Assignment And Assumption Agreement Review: Common Issues For Small Businesses

Transferring contracts is a regular part of running a small business, whether you are selling your company, restructuring, or handing off a customer relationship. But moving those rights and obligations is not as simple as sending an email or making a verbal agreement. Assignment and assumption agreements are the legal documents that make these transfers official and enforceable. Many founders and operators overlook critical details in these contracts, leading to disputes, lost revenue, or unexpected liabilities. In this guide, we explain what an assignment and assumption agreement is, why it matters, and the most common issues small businesses should watch for before signing or accepting one. We also provide practical examples, state law caveats, and checklists to help you avoid costly mistakes.

What Is An Assignment And Assumption Agreement?

An assignment and assumption agreement is a contract used when one party (the assignor) transfers its rights and duties under an existing contract to another party (the assignee). The assignee steps into the assignor's shoes, taking on both the benefits and the obligations of the original agreement. These agreements are common in business sales, asset transfers, mergers, and even in day-to-day operations when a business wants to delegate a contract to another entity.

For example, if a small marketing agency sells its client contracts to another agency, an assignment and assumption agreement would formally transfer those contracts. Similarly, if a startup wants to move a key supplier contract from one legal entity to another within its group, this agreement is usually required. In another scenario, a franchise owner might assign their franchise agreement to a buyer as part of a business sale, but only if the franchisor consents.

At the federal level, there is no single law governing assignment and assumption agreements. Instead, these contracts are generally governed by state contract law, which can vary. Some contracts, such as government contracts or those involving regulated industries, may have additional federal or state restrictions. Always check the underlying contract for any clauses that restrict assignment or require consent. For example, California law generally allows contract assignments unless the contract says otherwise, while Texas law may restrict assignment of certain oil and gas leases. In New York, anti-assignment clauses are strictly enforced, and courts may refuse to recognize assignments made in violation of such clauses.

It is also important to note that some contracts cannot be assigned under any circumstances. For example, personal service contracts (such as those for artists, doctors, or consultants) are usually not assignable because the other party relied on the unique skills of the original party. Similarly, government contracts often require agency approval before assignment.

Key Terms To Watch In Assignment And Assumption Agreements

Not all assignment and assumption agreements are created equal. The specific terms can have a major impact on your business's legal and financial exposure. Here are some of the most important provisions to review:

• Consent Requirements: Many contracts require the other party's written consent before assignment. Failing to obtain consent can make the assignment invalid or trigger a breach. For example, a SaaS agreement might state that the customer cannot assign the contract without the vendor's approval.
• Scope of Assignment: The agreement should clearly state which rights and obligations are being transferred. Is it the entire contract, or just certain parts? For example, a business might assign only its payment rights, not its performance obligations, which can create confusion or disputes.
• Effective Date: When does the transfer take effect? This is especially important for ongoing obligations or payments. If the effective date is unclear, both parties may be liable for the same obligations during the transition period.
• Release of Assignor: Does the original party remain liable after the assignment, or is there a full release? Some agreements only transfer benefits, not liabilities. For example, if a lease is assigned but the landlord does not release the original tenant, that tenant could still be liable if the new tenant defaults.
• Representations and Warranties: The assignor may need to confirm that the contract is valid, unmodified, and not in default. This protects the assignee from inheriting a contract with hidden problems.
• Indemnities: Who is responsible if something goes wrong after the assignment? Indemnity clauses can shift risk between the parties. For example, the assignor might agree to cover any claims arising from breaches before the assignment date.
• Governing Law: Which state's law will apply if there is a dispute? This can affect how the agreement is interpreted and enforced. For example, Delaware law is often chosen for business contracts due to its predictability, but this may not always be appropriate for your situation.

Small businesses should also check for any notice requirements or obligations to inform third parties. Missing a required notice can cause legal headaches down the line. For instance, some contracts require written notice to all parties within a certain number of days before the assignment is effective.

Another key point is the difference between an assignment of rights and a delegation of duties. Assignment transfers rights (such as the right to receive payment), while delegation transfers obligations (such as the duty to perform services). An assignment and assumption agreement should make clear whether both rights and duties are being transferred, or only one or the other.

