Assignment and Assumption of Contracts General Rules
The lease is a mixture of benefits and obligations, which can be unilateral or bilateral. The “assignor”, or a party to a lease, can assign the benefits to a third party, the “assignee” but cannot assign the obligations without the consent of the other contracting party or the non-assigning party. The assignee can assume the obligations without the consent of the non-assigning party, but this does not relieve the assignor of its primary liability for the obligations. Nor does it enable the non-assigning party to sue the assignee for a default. In the event of default, the non-assigning party can sue the assignor who could in turn sue the assignee who had assumed the obligations and either expressly or by implication agreed to indemnify the assignor for the assumed obligations. The point here is that benefits can be assigned without consent of the non-assigning party, but obligations cannot. Nonetheless, if the benefit is expressly not assignable or because of its nature is not assignable, or if the lease provides a mechanism for its assignment, then these express provisions would modify the right of the assignor to assign a benefit. This is known as the Doctrine of Privity of Contract, and it has value in some instances, like other contractual rules, but causes unnecessary complexity and rigidity in relation to assignments.
Privity of Estate
This is a concept applicable to leasehold covenants making them enforceable by purchasers of the reversion or the leasehold estate of the tenant. Such obligations and rights touching and concerning the land, run with the land.
Assignment of Leases
In commercial real estate transactions, the purchaser of commercial property often takes an assignment of the existing leases containing benefits and obligations in favour of both the landlord and the tenant. The tenant’s covenant to pay rent and numerous other covenants relating to the operation of the property or paying costs relating to the property are the benefits the landlord receives. In turn, the landlord is obliged to deliver quiet possession during the term and could also have an obligation to make structural or capital repairs. In the opposite position, the tenant has the right to receive quiet possession and it is obliged to pay rent. More than just a series of covenants, the lease also creates an interest in land in favour of the tenant. Due to this interest in land, privity of estate is created, which the law uses as a mechanism to bind assignees to honour the covenants in the lease.
The extent to which a lease contains obligations and benefits relating to the land, run with the land, and are binding on the assignee, are outlined according to the Commercial Tenancies Act. Such things bind the acquiror of the reversion or the leasehold estate even if the lease is not expressly assigned to the acquiror. Thus, even in the absence of an assignment of the lease and an assumption of the obligations of the landlord under the lease by a purchaser, the Commercial Tenancies Act effectively assigns those obligations.
Equities between the assignor and the non-assigning party are a factor to the assignee of a contract, whether or not the assignee has knowledge of the equities. Such concept of a purchase for value without notice does not apply to assigned leases. Therefore, the assignee has to obtain an estoppel certificate from the non-assigning party and either provide consideration for such certificate or actually rely upon the certificate, a reliance that is real and reasonable. Generally, in such instances, the assignor introduces representations and warranties relating to contractual defaults where the contractual risks are not high. It is not uncommon for the assignee to ensure that the lease has not otherwise been assigned. Section 53(1) of The Conveyancing and Law of Property Act categorically maintains the equities between the assignor and the non-assigning party.
Privity of Contract
The doctrines of privity of estate and privity of contract delineate the position of an assignee of a lease. The doctrine of privity of contract states that no person is entitled to or is bound by the terms of the contract to which he is not an original party, a method to protect the concept of consideration, so that only the person who gave consideration for the promise or bargain could enforce it. In view of this, an assignee of a contract is not entitled to the benefits of the contract or bound by the obligations of the contract since there is no privity of contract between the assignee and the non-assigning party. It means the assignee cannot ask the non-assigning party to deliver to it the benefits of the contract nor can the non-assigning party force the assignee to honour the contract. This part of the stipulation has been reversed by The Conveyance and Law of Property Act, leaving the remaining part in force. So, the assignor loses entitlement to the benefits of the contract, but remains responsible for the liabilities under the contract and retains an indemnity against the assignee for any breach.
The doctrine of privity of contract does not bar a contracting party from assigning the benefits of the contract to the assignee or the assignee from assuming the obligations under the contract, which is a personal contract between the assignor and the assignee without affecting the non-assigning party to the contract. The idea is to let a party to a contract to know who it is he or she is obliged to perform. A doctrine limiting the benefits and obligations of the contract to the parties to it makes it easy for both parties and the court to determine who is entitled to enforce the contract and who has the obligations under the contract.
Know your legal rights as a tenant or a landlord. For more information about renting in Toronto, and how you can use Ontario law to your advantage, contact the lawyers at Levy Zavet PC (Levy Zavet) in Toronto, Ontario.