deed of equitable assignment

Equitable Assignment: Everything You Need to Know

An equitable assignment is one that does not fulfill the statutory criteria for a legal assignment, but is binding and upheld by the courts in the interest of equability, justice, and fairness. 3 min read updated on September 19, 2022

An equitable assignment is one that does not fulfill the statutory criteria for a legal assignment, but is binding and upheld by the courts in the interest of equability, justice, and fairness.

Equitable Assignment

An equitable assignment may not appear to be self-evident by the law's standard, but it presents the assignee with a title that is protected and recognized in equity. It's based on the essence of a declaration of trust; specifically, essential fairness and natural justice. As long as there is valuable consideration involved, it does not matter if a formal agreement is signed. There needs to be some sort of intent displayed from one party to assign and the other party to receive.

The evaluation of a righteous equitable assignment is completed by determining if a debtor would rationally pay the debt to another party alleging to be the assignee. Equitable assignments can be created by:

• The assignor informing the assignee that they transferred a right to them
• The assignor instructing the other party to release their obligation from the assignee and place it instead on the assignor

The only part of an agreement that can be assigned is the benefit. Generally speaking, there is no prerequisite for the written notice to be received or given. The significant characteristic that separates an equitable assignment from a legal assignment is that most of the time, an equitable assignee may not take action against a third party. Instead, it must rely on the guidelines governing equitable assignments. In other words, the equitable assignee must team up with the assignor to take action.

The Doctrine of Equitable Assignment in Wisconsin

In Dow Family LLC v. PHH Mortgage Corp ., the Wisconsin Supreme Court issued in favor of the doctrine of equitable assignment. The case was similar to many other foreclosure cases, except this one came with a twist. Essentially, Dow Family LLC purchased a property and the property owner insisted the mortgage on the property had been paid off. However, in actuality, it wasn't. 

Prior to the sale, the mortgage on the property was with PHH Mortgage Corp. When PHH went to foreclose on the mortgage, Dow Family LLC contested it. There was one specific rebuttal that caught the attention of the Wisconsin Supreme Court. The official mortgage on record was with MERS, an appointee for the original lender, U.S. Bank.

Dow argued that PHH couldn't foreclose on the property because the true owner was MERS. Essentially, Dow was stating that the mortgage was never assigned to PHH. Based on this argument, PHH utilized the doctrine of equitable assignment.

Based on a case from 1859, Croft v. Bunster, the court determined that the security for a note is equitably assigned when the note is assigned without a need for an independent, written assignment. Additionally, Dow contended that the statute of frauds prohibits the utilization of the doctrine, mainly because it claimed every assignment on a property must be formally recorded.

During the case, Dow argued that the MERS system, which stored the data regarding the mortgage, was fundamentally flawed. According to the court, the statute of frauds was satisfied because the equitable assignment was in accordance with the operation of law. Most importantly, the court avoided all consideration regarding the MERS system, concluding it was not significant in their decision. 

The outcome was a major win for lenders, as they were relying on the doctrine specifically for these types of circumstances.

Most experts agree that this outcome makes sense in the current mortgage-lending environment. This is due to the fact that it is still quite common for mortgages to be bundled up into mortgage-backed securities and sold on the secondary market.

Many economists claim that by not requiring mortgages to be recorded each time a transfer is completed, the loans are more easily marketed to investors. Additionally, debtors know who their current mortgage company is because the new lender must always notify the current borrower in order to receive payment. It was determined that recording and documenting the mortgage merely provides a signal to the rest of the world that the property owner secures a debt.

If you need help with an equitable assignment, you can  post your job  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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Assigning debts and other contractual claims - not as easy as first thought

Harking back to law school, we had a thirst for new black letter law. Section 136 of the Law of the Property Act 1925 kindly obliged. This lays down the conditions which need to be satisfied for an effective legal assignment of a chose in action (such as a debt). We won’t bore you with the detail, but suffice to say that what’s important is that a legal assignment must be in writing and signed by the assignor, must be absolute (i.e. no conditions attached) and crucially that written notice of the assignment must be given to the debtor.