Common Mistakes Small Businesses Make

Assignment and assumption agreements are often signed in a rush, especially during business sales or urgent restructures. Here are some of the most frequent mistakes small business owners make, along with practical examples:

• Ignoring Consent Clauses: Many contracts prohibit assignment without the other party's written consent. Assigning without consent can lead to lawsuits or contract termination. For example, a restaurant owner selling their business may try to assign the lease to the buyer without getting the landlord's approval, only to find the assignment is invalid and the buyer cannot take over the space.
• Failing to Transfer All Obligations: Sometimes, only the benefits (like payments) are assigned, but not the obligations (like warranties or service requirements). This can leave the original party exposed to future claims. For example, a software company assigns its customer contracts but forgets to transfer the obligation to provide support, so customers continue to contact the original company for help.
• Overlooking Liabilities: If the agreement does not release the assignor from liabilities, the original party may remain on the hook for breaches that occur after the assignment. For instance, a commercial tenant assigns their lease to a new business, but the landlord does not release the original tenant, who is then sued when the new tenant fails to pay rent.
• Not Reviewing the Underlying Contract: The original contract may have hidden restrictions, penalties, or procedures for assignment. Always review it carefully before proceeding. For example, a consulting contract might require a 30-day notice and specific language in the assignment agreement, which is missed if the contract is not reviewed.
• Poor Recordkeeping: Failing to keep a signed copy of the agreement or to notify relevant stakeholders can create confusion and disputes later on. For example, a business assigns a supplier contract but does not notify the supplier, who continues to invoice the original company.
• Misunderstanding State Law Differences: State contract law can affect whether assignments are valid or enforceable. For instance, in Florida, certain real estate contracts cannot be assigned without a formal written agreement, while in Illinois, courts may allow assignments unless the contract specifically prohibits them.
• Assuming All Contracts Are Assignable: Some contracts, such as those involving personal services or government work, may not be assignable by law. For example, a medical practice tries to assign its patient contracts to a new owner, but state law prohibits assignment of patient care agreements without patient consent.

For example, a founder selling a software business might assume that all customer contracts can be assigned to the buyer. But if the customer contracts require written consent and that step is skipped, the buyer may not have legal rights to serve those customers. In another scenario, a franchisee assigns their franchise agreement to a buyer, but the franchisor refuses to approve the assignment, leaving both parties in limbo.

Checklist: Reviewing An Assignment And Assumption Agreement

Before signing or accepting an assignment and assumption agreement, use this checklist to spot potential issues and protect your business:

• Have you reviewed the underlying contract for assignment restrictions, anti-assignment clauses, or consent requirements?
• Is the scope of the assignment clearly described, including which rights and obligations are being transferred?
• Have all parties who need to consent or be notified been identified and contacted? For example, landlords, franchisors, or government agencies.
• Does the agreement specify the effective date of the transfer and any transition period?
• Are all obligations, not just benefits, being transferred? Is there a clear delegation of duties?
• Is there a release of the assignor from future liabilities, or does liability continue after the assignment?
• Are there clear representations and warranties about the contract's status, such as no defaults or pending disputes?
• Who is responsible for any claims, disputes, or breaches that arise after the assignment?
• Is the governing law appropriate for your business's location or operations? Consider whether the chosen state's law favors your position.
• Have you kept a signed copy of the agreement for your records, and have all required notices been sent?
• Have you updated your internal records and informed your team about the assignment?

It is also wise to keep a summary of all assigned contracts and their current status, especially if your business is growing or frequently restructures. This can help avoid confusion and ensure compliance with future audits or due diligence requests.

For businesses operating in multiple states, consider creating a standard review process that checks for state-specific requirements. For example, some states require assignments to be in writing and signed by all parties, while others may allow oral assignments in certain circumstances. Always err on the side of caution and obtain written agreements.

When Should You Seek Legal Review?

While many assignment and assumption agreements seem straightforward, there are situations where legal review is strongly recommended:

• High-Value Contracts: If the contract being assigned is a major revenue source or involves significant obligations, attorney review can help avoid costly mistakes. For example, assigning a contract with a Fortune 500 customer should be reviewed for hidden risks.
• Complex Transactions: Business sales, mergers, or restructures often involve multiple contracts and parties. Legal review helps ensure all steps are properly documented and that no critical contracts are left out.
• Regulated Industries: Contracts in healthcare, finance, education, or government may have special assignment rules under federal or state law. For instance, HIPAA regulations may restrict assignment of healthcare provider agreements.
• Disputes or Defaults: If the underlying contract is in dispute or has alleged breaches, legal advice is critical before assigning. Assigning a contract in default can transfer liability to the assignee or trigger lawsuits.
• Cross-State Assignments: If the parties are in different states, choice of law and jurisdiction can affect enforceability. For example, a contract assigned from a California company to a New York company may raise issues about which state's law applies.
• Assignments Involving Intellectual Property: Some IP licenses restrict assignment, and federal law may require special filings for patent or trademark assignments.
• Assignments Involving Real Estate: State and local laws may require specific forms or government approvals for real estate contract assignments.

