deed of assignment of option agreement

Deed of assignment of the benefit of an option agreement

Published by a lexisnexis property expert.

This Deed is made on [ insert date ].

[ insert name of Assignor ] [ of [ insert address ] OR incorporated in England and Wales with company registration number [ insert company registration number ] whose registered office is at [ insert registered office address ] ] (the Assignor );

[ insert name of Assignee ] [ of [ insert address ] OR incorporated in England and Wales with company registration number [ insert company registration number ] whose registered office is at [ insert registered office address ] ] (the Assignee ).

Definitions

In this Deed the following definitions apply:

Option Agreement

an option agreement relating to the Property dated [ insert date ] made between [ insert name of the grantor of the option ] and the Assignor, a copy of which is annexed to this Deed as the Appendix;

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Deed of assignment of contract (with subcontracting option) | Practical Law

Deed of assignment of contract (with subcontracting option)

Practical law uk standard document 9-381-3100 (approx. 12 pages).

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What is an option agreement?

An option agreement is an agreement between a buyer and seller of a property where the buyer or seller (or sometimes both) grant each other options to buy or sell the property to each other.

An option agreement will usually be a ‘call option’ agreement or ‘put and call option’ agreement. A call option is when a seller grants a buyer an option to purchase their property but not the obligation to purchase (i.e. the seller cannot compel the buyer to purchase).

A put option is when the buyer grants the seller an option to compel the buyer to purchase the property.

What are the benefits for buyers?

Option agreements are often used when buyers (especially developers) require flexibility in purchasing a property, for example:

• to secure the right to purchase a property but only exercise the right at a later date (when a contract will be formed);

• to secure a property before they have established the ultimate purchasing entity;

• to conduct due diligence or obtain development approval and defer stamp duty obligations until that is completed;

• to conduct due diligence and then assign the option to a developer or nominate another developer to complete the purchase and development.

Call option agreements are generally more favourable to developers as they are not compelled to purchase the property.

What are the benefits for sellers?

Sellers need to consider and buyers should explain what benefit a seller will get from granting a call option to a buyer, such as whether or not:

• They are getting an above market value price for the property that developers often offer due to the potential to develop the property;

• They are getting paid a reasonable amount for giving the developer the right but not the obligation to purchase the property during the call option period (a longer call option period would usually attract a higher amount payable to the seller in the form of an option fee or a non-refundable deposit); or

• The developer is improving the value of the property by obtaining a development approval (which runs with the property and which the seller can benefit from even if the developer does not purchase the property).

What key terms need to be included in an option agreement?

Apart from the obvious details such as the property address and names of the buyer and seller (and their lawyers), a call option agreement commonly includes the following:

• Purchase price (also known as the strike price) that the buyer will pay if the option is exercised.

• Call option fee that the buyer pays the seller in consideration of the seller granting the buyer the call option. This is often a relatively small amount such as $1000 so that stamp duty is kept to a minimum in those states where stamp duty is payable on the option fee. Buyers and sellers also need to consider when the call option fee will be paid and whether or not the call option fee will be refundable in certain situations, such as when the option agreement is terminated by the buyer under a due diligence condition.

• Due diligence condition and due diligence period if the buyer needs to conduct due diligence on the property and the viability of any proposed development. The buyer must give notice to the seller by the end of the due diligence period as to whether or not they are satisfied with its due diligence investigations or wish to waive the condition so that it no longer applies. If the buyer is not satisfied with its due diligence it can terminate the option agreement.

• Security deposit amount that is usually payable after due diligence has been satisfied or waived and is often non-refundable except where the seller defaults. The security deposit usually forms the deposit (or part of the deposit) when the option is exercised and the contract is formed.

• Call option period being the period during which the buyer can exercise it’s call option to purchase the property, with a call option commencement date (of no earlier than 42 days in New South Wales) and a call option expiry date. The option agreement will usually describe how the option must be exercised by the buyer, for example, by giving notice to the seller’s lawyer and sending them the contract signed by the buyer in the form of contract attached to the option agreement. Once the option is exercised a contract is formed and the terms of the contract then apply to the purchase.

