is assignment of contract legal in texas

Assignment of Contract

Jump to section, what is an assignment of contract.

An assignment of contract is a legal term that describes the process that occurs when the original party (assignor) transfers their rights and obligations under their contract to a third party (assignee). When an assignment of contract happens, the original party is relieved of their contractual duties, and their role is replaced by the approved incoming party.

How Does Assignment of Contract Work?

An assignment of contract is simpler than you might think.

The process starts with an existing contract party who wishes to transfer their contractual obligations to a new party.

When this occurs, the existing contract party must first confirm that an assignment of contract is permissible under the legally binding agreement . Some contracts prohibit assignments of contract altogether, and some require the other parties of the agreement to agree to the transfer. However, the general rule is that contracts are freely assignable unless there is an explicit provision that says otherwise.

In other cases, some contracts allow an assignment of contract without any formal notification to other contract parties. If this is the case, once the existing contract party decides to reassign his duties, he must create a “Letter of Assignment ” to notify any other contract signers of the change.

The Letter of Assignment must include details about who is to take over the contractual obligations of the exiting party and when the transfer will take place. If the assignment is valid, the assignor is not required to obtain the consent or signature of the other parties to the original contract for the valid assignment to take place.

Check out this article to learn more about how assigning a contract works.

Contract Assignment Examples

Contract assignments are great tools for contract parties to use when they wish to transfer their commitments to a third party. Here are some examples of contract assignments to help you better understand them:

Anna signs a contract with a local trash company that entitles her to have her trash picked up twice a week. A year later, the trash company transferred her contract to a new trash service provider. This contract assignment effectively makes Anna’s contract now with the new service provider.

Hasina enters a contract with a national phone company for cell phone service. The company goes into bankruptcy and needs to close its doors but decides to transfer all current contracts to another provider who agrees to honor the same rates and level of service. The contract assignment is completed, and Hasina now has a contract with the new phone company as a result.

Here is an article where you can find out more about contract assignments.

Assignment of Contract in Real Estate

Assignment of contract is also used in real estate to make money without going the well-known routes of buying and flipping houses. When real estate LLC investors use an assignment of contract, they can make money off properties without ever actually buying them by instead opting to transfer real estate contracts .

This process is called real estate wholesaling.

Real Estate Wholesaling

Real estate wholesaling consists of locating deals on houses that you don’t plan to buy but instead plan to enter a contract to reassign the house to another buyer and pocket the profit.

The process is simple: real estate wholesalers negotiate purchase contracts with sellers. Then, they present these contracts to buyers who pay them an assignment fee for transferring the contract.

This process works because a real estate purchase agreement does not come with the obligation to buy a property. Instead, it sets forth certain purchasing parameters that must be fulfilled by the buyer of the property. In a nutshell, whoever signs the purchase contract has the right to buy the property, but those rights can usually be transferred by means of an assignment of contract.

This means that as long as the buyer who’s involved in the assignment of contract agrees with the purchasing terms, they can legally take over the contract.

But how do real estate wholesalers find these properties?

It is easier than you might think. Here are a few examples of ways that wholesalers find cheap houses to turn a profit on:

• Direct mailers
• Place newspaper ads
• Make posts in online forums
• Social media posts

The key to finding the perfect home for an assignment of contract is to locate sellers that are looking to get rid of their properties quickly. This might be a family who is looking to relocate for a job opportunity or someone who needs to make repairs on a home but can’t afford it. Either way, the quicker the wholesaler can close the deal, the better.

Once a property is located, wholesalers immediately go to work getting the details ironed out about how the sale will work. Transparency is key when it comes to wholesaling. This means that when a wholesaler intends to use an assignment of contract to transfer the rights to another person, they are always upfront about during the preliminary phases of the sale.

In addition to this practice just being good business, it makes sure the process goes as smoothly as possible later down the line. Wholesalers are clear in their intent and make sure buyers know that the contract could be transferred to another buyer before the closing date arrives.

After their offer is accepted and warranties are determined, wholesalers move to complete a title search . Title searches ensure that sellers have the right to enter into a purchase agreement on the property. They do this by searching for any outstanding tax payments, liens , or other roadblocks that could prevent the sale from going through.

Wholesalers also often work with experienced real estate lawyers who ensure that all of the legal paperwork is forthcoming and will stand up in court. Lawyers can also assist in the contract negotiation process if needed but often don’t come in until the final stages.

If the title search comes back clear and the real estate lawyer gives the green light, the wholesaler will immediately move to locate an entity to transfer the rights to buy.

One of the most attractive advantages of real estate wholesaling is that very little money is needed to get started. The process of finding a seller, negotiating a price, and performing a title search is an extremely cheap process that almost anyone can do.

On the other hand, it is not always a positive experience. It can be hard for wholesalers to find sellers who will agree to sell their homes for less than the market value. Even when they do, there is always a chance that the transferred buyer will back out of the sale, which leaves wholesalers obligated to either purchase the property themselves or scramble to find a new person to complete an assignment of contract with.

Learn more about assignment of contract in real estate by checking out this article .

Who Handles Assignment of Contract?

The best person to handle an assignment of contract is an attorney. Since these are detailed legal documents that deal with thousands of dollars, it is never a bad idea to have a professional on your side. If you need help with an assignment of contract or signing a business contract , post a project on ContractsCounsel. There, you can connect with attorneys who know everything there is to know about assignment of contract amendment and can walk you through the whole process.

Meet some of our Lawyers

Chia-Fen Y.

Attorney Yu represents clients in business and real estate transactions and has successfully handled more than 200 cases. She has experience in corporate law, including forming legal entities, employment law and workers’ compensation law matters pertaining to wage and hour violations, industrial injuries, misclassifications, and other employment-related torts and contracts. Attorney Yu works with employers to address employee relationship issues, develop effective policies and craft employment agreements. Attorney Yu regularly advises clients on the legal and business aspects of potential investments, ongoing business operations, debt collections, shareholders and partners disputes, business purchase agreements, risk assessment, intellectual property disputes, and potential contract disputes. She regularly handles real estate law matters such as landlord-tenant disputes, lease agreements, buy-sell disputes, title disputes, and construction disputes. She also has substantial experience settling debts, and she drafts, reviews and negotiates settlement agreements. Attorney Yu conducts extensive legal research and provides on-point legal advice to both corporate and individual clients.

Ramanathan C.

Dual Qualified New York Attorney & Enrolled NZ Barrister & Solicitor

Attorney licensed to practice in both California and New York, Josiah is focused on helping people understand what's in their contracts, and do business with confidence.

I am an experienced in house counsel and have worked in the pharmaceutical, consumer goods and restaurant industry. I have experience with a variety of agreements, below is a non-exhaustive list of types of agreements I can help with: Supply Agreements Distribution Agreements Manufacture Agreements Service Agreements Employment Agreements Consulting Agreements Commercial and residential lease agreements Non-compete Agreements Confidentiality and Non-Disclosure Agreements Demand Letters Termination notice Notice of breach of contract My experience as in house counsel has exposed me to a wide variety of commercial matters for which I can provide consulting and assistance on. I have advised US, Canadian and International entities on cross-functional matters and have guided them when they are in different countries and jurisdictions as their counterparties. I can provide assistance early on in a business discussion to help guide you and make sure you ask the right questions even before the commercial agreement needs to be negotiated, but if you are ready to put a contract in place I can most definitely help with that too.

Jeff Colerick has been practicing law for over 30 years and has devoted his professional career to providing clients with intelligent representation and personal care. His experience as a lawyer involving complex matters has resulted in a long history of success. Jeff has built a practice based on a deep understanding of real estate assets and corporate activities. He combines his industry knowledge with a practical and collaborative approach to problem solving. Jeff’s client relationships are strong because they are built on mutual respect. Jeff talks the language of real estate and understands that it is a vehicle to deliver your business strategy. Jeff provides practical, responsive, and strategic advice related to real estate acquisition, construction, leasing, and sale of a wide range of real property types, including office, retail, medical, industrial, industrial flex-space, mixed-use condominium, multifamily and hospitality. As leader of the Goodspeed Merrill real estate practice group, Jeff represents clients with commercial and residential transactions, purchases and sales, land acquisition and development, real estate investment and financing, financing liens and security interests, and commercial leasing and lease maintenance, including lease enforcement support and advice. The firm represents clients in matters concerning construction, lending, developers, contractors and subcontractors, cell site leasing, property and boundary disputes, common interest community law, and residential condominiums and planned communities.

Harrison K.

