Any realtor who has worked on an Assignment knows that Assignment transactions are very complicated. In my experience, most realtors require a great deal of assistance when drafting an Assignment of Agreement of Purchase and Sale. The issues that realtors face in Assignments are unique and in my experience the vast majority of Assignments that I have reviewed require major redrafting which often results in confusion for all parties.
This column will provide some guidance on how realtors can draft an AAPA and some issues to consider when doing so.
- Recognize that a typical assignment transaction has 3 parties. First, there is the Assignor-the party who has bought from the builder and now wishes to sell or assign the Agreement. Second, there is the Assignee- the party who desires to purchase the contract from the Assignor. Then third party is the builder- the party who “holds all the cards” and without its consent, there cannot be an Assignment.
- Before you even begin the process of drafting the AAPA, ask yourself a question-will the builder give its consent to the Assignment? If the builder is not going to consent to the Assignment, do not proceed any further.
Remember that in most builder Agreements, the Assignor does not have the automatic right to assign the Agreement. Builder consent is required, and in some cases, the builder will not give consent. This usually happens when the builder has not yet sold a certain percentage of the units. Therefore, it is imperative to first ascertain if the builder will give consent before you begin the process of assigning and Agreement of Purchase and Sale.
- If you are going to venture into the world of Assignments, you will need a lawyer who has experience with these types of transactions. Not every real estate lawyer is familiar with Assignments as they are complex and fraught with many pitfalls. Be sure that the lawyer you recommend has successfully closed many Assignment transactions. There are many real estate lawyers who will not do Assignments because of their complexity. It is imperative to hire a lawyer who is experienced with Assignments.
- All Assignment Agreements must be conditional on the review and approval of both the Assignee’s and Assignor’s lawyer. I recommend that this condition should be for a minimum of 10 business days after acceptance of the Assignment Agreement. Due to their complexity, Assignments need to be reviewed by both lawyers. Often there are negotiations between the lawyers over the terms of the Agreement. This does not happen in 2 days.
Finalizing the Assignment Agreement takes time.
- All Assignment Agreements must be conditional on the builder providing its written consent to the Assignment. I recommend that this condition should be for a minimum of 30 days after acceptance of the Assignment Agreement. Builders who receive requests for Assignments typically do not treat these with great urgency. Once they receive a request, they will generally have a number of pre-conditions in order to give consent to the Assignment. This slows down the process. Once these conditions are met, there is often a delay of days or even weeks before the builder will actually sign the consent to finalize the Assignment.
- If you are acting for the Assignee, you should warn your client of the extra costs that the Assignee will face in the future. Just like any purchase from a builder, there are always hidden extra costs in the builder’s contract which could amount to thousands of dollars on closing.
Because the Assignee is buying the contract from the Assignor, the Assignee is responsible for paying all of these costs. Therefore, it is critical for the Assignee’s lawyer to obtain and review the entire original purchase Agreement so that the Assignee has a clear understanding of what they are buying and what the additional costs will be.
- The tax issues respecting Assignments are complicated. Whether you are acting for the Assignee or the Assignor there are numerous tax implications that need to be considered and explained in the Assignment transaction.
Realtors should have a basic understanding of these issues. Again, a lawyer with experience in Assignment transactions and an accountant should be consulted.
- Assignment trasnactions become even more complicated in the case where the Assignor has already had its interim occupancy closing with the builder.
The appropriate clauses to deal with this situation must be inserted into the Assignment Agreement.
- Perhaps the most complicated issue with Assignments is how the money flows. Specifically, the AAPA must clearly state when both the deposits paid to the builder and the profit on the transaction will be paid to the Assignor. If this is not clearly set out, then confusion will result and the transaction will surely “go off the rails”.
- There is no one correct way to draft an AAPA. However, OREA does have a form that is a good starting point that realtors should use when drafting an AAPA.
As can be seen, Assignment Agreements are complex and require careful drafting requiring the expertise of a real estate lawyer who is experienced in this area. You should always make the Assignment Agreement conditional on review by a lawyer to ensure that your client’s interests are protected and to avoid major problems in the future.