parties are, and what the goal of the agreement is. It also lays out specific terms and conditions that govern the relationship between the two parties.

The purpose of the assignment of purchase agreement is to successfully transfer rights from one party to another while ensuring the agreement remains mutually beneficial.

Common Sections in Assignment Of Purchase Agreements

Below is a list of common sections included in Assignment Of Purchase Agreements. These sections are linked to the below sample agreement for you to explore.

Assignment Of Purchase Agreement Sample

Reference : Security Exchange Commission - Edgar Database, EX-10.17 4 dex1017.htm ASSIGNMENT AND PURCHASE AGREEMENT , Viewed October 24, 2022, View Source on SEC .

Who Helps With Assignment Of Purchase Agreements?

Lawyers with backgrounds working on assignment of purchase agreements work with clients to help. Do you need help with an assignment of purchase agreement?

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Meet some of our assignment of purchase agreement lawyers.

Ryan Duffy is a skilled attorney with extensive experience in business law and estate planning. He received his undergraduate degree in Business from Franklin & Marshall College and went on to graduate from Villanova University Charles Widger School of Law. Ryan has worked with numerous clients on matters ranging from business formation and contract drafting to estate planning and asset protection. He is dedicated to helping businesses of all sizes achieve their goals while minimizing legal risks. He also works closely with individuals and families to help them protect their assets and plan for the future. With his extensive knowledge and practical approach, Ryan can provide valuable legal guidance and support to clients in need of business law and estate planning services.

I'm an attorney available to help small businesses in Georgia get started with initial business set-up, required filings, tax strategies, etc. I'm also available to draft, review, and negotiate contracts. I can draft and file real estate quit claims as well. My experience areas include small business startups, information technology, technology innovation, real estate transactions, taxes, community associations, intellectual property, electrical engineering, the business of video game development, higher education, business requirements definition, technology consulting, program management, and the electric utility industry. I work part-time for a local law firm and part-time in my solo practice. I'm also an adjunct professor at Southern New Hampshire University teaching business innovation and business law. In addition, I'm part owner, legal counsel to, and a board member of a virtual reality video game development company. I am a member of the Georgia Bar Association. Please reach out if you need attorney, documentation or consulting help in any of those areas!

I have been practicing law for 35 years. In addition to my law degree, I hold an MBA. I've created six companies, currently act as outside counsel to another 12, and have been an advisor to more than 500 startups and entrepreneurs.

We are a boutique firm located in San Diego that handles civil litigation with a couple other areas of law.

Elizabeth W.

Liz is an experienced insurance professional, having worked with carriers and brokers for over 10 years. She can review or draft a variety of commercial agreements and is here to help your business. Specialties include: Master Service Agreements, business process outsourcing, marketing and partnership agreements, broker agreements, business associate agreements, and NDAs.

I have been a freelance attorney for several years and have many of my clients returning to me for continued work because of the quality I produce.

Ms. Leavens is a corporate attorney with 10 years of experience as the General Counsel, Chief Compliance Officer and Corporate Secretary of a Congressionally chartered, non-profit corporation, and more than 20 years of experience as an advisor to executive officers and boards of directors in for-profit and non-profit organizations. She has substantial experience within in-house legal departments managing cross-functional teams comprised of multiple business units and attorneys on large-scale mission critical projects, and within a global law firm as a manager of public and private, domestic and international, multi-party business transactions. She has unique experience implementing government-sponsored business initiatives. Ms. Leavens was honored in 2015 as one of Washington, D.C.’s Top Corporate Counsel by Bisnow and the Association of Corporate Counsel; nominated in 2014 for the Association of Corporate Counsel (WMACCA) Outstanding Chief Legal Officer Award; and the recipient in 2014 of WMACCA’s Community Service Award.

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How To Navigate The Real Estate Assignment Contract

What is assignment of contract?

Assignment of contract vs double close

How to assign a contract

Assignment of contract pros and cons

Even the most left-brained, technical real estate practitioners may find themselves overwhelmed by the legal forms that have become synonymous with the investing industry. The assignment of contract strategy, in particular, has developed a confusing reputation for those unfamiliar with the concept of wholesaling. At the very least, there’s a good chance the “assignment of contract real estate” exit strategy sounds more like a foreign language to new investors than a viable means to an end.

A real estate assignment contract isn’t as complicated as many make it out to be, nor is it something to shy away from because of a lack of understanding. Instead, new investors need to learn how to assign a real estate contract as this particular exit strategy represents one of the best ways to break into the industry.

In this article, we will break down the elements of a real estate assignment contract, or a real estate wholesale contract, and provide strategies for how it can help investors further their careers. [ Thinking about investing in real estate? Register to attend a FREE online real estate class and learn how to get started investing in real estate. ]

What Is A Real Estate Assignment Contract?