When assigning debts, it’s worth remembering that you can’t legally assign part of a debt – any attempt to do so will take effect as an equitable assignment. The main practical difference between a legal and an equitable assignment is that the assignor will need to be joined in any legal proceedings in relation to the assigned debt (e.g. an attempt to recover that part of the debt).

Recent cases which tell another story

Why bother telling you the above?  Aside from our delight in remembering the joys of debating the merits of legal and equitable assignments (ehem), it’s worth revisiting our textbooks in the context of three recent cases. Although at first blush the statutory conditions for a legal assignment seem quite straightforward, attempts to assign contractual claims such as debts continue to throw up legal disputes:

• In  Sumitomo Mitsui Banking Corp Europe Ltd v Euler Hermes Europe SA (NV) [2019] EWHC 2250 (Comm),  the High Court held that a performance bond issued under a construction contract was not effectively assigned despite the surety acknowledging a notice of assignment of the bond. Sadly, the notice of assignment failed to meet the requirements under the bond instrument that the assignee confirm its acceptance of a provision in the bond that required the employer to repay the surety in the event of an overpayment. This case highlights the importance of ensuring any purported assignment meets any conditions stipulated in the underlying documents.
• In  Promontoria (Henrico) Ltd v Melton [2019] EWHC 2243 (Ch) (26 June 2019) , the High Court held that an assignment of a facility agreement and legal charges was valid, even though the debt assigned had to be identified by considering external evidence. The deed of assignment in question listed the assets subject to assignment, but was illegible to the extent that the debtor’s name could not be deciphered. The court got comfortable that there had been an effective assignment, given the following factors: (i) the lender had notified the borrower of its intention to assign the loan to the assignee; (ii) following the assignment, the lender had made no demand for repayment; (iii) a manager of the assignee had given a statement that the loan had been assigned and the borrower had accepted in evidence that he was aware of the assignment. Fortunately for the assignee, a second notice of assignment - which was invalid because it contained an incorrect date of assignment - did not invalidate the earlier assignment, which was found to be effective. The court took a practical and commercial view of the circumstances, although we recommend ensuring that your assignment documents clearly reflect what the parties intend!
• Finally, in Nicoll v Promontoria (Ram 2) Ltd [2019] EWHC 2410 (Ch),  the High Court held that a notice of assignment of a debt given to a debtor was valid, even though the effective date of assignment stated in the notice could not be verified by the debtor. The case concerned a debt assigned by the Co-op Bank to Promontoria and a joint notice given by assignor and assignee to the debtor that the debt had been assigned “on and with effect from 29 July 2016”. A subsequent statutory demand served by Promontoria on the debtor for the outstanding sums was disputed on the basis that the notice of assignment was invalid because it contained an incorrect date of assignment. Whilst accepting that the documentation was incapable of verifying with certainty the date of assignment, the Court held that the joint notice clearly showed that both parties had agreed that an assignment had taken place and was valid. This decision suggests that mistakes as to the date of assignment in a notice of assignment may not necessarily be fatal, if it is otherwise clear that the debt has been assigned.

The conclusion from the above? Maybe it’s not quite as easy as first thought to get an assignment right. Make sure you follow all of the conditions for a legal assignment according to the underlying contract and ensure your assignment documentation is clear.

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Out-Law Guide 4 min. read

Assignment and novation

19 Aug 2011, 4:40 pm

Assignment involves the transfer of an interest or benefit from one person to another. However the 'burden', or obligations, under a contract cannot be transferred.

Assignment in construction contracts

As noted above only the benefits of a contract can be assigned - not the burden. In the context of a building contract:

• the employer may assign its right to have the works constructed, and its right to sue the contractor in the event that the works are defective – but not its obligation to pay for the works;
• the contractor may assign its right to payment of the contract sum - but not its obligation to construct the works in accordance with the building contract or its obligation to meet any valid claims, for example for defects.

After assignment, the assignee is entitled to the benefit of the contract and to bring proceedings against the other contracting party to enforce its rights. The assignor still owes obligations to the other contracting party, and will remain liable to perform any part of the contract that still has to be fulfilled since the burden cannot be assigned. In practice, what usually happens is that the assignee takes over the performance of the contract with effect from assignment and the assignor will generally ask to be indemnified against any breach or failure to perform by the assignee.  The assignor will remain liable for any past liabilities incurred before the assignment.