Harrison Kordestani is an executive with over twenty-five years experience in entertainment and media, energy, technologies, and start-ups. Mr. Kordestani has also developed a specialized legal and strategic consulting practice representing select entertainment, oil and gas, mortgage lending, and technology start-up clientele. He is also deeply passionate about new technologies and has also actively worked in building companies in the video-on-demand, wearable tech, information of things, demand prediction and app-marketing spaces. As an attorney, Mr. Kordestani's focus has been on transactional drafting and negotiation and providing ongoing legal counsel, corporate compliance, and contract interpretation to numerous private individuals as well as companies in varied fields.

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Starting Guide to Enforcing a Contract in Texas: Know Your Options and Get Help

by Davis Business Law | Feb 15, 2024 | Blog , Business Contracts , Business Law , Texas Business Law

If your Texas business is dealing with legal contract issues, it is important to understand what a legally enforceable contract is, what you can do to enforce one when you have a contract claim, and how and when to get help. In this guide, you’ll learn how to determine if a contract is enforceable, what actions you can take if someone breaches, the types of damages you might recover, and the deadlines for legal action. Most importantly, you should contact an experienced business attorney, like the team here at Davis Business Law, to help you protect your business when you have a contract claim.

Key Takeaways

When someone breaches a valid contract, sometimes a court will force them to perform the contract. Other times, the court may require them to pay damages to the party who the breach hurt. In contract law, you have to prove your damages, and they have to be actual economic damages – how much money did you lose because of the breach?

While Texas contract law recognizes oral contracts, written agreements are best and required for certain types of contracts, such as those involving real estate, transactions over $500, or contracts that cannot be fully performed within a year.

The statute of limitations for filing Texas contract claim is four years from the date of the breach, but you should probably file a lawsuit much sooner to mitigate damages and preserve evidence.

Understanding Texas Contract Law

Photo by Wesley Tingey on Unsplash

The enforceability of a Texas contract relies on several factors. The first one being mutual agreement between the parties, where they both accept and understand the definite terms stated in an offer. If both parties do not completely agree on the terms, then the contract is considered invalid. Most written contracts will satisfy this with the signatures. But even a signed contract can be invalid sometimes, like when the signature is forged or when the person signing never had authority to sign.

For a valid contract to be formed, there must be mutual consideration involved. This means that each party needs to give something valuable such as money or benefits in exchange for fulfilling their obligations under the contract – Bob gives Sally fifty widgets and Sally gives Bob $2000. If benefit only flows to one person in the “contract,” it may be invalid.

It is also crucial for individuals or entities to have the capacity and understanding of what they are committing themselves to. If one party lacks this ability due to various reasons, such as age or mental state at the time of making an agreement, the contract may be voided. This also applies to company employees or representatives who clearly do not have authority to enter into that type of agreement (i.e. a Walmart greeter does not have authority to sell the store). Therefore, it is important to determine whether there was indeed a valid contract established between all parties involved to avoid potential disputes regarding its validity.

A Written Contract is Important

A man’s word may be his bond, but get it in writing. Our attorneys handle far too many lawsuits involving “handshake deals.” And the biggest problem is that no one ever agrees over what they shook hands on, or even whether they ever had a valid contract at all. Put your agreements into writing and call us to help you draft the agreement.

Having a written contract simplifies dispute resolution as it eliminates any uncertainties and ambiguities. A written agreement clearly outlines the mutual understanding of both parties, including important details such as payment and services to be provided. While not required for all contracts in Texas, having a written contract is highly recommended to ensure easier enforcement.

A valid written contract between the parties can range from an official typed document to even something informal like notes on a napkin, so long as the writing contains agreed upon terms that have been signed by both parties involved. In short: whether it’s through formal documentation or just simple writing on paper. Signing off ensures authenticity when creating legally-binding agreements.

Texas contract law has a statute of frauds which requires that certain types of contracts, like those for land, for the sale of goods over $500, or those which take over a year to perform, must be in writing to be legally enforceable.

Do I have a Contract Claim: Proving a Valid Contract and That a Breach Occurred

The initial step in establishing a breach under Texas contract law involves providing evidence of the contract’s validity. Did the parties reach a mutual understanding of the terms of obligations to each other? If so, did one party perform and the other party fail to perform? If so, then there is likely a valid contract and a breach.

It is crucial to present proof of how the other side breached specific contractual terms. Under Texas contract law, the burden is upon the party alleging a contract breach to provide evidence of a valid contract, the breach of the contract, and damages the breach caused. Evidence is so essential, particularly of damages, and quickly hiring an attorney to help you identify and preserve evidence will help your chances of succeeding on your contract claim.

Evaluating the Breach

In Texas contract law, some breaches are material, and some don’t really matter. A material breach is a serious violation that significantly hinders the value of a contract, as opposed to minor breaches that do not prevent overall fulfillment.

For example, on a construction project, a material breach could be that a building was not constructed to the required designs. And an immaterial breach could be that the building was completed a few days late, but it did not matter because the owner was not yet prepared to move in.

Legal Remedies Available

In Texas, when a breach of contract occurs, the aggrieved party can seek resolution and compensation with various remedies. These remedies aim to restore the injured party to the position they would have been in had the breach not occurred. The following are some common remedies available:

Compensatory Damages – This is the most typical remedy, where the non-breaching party can recover the money necessary to cover the losses incurred due to the breach.

Consequential Damages – These damages go beyond direct losses and cover foreseeable damages resulting from the breach, like lost promised future revenue.

Specific Performance – In cases where money damages are inadequate, a court may order the breaching party to fulfill their obligations as stated in the contract.

Rescission – This remedy allows the parties to cancel the contract, returning both to their original positions before the agreement.

Restitution – This remedy returns any benefits or property transferred to the breaching party under the contract.

Liquidated Damages – Sometimes, contracts include a provision specifying damages in case of a breach.

Attorney’s Fees – In Texas, state law provides that the prevailing party may be entitled to recover reasonable attorney’s fees and court costs.

It’s important to note that the availability and extent of these remedies may vary depending on the specific contract terms, the nature of the breach, and the applicable laws.

If you’re facing a breach of contract situation in Texas, seeking legal advice from a qualified attorney is essential to determine the best course of action.

Statute of Limitations for Contract Claims in Texas

Texas contract law requires that any breach of contract claim must be filed within four years from the date on which the breach occurred, unless it was not immediately recognized. This time frame is set by Chapter 16 in the Texas Civil Practice and Remedies Code.

This statute is based on several reasons.

It ensures that disputes are resolved promptly while evidence is still accessible.

It promotes stability and predictability in contractual relationships between parties involved.

The goal is also to encourage timely resolution so both sides can move forward with certainty.

We have delved into the intricacies of contract enforcement in Texas. We’ve covered important topics such as understanding the essential requirements for a valid contract, the significance of written contracts, the challenges of oral contracts, and steps to take when faced with breach of contract situations.

The most important thing to remember is that contract law can be complicated and it is often very dependent on evidence. Contacting an attorney as son as possible is a good idea. Your attorney can help you identify and preserve the evidence you need to put on your best case. And your attorney can even advise you on how to limit damages (which the law requires you to do). If you have a contract claim, call or contact Davis Business Law today.

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Assignment of Contract Rights: Everything You Need to Know

The assignment of contract rights happens when one party assigns the obligations and rights of their part of a legal agreement to a different party. 3 min read updated on February 01, 2023

The assignment of contract rights happens when one party assigns the obligations and rights of their part of a legal agreement to a different party. 

What Is an Assignment of Contract?

The party that currently holds rights and obligations in an existing contract is called the assignor and the party that is taking over that position in the contract is called the assignee. When assignment of contract takes place, the assignor usually wants to hand all of their duties over to a new individual or company, but the assignee needs to be fully aware of what they're taking on. 

Only tangible things like property and contract rights can be transferred or assigned . Most contracts allow for assignment or transfer of contract rights, but some will include a clause specifying that transfers are not permitted. 

If the contract does allow for assignments, the assignor isn't required to have the agreement of the other party in the contract but may transfer their rights whenever they want. Contract assignment does not affect the rights and responsibilities of either party involved in the contract. Just because rights are assigned or transferred doesn't mean that the duties of the contract no longer need to be carried out. 

Even after the assignor transfers their rights to another, they still remain liable if any issues arise unless otherwise noted in an agreement with the other party. 

The purpose for the assignment of contract rights is to change the contractual relationship, or privity , between two parties by replacing one party with a new party. 

How Do Contract Assignments Work?

Contract assignments are handled differently depending on certain aspects of the agreement and other factors. The language of the original contract plays a huge role because some agreements include clauses that don't allow for the assignment of contract rights or that require the consent of the other party before assignment can occur.

For example, if Susan has a contract with a local pharmacy to deliver her prescriptions each month and the pharmacy changes ownership, the new pharmacy can have Susan's contract assigned to them. As long as Susan continues to receive her medicine when she needs it, the contract continues on, but now Susan has an agreement with a new party. 

