Assignment And Assumption Agreement: Payment, Liability And Termination Terms To Check

Transferring a contract to another party can be a useful way for US startups and small businesses to manage growth, exit strategies, or changes in business structure. However, assignment and assumption agreements are not as simple as handing over a document and walking away. Failing to review or negotiate key terms around payment, liability, and termination can result in unexpected costs, disputes, or even lawsuits. Many founders overlook the fine print, assume all contracts are assignable, or do not realize that state law or the original contract may limit their ability to assign. This guide explains what an assignment and assumption agreement is, what to check before signing or accepting one, and how to avoid common pitfalls.

What Is An Assignment And Assumption Agreement?

An assignment and assumption agreement is a legal document that transfers one party's rights and obligations under an existing contract to another party. In business, this often happens when a company is sold, restructures, or wants to delegate certain duties to a third party. The original party (the assignor) assigns its interest in the contract to a new party (the assignee), who then assumes the obligations and benefits of the contract going forward.

For example, if your startup has a valuable supplier contract but you are selling your business, you may want the buyer to take over the contract. An assignment and assumption agreement makes this possible, provided the original contract allows assignment and the other party (often called the non-assigning party or counterparty) agrees if required.

Key features of an assignment and assumption agreement include:

• Identification of the contract: Clearly specify which contract is being assigned.
• Parties involved: Name the assignor, assignee, and (if required) the non-assigning party.
• Scope of assignment: Define exactly what rights and obligations are being transferred.
• Effective date: State when the assignment takes effect.
• Consent: Include any required consents from the non-assigning party.

Assignment and assumption agreements are common in mergers and acquisitions, asset sales, partnership changes, and some commercial leasing situations. They are also used when outsourcing or subcontracting key business functions. If you are considering a business sale, reviewing your contracts for assignment clauses is an important step.

When Can You Assign A Contract?

Not all contracts can be assigned. Under US law, the default rule is that most contract rights can be assigned unless:

• The contract specifically prohibits assignment.
• The assignment would materially change the duties of the other party.
• The contract involves personal services or unique skills.

Many commercial contracts include an "anti-assignment" clause that restricts or forbids assignment without the other party's written consent. For example, a SaaS agreement or a supplier contract may state that neither party can assign the agreement without the other's prior written approval. Even if the contract is silent, some state laws (such as California Civil Code Section 1457) may limit assignments in certain situations.

Before preparing or signing an assignment and assumption agreement, check:

• Does the original contract allow assignment?
• Is written consent from the other party required?
• Are there any notice requirements or timeframes?
• Does the assignment trigger any fees or penalties?

Failing to comply with anti-assignment clauses can result in the assignment being void, or even a breach of contract claim. If you are unsure, review the contract with a licensed attorney familiar with your state law and industry.

Key Payment Terms To Check

Payment obligations are a major area of risk in assignment and assumption agreements. Both the assignor and assignee need to be clear on who is responsible for past, current, and future payments under the contract. Common mistakes include assuming the assignee automatically takes over all payment obligations, or failing to address unpaid amounts that accrued before the assignment date.

When reviewing or drafting an assignment and assumption agreement, check:

• Outstanding payments: Who is responsible for payments owed before the assignment date? For example, if the assignor owes $10,000 in unpaid invoices, does the assignee take on this debt, or does the assignor remain liable?
• Future payments: From what date does the assignee become responsible for ongoing payments (such as rent, subscription fees, or installment payments)?
• Adjustments or prorations: Will payments be prorated if the assignment occurs mid-billing cycle?
• Security deposits or prepayments: If the assignor paid a deposit or advance, will this transfer to the assignee? Will the non-assigning party return or reissue the deposit?
• Notice to payees: Does the agreement require notifying vendors or payees about the change in payer?

For example, in a commercial lease assignment, the landlord may require the assignee to pay a security deposit or provide a new guarantee. In a software license assignment, the software provider may require the assignee to pay any outstanding license fees before approving the transfer.

Always document payment terms clearly in the agreement. If the parties intend for the assignee to assume all debts and obligations, say so explicitly. If certain payments remain the assignor's responsibility, list them in a schedule or exhibit.

Liability And Indemnity: Who Is On The Hook?

Liability is a critical issue in assignment and assumption agreements. The assignor may want to walk away from all obligations, but the non-assigning party (such as a landlord, supplier, or client) may insist the assignor remains liable for breaches or unpaid amounts, even after the assignment. This is known as "continuing liability."

There are several ways liability can be structured:

• Full release: The assignor is released from all obligations after the assignment. The assignee is solely responsible going forward.
• Continuing liability: The assignor remains liable for obligations that arose before or after the assignment, often as a backup if the assignee defaults.
• Indemnity: The assignee agrees to indemnify (reimburse) the assignor for any losses or claims arising from the contract after the assignment date.

For example, if you assign a service contract to another company, but the assignee later fails to perform, the client may sue both you (the assignor) and the assignee. Unless the agreement includes a full release, you could be on the hook for damages.

