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San Diego Business Contracts: Anti-Assignment Clauses
When it comes to ongoing and long-term business relationships, the person with whom a business partner interacts with is often very important. Business runs on personal connections, loyalty, and trust. This means that many ongoing business relationships are built on reputations and integrity. These are important factors in deciding whether to engage in a business relationship.
For these reasons, many business contracts contain what are typically called “anti-assignment” clauses. Your contracting partners want to deal with YOU, not someone else. A typical anti-assignment clause might read like this: “The parties to this Agreement may not assign or otherwise transfer their rights and/or obligations hereunder without the prior written consent of the other party.” Indeed, with respect to certain types of contracts — like financing agreements — any actual assignment or effort to assign can be deemed an event of default. This type of anti-assignment clause can be slightly weakened by adding language related to the consent needed. Thus, for example, language could be added stating the that a party’s consent “… shall not be unreasonably withheld.” Conversely, the anti-assignment can be strengthened by stating that consent is given at a party’s “… sole discretion.”
In the above example, the anti-assignment clause is mutual — meaning that it applies to all contracting parties. However, one-sided anti-assignment clauses are common. This is true with most commercial leases, for example, when the tenant is prohibited from assigning the lease, but the landlord is not. Asymmetrical anti-assignment clauses typically reflect business realities where one side has reason to care and the other does not and/or where third parties are necessarily involved. Continuing the commercial lease example, tenants generally do not care too much about who the landlord is as long as their rights under the lease are maintained and respected. By contrast, since credit-worthiness and reputation are important factors in whether the rent gets paid, landlords may care quite a lot about who their tenants are. Furthermore, because most property is encumbered by loans and mortgages, there are third parties involved — the lenders — who often require the assignment of rents and leases as a form of collateralization. Thus, asymmetrical anti-assignment clauses have become customary with respect to commercial leases.
San Diego Corporate Law: Change of Control Provisions
When dealing with corporate entities, there is another important aspect of anti-assignment clauses – change of control provisions. If control of a corporation or other corporate entity is transferred, this can accomplish a de facto assignment of contractual rights and obligations. Change of control can be established through a sale/purchase, a receivership/bankruptcy, divorce proceedings, or by virtue of death and/or probate proceedings.
Thus, if an anti-assignment clause is contained in a contract, there is usually a corresponding clause prohibiting change of control or deeming such a change of control to be (i) a default under the contract or (ii) a violation of the anti-assignment clause. This is the main reason that, when a sale/purchase of a business is contemplated, it is often necessary to obtain the consent of third parties, such as the landlord. Often, failure to obtain such consents will result in cancellation of the proposed sale/purchase.
Contact San Diego Corporate Law Today
If you would like more information about anti-assignment clauses or other common provisions in your business contracts, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can be reached at (858) 483-9200 or via email.
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