Some contracts specify that the liability of the agreement lies with the original parties, even if assignment of contract takes place. This happens when the assignor guarantees that the assignee will continue to perform  the duties required in the contract. That guarantee makes the assignor liable. 

Are Assignments Always Enforced?

Assignments of contract rights are usually enforceable, but will not be under these circumstances:

• Assignment is prohibited in the contract language, which is called an anti-assignment clause.
• Assignment of rights changes the foundational terms of the agreement.
• The assignment is illegal in some way.

If assignment of contract takes place, but the contract actually prohibits it, the assignment will automatically be voided. 

When a transfer of contract rights will somehow change the basics of the contract, assignment cannot happen. For instance, if risks are increased, value is decreased, or the ability for performance is affected, the assignment will probably not be enforced by the court. 

Basic Rights of Contract Assignments

Most contracts allow for assignments, but you'll want to double check a contract before signing if this is something you anticipate happening during the lifespan of your agreement. Contract law does impose strict rules and regulations regarding the assignment of contract rights, so it's important to be sure that any transfers of rights are fully legal before acting on them. 

Any business agreements should always outline provisions for contract assignments and be well-drafted to be sure that the agreement is effective and enforceable. 

Why Use Contract Assignments?

When an assignor hands over their contracts rights to an assignee, they are signing away their obligation to perform and putting that obligation on a new party. The other party involved in the contract should see no difference in how the agreement plays out. If performance is negatively affected by the assignment of rights, something is wrong. 

If a party in a contract can no longer perform their duties, it is better to assign their contractual rights to a party who can carry out the duties rather than breach contract. 

If you need help with the assignment of contract rights, you can  post your legal need  on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb. 

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General Contract Clauses: Assignment and Delegation (TX) | Practical Law

General Contract Clauses: Assignment and Delegation (TX)

Practical law standard clauses w-000-0869  (approx. 19 pages).

Cross-Examination: Don’t Mess with Texas Contract Law

How to prosper with proper documentation for cat losses.

Photos credit: BrAt_PiKaChU/Stock / Getty Images Plus via Getty Images and Ed Crosss

“Don’t mess with Texas” has been the unofficial slogan of the Lone Star State since 1985. While the rest of the country thinks it’s just a catchphrase, true Texans know it actually began as an anti-littering campaign. The saying is especially fitting now because the State of Texas does not want remediation contractors littering the state with contracts that do not comply with its unique laws. These laws are traps for the unwary. 

Follow the Special Rules for Disaster Remediation Contracts

Texas is the only state I know of that has a separate body of statutes specifically targeting “disaster remediation contracts.” The rules are very specific and have more twists than a pretzel factory, particularly when it comes to lien rights. The state is on the lookout for crooked contractors, and violators can land in the hoosegow. 

In the aftermath of Hurricane Harvey, some contractors pressured Texans to provide upfront payments for work that was never performed. The state took a rather dim view of that, and made it a crime for a contractor to require full or partial payment before work is performed. Texas Disaster Remediation Contracts must state that the contract is subject to Chapter 58 of the Texas Business & Commerce Code, that the contractor may not require advance payments, and that progress payments must be in reasonable proportion to the amount of work actually performed, including materials delivered.¹ A violation of any of these requirements is deemed a “deceptive act” that may have serious legal consequences. 

Contractors will march into Texas with good intentions and traditional work authorizations that fail to specify material terms, making them difficult or impossible to enforce. Think of a contract as a list of everything you would want a court to give you in the event the customer does not pay. If it’s not in a writing signed by the customer, the court probably won’t give it you. When a Texas judge sees an old fashioned work authorization, they’ll might think the contractor just fell off the turnip truck. 

Contractors must provide their residential customers with a list of subcontractors, or get a waiver of the right to the list. However, most or all of the other requirements cannot be waived. Before a residential contract is executed by the owner, Texas requires the contractor to provide a written statement substantially similar to the text of Texas Property Code Section 53.255, indicating that: 

• Texas law requires contractors to provide owners with an overview of their rights, responsibilities, and risks in the transaction.
• The contractor may not require the owner to convey the property to the contractor as a condition to the agreement to perform work.
• The owner should investigate the contractor and obtain references before signing the contract.
• The owner should insist on a written contract that explains what the contractor will do, when it will be done, and the cost of work or an explanation of how the cost will be determined. 

Give Notice of the Right to Cancel

Consumers in Texas may cancel a consumer transaction up to three business days after signing the agreement. Contractors have to provide a notice of the right to cancel, and it must be in same language used in the principal sales presentation, e.g., Spanish. The form of the notice is dictated by the Texas Business and Professions Code and must be in boldface type in a minimum size of 10 points. The contractor must also provide a Notice of Cancellation form for customers to sign in the event they elect to cancel.

Hold Harmless Provisions and Releases of Liability

Texas courts generally don’t want you to hang your wash on someone else’s line. The EPA and OSHA, in addition to local and state authorities, have specific and stringent requirements for the removal of materials that contain lead and asbestos. Contractors should also follow the applicable federal and local regulations for preventing silica dust exposure to workers and occupants. In light of recent weather activity, when the restoration industry is overtaxed, there is a temptation to rush in without following proper procedures. Some jurisdictions require asbestos surveys and a notification process many days before work begins. Some good-intentioned contractors may try to expedite demolition projects by seeking waivers or releases of liability to skirt the rules. Not so fast! Some releases are enforceable in Texas, but many are not! 

It is not unusual for businesses to seek releases of liability for negligence or even gross negligence. The more serious the wrong, the more difficult it is to be released from liability for it. Some courts in Texas believe that releases for gross negligence violate public policy and should not be enforced. Definitely ask for a release if the customer refuses your recommendations on an issue that could lead to secondary damage or bodily injury. 

Releases are subject to the Texas Fair Notice Requirements, which essentially stands for the proposition that a business must have very good evidence that a customer was aware of a release and had a good understanding of what rights were being released. Written releases must be specific and conspicuous. This means that they must not be buried in fine print. A good practice is to put them in bold, capital letters. They must be presented in a way that would capture the attention of a reasonable person. 

Add Some Teeth to Improve Collection Chances 

Contractors have much better leverage in collections when their contracts contain provisions for attorneys’ fees, collection costs, late fees, service charges, and interest. Unlike many states, Texas has some serious teeth to its lien statute, which states that the court “shall” award costs and attorney’s fees in a lien foreclosure action.² 

Customers Must Pay Deductibles

It’s a crime in Texas to pay or offer to pay policyholder’s deductible or to rebate all or part of a deductible. It’s also a crime for a policyholder to submit a claim for charges that have been padded to offset the deductible. Texas allows insurers to deny claims when the deductible is not paid. The deductible protects the carrier by ensuring the policyholder has some skin in the game. Contractors are coming to Texas in droves from all of the country, in response to the catastrophe resulting from the severe winter weather of 2021. Unfortunately, some of these contractors are “all hat and no cattle.”

The Texas Hold’em: Mechanic’s Liens

Of course, the most powerful collection tool is the mechanic’s lien. A lien is a legal hold on property to secure a debt. To fix a lien on Texas residential property, a written contract must usually be executed before the work is performed. Unlike any other state law I have seen, to protect the right to lien the home of a married person, the remediation contract must be signed by both spouses, even if the other spouse’s name is not on the property! Further, the contract must be filed with the county clerk where the homestead is located.³ 

Use Lump Sum Prices Whenever Possible

Everyone hates sticker shock. After decades of collecting money for remediation contractors, I cannot overstate the point that fixed price contracts are much easier to enforce than “time and materials contracts.” I

 know what you’re thinking: “Ed, it’s impossible to state a price for emergency service before work begins!” I respectfully disagree. The problem is that emergency service work authorizations often obligate the contractor to return the property to its pre-loss condition. The price for that is usually impossible to accurately determine at the outset, but it’s not necessary to commit to that result the moment you walk on the job. 

It’s totally unnecessary to scope an entire project just to start the stabilization process! The better approach is to go in stages, pricing each one as you go. Write a scope for an initial set of services that will definitely be necessary, and agree on a lump sum price for that. Explain that water damage is progressive, and establish an understanding that drying times are difficult to predict. Return on day two or day three, taking moisture meter readings, revisiting the scope and executing change orders as necessary to bring the project to conclusion. For example, an initial scope could be six air movers and a dehumidifier for three days, and ten labor hours for the lump sum price of x dollars, to be followed by a change order for additional services, if needed. If you have the customer’s agreement to the price for each stage of work, they have no argument that they “would not have hired you if they knew it was going to cost so much.”