• Contract settlement period being the period of time after the option has been exercised that ends on the date of settlement of the purchase when the buyer must pay the seller the balance of the purchase price in exchange for the transfer of title. • Assignment clause permitting the buyer to assign the option (which can be for consideration, e.g. when the option is ‘sold’) to another buyer or developer.

• Nomination clause permitting the buyer to nominate another buyer to complete the contract when the option is exercised.

• Development application clause permitting the buyer and it’s consultants to access the property to carry out inspections and reports to support its development application.

• Contract of sale and any seller disclosure documents must be attached to the option agreement.

Example timeline of a call option agreement

Assignment and nomination of options.

A buyer can assign an option to another buyer or nominate another buyer to complete a contract once an option is exercised. There can be stamp duty assessed on assignments and nominations depending on the laws in the jurisdiction of the property location. Legal advice should be obtained as early as possible where this is a likelihood.

Form of option agreements

Option agreements are less common that standard contracts of sale and so many lawyers and conveyancers will not be familiar with option agreements and how they work. There is no prescribed form for an option agreement and they need to be prepared to suit the terms of a particular deal. Buyers and sellers should therefore choose a property law firm, such as lawlab, who have extensive experience in dealing with option agreements. Lawlab can provide a template heads of agreement for option to assist buyers when negotiating terms of an option deal.

Legal costs for option agreements

Lawlab’s standard fee schedule is as follows for call option agreements to purchase an existing residential property:

*Pricing valid 1 July 2022 to 30 June 2023

Sign up to Rundl today https://go.rundl.com/accounts/signup and order an Option Agreement Rundl now https://go.rundl.com/services/54351430/order

Disclaimer: This information is general in nature only and does not constitute legal advice. Lawlab accepts no liability for the content of this information. You should obtain legal advice specific to your individual circumstances.

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Real Estate Option Agreement

Jump to section, what is a real estate option agreement.

A real estate option agreement is a legal agreement between a seller and a buyer or investor that allows the buyer or investor the right to purchase a property. An option agreement usually gives the buyer or investor a specific timeframe to make their decision whether or not to purchase the property.

Also known as a purchase option agreement , this document allows purchasers to reserve the right to make that decision at a later date when conditions may have changed. Having a real estate option agreement does not force a buyer or investor to purchase a property, but simply gives them the option to at a later date.

Common Sections in Real Estate Option Agreements

Below is a list of common sections included in Real Estate Option Agreements. These sections are linked to the below sample agreement for you to explore.

Real Estate Option Agreement Sample

Reference : Security Exchange Commission - Edgar Database, EX-10.12 24 c00246exv10w12.htm REAL ESTATE OPTION AGREEMENT , Viewed October 4, 2021, View Source on SEC .

Who Helps With Real Estate Option Agreements?

Lawyers with backgrounds working on real estate option agreements work with clients to help. Do you need help with a real estate option agreement?

Post a project in ContractsCounsel's marketplace to get free bids from lawyers to draft, review, or negotiate real estate option agreements. All lawyers are vetted by our team and peer reviewed by our customers for you to explore before hiring.

Meet some of our Real Estate Option Agreement Lawyers

Matt practices law in the areas of commercial finance, contract law, business & corporate law, and residential and commercial real estate (with a particular emphasis on retail shopping centers and office buildings). He has extensive experience in negotiating and structuring complex commercial loan, asset acquisition, asset disposition and real estate transactions. Matt additionally works on various general matters for clients such as forming LLCs and corporations, preparing various LLC and corporation documents and drafting and reviewing various types of contracts and agreements for clients and providing advice regarding same. Matt provides clients with extensive and timely communication on their matters and ensures that his clients are well represented and highly satisfied with their legal representation and the work product provided. Matt offers all potential clients a free initial consultation to discuss their legal matters prior to engaging his firm to represent them. Prior to opening his law firm Matt worked for many years in the New York City office of a large international law firm where he counseled large multi-national businesses, financial institutions, investment groups and individuals on highly sophisticated business, financial and real estate transactions. Matt provides his clients with diligent legal representation on their matters with a very personal approach.

Skilled in the details of complex corporate transactions, I have 15 years experience working with entrepreneurs and businesses to plan and grow for the future. Clients trust me because of the practical guided advice I provide. No deal is too small or complex for me to handle.