In construction contracts, the issue of assignment often arises in looking at whether collateral warranties granted to parties outside of the main construction contract can be assigned.

Funders may require the developer to assign contractual rights against the contractor and the design team as security to the funder, as well as the benefit of performance bonds and parent company guarantees. The developer may assign such rights to the purchaser either during or after completion of the construction phase.

Contractual assignment provisions

Many contracts exclude or qualify the right to assignment, and the courts have confirmed that a clause which provides that a party to a contract may not assign the benefit of that contract without the consent of the other party is legally effective and will extend to all rights and benefits arising under the contract, including the right to any remedies. Other common qualifications on the right to assign include:

• a restriction on assignment without the consent of the other party, whether or not such consent is not to be unreasonably withheld or delayed;
• only one of the parties may assign;
• only certain rights may be assigned – for example, warranties and indemnities may be excluded;
• a limit on the number of assignments - as is almost always the case in respect of collateral warranties;
• a right to assign only to a named assignee or class of assignee.

Note that in some agreements where there is a prohibition on assignment, it is sometimes possible to find the reservation of specific rights to create a trust or establish security over the subject matter of the agreement instead.

Legal and equitable assignment

The Law of Property Act creates the ability to legally assign a debt or any other chose in action where the debtor, trustee or other relevant person is notified in writing. If the assignment complied with the formalities in the Act it is a legal assignment, otherwise it will be an equitable assignment.

Some transfers can only take effect as an equitable assignment, for example:

• an oral assignment;
• an assignment by way of charge;
• an assignment of only part of the chosen in action;
• an assignment of which notice has not been given to the debtor;
• an agreement to assign.

If the assignment is equitable rather than legal, the assignor cannot enforce the assigned property in its own name and to do so must join the assignee in any action. This is designed to protect the debtor from later proceedings brought by the assignor or another assignee from enforcing the action without notice of the earlier assignment.

Security assignments

Using assignment as a way of taking security requires special care, as follows:

• if the assignment is by way of charge, the assignor retains the right to sue for any loss it suffers caused by a breach of the other contract party;
• if there is an outright assignment coupled with an entitlement to a re-assignment back once the secured obligation has been performed, it is an assignment by way of legal mortgage.

Please see our separate Out-Law guide for more information on types of security.

Restrictions on assignment

There are restrictions on the assignment of certain types of interest on public policy grounds, as follows:

• certain personal contracts – for example, a contract for the employment of a personal servant or for the benefit of a motor insurance policy cannot be assigned;
• a bare cause of action or 'right to sue' where the assignee has no commercial interest in the subject matter of the underlying transaction cannot be assigned;
• certain rights conferred by statute – for example, a liquidator's powers to bring wrongful trading proceedings against a director – cannot be assigned;
• an assignment of a contract may not necessarily transfer the benefit of an arbitration agreement contained in the contract;
• the assignment of certain rights is regulated – for example, the assignment of company shares or copyright.

If you want to transfer the burden of a contract as well as the benefits under it, you have to novate. Like assignment, novation transfers the benefits under a contract but unlike assignment, novation transfers the burden under a contract as well.

In a novation the original contract is extinguished and is replaced by a new one in which a third party takes up rights and obligations which duplicate those of one of the original parties to the contract. Novation does not cancel past rights and obligations under the original contract, although the parties can agree to novate these as well.

Novation is only possible with the consent of the original contracting parties as well as the new party. Consideration (the 'price' paid, whether financial or otherwise, by the new party in return for the contract being novated to it) must be provided for this new contract unless the novation is documented in a deed signed by all three parties.

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Deed of assignment of equitable interest in land | Practical Law

Deed of assignment of equitable interest in land

Practical law uk standard document 0-590-6686  (approx. 9 pages).

The Law Dictionary

Your Free Online Legal Dictionary • Featuring Black’s Law Dictionary, 2nd Ed.

EQUITABLE ASSIGNMENT Definition & Legal Meaning

Definition & citations:.