A real estate assignment contract is a wholesale strategy used by real estate investors to facilitate the sale of a property between an owner and an end buyer. As its name suggests, contract assignment strategies will witness a subject property owner sign a contract with an investor that gives them the rights to buy the home. That’s an important distinction to make, as the contract only gives the investor the right to buy the home; they don’t actually follow through on a purchase. Once under contract, however, the investor retains the sole right to buy the home. That means they may then sell their rights to buy the house to another buyer. Therefore, when a wholesaler executes a contact assignment, they aren’t selling a house but rather their rights to buy a house. The end buyer will pay the wholesale a small assignment fee and buy the house from the original buyer.

The real estate assignment contract strategy is only as strong as the contracts used in the agreement. The language used in the respective contract is of the utmost importance and should clearly define what the investors and sellers expect out of the deal.

There are a couple of caveats to keep in mind when considering using sales contracts for real estate:

Contract prohibitions: Make sure the contract you have with the property seller does not have prohibitions for future assignments. This can create serious issues down the road. Make sure the contract is drafted by a lawyer that specializes in real estate assignment contract law.

Property-specific prohibitions: HUD homes (property obtained by the Department of Housing and Urban Development), real estate owned or REOs (foreclosed-upon property), and listed properties are not open to assignment contracts. REO properties, for example, have a 90-day period before being allowed to be resold.

What Is An Assignment Fee In Real Estate?

An assignment fee in real estate is the money a wholesaler can expect to receive from an end buyer when they sell them their rights to buy the subject property. In other words, the assignment fee serves as the monetary compensation awarded to the wholesaler for connecting the original seller with the end buyer.

Again, any contract used to disclose a wholesale deal should be completely transparent, and including the assignment fee is no exception. The terms of how an investor will be paid upon assigning a contract should, nonetheless, be spelled out in the contract itself.

The standard assignment fee is $5,000. However, every deal is different. Buyers differ on their needs and criteria for spending their money (e.g., rehabbing vs. buy-and-hold buyers). As with any negotiations , proper information is vital. Take the time to find out how much the property would realistically cost before and after repairs. Then, add your preferred assignment fee on top of it.

Traditionally, investors will receive a deposit when they sign the Assignment of Real Estate Purchase and Sale Agreement . The rest of the assignment fee will be paid out upon the deal closing.

Assignment Contract Vs Double Close

The real estate assignment contract strategy is just one of the two methods investors may use to wholesale a deal. In addition to assigning contracts, investors may also choose to double close. While both strategies are essentially variations of a wholesale deal, several differences must be noted.

A double closing, otherwise known as a back-to-back closing, will have investors actually purchase the home. However, instead of holding onto it, they will immediately sell the asset without rehabbing it. Double closings aren’t as traditional as fast as contract assignment, but they can be in the right situation. Double closings can also take as long as a few weeks. In the end, double closings aren’t all that different from a traditional buy and sell; they transpire over a meeter of weeks instead of months.

Assignment real estate strategies are usually the first option investors will want to consider, as they are slightly easier and less involved. That said, real estate assignment contract methods aren’t necessarily better; they are just different. The wholesale strategy an investor chooses is entirely dependent on their situation. For example, if a buyer cannot line up funding fast enough, they may need to initiate a double closing because they don’t have the capital to pay the acquisition costs and assignment fee. Meanwhile, select institutional lenders incorporate language against lending money in an assignment of contract scenario. Therefore, any subsequent wholesale will need to be an assignment of contract.

Double closings and contract assignments are simply two means of obtaining the same end. Neither is better than the other; they are meant to be used in different scenarios.

Flipping Real Estate Contracts

Those unfamiliar with the real estate contract assignment concept may know it as something else: flipping real estate contracts; if for nothing else, the two are one-in-the-same. Flipping real estate contracts is simply another way to refer to assigning a contract.

Is An Assignment Of Contract Legal?

Yes, an assignment of contract is legal when executed correctly. Wholesalers must follow local laws regulating the language of contracts, as some jurisdictions have more regulations than others. It is also becoming increasingly common to assign contracts to a legal entity or LLC rather than an individual, to prevent objections from the bank. Note that you will need written consent from all parties listed on the contract, and there cannot be any clauses present that violate the law. If you have any questions about the specific language to include in a contract, it’s always a good idea to consult a qualified real estate attorney.

When Will Assignments Not Be Enforced?

In certain cases, an assignment of contract will not be enforced. Most notably, if the contract violates the law or any local regulations it cannot be enforced. This is why it is always encouraged to understand real estate laws and policy as soon as you enter the industry. Further, working with a qualified attorney when crafting contracts can be beneficial.