An experienced commercial contracts attorney with sales, leasing, NDA, SEC compliance, corporate governance, commercial real estate, and employment experience. Also well versed in internal and external policy document and manual creation.

Christina M.

I am a regulatory transactional attorney with 16 years of in-house experience, largely in the gaming/gambling industry. I have negotiated various types and sizes of contracts from janitorial services for a small commercial building to multi-million dollar technology transactions. I also have a strong regulatory background that strengthens my ability to navigate contracts that are subject to stringent regulations.

Attorney with over 10+ years' experience and have closed over $1 Billion in real estate, telecommunications, & business transactions

I am an attorney with over 13 years experience licensed in both Illinois and Indiana. I spent the early part of my career as a civil litigation attorney. Eventually, I moved into an in-house role, specifically as general counsel, to help companies avoid the pains of litigation. In doing so, I gained significant experience in executive leadership, corporate governance, risk management and cybersecurity/privacy. I bring this wealth of experience to my client engagements to not only resolve the immediate issue, but help implement lasting improvements in practices to avoid similar problems going forward.

I am a Spanish-fluent corporate and commercial real estate attorney and broker licensed in New York and New Jersey. My pragmatic approach towards conflict resolution allows me to provide valuable advice to clients on avoiding issues of liability through effective risk management and strategic allocation of resources. I counsel businesses, developers, owners and investors on residential/commercial real estate and corporate transactions involving the acquisition, finance, development, leasing and disposition of all asset classes. In addition, I advise on joint venture partnerships and the negotiation, structure and drafting of operating agreements. Throughout my successful practice, I have held in-house counsel positions at large corporations, including JPMorgan Chase and Duane Reade, and had the privilege of working for the Department of Justice where I honed expertise in all aspects of mortgage-backed securities.

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Assignment: Definition in Finance, How It Works, and Examples

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

Yarilet Perez is an experienced multimedia journalist and fact-checker with a Master of Science in Journalism. She has worked in multiple cities covering breaking news, politics, education, and more. Her expertise is in personal finance and investing, and real estate.

What Is an Assignment?

Assignment most often refers to one of two definitions in the financial world:

The transfer of an individual's rights or property to another person or business. This concept exists in a variety of business transactions and is often spelled out contractually.
In trading, assignment occurs when an option contract is exercised. The owner of the contract exercises the contract and assigns the option writer to an obligation to complete the requirements of the contract.

Key Takeaways

Assignment is a transfer of rights or property from one party to another.
Options assignments occur when option buyers exercise their rights to a position in a security.
Other examples of assignments can be found in wages, mortgages, and leases.

Uses For Assignments

Assignment refers to the transfer of some or all property rights and obligations associated with an asset, property, contract, or other asset of value. to another entity through a written agreement.

Assignment rights happen every day in many different situations. A payee, like a utility or a merchant, assigns the right to collect payment from a written check to a bank. A merchant can assign the funds from a line of credit to a manufacturing third party that makes a product that the merchant will eventually sell. A trademark owner can transfer, sell, or give another person interest in the trademark or logo. A homeowner who sells their house assigns the deed to the new buyer.

To be effective, an assignment must involve parties with legal capacity, consideration, consent, and legality of the object.

A wage assignment is a forced payment of an obligation by automatic withholding from an employee’s pay. Courts issue wage assignments for people late with child or spousal support, taxes, loans, or other obligations. Money is automatically subtracted from a worker's paycheck without consent if they have a history of nonpayment. For example, a person delinquent on $100 monthly loan payments has a wage assignment deducting the money from their paycheck and sent to the lender. Wage assignments are helpful in paying back long-term debts.

Another instance can be found in a mortgage assignment. This is where a mortgage deed gives a lender interest in a mortgaged property in return for payments received. Lenders often sell mortgages to third parties, such as other lenders. A mortgage assignment document clarifies the assignment of contract and instructs the borrower in making future mortgage payments, and potentially modifies the mortgage terms.

A final example involves a lease assignment. This benefits a relocating tenant wanting to end a lease early or a landlord looking for rent payments to pay creditors. Once the new tenant signs the lease, taking over responsibility for rent payments and other obligations, the previous tenant is released from those responsibilities. In a separate lease assignment, a landlord agrees to pay a creditor through an assignment of rent due under rental property leases. The agreement is used to pay a mortgage lender if the landlord defaults on the loan or files for bankruptcy . Any rental income would then be paid directly to the lender.