Assignment of Benefits

A great way restoration contractors keep insurance companies honest is to obtain an assignment of rights under a claim. A properly drafted assignment allows the contractor to make a claim directly against an insurance company that would otherwise be impossible. 

Most insurance policies contain provisions stating that the policies cannot be assigned. Most states do not apply these “anti-assignment” provisions to the assignment of rights under an individual claim. These are called “post-loss assignments of benefits.” Texas is in the minority of jurisdictions that apply the anti-assignment provisions to post-loss assignments, so the typical assignment of benefits probably will not work in Texas. However, Texas law allows the written assignment of an interest in a cause of action, which means that a contractor can receive the right to pursue a claim against an insurance company for breach of the policy.

Encourage customers to read the contract! Do not rush a customer into signing a contract. Texas is wary of contractors who get signatures on contracts with blanks in them, especially when the blanks are later filled in with terms that are not favorable to the customer. This can lead to severe legal consequences for the contractor, so simply don’t ask a customer to sign a contract with blanks in it. If space is inadvertently left blank, immediately bring this to the attention of the customer, explain how you believe the blank should be filled in, and try to reach an agreement, memorialized in a signed change order. In an impasse on a fundamental term of the contract, contact a Texas lawyer and discuss whether it is best for all concerned to cancel the contract. 

Whether required by law or not, all restoration contracts should be in writing.⁴ Thorough communications and good contracts mirroring those communications greatly reduce the chance of conflict and collection problems. 

This article is for general information and is not intended to be legal advice. Rather than relying on hearsay or entertaining magazine articles, to start getting the slack out of your rope, read the actual law. If you’d like a free copy of some of the important Texas rules for disaster remediation contracts, just send an email to [email protected] with “Texas Rules” in the subject line. 

If you’re working on the 2021 Texas freeze, just remember: this ain’t their first rodeo. Git-R-Done! 

¹ Texas Business & Commerce Code Section 58.003

² Texas Property Code Section 53.156

³ Texas Property Code Section 53.254

⁴ This is not to say that the failure to execute a written contract will always deprive contractors of the right to payment in all jurisdictions. 

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Ed Cross, “The Restoration Lawyer,” represents restorers nationwide from offices in Palm Desert, California and Honolulu, Hawaii. His firm drafts restoration contracts, collects money for restorers and represents them in litigation. He is the Restoration Contractor Advocate for the Restoration Industry Association. He can be reached at (760) 773-4002 or by email at [email protected]. For information about how to document a file to accelerate collections, visit EdCross.com/collections. 

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Assignments: The Basic Law

The assignment of a right or obligation is a common contractual event under the law and the right to assign (or prohibition against assignments) is found in the majority of agreements, leases and business structural documents created in the United States.

As with many terms commonly used, people are familiar with the term but often are not aware or fully aware of what the terms entail. The concept of assignment of rights and obligations is one of those simple concepts with wide ranging ramifications in the contractual and business context and the law imposes severe restrictions on the validity and effect of assignment in many instances. Clear contractual provisions concerning assignments and rights should be in every document and structure created and this article will outline why such drafting is essential for the creation of appropriate and effective contracts and structures.

The reader should first read the article on Limited Liability Entities in the United States and Contracts since the information in those articles will be assumed in this article.

Basic Definitions and Concepts:

An assignment is the transfer of rights held by one party called the “assignor” to another party called the “assignee.” The legal nature of the assignment and the contractual terms of the agreement between the parties determines some additional rights and liabilities that accompany the assignment. The assignment of rights under a contract usually completely transfers the rights to the assignee to receive the benefits accruing under the contract. Ordinarily, the term assignment is limited to the transfer of rights that are intangible, like contractual rights and rights connected with property. Merchants Service Co. v. Small Claims Court , 35 Cal. 2d 109, 113-114 (Cal. 1950).

An assignment will generally be permitted under the law unless there is an express prohibition against assignment in the underlying contract or lease. Where assignments are permitted, the assignor need not consult the other party to the contract but may merely assign the rights at that time. However, an assignment cannot have any adverse effect on the duties of the other party to the contract, nor can it diminish the chance of the other party receiving complete performance. The assignor normally remains liable unless there is an agreement to the contrary by the other party to the contract.

The effect of a valid assignment is to remove privity between the assignor and the obligor and create privity between the obligor and the assignee. Privity is usually defined as a direct and immediate contractual relationship. See Merchants case above.

Further, for the assignment to be effective in most jurisdictions, it must occur in the present. One does not normally assign a future right; the assignment vests immediate rights and obligations.

No specific language is required to create an assignment so long as the assignor makes clear his/her intent to assign identified contractual rights to the assignee. Since expensive litigation can erupt from ambiguous or vague language, obtaining the correct verbiage is vital. An agreement must manifest the intent to transfer rights and can either be oral or in writing and the rights assigned must be certain.

Note that an assignment of an interest is the transfer of some identifiable property, claim, or right from the assignor to the assignee. The assignment operates to transfer to the assignee all of the rights, title, or interest of the assignor in the thing assigned. A transfer of all rights, title, and interests conveys everything that the assignor owned in the thing assigned and the assignee stands in the shoes of the assignor. Knott v. McDonald’s Corp ., 985 F. Supp. 1222 (N.D. Cal. 1997)

The parties must intend to effectuate an assignment at the time of the transfer, although no particular language or procedure is necessary. As long ago as the case of National Reserve Co. v. Metropolitan Trust Co ., 17 Cal. 2d 827 (Cal. 1941), the court held that in determining what rights or interests pass under an assignment, the intention of the parties as manifested in the instrument is controlling.

The intent of the parties to an assignment is a question of fact to be derived not only from the instrument executed by the parties but also from the surrounding circumstances. When there is no writing to evidence the intention to transfer some identifiable property, claim, or right, it is necessary to scrutinize the surrounding circumstances and parties’ acts to ascertain their intentions. Strosberg v. Brauvin Realty Servs., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998)

The general rule applicable to assignments of choses in action is that an assignment, unless there is a contract to the contrary, carries with it all securities held by the assignor as collateral to the claim and all rights incidental thereto and vests in the assignee the equitable title to such collateral securities and incidental rights. An unqualified assignment of a contract or chose in action, however, with no indication of the intent of the parties, vests in the assignee the assigned contract or chose and all rights and remedies incidental thereto.

More examples: In Strosberg v. Brauvin Realty Servs ., 295 Ill. App. 3d 17 (Ill. App. Ct. 1st Dist. 1998), the court held that the assignee of a party to a subordination agreement is entitled to the benefits and is subject to the burdens of the agreement. In Florida E. C. R. Co. v. Eno , 99 Fla. 887 (Fla. 1930), the court held that the mere assignment of all sums due in and of itself creates no different or other liability of the owner to the assignee than that which existed from the owner to the assignor.

And note that even though an assignment vests in the assignee all rights, remedies, and contingent benefits which are incidental to the thing assigned, those which are personal to the assignor and for his sole benefit are not assigned. Rasp v. Hidden Valley Lake, Inc ., 519 N.E.2d 153, 158 (Ind. Ct. App. 1988). Thus, if the underlying agreement provides that a service can only be provided to X, X cannot assign that right to Y.

Novation Compared to Assignment:

Although the difference between a novation and an assignment may appear narrow, it is an essential one. “Novation is a act whereby one party transfers all its obligations and benefits under a contract to a third party.” In a novation, a third party successfully substitutes the original party as a party to the contract. “When a contract is novated, the other contracting party must be left in the same position he was in prior to the novation being made.”

A sublease is the transfer when a tenant retains some right of reentry onto the leased premises. However, if the tenant transfers the entire leasehold estate, retaining no right of reentry or other reversionary interest, then the transfer is an assignment. The assignor is normally also removed from liability to the landlord only if the landlord consents or allowed that right in the lease. In a sublease, the original tenant is not released from the obligations of the original lease.

Equitable Assignments:

An equitable assignment is one in which one has a future interest and is not valid at law but valid in a court of equity. In National Bank of Republic v. United Sec. Life Ins. & Trust Co. , 17 App. D.C. 112 (D.C. Cir. 1900), the court held that to constitute an equitable assignment of a chose in action, the following has to occur generally: anything said written or done, in pursuance of an agreement and for valuable consideration, or in consideration of an antecedent debt, to place a chose in action or fund out of the control of the owner, and appropriate it to or in favor of another person, amounts to an equitable assignment. Thus, an agreement, between a debtor and a creditor, that the debt shall be paid out of a specific fund going to the debtor may operate as an equitable assignment.