It may seem obvious, but assignment contracts will not be enforced if the language is used incorrectly. If the language in a contract contradicts itself, or if the contract is not legally binding it cannot be enforced. Essentially if there is any anti-assignment language, this can void the contract. Finally, if the assignment violates what is included under the contract, for example by devaluing the item, the contract will likely not be enforced.

How To Assign A Real Estate Contract

A wholesaling investment strategy that utilizes assignment contracts has many advantages, one of them being a low barrier-to-entry for investors. However, despite its inherent profitability, there are a lot of investors that underestimate the process. While probably the easiest exit strategy in all of real estate investing, there are a number of steps that must be taken to ensure a timely and profitable contract assignment, not the least of which include:

Find the right property

Acquire a real estate contract template

Submit the contract

Assign the contract

Collect the fee

1. Find The Right Property

You need to prune your leads, whether from newspaper ads, online marketing, or direct mail marketing. Remember, you aren’t just looking for any seller: you need a motivated seller who will sell their property at a price that works with your investing strategy.

The difference between a regular seller and a motivated seller is the latter’s sense of urgency. A motivated seller wants their property sold now. Pick a seller who wants to be rid of their property in the quickest time possible. It could be because they’re moving out of state, or they want to buy another house in a different area ASAP. Or, they don’t want to live in that house anymore for personal reasons. The key is to know their motivation for selling and determine if that intent is enough to sell immediately.

With a better idea of who to buy from, wholesalers will have an easier time exercising one of several marketing strategies:

Direct Mail

Real Estate Meetings

Local Marketing

2. Acquire A Real Estate Contract Template

Real estate assignment contract templates are readily available online. Although it’s tempting to go the DIY route, it’s generally advisable to let a lawyer see it first. This way, you will have the comfort of knowing you are doing it right, and that you have counsel in case of any legal problems along the way.

One of the things proper wholesale real estate contracts add is the phrase “and/or assigns” next to your name. This clause will give you the authority to sell the property or assign the property to another buyer.

You do need to disclose this to the seller and explain the clause if needed. Assure them that they will still get the amount you both agreed upon, but it gives you deal flexibility down the road.

3. Submit The Contract

Depending on your state’s laws, you need to submit your real estate assignment contract to a title company, or a closing attorney, for a title search. These are independent parties that look into the history of a property, seeing that there are no liens attached to the title. They then sign off on the validity of the contract.

4. Assign The Contract

Finding your buyer, similar to finding a seller, requires proper segmentation. When searching for buyers, investors should exercise several avenues, including online marketing, listing websites, or networking groups. In the real estate industry, this process is called building a buyer’s list, and it is a crucial step to finding success in assigning contracts.

Once you have found a buyer (hopefully from your ever-growing buyer’s list), ensure your contract includes language that covers earnest money to be paid upfront. This grants you protection against a possible breach of contract. This also assures you that you will profit, whether the transaction closes or not, as earnest money is non-refundable. How much it is depends on you, as long as it is properly justified.

5. Collect The Fee

Your profit from a deal of this kind comes from both your assignment fee, as well as the difference between the agreed-upon value and how much you sell it to the buyer. If you and the seller decide you will buy the property for $75,000 and sell it for $80,000 to the buyer, you profit $5,000. The deal is closed once the buyer pays the full $80,000.

Assignment of Contract Pros

For many investors, the most attractive benefit of an assignment of contract is the ability to profit without ever purchasing a property. This is often what attracts people to start wholesaling, as it allows many to learn the ropes of real estate with relatively low stakes. An assignment fee can either be determined as a percentage of the purchase price or as a set amount determined by the wholesaler. A standard fee is around $5,000 per contract.

The profit potential is not the only positive associated with an assignment of contract. Investors also benefit from not being added to the title chain, which can greatly reduce the costs and timeline associated with a deal. This benefit can even transfer to the seller and end buyer, as they get to avoid paying a real estate agent fee by opting for an assignment of contract. Compared to a double close (another popular wholesaling strategy), investors can avoid two sets of closing costs. All of these pros can positively impact an investor’s bottom line, making this a highly desirable exit strategy.

Assignment of Contract Cons

Although there are numerous perks to an assignment of contract, there are a few downsides to be aware of before searching for your first wholesale deal. Namely, working with buyers and sellers who may not be familiar with wholesaling can be challenging. Investors need to be prepared to familiarize newcomers with the process and be ready to answer any questions. Occasionally, sellers will purposely not accept an assignment of contract situation. Investors should occasionally expect this, as to not get discouraged.

Another obstacle wholesalers may face when working with an assignment of contract is in cases where the end buyer wants to back out. This can happen if the buyer is not comfortable paying the assignment fee, or if they don’t have owner’s rights until the contract is fully assigned. The best way to protect yourself from situations like this is to form a reliable buyer’s list and be upfront with all of the information. It is always recommended to develop a solid contract as well.