Options Assignment

Options can be assigned when a buyer decides to exercise their right to buy (or sell) stock at a particular strike price . The corresponding seller of the option is not determined when a buyer opens an option trade, but only at the time that an option holder decides to exercise their right to buy stock. So an option seller with open positions is matched with the exercising buyer via automated lottery. The randomly selected seller is then assigned to fulfill the buyer's rights. This is known as an option assignment.

Once assigned, the writer (seller) of the option will have the obligation to sell (if a call option ) or buy (if a put option ) the designated number of shares of stock at the agreed-upon price (the strike price). For instance, if the writer sold calls they would be obligated to sell the stock, and the process is often referred to as having the stock called away . For puts, the buyer of the option sells stock (puts stock shares) to the writer in the form of a short-sold position.

Suppose a trader owns 100 call options on company ABC's stock with a strike price of $10 per share. The stock is now trading at $30 and ABC is due to pay a dividend shortly. As a result, the trader exercises the options early and receives 10,000 shares of ABC paid at $10. At the same time, the other side of the long call (the short call) is assigned the contract and must deliver the shares to the long.

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assignments basic law

Assignments: The Basic Law

The assignment of a right or obligation is a common contractual event under the law and the right to assign (or prohibition against assignments) is found in the majority of agreements, leases and business structural documents created in the United States.

As with many terms commonly used, people are familiar with the term but often are not aware or fully aware of what the terms entail. The concept of assignment of rights and obligations is one of those simple concepts with wide ranging ramifications in the contractual and business context and the law imposes severe restrictions on the validity and effect of assignment in many instances. Clear contractual provisions concerning assignments and rights should be in every document and structure created and this article will outline why such drafting is essential for the creation of appropriate and effective contracts and structures.

The reader should first read the article on Limited Liability Entities in the United States and Contracts since the information in those articles will be assumed in this article.

Basic Definitions and Concepts:

An assignment is the transfer of rights held by one party called the “assignor” to another party called the “assignee.” The legal nature of the assignment and the contractual terms of the agreement between the parties determines some additional rights and liabilities that accompany the assignment. The assignment of rights under a contract usually completely transfers the rights to the assignee to receive the benefits accruing under the contract. Ordinarily, the term assignment is limited to the transfer of rights that are intangible, like contractual rights and rights connected with property. Merchants Service Co. v. Small Claims Court , 35 Cal. 2d 109, 113-114 (Cal. 1950).

An assignment will generally be permitted under the law unless there is an express prohibition against assignment in the underlying contract or lease. Where assignments are permitted, the assignor need not consult the other party to the contract but may merely assign the rights at that time. However, an assignment cannot have any adverse effect on the duties of the other party to the contract, nor can it diminish the chance of the other party receiving complete performance. The assignor normally remains liable unless there is an agreement to the contrary by the other party to the contract.

The effect of a valid assignment is to remove privity between the assignor and the obligor and create privity between the obligor and the assignee. Privity is usually defined as a direct and immediate contractual relationship. See Merchants case above.

Further, for the assignment to be effective in most jurisdictions, it must occur in the present. One does not normally assign a future right; the assignment vests immediate rights and obligations.

No specific language is required to create an assignment so long as the assignor makes clear his/her intent to assign identified contractual rights to the assignee. Since expensive litigation can erupt from ambiguous or vague language, obtaining the correct verbiage is vital. An agreement must manifest the intent to transfer rights and can either be oral or in writing and the rights assigned must be certain.

Note that an assignment of an interest is the transfer of some identifiable property, claim, or right from the assignor to the assignee. The assignment operates to transfer to the assignee all of the rights, title, or interest of the assignor in the thing assigned. A transfer of all rights, title, and interests conveys everything that the assignor owned in the thing assigned and the assignee stands in the shoes of the assignor. Knott v. McDonald’s Corp ., 985 F. Supp. 1222 (N.D. Cal. 1997)

The parties must intend to effectuate an assignment at the time of the transfer, although no particular language or procedure is necessary. As long ago as the case of National Reserve Co. v. Metropolitan Trust Co ., 17 Cal. 2d 827 (Cal. 1941), the court held that in determining what rights or interests pass under an assignment, the intention of the parties as manifested in the instrument is controlling.