Checklist for liability and indemnity terms:

• Does the agreement state whether the assignor is released from future liability?
• Is the assignee required to indemnify the assignor for claims after the assignment?
• Are there any limits on liability or indemnity (such as a cap on damages)?
• Does the non-assigning party need to sign a release for the assignor?
• Are there insurance requirements for the assignee?

State law and the original contract may affect whether a release is effective. Some states require clear, written releases, and some contracts prohibit releases unless all parties agree. Always review liability terms with a licensed attorney, especially for high-value or long-term contracts.

Termination, Defaults, And Other Traps

Assignment and assumption agreements should also address what happens if the contract is terminated, if a party defaults, or if the assignment itself is challenged.

• Termination rights: Does the assignment trigger a right for the non-assigning party to terminate the contract? Some contracts allow termination if assigned without consent.
• Defaults: Who is responsible if there was a breach or default before the assignment? Will the assignee cure past defaults?
• Warranties and representations: Does the assignor warrant that the contract is valid, enforceable, and not in default?
• Dispute resolution: How will disputes about the assignment be resolved? Is there a choice of law or venue clause?
• Reassignment: Can the assignee further assign the contract in the future?

Common mistakes include failing to check whether the assignment itself is a default, or assuming that the non-assigning party will not object. For example, a landlord may terminate a lease if the tenant assigns it without permission, even if the new tenant is creditworthy.

Checklist for termination and default terms:

• Does the original contract allow termination upon assignment?
• Are all parties notified of the assignment and any consents obtained?
• Does the agreement address responsibility for past and future defaults?
• Are there procedures for resolving disputes about the assignment?

Termination and default issues are often state-specific and may be affected by local statutes, especially for leases and service contracts. Always review these terms carefully and consult with a licensed attorney if needed.

Practical Steps Before Signing Or Accepting An Assignment

Whether you are the assignor, assignee, or non-assigning party, there are practical steps to take before signing or accepting an assignment and assumption agreement:

1. Review the original contract: Check for anti-assignment clauses, consent requirements, and any restrictions.
2. Get written consent: If required, obtain written consent from the non-assigning party before proceeding.
3. Clarify payment and liability terms: Agree on who is responsible for past and future payments, liabilities, and defaults.
4. Document everything: Use a written agreement that clearly identifies the contract, parties, assignment date, and all key terms.
5. Notify all parties: Provide notice to the non-assigning party, vendors, and other stakeholders as required.
6. Check state law: Some states have specific rules for assignments, especially for real estate, leases, and certain industries.
7. Consult a licensed attorney: Have the agreement reviewed for enforceability and compliance with state law.

For example, if you are selling your business and want to assign customer contracts to the buyer, you may need to notify each customer and get their written consent. If you are taking over a lease, you may need to provide financial information to the landlord and sign a new guarantee. These steps help ensure your assignment and assumption agreement is valid and enforceable.

Skipping these steps can result in the assignment being invalid, or expose your business to unexpected liabilities.

FAQs

Do all contracts require the other party's consent to assign?

No, not all contracts require consent to assign. The default rule under US contract law is that most rights can be assigned unless the contract specifically prohibits it or the assignment would materially change the other party's obligations. However, many commercial contracts include anti-assignment clauses that require written consent. Always check the contract and applicable state law before proceeding.

What is the difference between assignment and novation?

Assignment transfers rights and obligations to a new party, but the original party may remain liable unless released. Novation is a separate agreement where the original party is fully released and replaced by the new party, with the consent of all parties. Novation is often used when the non-assigning party wants to ensure the original party is no longer liable.

Can an assignment and assumption agreement be used for leases?

Yes, assignment and assumption agreements are commonly used to transfer commercial leases. However, most leases require the landlord's written consent, and the landlord may impose conditions such as a new security deposit or guarantee. State landlord-tenant laws may also affect the process.

What happens if the assignment is done without required consent?

If an assignment is made without required consent, it may be void or unenforceable. The non-assigning party may have the right to terminate the contract or claim damages. Always obtain all necessary consents before completing an assignment.

Should I use a lawyer to review an assignment and assumption agreement?

It is highly recommended to have a licensed attorney review any assignment and assumption agreement, especially for high-value or long-term contracts. State law, industry rules, and the original contract can all affect enforceability and liability. A lawyer can help you avoid costly mistakes and ensure your interests are protected.

Key Takeaways

• Assignment and assumption agreements transfer contract rights and obligations, but require careful review of payment, liability, and termination terms.
• Always check the original contract for anti-assignment clauses and consent requirements before proceeding.
• Clarify who is responsible for past and future payments, defaults, and liabilities in the agreement.
• State law and the original contract may affect whether an assignment is valid and who remains liable.
• Consult a licensed attorney for review, especially for high-value or complex assignments.

If you need help reviewing or preparing an assignment and assumption agreement, or have questions about payment, liability, or termination terms, contact our team at (888) 449-8437 or team@sprintlaw.com. Where legal services are required, they are provided by licensed US lawyers at ElevateNext US, LLC, a trusted US law firm, through the Sprintlaw platform.