In Egyptian Navigation Co. v. Baker Invs. Corp. , 2008 U.S. Dist. LEXIS 30804 (S.D.N.Y. Apr. 14, 2008), the court stated that an equitable assignment occurs under English law when an assignor, with an intent to transfer his/her right to a chose in action, informs the assignee about the right so transferred.

An executory agreement or a declaration of trust are also equitable assignments if unenforceable as assignments by a court of law but enforceable by a court of equity exercising sound discretion according to the circumstances of the case. Since California combines courts of equity and courts of law, the same court would hear arguments as to whether an equitable assignment had occurred. Quite often, such relief is granted to avoid fraud or unjust enrichment.

Note that obtaining an assignment through fraudulent means invalidates the assignment. Fraud destroys the validity of everything into which it enters. It vitiates the most solemn contracts, documents, and even judgments. Walker v. Rich , 79 Cal. App. 139 (Cal. App. 1926). If an assignment is made with the fraudulent intent to delay, hinder, and defraud creditors, then it is void as fraudulent in fact. See our article on Transfers to Defraud Creditors .

But note that the motives that prompted an assignor to make the transfer will be considered as immaterial and will constitute no defense to an action by the assignee, if an assignment is considered as valid in all other respects.

Enforceability of Assignments:

Whether a right under a contract is capable of being transferred is determined by the law of the place where the contract was entered into. The validity and effect of an assignment is determined by the law of the place of assignment. The validity of an assignment of a contractual right is governed by the law of the state with the most significant relationship to the assignment and the parties.

In some jurisdictions, the traditional conflict of laws rules governing assignments has been rejected and the law of the place having the most significant contacts with the assignment applies. In Downs v. American Mut. Liability Ins. Co ., 14 N.Y.2d 266 (N.Y. 1964), a wife and her husband separated and the wife obtained a judgment of separation from the husband in New York. The judgment required the husband to pay a certain yearly sum to the wife. The husband assigned 50 percent of his future salary, wages, and earnings to the wife. The agreement authorized the employer to make such payments to the wife.

After the husband moved from New York, the wife learned that he was employed by an employer in Massachusetts. She sent the proper notice and demanded payment under the agreement. The employer refused and the wife brought an action for enforcement. The court observed that Massachusetts did not prohibit assignment of the husband’s wages. Moreover, Massachusetts law was not controlling because New York had the most significant relationship with the assignment. Therefore, the court ruled in favor of the wife.

Therefore, the validity of an assignment is determined by looking to the law of the forum with the most significant relationship to the assignment itself. To determine the applicable law of assignments, the court must look to the law of the state which is most significantly related to the principal issue before it.

Assignment of Contractual Rights:

Generally, the law allows the assignment of a contractual right unless the substitution of rights would materially change the duty of the obligor, materially increase the burden or risk imposed on the obligor by the contract, materially impair the chance of obtaining return performance, or materially reduce the value of the performance to the obligor. Restat 2d of Contracts, § 317(2)(a). This presumes that the underlying agreement is silent on the right to assign.

If the contract specifically precludes assignment, the contractual right is not assignable. Whether a contract is assignable is a matter of contractual intent and one must look to the language used by the parties to discern that intent.

In the absence of an express provision to the contrary, the rights and duties under a bilateral executory contract that does not involve personal skill, trust, or confidence may be assigned without the consent of the other party. But note that an assignment is invalid if it would materially alter the other party’s duties and responsibilities. Once an assignment is effective, the assignee stands in the shoes of the assignor and assumes all of assignor’s rights. Hence, after a valid assignment, the assignor’s right to performance is extinguished, transferred to assignee, and the assignee possesses the same rights, benefits, and remedies assignor once possessed. Robert Lamb Hart Planners & Architects v. Evergreen, Ltd. , 787 F. Supp. 753 (S.D. Ohio 1992).

On the other hand, an assignee’s right against the obligor is subject to “all of the limitations of the assignor’s right, all defenses thereto, and all set-offs and counterclaims which would have been available against the assignor had there been no assignment, provided that these defenses and set-offs are based on facts existing at the time of the assignment.” See Robert Lamb , case, above.

The power of the contract to restrict assignment is broad. Usually, contractual provisions that restrict assignment of the contract without the consent of the obligor are valid and enforceable, even when there is statutory authorization for the assignment. The restriction of the power to assign is often ineffective unless the restriction is expressly and precisely stated. Anti-assignment clauses are effective only if they contain clear, unambiguous language of prohibition. Anti-assignment clauses protect only the obligor and do not affect the transaction between the assignee and assignor.

Usually, a prohibition against the assignment of a contract does not prevent an assignment of the right to receive payments due, unless circumstances indicate the contrary. Moreover, the contracting parties cannot, by a mere non-assignment provision, prevent the effectual alienation of the right to money which becomes due under the contract.

A contract provision prohibiting or restricting an assignment may be waived, or a party may so act as to be estopped from objecting to the assignment, such as by effectively ratifying the assignment. The power to void an assignment made in violation of an anti-assignment clause may be waived either before or after the assignment. See our article on Contracts.

Noncompete Clauses and Assignments:

Of critical import to most buyers of businesses is the ability to ensure that key employees of the business being purchased cannot start a competing company. Some states strictly limit such clauses, some do allow them. California does restrict noncompete clauses, only allowing them under certain circumstances. A common question in those states that do allow them is whether such rights can be assigned to a new party, such as the buyer of the buyer.

A covenant not to compete, also called a non-competitive clause, is a formal agreement prohibiting one party from performing similar work or business within a designated area for a specified amount of time. This type of clause is generally included in contracts between employer and employee and contracts between buyer and seller of a business.

Many workers sign a covenant not to compete as part of the paperwork required for employment. It may be a separate document similar to a non-disclosure agreement, or buried within a number of other clauses in a contract. A covenant not to compete is generally legal and enforceable, although there are some exceptions and restrictions.

Whenever a company recruits skilled employees, it invests a significant amount of time and training. For example, it often takes years before a research chemist or a design engineer develops a workable knowledge of a company’s product line, including trade secrets and highly sensitive information. Once an employee gains this knowledge and experience, however, all sorts of things can happen. The employee could work for the company until retirement, accept a better offer from a competing company or start up his or her own business.

A covenant not to compete may cover a number of potential issues between employers and former employees. Many companies spend years developing a local base of customers or clients. It is important that this customer base not fall into the hands of local competitors. When an employee signs a covenant not to compete, he or she usually agrees not to use insider knowledge of the company’s customer base to disadvantage the company. The covenant not to compete often defines a broad geographical area considered off-limits to former employees, possibly tens or hundreds of miles.

Another area of concern covered by a covenant not to compete is a potential ‘brain drain’. Some high-level former employees may seek to recruit others from the same company to create new competition. Retention of employees, especially those with unique skills or proprietary knowledge, is vital for most companies, so a covenant not to compete may spell out definite restrictions on the hiring or recruiting of employees.

A covenant not to compete may also define a specific amount of time before a former employee can seek employment in a similar field. Many companies offer a substantial severance package to make sure former employees are financially solvent until the terms of the covenant not to compete have been met.

Because the use of a covenant not to compete can be controversial, a handful of states, including California, have largely banned this type of contractual language. The legal enforcement of these agreements falls on individual states, and many have sided with the employee during arbitration or litigation. A covenant not to compete must be reasonable and specific, with defined time periods and coverage areas. If the agreement gives the company too much power over former employees or is ambiguous, state courts may declare it to be overbroad and therefore unenforceable. In such case, the employee would be free to pursue any employment opportunity, including working for a direct competitor or starting up a new company of his or her own.

It has been held that an employee’s covenant not to compete is assignable where one business is transferred to another, that a merger does not constitute an assignment of a covenant not to compete, and that a covenant not to compete is enforceable by a successor to the employer where the assignment does not create an added burden of employment or other disadvantage to the employee. However, in some states such as Hawaii, it has also been held that a covenant not to compete is not assignable and under various statutes for various reasons that such covenants are not enforceable against an employee by a successor to the employer. Hawaii v. Gannett Pac. Corp. , 99 F. Supp. 2d 1241 (D. Haw. 1999)

It is vital to obtain the relevant law of the applicable state before drafting or attempting to enforce assignment rights in this particular area.

Conclusion:

In the current business world of fast changing structures, agreements, employees and projects, the ability to assign rights and obligations is essential to allow flexibility and adjustment to new situations. Conversely, the ability to hold a contracting party into the deal may be essential for the future of a party. Thus, the law of assignments and the restriction on same is a critical aspect of every agreement and every structure. This basic provision is often glanced at by the contracting parties, or scribbled into the deal at the last minute but can easily become the most vital part of the transaction.