A result that falls short of meeting the requirements of a legal assignment, yet, in the interest of fairness and justice, will be enforced by the courts, and documented as valid.

This article contains general legal information but does not constitute professional legal advice for your particular situation. The Law Dictionary is not a law firm, and this page does not create an attorney-client or legal adviser relationship. If you have specific questions, please consult a qualified attorney licensed in your jurisdiction.

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Assignments: why you need to serve a notice of assignment

Catherine phillips.

PSL Principal Associate

It's the day of completion; security is taken, assignments are completed and funds move. Everyone breathes a sigh of relief. At this point, no-one wants to create unnecessary paperwork - not even the lawyers! Notices of assignment are, in some circumstances, optional. However, in other transactions they could be crucial to a lender's enforcement strategy. In the article below, we have given you the facts you need to consider when deciding whether or not you need to serve notice of assignment.

What issues are there with serving notice of assignment?

Assignments are useful tools for adding flexibility to banking transactions. They enable the transfer of one party's rights under a contract to a new party (for example, the right to receive an income stream or a debt) and allow security to be taken over intangible assets which might be unsuitable targets for a fixed charge. A lender's security net will often include assignments over contracts (such as insurance or material contracts), intellectual property rights, investments or receivables.

An assignment can be a legal assignment or an equitable assignment. If a legal assignment is required, the assignment must comply with a set of formalities set out in s136 of the Law of Property Act 1925, which include the requirement to give notice to the contract counterparty.

The main difference between legal and equitable assignments (other than the formalities required to create them) is that with a legal assignment, the assignee can usually bring an action against the contract counterparty in its own name following assignment. However, with an equitable assignment, the assignee will usually be required to join in proceedings with the assignor (unless the assignee has been granted specific powers to circumvent that). That may be problematic if the assignor is no longer available or interested in participating.

Why should we serve a notice of assignment?

The legal status of the assignment may affect the credit scoring that can be given to a particular class of assets. It may also affect a lender's ability to effect part of its exit strategy if that strategy requires the lender to be able to deal directly with the contract counterparty.

The case of General Nutrition Investment Company (GNIC) v Holland and Barrett International Ltd and another (H&B) provides an example of an equitable assignee being unable to deal directly with a contract counterparty as a result of a failure to provide a notice of assignment.

The case concerned the assignment of a trade mark licence to GNIC . The other party to the licence agreement was H&B. H&B had not received notice of the assignment. GNIC tried to terminate the licence agreement for breach by serving a notice of termination. H&B disputed the termination. By this point in time the original licensor had been dissolved and so was unable to assist.

At a hearing of preliminary issues, the High Court held that the notices of termination served by GNIC , as an equitable assignee, were invalid, because no notice of the assignment had been given to the licensee. Although only a High Court decision, this follows a Court of Appeal decision in the Warner Bros Records Inc v Rollgreen Ltd case, which was decided in the context of the attempt to exercise an option.

In both cases, an equitable assignee attempted to exercise a contractual right that would change the contractual relationship between the parties (i.e. by terminating the contractual relationship or exercising an option to extend the term of a licence). The judge in GNIC felt that "in each case, the counterparty (the recipient of the relevant notice) is entitled to see that the potential change in his contractual position is brought about by a person who is entitled, and whom he can see to be entitled, to bring about that change".

In a security context, this could hamper the ability of a lender to maximise the value of the secured assets but yet is a constraint that, in most transactions, could be easily avoided.

Why not serve notice?

Sometimes it's just not necessary or desirable. For example:

• If security is being taken over a large number of low value receivables or contracts, the time and cost involved in giving notice may be disproportionate to the additional value gained by obtaining a legal rather than an equitable assignment.
• If enforcement action were required, the equitable assignee typically has the option to join in the assignor to any proceedings (if it could not be waived by the court) and provision could be made in the assignment deed for the assignor to assist in such situations. Powers of attorney are also typically granted so that a lender can bring an action in the assignor's name.
• Enforcement is often not considered to be a significant issue given that the vast majority of assignees will never need to bring claims against the contract counterparty.