Legal review can also help spot hidden risks, such as indemnity clauses that shift liability, or missing releases that leave the assignor exposed. Remember, state contract law governs most assignment and assumption agreements, and requirements can differ significantly between states. For example, in California, the Civil Code Section 1457 allows assignment unless the contract prohibits it, but in New York, courts strictly enforce anti-assignment clauses. Some states restrict the assignment of certain types of contracts, such as personal service agreements or government contracts, even if the contract itself is silent.

In addition, some industries have their own regulations or licensing requirements that impact contract assignments. For example, transferring a liquor license or a healthcare provider agreement may require regulatory approval beyond just the consent of the other contracting party. In the construction industry, some states require notification to bonding companies before assigning contracts.

Finally, an attorney can help ensure that the agreement is properly executed and enforceable, including making sure all required parties have signed and that the document meets state-specific formalities. For example, some states require notarization or witness signatures for certain assignments, especially those involving real estate or long-term leases.

Legal review is also important if you are using a template agreement found online. Many templates do not include state-specific language or may omit critical provisions, such as releases or indemnities. Customizing the agreement to your specific transaction and jurisdiction can help prevent future disputes.

FAQs

Can any contract be assigned and assumed?

No, not every contract can be assigned and assumed. Many contracts include anti-assignment clauses that prohibit or restrict assignment without the other party's consent. Some contracts, such as those for personal services or government contracts, may not be assignable by law even if the contract is silent. Always review the underlying contract and check state law before proceeding. For example, a contract for a famous chef to run a restaurant cannot usually be assigned to another chef without the owner's approval.

What happens if you assign a contract without consent?

If a contract requires consent and you assign it without obtaining that consent, the assignment may be invalid. This can result in a breach of contract, termination of the agreement, or legal claims for damages. In some cases, the other party may choose to accept the assignment after the fact, but this is not guaranteed. For example, a landlord may terminate a lease if the tenant assigns it without approval.

Does an assignment and assumption agreement automatically release the original party from liability?

No, an assignment and assumption agreement does not automatically release the assignor from liability unless the agreement specifically includes a release. Without a release, the original party may remain liable for breaches or obligations that arise after the assignment. Always check the agreement's language carefully. For example, a seller of a business may still be sued for unpaid debts if the agreement does not include a release.

What records should small businesses keep after an assignment?

Small businesses should keep a signed copy of the assignment and assumption agreement, any written consents or notices, and a summary of the contracts that have been assigned. Good recordkeeping helps resolve disputes and proves that the transfer was properly completed. It is also helpful to keep correspondence with third parties, such as landlords or customers, confirming their consent or acknowledgment of the assignment.

When is attorney review most important?

Attorney review is especially important for high-value contracts, complex transactions, regulated industries, or when the underlying contract is in dispute. Legal review can help ensure the agreement is enforceable and that all risks are properly managed. For example, in a business sale involving multiple contracts and locations, legal review can prevent missed assignments or unenforceable transfers.

Key Takeaways

• Assignment and assumption agreements are essential for transferring contractual rights and obligations, but they come with legal risks and practical pitfalls.
• Always review the underlying contract for assignment restrictions, consent requirements, and potential liabilities before proceeding.
• Do not assume that assignment automatically releases the original party from liability; check for a release clause and confirm with the other parties.
• State contract law governs most assignments, and requirements can vary by state and industry. Always check for state-specific rules and industry regulations.
• Legal review is recommended for high-value, complex, or regulated contracts to avoid costly mistakes and ensure enforceability.
• Keep thorough records of all assignments, consents, and related correspondence to protect your business in the event of a dispute or audit.

If you need help reviewing or drafting an assignment and assumption agreement, or want to better understand your business's risks, 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.