Know that not all properties can be wholesaled, for example HUD houses. In these cases, there are often anti-assigned clauses preventing wholesalers from getting involved. Make sure you know how to identify these properties so you don’t waste your time. Keep in mind that while there are cons to this real estate exit strategy, the right preparation can help investors avoid any big challenges.

Assignment of Contract Template

If you decide to pursue a career wholesaling real estate, then you’ll want the tools that will make your life as easy as possible. The good news is that there are plenty of real estate tools and templates at your disposal so that you don’t have to reinvent the wheel! For instance, here is an assignment of contract template that you can use when you strike your first deal.

As with any part of the real estate investing trade, no single aspect will lead to success. However, understanding how a real estate assignment of contract works is vital for this business. When you comprehend the many layers of how contracts are assigned—and how wholesaling works from beginning to end—you’ll be a more informed, educated, and successful investor.

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SUMMARY OF DIFFERENCE BETWEEN CONTRACT OF SALE AND DEED OF ASSIGNMENT

Contract of sale and deed of assignment are both documents used in real estate-related transactions in Nigeria. Although they are both used in property transactions the difference between both documents can be derived from their distinctive features and the role they each individually play in the acquisition of title to landed properties in Nigeria.

Generally, there are five stages involved in the process of acquisition of land in Nigeria, which range from the pre-contract stage to the post-completion stage. The contract of sale is executed at the second stage of a land transaction; it is evidenced in writing and is not mandated to be under seal. It is a preliminary land document executed in the transfer of ownership in the land to another from the seller to the buyer. A contract of sale takes effect after it has been exchanged between parties and it contains not only the basic requirements but goes further to include detailed terms, consideration, and future obligations of what the parties have agreed in respect of the land transaction. Some of the provisions of a contract of sale are:

• Full details of the parties – (name and address).
• Particulars of the property to be transacted (location, survey plan, etc).
• Particulars of witnesses.
• Purchase price of the property.
• Payment of deposit, to whom it is to be paid, and in what capacity.
• Balance and interest on unpaid purchase sum where the payment is to be paid in installments.
• The capacity of the vendor.
• Risk and insurance.
• Possession before completion
• Completion date of the transaction.
• Provision for fixtures and fittings.
• Specific terms, risks, etc.

Where a contract of sale has been executed between parties, an equitable right of the title is passed to the buyer as the vendor still retains legal title to the land and holds the same in trust for the buyer. A vendor cannot transact with the land contrary to the agreement in the contract and no party can rescind the contract without being held liable for a breach of contract.

Features of a Contract of Sale

• In a contract of sale, the vendor is committed to the transaction and the purchaser has sufficient time to investigate the title before the final completion of the transaction.
• The death of either party to the transaction does not terminate the contract as personal representatives can proceed with the contract of sale.
• A contract of sale prevents last-minute withdrawal as withdrawal would amount to a breach of the contract.
• A contract of sale protects the equitable interest of the purchaser
• It crystallizes the position of the parties as terms have been expressly agreed upon.
• The vendor cannot unilaterally and subsequently increase the purchase price as the price has already been fixed in the contract.
• Payment of lesser stamp duties.

Deed of Assignment is the legal instrument executed between a buyer and seller upon the negotiation and completion phase of a sale of land transaction, subject to perfection. It is usually demanded by the buyer of the real property at the conclusion of the property transaction as the final legal document that transfers the interest of title in a land without any conditions attached, beyond the payment of the consideration price of the property. In a deed of assignment, the nomenclature of parties changes from Vendor to Assignor and Buyer to Assignee. Upon the execution of a deed of assignment between parties, there is a permanent transfer of legal title and ownership to land from the assignor to the assignee for a consideration paid and accepted by the assignor.

Deed of assignment is required to be evidenced in writing; to be signed, sealed, and delivered by parties to the transaction. A deed of assignment is said to have been delivered when interest has passed to the Assignee and the interest can be passed with or without a physical handover.

Another major difference between a contract of sale and deed is that under a deed of assignment, the title of land acquired is required to be perfected upon payment of the full consideration and execution of the deed. The perfection of title involves the assignee taken the required steps to register the deed of assignment at the appropriate Land Registry. The process for the perfection of a deed of assignment involves the following three steps;

• Obtaining Governors Consent.
• Stamping of the deed of assignment, and
• Registration of the deed of assignment.

Finally, in a contract of sale, the buyer only acquires equitable interest in the property while the seller retains the legal interest in trust for the buyer. In the deed of assignment, the assignee acquires legal interest in the property and it can serve as a good root of title to subsequent buyers while the interest of the assignor on the same property is completely extinguished.

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