The intent of the parties to an assignment is a question of fact to be derived not only from the instrument executed by the parties but also from the surrounding circumstances. When there is no writing to evidence the intention to transfer some identifiable property, claim, or right, it is necessary to scrutinize the surrounding circumstances and parties’ acts to ascertain their intentions. Strosberg v. Brauvin Realty Servs., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998)

The general rule applicable to assignments of choses in action is that an assignment, unless there is a contract to the contrary, carries with it all securities held by the assignor as collateral to the claim and all rights incidental thereto and vests in the assignee the equitable title to such collateral securities and incidental rights. An unqualified assignment of a contract or chose in action, however, with no indication of the intent of the parties, vests in the assignee the assigned contract or chose and all rights and remedies incidental thereto.

More examples: In Strosberg v. Brauvin Realty Servs ., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998), the court held that the assignee of a party to a subordination agreement is entitled to the benefits and is subject to the burdens of the agreement. In Florida E. C. R. Co. v. Eno , 99 Fla. 887 (Fla. 1930), the court held that the mere assignment of all sums due in and of itself creates no different or other liability of the owner to the assignee than that which existed from the owner to the assignor.

And note that even though an assignment vests in the assignee all rights, remedies, and contingent benefits which are incidental to the thing assigned, those which are personal to the assignor and for his sole benefit are not assigned. Rasp v. Hidden Valley Lake, Inc ., 519 N.E.2d 153, 158 (Ind. Ct. App. 1988). Thus, if the underlying agreement provides that a service can only be provided to X, X cannot assign that right to Y.

Novation Compared to Assignment:

Although the difference between a novation and an assignment may appear narrow, it is an essential one. “Novation is a act whereby one party transfers all its obligations and benefits under a contract to a third party.” In a novation, a third party successfully substitutes the original party as a party to the contract. “When a contract is novated, the other contracting party must be left in the same position he was in prior to the novation being made.”

A sublease is the transfer when a tenant retains some right of reentry onto the leased premises. However, if the tenant transfers the entire leasehold estate, retaining no right of reentry or other reversionary interest, then the transfer is an assignment. The assignor is normally also removed from liability to the landlord only if the landlord consents or allowed that right in the lease. In a sublease, the original tenant is not released from the obligations of the original lease.

Equitable Assignments:

An equitable assignment is one in which one has a future interest and is not valid at law but valid in a court of equity. In National Bank of Republic v. United Sec. Life Ins. & Trust Co. , 17 App. D.C. 112 (D.C. Cir. 1900), the court held that to constitute an equitable assignment of a chose in action, the following has to occur generally: anything said written or done, in pursuance of an agreement and for valuable consideration, or in consideration of an antecedent debt, to place a chose in action or fund out of the control of the owner, and appropriate it to or in favor of another person, amounts to an equitable assignment. Thus, an agreement, between a debtor and a creditor, that the debt shall be paid out of a specific fund going to the debtor may operate as an equitable assignment.

In Egyptian Navigation Co. v. Baker Invs. Corp. , 2008 U.S. Dist. LEXIS 30804 (S.D.N.Y. Apr. 14, 2008), the court stated that an equitable assignment occurs under English law when an assignor, with an intent to transfer his/her right to a chose in action, informs the assignee about the right so transferred.

An executory agreement or a declaration of trust are also equitable assignments if unenforceable as assignments by a court of law but enforceable by a court of equity exercising sound discretion according to the circumstances of the case. Since California combines courts of equity and courts of law, the same court would hear arguments as to whether an equitable assignment had occurred. Quite often, such relief is granted to avoid fraud or unjust enrichment.

Note that obtaining an assignment through fraudulent means invalidates the assignment. Fraud destroys the validity of everything into which it enters. It vitiates the most solemn contracts, documents, and even judgments. Walker v. Rich , 79 Cal. App. 139 (Cal. App. 1926). If an assignment is made with the fraudulent intent to delay, hinder, and defraud creditors, then it is void as fraudulent in fact. See our article on Transfers to Defraud Creditors .