As an example, one client of ours came into the office outraged that his co venturer on a sizable exporting agreement, who had excellent connections in Brazil, had elected to pursue another venture instead and assigned the agreement to a party unknown to our client and without the business contacts our client considered vital. When we examined the handwritten agreement our client had drafted in a restaurant in Sao Paolo, we discovered there was no restriction on assignment whatsoever…our client had not even considered that right when drafting the agreement after a full day of work.

One choses who one does business with carefully…to ensure that one’s choice remains the party on the other side of the contract, one must master the ability to negotiate proper assignment provisions.

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Title Tip: Do Your Homework on Assigning Contracts

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Assignment of a real estate contract is looked upon with suspicion by lots of folks. While it is not legal in all states, under Texas law, contracts are assignable unless there is a specific clause in the contract that prohibits it.

There are some sellers who become upset when they discover that the person buying their property is not really the person buying their property. That their buyer has sold the right to purchase the home to someone else at a higher price.

Assignment of a contract is when someone enters into a written agreement to purchase a property from a seller and then that person assigns their interest to someone else. Typically, this is done when the original purchaser is a wholesaler. We will call them the Assignor. They find a property, put the property under contract and then find someone else (an Assignee) to whom they sell the contract for a fee.

The Assignor hands off the contract’s benefits to the Assignee while the property is still under contract. They may do this without the consent of the seller. But … there’s always a but.

While the Assignor may sell his or her rights in the contract to an Assignee, it does not relieve the Assignor of his or her duties and obligations. The Assignor still has responsibilities to the seller under the terms of the contract. If the Assignee doesn’t perform under the contract, then the Assignor is in default. The Assignor usually maintains obligations under the contract. This is where you contact a real estate attorney if you have an issue.

Some people view the business of a real estate wholesaler as shady. They don’t like the idea of someone ‘flipping’ the contract for a higher price. However, wholesalers earn their living by legitimately finding bargains and reselling them at a profit. They usually target rundown or distressed properties. Then they find buyers who may be looking to remodel or flip the property. Like anyone, they do it to earn a profit.

Maybe the disdain is because the wholesaler doesn’t actually purchase the home. They’re a middleman. Folks who oppose the idea of assigning a contract feel that the purchaser should only enter into a contract to purchase a property if they honestly intent to purchase the property.

Since anyone being paid in the transaction must be disclosed on the closing statement, the seller can see that there is another buyer paying more for the property. That doesn’t usually happen until closing time. Then money and the property changes hands. The buyer is the Assignee. The Assignor never takes title or possession of the property.

The Buyer/Assignee may then rehab the property and resell it. Like a board game, the property then passes to someone else.

The opinions expressed are of the individual author for informational purposes only and not for the purpose of providing legal advice. Contact an attorney to obtain advice for any particular issue or problem.

Lydia Blair (formerly Lydia Player) was a successful Realtor for 10 years before jumping to the title side of the business in 2015. Prior to selling real estate, she bought, remodeled and sold homes (before house flipping was an expression). She’s been through the real estate closing process countless times as either a buyer, a seller, a Realtor, and an Escrow Officer. As an Escrow Officer for Allegiance Title at Preston Center, she likes solving problems and cutting through red tape. The most fun part of her job is handing people keys or a check.

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CandysDirt.com welcomes articles and op-eds from our readers and brand partners. Think you have a great story to tell? Send us a note at [email protected] .

Great article Lydia!!! So many agents think that the Buyer on a contract must have “AND/OR ASSIGNS” at the end of the Buyer’s name for a contract to be assignable but that is simply NOT true. Contracts are assignable unless the contract specifically prohibits it!

Great article, Lydia! The wholesale market is very active in DFW. Almost every investment group I know teaches it as a method to make a profit. I’ve seen MLS listed properties come across through my inbox as investor “deals”. Realtors and Investors alike – Do your research!

Great real world example and explanation of when assignment happens in Texas Real Estate, thank you!

In the original purchase agreement there was mention of a survey alta and title report. Each stated 10 days for review. It stated it would be ordered then buyer pays. In the assignment contract it states under Florida laws. But the deal is in Texas. The buyer in the assignment wants to see the survey and the title, do they have the right so see those?

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Wholesaling in Texas Real Estate

Sale and Assignment of Earnest Money Contracts by David J. Willis J.D., LL.M.

Introduction

Wholesaling is the term for getting a property under contract and then selling that contract to a real estate investor who typically does fix-up work before re-selling the property at a profit—all within a reasonably brief timeframe. There are, of course, other wholesaling scenarios and contracts may be assigned more than once.

Both the Texas legislature and TREC have moved in recent years toward greater regulation of the business of sale and assignment of earnest money contracts. Current applicable law is discussed in detail below.

Assignability of a Contract

An earnest money contract that is destined to be assigned should expressly state that it is assignable. This obvious first step is often omitted by amateurs.

A common way to list the buyer in paragraph 1 of the TREC contract is (for example) “ABC LLC and/or its assigns.” This helpful but not really sufficient for wholesaling. Time and space permitting, careful lawyers would prefer a more comprehensive provision such as:

It is expressly agreed that this contract may be assigned at any time by Buyer before closing without prior notice to or consent by Seller. Seller unconditionally agrees: (1) that the effect of any such assignment will be to immediately relieve the person presently named as Buyer of any further obligations under the contract; (2) to accept the assignee as Buyer; and (3) to timely and without object cooperate in the execution and delivery of closing documents, including a warranty deed, according to the terms of this contract.

Since the available line on the TREC 1-4 form is just too short for this longer and more thorough clause, an investor involved in the business of wholesaling should consider including a custom attorney-drafted special provisions addendum. There is no substitute for such an assignability addendum if there is to be a smooth and successful sale and assignment of the earnest money contract to a substitute buyer.

Even if the contract is expressly designed to be assignable, it is always a good idea to attach the seller-owner’s written consent to any assignment instrument. More on this below.

Two Approaches

There are two main approaches to the business of selling and assigning earnest money contracts.

The First Method: One Step

In the first method, an earnest money contract is sold as a one-time, one-document event that is entirely independent from closing of the sale of the property. In other words, there is no executory due-diligence phase—no gap in time—in anticipation of a later finalization at a future closing. The full consideration is paid now, a final assignment instrument is executed, and the assignor (the original buyer under the contract) leaves the picture permanently.

Consideration usually consists of an assignment fee plus reimbursement for the down payment previously posted by the contract assignor. The assignee of the contract then assumes the role of buyer of the property and goes forward to closing of the property sale. No additional involvement by the contract assignor (now gone) is required.

The Second Method: Two Steps

The second approach is more complex. Instead of a one-time, one document event, the assignment process moves forward (or at least should move forward) in several distinct steps:

(1) Agreement to Assign . An interim/executory agreement is executed. This is an agreement to assign the earnest money contract (upon certain terms and conditions) in anticipation of a final assignment that will occur more or less simultaneously with a future closing of the sale of the property. The key drafting point to understand here is that there is major difference between an agreement to assign and the final assignment.

The interim agreement recites contingencies and critical deal points such as whether or not the final assignment of the contract will be made “as is,” in the contract’s present condition, and without representation, warranty, or recourse, express or implied. (The alternative is to include representations and warranties plus a means of recourse if the seller of the property fails to sign over a deed at closing.)

(2) Deposit . As consideration for the agreement to assign, the assignee pays a non-refundable deposit which is less than the full assignment fee that will be due at closing (but will be credited towards it).

(3) Due Diligence by Assignee . The time between execution of the interim agreement and the date of closing of the property sale may be used by the proposed assignee as a due-diligence period. The agreement to assign may contain provisions for accessing information about the contract and the property along with a provision for unilateral termination if the assignee decides not to proceed.

(4) Closing. At the property closing there is a two-step process (or back-to-back closings). In order to wind up the assignment, the contract assignee pays the balance of the assignment fee and refunds the earnest money to the contract assignor as required by the agreement to assign. The assignment should then be finalized by a “Sale and Assignment of Earnest Money Contract.” The assignment process thus concludes. The assignee now “owns” the earnest money contract, which really means that he now stands in the shoes of the buyer for purposes of moving forward with closing of the property sale (conveyance of title by warranty deed).

The obvious advantage to the above approach, at least for the buyer of the contract, is that only a deposit is required to begin the assignment process—not full payment of the entire assignment fee and earnest money refund to the contract assignor. Full payment is not due until closing when it is clear that the seller of the property has appeared and is ready to execute and deliver a warranty deed. The contract assignee thus risks less up-front money by using this approach.

Collapsing the Steps

One often sees an attempt to collapse these steps (in the documentary sense) by means of a single abbreviated and combined instrument that purports to join interim/executory and final assignment provisions within the same instrument. The result is muddled at best, akin to trying to combine an earnest money contract for the sale of property with the actual transfer of title in a deed. These steps are conceptually and transactionally separate, and that separation should be maintained in order to achieve a correct and durable legal outcome.

