Less than 10 years ago residential real estate assignments were a license to print money. As the British Columbia real estate market boomed, thousands of buyers signed condo pre-sale contracts - not because they intended to ever move into the suite, or even rent them out, but because they wanted to ‘flip’ the contracts for a profit as prices continued to rise or when the developments were complete. Some condos were bought and sold two or three times before construction was even finished.
In both the commercial and residential real estate industries, it has become common for contract holders to assign leases or contracts of purchase and sale to other individuals and entities. In the commercial realm, business owners may opt for an assignment if they change their corporate identity, if the premises are sold, or if they sublease unused space to another business. If all goes well, and the rent keeps getting paid, things go smoothly. However, given that most commercial landlords will experience a tenant dispute, and that residential real estate law more very complex than most people realize, that’s a big “if”.
Residential real estate pre-sale assignments
Assignments of pre-sale purchase contracts for condominium developments can carry significant risks for all of the parties involved. Most buyers trying to assign one of these contracts are surprised when legal complications arise. The typical reasoning is that since the development is not completed and since the contract seems simple, the assignee should bear any risk and the assignor should generate an easy profit from a rising real estate market.
The most common misunderstanding people have is the belief that once a contract is assigned, the assignor no longer has any obligations to the vendor (typically, a developer or original pre-sale contract holder). As a general rule, this is a false belief. Unless the agreement expressly states the assignor will not be liable for anything - and the vendor agrees to it - the assignor remains exposed if anything goes wrong.
In the case of a condo pre-sale, if the new buyer fails to complete the purchase for any reason (e.g. inability to qualify for a mortgage when the building is ready for occupancy), the vendor can sue both the assignee and assignor for forfeiture of the deposit, as well as any additional damages, such as the cost to sell the unit to someone else.
This risk was highlighted in late 2008 and 2009 when real estate prices declined significantly due to the recession. This left many people with pre-sale contracts for condos they could no longer afford or could not assign to someone else. Vendors such as developers sued assignees and assignors for tens or even hundreds of thousands of dollars of damages as a result. I met more than one assignor who was shocked to be named as a defendant in a lawsuit during this time.
The risks in an assignment of a commercial lease are less obvious than those in a residential situation. For example, a commercial lease often requires the lessee to provide formal notice of changes to the landlord before the landlord can exercise its right to terminate the lease or sue for accelerated rent. A lease assignment affects this obligation.
Once a contract is assigned, landlords often stop dealing with the old tenant (assignor). If the new tenant (assignee) fails to meet its obligations, the landlord will provide notice of default to the new tenant.
In some cases, however, the landlord may sue both the old and new tenants. If the old tenant did not notify the landlord of the assignment, if the original lease was altered in any way without the landlord’s approval or if the new tenant damaged the property, the landlord may have cause to sue both parties. The benefit of the assignment - as opposed to replacement of the contracting parties - will have been inadvertently lost. To make matters worse, the new tenant might not have the resources to pay a judgment against it, and the landlord will be out-of-pocket for damages such as lost rent or repairs unless the money is recovered from the original assignor.
Practical steps to protect yourself
An assignor should first determine if the vendor or commercial landlord will agree that the assignment will free him/her/the business of any liability. Most savvy businesses will not agree to this. If that is the case, the assignor should obtain an indemnity (an exception against penalties) from the assignee. Furthermore, the assignor should be satisfied that the assignee has the means and capability of following through on any obligations.
Landlords can safeguard their interests by including language in the original lease and/or assignment stipulating that notice to an assignee will be deemed sufficient notice to the assignor, thus getting around the need to provide separate notice to both. This, however, may not be enough to overcome legislated requirements to provide statutory notice.
Assignments can be a useful and profitable tool for landlords, tenants, developers and real estate purchasers. That said, everyone involved should remember that assignments are legal documents. Failing to understand the associated risks may leave all parties involved ill-prepared to deal with liabilities. It is always prudent to get advice from a professional before entering into, or approving, an assignment of a commercial lease or a residential property purchase contract.