But note that the motives that prompted an assignor to make the transfer will be considered as immaterial and will constitute no defense to an action by the assignee, if an assignment is considered as valid in all other respects.

Enforceability of Assignments:

Whether a right under a contract is capable of being transferred is determined by the law of the place where the contract was entered into. The validity and effect of an assignment is determined by the law of the place of assignment. The validity of an assignment of a contractual right is governed by the law of the state with the most significant relationship to the assignment and the parties.

In some jurisdictions, the traditional conflict of laws rules governing assignments has been rejected and the law of the place having the most significant contacts with the assignment applies. In Downs v. American Mut. Liability Ins. Co ., 14 N.Y.2d 266 (N.Y. 1964), a wife and her husband separated and the wife obtained a judgment of separation from the husband in New York. The judgment required the husband to pay a certain yearly sum to the wife. The husband assigned 50 percent of his future salary, wages, and earnings to the wife. The agreement authorized the employer to make such payments to the wife.

After the husband moved from New York, the wife learned that he was employed by an employer in Massachusetts. She sent the proper notice and demanded payment under the agreement. The employer refused and the wife brought an action for enforcement. The court observed that Massachusetts did not prohibit assignment of the husband’s wages. Moreover, Massachusetts law was not controlling because New York had the most significant relationship with the assignment. Therefore, the court ruled in favor of the wife.

Therefore, the validity of an assignment is determined by looking to the law of the forum with the most significant relationship to the assignment itself. To determine the applicable law of assignments, the court must look to the law of the state which is most significantly related to the principal issue before it.

Assignment of Contractual Rights:

Generally, the law allows the assignment of a contractual right unless the substitution of rights would materially change the duty of the obligor, materially increase the burden or risk imposed on the obligor by the contract, materially impair the chance of obtaining return performance, or materially reduce the value of the performance to the obligor. Restat 2d of Contracts, § 317(2)(a). This presumes that the underlying agreement is silent on the right to assign.

If the contract specifically precludes assignment, the contractual right is not assignable. Whether a contract is assignable is a matter of contractual intent and one must look to the language used by the parties to discern that intent.

In the absence of an express provision to the contrary, the rights and duties under a bilateral executory contract that does not involve personal skill, trust, or confidence may be assigned without the consent of the other party. But note that an assignment is invalid if it would materially alter the other party’s duties and responsibilities. Once an assignment is effective, the assignee stands in the shoes of the assignor and assumes all of assignor’s rights. Hence, after a valid assignment, the assignor’s right to performance is extinguished, transferred to assignee, and the assignee possesses the same rights, benefits, and remedies assignor once possessed. Robert Lamb Hart Planners & Architects v. Evergreen, Ltd. , 787 F. Supp. 753 (S.D. Ohio 1992).

On the other hand, an assignee’s right against the obligor is subject to “all of the limitations of the assignor’s right, all defenses thereto, and all set-offs and counterclaims which would have been available against the assignor had there been no assignment, provided that these defenses and set-offs are based on facts existing at the time of the assignment.” See Robert Lamb , case, above.

The power of the contract to restrict assignment is broad. Usually, contractual provisions that restrict assignment of the contract without the consent of the obligor are valid and enforceable, even when there is statutory authorization for the assignment. The restriction of the power to assign is often ineffective unless the restriction is expressly and precisely stated. Anti-assignment clauses are effective only if they contain clear, unambiguous language of prohibition. Anti-assignment clauses protect only the obligor and do not affect the transaction between the assignee and assignor.

Usually, a prohibition against the assignment of a contract does not prevent an assignment of the right to receive payments due, unless circumstances indicate the contrary. Moreover, the contracting parties cannot, by a mere non-assignment provision, prevent the effectual alienation of the right to money which becomes due under the contract.

A contract provision prohibiting or restricting an assignment may be waived, or a party may so act as to be estopped from objecting to the assignment, such as by effectively ratifying the assignment. The power to void an assignment made in violation of an anti-assignment clause may be waived either before or after the assignment. See our article on Contracts.