The details of wholesaling transactions can vary widely. This is an investment arena full of determined DIYers (using junk forms from the Internet that are non-specific to Texas) and many wholesale assignment transactions fail as a result.

LAW APPLICABLE TO WHOLESALING

Before delving into further practical aspects of the wholesaling process, we should stop and take a look at applicable law.

Occupations Code Licensing Requirement

Is a real estate broker’s license required in order to engage in wholesaling? Section 1101.002.A of the Occupations Code answers this question with a definite maybe depending on how one defines the brokerage of real estate. Chapter 1101 states that a real estate broker “means a person who, in exchange for a commission or other valuable consideration or with the expectation of receiving a commission or other valuable consideration, performs for another person one of the following acts . . . deals in options on real estate, including buying, selling, or offering to buy or sell options on real estate. . . .” An executed earnest money contract can be considered a kind of option to buy real estate. It definitely represents an interest in real estate. So if one is buying or selling such contracts (engaging in wholesaling) then a broker’s license may be required. More on this below.

Occupations Code Disclosure Requirement

Section 1101.0045 of the Occupations Code offers a loophole for wholesalers who are working without a broker’s license, but only so long as they make express disclosure that what they are selling is merely an equitable interest —as opposed to a legal interest . The difference can be challenging for non-lawyers to understand; however, an equitable interest means an interest that is less tangible, less certain, and more contingent than a solid and present legal interest. The statute reads:

OCC Sec. 1101.0045. Equitable Interests in Real Property

(a) A person may acquire an option or an interest in a contract to purchase real property and then sell or offer to sell the option or assign or offer to assign the contract without holding a license issued under this chapter if the person: (1) does not use the option or contract to purchase to engage in real estate brokerage; and (2) discloses in writing the nature of the equitable interest to any seller or potential buyer.

(b) A person selling or offering to sell an option or assigning or offering to assign an interest in a contract to purchase real property without disclosing the nature of that interest as provided by Subsection (a)(2) is engaging in real estate brokerage.

OCC Section 1101.0045 wants wholesalers to make full disclosure, which means making it clear that what is being transferred is not the property itself but only an equitable right to acquire the property subject to the terms and conditions of the contract being assigned. Accordingly, wholesalers who assign contracts are not illegally acting as real estate brokers if they fully disclose the nature of the interest they are selling. The difference between a broker’s license being required or not required comes down to disclosure.

Texas Administrative Code Disclosure Requirement

TAC contains TREC rules applicable to real estate license holders. Rule 535.6 states:

22 TAC Sec. [TREC Rule] 535.6. Equitable Interests in Real Property

(a) A person may acquire an option or enter into a contract to purchase real property and then sell or offer to sell the option or assign or offer to assign the interest in the contract without having a real estate license if the person: (1) does not use the option or contract to purchase to engage in real estate brokerage; and (2) discloses the nature of their equitable interest to any potential buyer.

(b) A person selling or offering to sell an option or assigning or offering to assign an interest in a contract to purchase real property without disclosing the nature of that interest to a potential buyer is engaging in real estate brokerage.

(c) A license holder who is engaging in real estate brokerage by selling or buying or offering to sell or buy an option or assigning or offering to assign an interest in a contract to purchase real property must disclose to any potential seller or buyer that the principal is selling or buying an option or assigning an interest in a contract and does not have legal title to the real property.

(d) A license holder acting on his or her own behalf or in a capacity described by §535.144(a) who is selling an option or assigning an interest in a contract to purchase real property must disclose to any potential buyer that the license holder is selling an option or assigning an interest in a contract and that the license holder does not have legal title to the real property.

This TREC rule echoes a theme found in the Real Estate License Act, the Property Code, and case law: full disclosure is always the safer route whether one is a license holder or not.

Property Code Disclosure Requirements

The Property Code sets out two disclosure requirements (in Sections 5.0205 and 5.086) that apply in the context of the sale and assignment of earnest money contracts:

Prop. Code Sec. 5.0205. Equitable Interest Disclosure

Before entering into a contract to sell an option or assign an interest in a contract to purchase real property, a person must disclose in writing to (1) any potential buyer that the person is selling only an option or assigning an interest in a contract and the person does not have legal title to the real property; and (2) [to] the owner of the real property that the person intends to sell an option or assign an interest in a contract.

This is the second disclosure requirement:

Prop. Code Sec. 5.086. Equitable Interest Disclosure

Before entering into a contract, a person selling an option or assigning an interest in a contract to purchase real property must disclose to any potential buyer that the person is selling only an option or assigning an interest in a contract and that the person does not have legal title to the real property.

These sections of the Property Code apply to everyone whether licensed or not. Every seller-assignor (wholesaler) must comply.

Reading the above statutes together, it should be clear that wholesaling without providing the required equitable interest disclosure (to the property owner and the buyer-assignee of the contract) can get an investor in double trouble, both for violating the Property Code and potentially for brokering real estate without a license.

Equitable Interest Disclosure

The following proposed wording at or near the top of the contract assignment would likely satisfy equitable interest disclosure requirements:

EQUITABLE INTEREST DISCLOSURE PURSUANT TO TEXAS PROPERTY CODE SECTIONS 5.0205 AND 5.086: THIS INSTRUMENT REPRESENTS ONLY AN OPTION TO PURCHASE REAL PROPERTY OR AN ASSIGNMENT OF AN INTEREST IN REAL PROPERTY. IT IS NOT A SALE OF THE PROPERTY OR A TRANSFER OF TITLE TO THE PROPERTY. ASSIGNOR DOES NOT HAVE LEGAL TITLE TO THE PROPERTY. ASSIGNOR IS NOT A REAL ESTATE BROKER AND HAS NOT GIVEN ASSIGNEE REAL ESTATE ADVICE. CONSULT AN ATTORNEY PRIOR TO EXECUTING THIS DOCUMENT IF YOU DO NOT UNDERSTAND IT.

The disclosure is probably best inserted beneath the customary notice of confidentiality rights that is required by Texas county clerks for recordable instruments.

Note that a buyer-assignee of an earnest money contract should probably want the assignment instrument to be recorded. Why? To insure that the contract will not later be sold by an unscrupulous seller-assignor to someone else.

THE ASSIGNMENT INSTRUMENT

General features of the assignment.

The assignment instrument is often entitled “Sale and Assignment of Earnest Money Contract” or “Assignment of Contract” or something similar. We will refer to it simply as the assignment.

It goes without saying that the assignment should adequately describe both: (1) the main features of the contract and (2) the underlying real property. In order to make the assignment a complete package, it is good practice to attach a copy of the contract as an exhibit. If there is a lengthy metes and bounds property description (rather than the usual lot and block) then this should be attached as well.

Assignment of a contract is comparable to assigning a promissory note since many of the same principles apply. The main difference is that earnest money contracts, unlike notes, are not negotiable instruments subject to the Uniform Commercial Code. Even so, these two types of assignments share a number of characteristics:

(1) the advisability of thorough due diligence by the prospective buyer-assignee, which requires not only an examination of the terms of the contract itself but also the underlying realty;

(2) the general preference on the part of the assignor to make the transfer “as is” and without recourse, to the extent possible;

(3) the inclusion and limitation of representations and warranties by the seller-assignor plus a method of recourse if the property seller fails to perform;

(4) the period during representations and warranties will survive, if at all; and

(5) the requirement that the seller-assignor disclose any material issues, facts, or conditions that could reasonably influence the buyer-assignee’s decision to buy or not buy the contract.

Failure by the seller-assignor to disclose known defects or adverse conditions in either the contract or the underlying realty (if justifiably relied upon by the buyer-assignee) constitutes fraud.

Representations and Warranties by Assignor

An assignment may include extensive representations and warranties, limited reps and warranties, or no reps and warranties at all—in which case the assignment is made entirely “as is” and without recourse against the assignor. It should be obvious that these issues need to be made clear in the instrument, but one often sees assignments that ignore reps and warranties altogether in the interest of “keeping it short.” Internet junk forms are particularly deficient in this respect.

A poorly-written assignment that does not address the full range of reps and warranties (and how they may be limited or excluded) is an engraved invitation to a lawsuit. If this subject is not thoroughly addressed, either or both parties may assume that reps and warranties exist when they do not, or they may later assert that reps and warranties were somehow implied in the course of dealing between the parties. Either outcome can lead to litigation involving a lot of finger-pointing and he-said-she-said allegations. Dodging reps and warranties in the interest of document brevity is amateurish and dangerous. Critical legal issues do not go away merely because they are ignored.