Care should however, be taken in all circumstances where the underlying contract contains a ban on assignment, as the contract counterparty would not have to recognise an assignment that is made in contravention of that ban. Furthermore, that contravention in itself may trigger termination and/or other rights in the assigned contract, that could affect the value of any underlying security.

What about acknowledgements of notices?

A simple acknowledgement of service of notice is simply evidence of the notice having been received. However, these documents often contain commitments or assurances by the contract counterparty which increase their value to the assignee.

Best practice for serving notice of assignment

Each transaction is different and the weighting given to each element of the security package will depend upon the nature of the debt and the borrower's business. The service of a notice of assignment may be a necessity or an optional extra. In each case, the question of whether to serve notice is best considered with your advisers at the start of a transaction to allow time for the lender's priorities to be highlighted to the borrowers and captured within the documents.

For further advice on serving notice of assignment please contact Kirsty Barnes or Catherine Phillips  from our Banking & Finance team.

NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.

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Related Content

• practice notes (88)
• precedents (5)
• q&as (43)

Equitable assignment definition

What does equitable assignment mean.

assignment s can occur in equity when any of the requirements of legal assignment are not satisfied.

The assignor can inform the assignee that he transfers a right or rights to him or instruct the other party or parties to the agreement to discharge their obligations to the assignee. Only the benefit of an agreement may be assigned. There is no requirement for written notice to be given or received. The position of a party who wishes to be able to make an equitable transfer of obligations under the contract is the same as described under legal assignments.

View the related practice notes about Equitable assignment

Contracts required to be in writing.

This Practice Note considers the specific situations where a contract is required by law to be in writing: assignments, contracts for the sale of land, equitable mortgages, assents, transfers of shares, transfers of intellectual property rights, and guarantees.When a written contract is beneficial or a necessityContracts can be formed in one of three ways:•orally•by conduct, or•‘under hand’ (in writing)For more information on contract formation, see: Formation and interpretation—overview.Simple contracts are created in any of the above manners in ‘simple form’, whereas deeds must be executed in ‘solemn form’. See Practice Notes: Deeds and Executing documents—deeds and simple contracts.There are certain situations when a written contract is required by law or is necessary to satisfy registration requirements. Contracts are required by statute to be made or evidenced in writing for:•assignments•contracts for the sale of land (as opposed to the actual conveyance, which must be by deed)•equitable mortgages•assents•transfers of shares•transfers of intellectual property rights•guarantees‘Writing’ is defined in schedule 1 to the Interpretation Act 1978 (IA 1978) to include:‘typing, printing, lithography, photography and...

Transferring a loan by assignment

This Practice Note explains one of the key ways a lender can transfer a loan under English law to another lender—assignment. The other key ways are: •novation—see Practice Note: Transferring a loan by novation, and•sub-participation or risk–participation—see Practice Note: Selling a loan by sub-participationA loan (which is a debt) is a chose in action. A chose in action is something which is recoverable by legal action (as opposed to something which is physically possessed). As a basic principle, choses in action cannot be assigned at common law.Assignments of choses in action are therefore either:•statutory—often referred to as 'legal' assignments because they have an equivalent effect to legal assignments, or•equitableUnder English law, an assignment is a transfer of rights; it does not transfer obligations (in contrast to a novation—see Practice Note: Transferring a loan by novation).This Practice Note discusses:•requirements for a legal assignment•how legal assignments differ from equitable assignments•the advantages and disadvantages of assignments as a method of transfer, and •the approach taken to assignments in the Loan Market Association (LMA)...

Discover our 88 Practice Notes on Equitable assignment

View the related precedents about Equitable assignment

Ireland—notice of assignment of contract—from assignor.

Ireland—Notice of assignment of contract—from assignor [Headed notepaper of the assignor] To: [Insert name and address of recipient (ie the other party to the contract that was assigned)] [Insert date] This Precedent is a letter notice of assignment, which informs a party to a commercial contract that the other party (the assignor) has assigned all or part of its rights, title, benefit and interest in the contract to a third party (the assignee). It assumes that the commercial contract which was assigned is governed by the laws of Ireland. In the case of an assignment of contractual rights, giving the contract counterparty written notice of the assignment is one of the key requirements for the creation of a statutory assignment under section 28 of the Supreme Court of Judicature Act (Ireland) 1877 (SCJA(I) 1877 (IRL)) (ie an assignment which takes effect as a legal assignment). Section 28 of SCJA(I) 1877 (IRL) does not include any specific requirements about the form of the notice which needs to be given. This Precedent...