Noncompete Clauses and Assignments:

Of critical import to most buyers of businesses is the ability to ensure that key employees of the business being purchased cannot start a competing company. Some states strictly limit such clauses, some do allow them. California does restrict noncompete clauses, only allowing them under certain circumstances. A common question in those states that do allow them is whether such rights can be assigned to a new party, such as the buyer of the buyer.

A covenant not to compete, also called a non-competitive clause, is a formal agreement prohibiting one party from performing similar work or business within a designated area for a specified amount of time. This type of clause is generally included in contracts between employer and employee and contracts between buyer and seller of a business.

Many workers sign a covenant not to compete as part of the paperwork required for employment. It may be a separate document similar to a non-disclosure agreement, or buried within a number of other clauses in a contract. A covenant not to compete is generally legal and enforceable, although there are some exceptions and restrictions.

Whenever a company recruits skilled employees, it invests a significant amount of time and training. For example, it often takes years before a research chemist or a design engineer develops a workable knowledge of a company’s product line, including trade secrets and highly sensitive information. Once an employee gains this knowledge and experience, however, all sorts of things can happen. The employee could work for the company until retirement, accept a better offer from a competing company or start up his or her own business.

A covenant not to compete may cover a number of potential issues between employers and former employees. Many companies spend years developing a local base of customers or clients. It is important that this customer base not fall into the hands of local competitors. When an employee signs a covenant not to compete, he or she usually agrees not to use insider knowledge of the company’s customer base to disadvantage the company. The covenant not to compete often defines a broad geographical area considered off-limits to former employees, possibly tens or hundreds of miles.

Another area of concern covered by a covenant not to compete is a potential ‘brain drain’. Some high-level former employees may seek to recruit others from the same company to create new competition. Retention of employees, especially those with unique skills or proprietary knowledge, is vital for most companies, so a covenant not to compete may spell out definite restrictions on the hiring or recruiting of employees.

A covenant not to compete may also define a specific amount of time before a former employee can seek employment in a similar field. Many companies offer a substantial severance package to make sure former employees are financially solvent until the terms of the covenant not to compete have been met.

Because the use of a covenant not to compete can be controversial, a handful of states, including California, have largely banned this type of contractual language. The legal enforcement of these agreements falls on individual states, and many have sided with the employee during arbitration or litigation. A covenant not to compete must be reasonable and specific, with defined time periods and coverage areas. If the agreement gives the company too much power over former employees or is ambiguous, state courts may declare it to be overbroad and therefore unenforceable. In such case, the employee would be free to pursue any employment opportunity, including working for a direct competitor or starting up a new company of his or her own.

It has been held that an employee’s covenant not to compete is assignable where one business is transferred to another, that a merger does not constitute an assignment of a covenant not to compete, and that a covenant not to compete is enforceable by a successor to the employer where the assignment does not create an added burden of employment or other disadvantage to the employee. However, in some states such as Hawaii, it has also been held that a covenant not to compete is not assignable and under various statutes for various reasons that such covenants are not enforceable against an employee by a successor to the employer. Hawaii v. Gannett Pac. Corp. , 99 F. Supp. 2d 1241 (D. Haw. 1999)

It is vital to obtain the relevant law of the applicable state before drafting or attempting to enforce assignment rights in this particular area.

Conclusion:

In the current business world of fast changing structures, agreements, employees and projects, the ability to assign rights and obligations is essential to allow flexibility and adjustment to new situations. Conversely, the ability to hold a contracting party into the deal may be essential for the future of a party. Thus, the law of assignments and the restriction on same is a critical aspect of every agreement and every structure. This basic provision is often glanced at by the contracting parties, or scribbled into the deal at the last minute but can easily become the most vital part of the transaction.

As an example, one client of ours came into the office outraged that his co venturer on a sizable exporting agreement, who had excellent connections in Brazil, had elected to pursue another venture instead and assigned the agreement to a party unknown to our client and without the business contacts our client considered vital. When we examined the handwritten agreement our client had drafted in a restaurant in Sao Paolo, we discovered there was no restriction on assignment whatsoever…our client had not even considered that right when drafting the agreement after a full day of work.

One choses who one does business with carefully…to ensure that one’s choice remains the party on the other side of the contract, one must master the ability to negotiate proper assignment provisions.

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