In both the “AS IS” and Standard Residential FAR/BAR Contracts (“Contract”), Section 7 addresses when a buyer can assign the Contract to a new buyer. This section is often overlooked as it is used infrequently or is more of an afterthought for a buyer. This usually comes up when a Buyer says, “Actually, I would like to put this property in my trust.” or “Can I take title in my LLC?” after the Contract has been executed or even sometimes at the closing table. If the buyer assigns the Contract to an LLC or Trust that they own, the new LLC or trust is, by definition, a new buyer.
Please note, if a buyer is trying to assign a contract that is contingent or dependent on financing, the buyer will have to confirm that their lender is willing and able to lend to the new buyer as soon as possible, as a Buyer’s Loan Approval is based on the buyer specifically listed on the Contract.
Which Box to Select?
There are three options:
- Buyer may assign and be released from any further liability under the Contract.
- Buyer may assign but not be released from liability under the Contract.
- May not assign this Contract. For example, the buyer may not assign the Contract if a box goes unselected.
If option (1) is selected, the buyer may assign the Contract to a new buyer and will no longer be responsible for closing under the Contract even if the new buyer fails to perform. A listing agent should be very cautious about this box as a seller may not trust a new buyer and would like comfort in knowing someone will be on the hook to close.
If option (2) is selected, the buyer can assign the Contract but will be held liable to close the Contract if the newly assigned buyer defaults. This is the “happy medium” option. It allows the buyer to assign the Contract, but the seller does not have to worry about a potential new buyer not following through.
If a buyer wants to assign a contract under options (1) and (2), then an Assignment (not an addendum) from the buyer to the new buyer needs to be drafted and executed. Again, the seller does not have to sign or consent here.
If option (3) is selected or no box is selected, the buyer cannot assign the Contract to a new buyer. Instead, the selling agent should discuss with the buyer exactly how they want to take title. For example, if the buyer is unsure if they want to take title to the property in their LLC or Trust, the selling agent should avoid this option.
If the buyer wants to assign a contract and option (3) is selected or no box is selected, the buyer can still assign the Contract; however, the seller must sign an Assignment consenting to the assignment. Although this is an easy step if the seller is amendable, this is not always the case.
I experienced a situation where the agent selected option (3), and the seller did not consent to a couple assigning a Contract into a family trust. As a result, the couple had to take title in their individual names at Closing. To put the property into the trust, the buyers had to deed it into the family trust post-closing, which cost them extra money in drafting, recording fees, and potentially documentary stamp taxes. A deed prepared after Closing may not be prepared with the benefit of an updated title commitment, and depending on the change made to title, the owner may run the risk of no longer having coverage under the title policy obtained at Closing.
Knowing how the buyer wants to take title before the Contract is drafted can prevent additional work or cost for your buyer, so make sure to discuss all the options ahead of time.
Don’t hesitate to contact your trusted real estate attorneys for legal advice if you have any questions or concerns regarding anything mentioned in this blog.