Ireland—Debenture: single company chargor—bilateral—all monies

Bilateral debenture for a chargor incorporated as a limited company in Ireland to secure the chargor’s obligations to the lender on an all monies basis Using this Precedent Debenture This is a precedent bilateral Debenture which can be used to take security over all of the assets of a company. This drafting note explains the context in which this precedent Debenture might be used as well as the features of this precedent Debenture and the assumptions on which it is based. Negotiating a security package—general principles A lender's primary concern is that it is repaid. If a borrower fails to repay a loan the lender may have to go to court to obtain a judgment for payment of the sum owed to it. Even if it obtains such judgment this does not mean that the lender will be repaid in full or even in part. For example, if the borrower is insolvent, the lender may have to share the borrower's available assets with other creditors and will only receive part...

Dive into our 5 Precedents related to Equitable assignment

View the related q&as about Equitable assignment

If a tenant fails to complete the formalities for assigning a commercial lease to an assignee, and the assignee takes possession of the premises with the landlord’s knowledge and consent, would there be an equitable assignment of the lease.

If a tenant fails to complete the formalities for assigning a commercial lease to an assignee, and the assignee takes possession of the premises with the landlord’s knowledge and consent, would there be an equitable assignment of the lease? What are the formality requirements for assigning a commercial lease? There are three main formalities for assigning a lease. First, the contract for the assignment of a lease needs to be made in writing, signed, incorporating all the terms which the parties have expressly agreed in one document or, if contracts are exchanged, in each document (section 2 of the Law of Property (Miscellaneous Provisions) Act 1989 (LP(MP)A 1989). Second, the assignment of a lease must be made by way of a deed, even if the lease itself was created orally (section 53 of the Law of Property Act 1925; Crago v Julian. Third, if the lease being assigned is a registered lease, the assignment must be completed by registering it at HM Land Registry (section 27(1)(a) of the Land...

Person 1 is the freehold owner of Plot A and also had a lease of the neighbouring plot, Plot B. Person 1 grants a lease to Person 2 of Plots A and B. Person 1's leasehold tenure of Plot B comes to an end—Person 2 now ends up with a split reversion landlord situation, having Person 1 as landlord with control over Plot A and the original freehold owner of Plot B as its other landlord. Are the landlords jointly and severally liable for landlord covenants under the lease (which is holding over)?

Person 1 is the freehold owner of Plot A and also had a lease of the neighbouring plot, Plot B. Person 1 grants a lease to Person 2 of Plots A and B. Person 1's leasehold tenure of Plot B comes to an end—Person 2 now ends up with a split reversion landlord situation, having Person 1 as landlord with control over Plot A and the original freehold owner of Plot B as its other landlord. Are the landlords jointly and severally liable for landlord covenants under the lease (which is holding over)? A split reversion (also known as a severed reversion) most commonly arises when a landlord, after granting a lease of a property, disposes of their reversionary interest in part of the property by selling part of the property to a third party. As a result of that dealing, the tenant (who remains in occupation of the whole property under the original lease) finds themselves with two landlords in respect of different parts of the property...

See the 43 Q&As about Equitable assignment

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Banking & finance—november 2023 case round-up.

Banking & Finance analysis: This News Analysis provides a summary of the cases we have alerted in Banking & Finance for November 2023.

Property Disputes weekly highlights—30 November 2023

This week's edition of Property Disputes weekly highlights includes: the introduction of the Leasehold and Freehold Reform Bill to Parliament, a Supreme Court decision on the power to grant newcomer injunctions, analysis of a High Court decision on rescinding the mistaken discharge of mortgages, a Court of Appeal decision on section 5 notices where the transaction involves the disposal of an estate or interest in more than one building, and a decision on proprietary estoppel in cases of void land contracts.

