Sunday, August 20, 2006
Assignees, Nominees And Other Extra-terrestrial Buyers
Assignments of real estate contracts.
__________________
This world would be unquestionably a simpler place to live in, if one was at least given the right to know whom he is selling his own house to. But after nineteen years of real estate sales practice, I have come to the realization that this is not meant to be.
The common law Doctrine of Privity as it relates to contracts provides that a contract cannot confer rights or impose obligations arising under it on any person or agent except the parties to it. In essence, the Doctrine of Privity of Contracts simply states, that only the parties to a contract have the right to sue or be sued under it. This means, generally speaking, that third parties who get a benefit under a contract do not have the right to go against the parties to the contract beyond the entitlement to such benefit. An example of this occurs when a manufacturer sells a product to a distributor and the distributor sells the product to a retailer. The retailer then sells the product to a consumer. There is no privity of contract between the manufacturer and the consumer.
However, one exception to this doctrine is that for contracts, which create an interest in land. Contracts involving real property ‘run with the land’, so that a new property owner can sue or be sued on a contract, even though he was not a party to it. A second exception to the Doctrine of Privity is an assignment
In an assignment, a person (called ‘the assignor’) can assign to a third party (‘the assignee’) his entitlement to benefits arising out of a contract. If he does so, the third party has the right to sue to enforce those benefits. Obviously, a person cannot assign liabilities under a contract.
There are two types of assignments: statutory and equitable. A statutory assignment has three essentials:
[ ] The assignment is in writing.
[ ] The assignment is absolute, that is for the whole amount, and unconditional.
[ ] Notice of the assignment has been given in writing to the original promissor.
If any of the foregoing essentials is missing, the assignment might still be equitable. Statutory and equitable assignments are enforced differently by the Courts. In an equitable assignment all three parties must be named as parties in a court action to recover the amount outstanding. In a statutory assignment, on the other hand, only the original promissor and the assignee are named as parties to the action. The assignor is not a party to it.
An assignment does not alter the rights of the parties to the original contract. The assignee has no better legal position than the assignor had. More specifically, he receives the assignment subject to any defenses, which could have been raised between the original parties. If the assignor has properly assigned his rights, he is free from any further liabilities. It is now up to the assignee to collect the benefits of the original contract. Should the assignee fail, he cannot sue the assignor for it.
Finally, the original promissor does not have to make payments to the assignee until he receives proper notice. Once this notice is received, the original promissor must pay to the assignee – and not the assignor – even though he has not consented to the assignment.
Although no one can assign his liabilities under a contract, as stated above, a promissor can have his obligations performed by someone else. For instance, a promissor can require his employee or sub-contractor to perform his obligations under a building construction contract. Where a promissor has someone else perform his obligations under a contract, it is called ‘vicarious performance’. Vicarious performance is not an assignment, in that it does not result in the substitution of one the original contracting parties for another.
In the aforesaid example of a building construction agreement, the original contractor (promissor) is still liable to the other contracting party. In addition, the sub-contractor who performs vicariously cannot be sued by the other contracting party for non-performance. Only the building contractor can sue the sub-contractor, and this is so because of the privy of contract intercurrent between the two of them.
Luigi Frascati
Real Estate Chronicle