Covenants and Agreements

When it comes to duties and obligations of seller-assignor and buyer-assignee, clarity and express written provisions are important. Nothing oral should be relied upon. Nothing should be assumed or implied. For example, a well-drafted assignment would include agreement by the assignor to promptly deliver the original contract and any related documentation to the assignor. The assignee should agree to be bound by the earnest money contract and perform accordingly as the new buyer thereunder. Both parties should agree to take such other and further action, including the execution and delivery of additional documents, as may be reasonable or necessary to effectuate the assignment.

Recourse in Event the Contract or Closing Fails

As is the case with promissory notes, contracts can be assigned with or without recourse against the assignor. Recourse comes in three varieties: none, full, or limited. No recourse means what it says—if the contract does not close, then the assignee is stuck with a failed contract and is solely responsible for pursuing remedies against the selling property owner. Full recourse means that the buyer-assignee gets to give the contract back to the seller-assignor if the transaction fails to close through no fault of the buyer-assignee. Limited recourse can mean different things, but it falls somewhere between no recourse and full recourse. In any of these cases, the assignment should provide that the availability of recourse—whether none, full, or limited—is circumscribed within a specific time period.

It is often the case that earnest money contracts are assigned without recourse, meaning “as is.” If sale of a contract is to be entirely “as is,” an effective clause for this purpose is essential.

Drafting of an “as is” clause should be carefully done, since the seller-assignor will want not only to disclaim assurances regarding the transferred earnest money contract but also any reps or warranties concerning the condition and value of the underlying real property.

Oral statements should of course be disclaimed.

Express Consent from the Owner of the Property

It is important—vital, in fact—for the buyer-assignee of an earnest money contract to be sure that the property owner consents to the assignment and will honor the buyer-assignee’s status as the new buyer under the contract. Otherwise, the assignee may face a hostile seller at closing who refuses to accept the assignee of the contract as the legitimate buyer of the property.

The cooperation of the property seller should not be simply assumed. After all, the buyer-assignee of the contract does not want to be put in the position of being forced to sue the property owner for specific performance—an expensive event that could easily destroy the profitability of the transaction. Accordingly, the assignment should include owner-consent wording along the following lines:

I/We, the undersigned, am/are listed as Seller in the Contract which is the subject of this Sale and Assignment. I/We give my/our unconditional consent to the sale and assignment of the Contract to the above-named Assignee, and I/we agree to in all respects recognize and cooperate with Assignee as the rightful Buyer under the Contract to purchase the Property.

The equitable interest disclosure requirement of the Property Code could be the beginning of a future regulatory scheme for the wholesaling of earnest money contracts. Abuses and mishaps in this area make news from time to time, so Texas legislatures may decide to build on existing disclosure requirements and expand beyond them, just as occurred in the case of executory contracts in 2005. The pressure for regulation may also increase as cases appear that seek to bring wholesaling within the reach of the Deceptive Trade Practices Act.

Information in this article is provided for general informational and educational purposes only and is not offered as legal advice upon which anyone may rely. The law changes. No attorney-client relationship is created by the offering of this article. This firm does not represent you unless and until it is expressly retained in writing to do so. Legal counsel relating to your individual needs and circumstances is advisable before taking any action that has legal consequences. Consult your tax advisor as well.

Copyright © 2024 by David J. Willis. All rights reserved. Mr. Willis is board certified in both residential and commercial real estate law by the Texas Board of Legal Specialization. More information is available at his website, www.LoneStarLandLaw.com .

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Is a Verbal Agreement Legally Binding in Texas?

Most verbal agreements are legally binding in Texas. A handshake can be legally binding in Texas if the agreement is otherwise a valid contract. However, certain agreements must be in writing by law before they become binding.

Texas’s verbal agreement law comes from Texas common law, the Uniform Commercial Code, and other Texas state statutes.

Suppose your neighbor offers you 50 of his home-grown watermelons for $50.00 on the 1st of next month. You accept, but when the 1st of the month arrives, your neighbor says he will not honor your agreement. He has decided to sell the watermelons to a major grocery store instead to make a larger profit. Can you sue him to bind him to your oral contract? How do you know when you should contact an attorney about your claim?

The answer depends on whether there was a valid verbal contract. Contract litigation can be complex, and lawsuits involving binding oral contracts can be more expensive because they are difficult to prove. If you object to an oral contract or need to enforce a verbal agreement in Texas, The Hunnicutt Law Group can help.

Does a Verbal Agreement Hold up in Court in Texas?

For any agreement to be enforceable in court, it must have all the elements of a valid contract. The law requires the parties to express mutual consent and exchange something of value (the “consideration”) to have an enforceable contract.

Mutual Consent

The parties must show mutual consent before a court will enforce either a formal, written contract or a handshake agreement. To have mutual consent, the parties must freely communicate their agreement and its terms to one another. It is as simple as an offer (“I offer to sell you 50 watermelons from my garden for $50 on the 1st of next month”) and acceptance (“I agree”). 

Consideration

For an agreement to hold up in court, there must be sufficient consideration.

Consideration requires an exchange of value. You can think of consideration as a requirement that each party to the deal give up something to get something else. The neighbor must give up the watermelons to get paid, and you must give up your $50.00 to get the watermelons. Therefore, there is sufficient consideration in your oral agreement. 

What Agreements Must Be in Writing?

Texas laws require some agreements to be in writing before a court will enforce them. The subjects of these agreements are so important that Texas says they must be in writing to prevent fraud. Texas lists these agreements in the state’s “ Statute of Frauds .” They include:

• Real estate agreements; 
• Agreements for the sale of goods valued at more than $500 ; 
• Agreements when a party cannot conceivably perform within one year;
• Loan agreements;
• Executory contracts (future obligations, like an equipment lease or development contract); and
• Agreements for oil or gas commissions.

Verbal agreements can cause disagreements about the contract’s terms. While the agreements specified by the law must be in writing, it is always a good idea to put your agreements in writing even if the Statute of Frauds doesn’t require it. 

Was There a Breach of Contract?

When you delivered payment for your neighbor’s watermelons on the 1st of the month, you performed your contractual obligation. When your neighbor refused to sell you the watermelons, he broke his promise. A broken promise in an agreement is a breach of contract , and you may be able to recover damages.

To recover for breach of contract in Texas, you must prove by a preponderance of the evidence that: 

• There was a valid contract (see above); 
• You fulfilled your contractual obligations; 
• The other party failed to perform; and 
• You suffered damages or harm as a result of the other party’s breach. 

If the court finds a breach of contract , the breaching party must compensate the injured party to put them in the same position as if they had performed. In the case of a denied sale, your neighbor would have to pay you for the loss of the bargain. 

In conclusion, a verbal agreement is legally binding in Texas unless the agreement must be in writing under Texas’s Statute of Frauds. If not required, oral contracts are enforceable. 

Hunnicutt Law Group Is Here to Answer Your Questions

If you have questions about verbal agreements in Texas or verbal contracts in Texas, do not hesitate to contact us at The Hunnicutt Law Group. We handle complex matters for local businesses, large companies, and individuals across the country. In addition, Mr. Hunicutt has over 25 years of experience with breach-of-contract claims in federal and state courts and arbitration. The Hunnicutt Law Group offers results-oriented and client-focused results and can help protect the viability of your business today. 

J. Stephen Hunnicutt

Our founding attorney, Stephen Hunnicutt, set the precedent for a commitment to excellence and a focus on the client. With 25 years of experience, he has handled countless cases involving business litigation and commercial litigation. Over the years, Mr. Hunnicutt has worked as in-house counsel for a Fortune 500 energy company, a large firm, a small firm, and finally, in his own practice.

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• Implementing Global Human Resources

When to Select the Employment Model

By default, every enterprise uses the single-assignment employment model. To select a different employment model for the enterprise or for individual legal employers, use the Manage Enterprise HCM Information and Manage Legal Entity HCM Information tasks in the Setup and Maintenance work area respectively.

This topic discusses the choices you can make and identifies any restrictions.

You can select a different employment model for individual legal employers.

Single Assignment v. Multiple Assignment

If you select:

Single Assignment or Single Assignment with Contract, all work relationships in the enterprise or legal employer are restricted to a single assignment.

Multiple Assignments, all work relationships in the enterprise or legal employer can include one or more assignments; therefore, work relationships can include a single assignment when appropriate.

Multiple Contracts with Single Assignment, all assignments in the enterprise or legal employer can be associated with its individual contract.

Changing the Employment Model for the Enterprise or Legal Employer

In general, you can change the employment model for the enterprise or legal employer both during initial implementation and later. However, there are some restrictions on switching to and from particular employment models.

The following table identifies the valid and restricted switching options.