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The Interrelationship Between Set-off and Assignment

Louise Gullifer QC (Hon) Rouse Ball Professor of English Law, University of Cambridge

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A recent decision in the Court of Appeal, Bibby Factors Northwest Ltd v HFD Ltd [2015] EWCA Civ 1908 , concerns the extent to which an assignee of debts is bound by set-offs arising between the assignor and the debtor. 

The law in this area is reasonably clear, but somewhat complicated, and was summarised succinctly and accurately by the Court of Appeal in paragraphs [30] to [32] of the decision:

‘First the debtor may show that the money claimed is not due, in whole or in part, either because of some substantive defence or some right of abatement.

Second, the debtor may have a contractual right of set off.

Third, the debtor may have a cross claim which equity will regard him as entitled to set off against the debt such that only the balance may be claimed. If so, and subject to any question of estoppel, the factor, as assignee, can be in no better position than his assignor, whether the assignment takes effect as a statutory assignment or in equity. It is no matter that the cross claim had not accrued due before the debtor had notice of the assignment.

Fourth, the debtor may have a cross claim which is independent of the claim against him in the sense that it does not fall into the category of a claim which forms the subject of an equitable set off. In such a case the factor/assignee cannot successfully be met by a cross claim which arose after the Customer/debtor had notice of the assignment.’

Bibby deals with one matter of possible uncertainty in this area, but others remain, some of which were raised but not decided in Bibby .  One such matter is discussed later in this blog, and other matters, such as the interaction with insolvency set-off, will be discussed in a later blog.'

The Bibby case concerned a factoring agreement, which provided for the sale of all present and future debts.  The assignor, who had for many years supplied goods to the debtor, was in administration and the factor (Bibby) sued the debtor on outstanding invoices.  The debtor claimed to set off, inter alia, rebates to which it was entitled under its contracts with the assignor, which, it said, constituted equitable set-off, and therefore could be relied upon whether or not they accrued before notice of assignment (under the third principle set out above).    

The chief ground on which Bibby challenged this allegation was to argue that the degree of closeness between the claim (on the invoices) and the cross-claim (the rebates) was insufficient to establish equitable set-off (according to the test set out by Rix LJ in Geldof Metaalconstructie NV v Simon Carves Limited [2010] EWCA Civ 667 ).  This was because the debtor should have informed the factor about the rebates once they realised that the claims were assigned, and, therefore, it was not ‘manifestly unjust to allow [the factor] to enforce payment without taking into account the cross-claim’, despite the fact that the claims and cross-claims were otherwise closely connected.

The Court of Appeal upheld the judge’s decision that the test for equitable set-off was satisfied.  There was no duty on the debtor to inform the factor about the rebates, nor was there a sufficiently clear representation as to the absence of rebates to give rise to an estoppel.  The court confirmed what had been made clear in the Geldof case: that there was only one test, which had two elements:

• the ‘close connection’ part was the formal element to the test, which was ‘to ensure that the doctrine of equitable set-off is based on principle and not discretion’; and
• the ‘unjust’ part was the functional element and was ‘to remind litigants and courts that the ultimate rationality of the regime is equity’ ( Geldof [43]).  

In very many cases it will be the closeness of the connection which gives rise to the manifest injustice, but there are some situations in which this can be rebutted by other matters.  One (at least where the court is deciding whether to award summary judgment on the claim) is the strength and calculability of the cross-claim.  For example, in Star Rider Ltd v Inntrepreneur Pub Co [1998] 1 EGLR 53, the speculative quantum of the cross-claim was one reason for holding that it was just to award summary judgment on the claim.  Another is the conduct of the cross-claimant, who cannot rely on his own wrongful conduct to manufacture a cross-claim ( Bluestorm Ltd v Portvale Holdings Ltd [2004] EWCA Civ 289 ).   

This analysis shows that the relevant question is whether it is manifestly unjust as between the claimant and the cross-claimant not to allow the cross-claim to be set off.   The assignee, since he can be in no better position than the assignor, takes subject to any set-off.  The conduct of the debtor vis a vis the assignee is irrelevant, unless it gives rise to an estoppel.  The decision of the Court of Appeal in Bibby confirms this reasoning (see paragraphs [38] and [48]. 

As a result, sensible receivables financiers who wish to know about potential cross-claims will both make enquiries themselves before making their advances and will make sure that their contracts with assignors include an obligation to inform them of such.  In the absence of a separate agreement, a factor assignee cannot oblige a debtor to pass on information about cross-claims.  While the assignment, once notice is given, creates a relationship between the assignee and the debtor in that the debtor must pay the assignee to obtain a good discharge, it cannot, of itself, impose any further obligations on the debtor.

Having come to this conclusion, there was no need for the Court of Appeal to consider independent set-off.  Tantalisingly, a point on this type of set-off that had been raised and considered at first instance is one on which there is little authority and considerable academic debate.  This rest of this blog is devoted to discussion of this point.

Under the fourth principle listed above, an assignee is not bound by an independent set-off between the assignor and the debtor which arises after notice of assignment has been given to the debtor.  The rationale for this rule is that once the debtor knows about the assignment he should not be able to erode the assignee’s rights by allowing further set-offs to accrue.  Bibby made the argument that the debtor had been notified ‘of the assignment’ at the time of the initial factoring agreement, and that all independent set-offs arising after that time could not be relied upon by the debtor.   

This raises the contentious question of whether a notice of assignment given in relation to future debts can prevent the debtor relying on independent set-offs which arise after the date of the notice but before the debt arises.  An assignment of a future debt takes effect immediately as a contract to assign, but the assignment does not take place until the debt comes into existence.  There is remarkably little modern authority on the effect of a notice of such an assignment which is given before the debt actually arises.  

It seems that such a notice will not be sufficient to make the assignment a statutory one, on the grounds that the section itself does not refer to agreements to assign, but only assignments.  Further, there are a number of (mainly nineteenth century) cases which establish that a notice given of a ‘mere expectancy’ is ineffective to establish priority under Dearle v Hall , so that another notice must be given after the debt arises to protect the priority position of the assignee.  Many of these cases were in the context of an army officer’s expectancy of a fund were he to be gazetted out of the army: the fund was a mere expectancy until the day the notice in the Gazette appeared, at which point it was held on trust for the officer by the army.  Not surprisingly, army officers often raised money on the strength of this expectancy, but the incumbrancer(s) had to keep serving notices daily on the army agents to try and be the first to give notice on the day of the Gazette (see Re Dallas [1904] 2 Ch 385)!     

The only case to mention the effectiveness of a notice of an assignment of a future debt in the context of set-off is also an army officer case ( Roxburgh v Cox (1881) LR 17 Ch D 520).  Here, the set-off arose the moment the Gazette notice appeared, and the notice of assignment was not given until the next day, so the point was not in issue (the assignee clearly took subject to the set-off).   Thus, Baggally LJ’s dictum that ‘any notice given by [the assignee] before the money came into the possession of [the army agents asserting the set-off] would have been ineffectual’ was obiter.    

The point is therefore an open one.  Opinion is divided.  Oditah (at 8.3 of Legal Aspects of Receivables Financing ) supports the view of Baggally LJ, as did the judge in Bibby at first instance.  However, Derham (at 17.29 of his magisterial book on set-off) and Philip Wood (at 16-119 of English and International Law of Set-Off , where he describes the view of Baggally LJ as ‘arbitrary and out of accord with realities’) support the view that notice given of an assignment of future debts marks the moment after which the accrual of independent set-offs do not bind the assignee.

There are also some obiter judicial remarks: Andrew Smith J at first instance in Dry Bulk Handy Holding Inc v Fayette International [2012] EWHC 2107 (Comm) [66] firmly supports Philip Wood’s view.  Mance J in Marathon Electrical Manufacturing Corp v Mashreqbank PSC [1997] 2 BCLC 460 at 466-467 appears to implicitly accept the Oditah’s view in relation to true future receivables (where the contract under which the receivable arises has not yet been entered into), but his discussion is focused on the fact that English law has a wide interpretation of ‘present receivables’ which includes any debts arising from existing contracts, even though they have not yet accrued.

The view that notice of an assignment of future debts is enough to prevent further independent set-offs being asserted against an assignee certainly accords with common sense, given the rationale for the rule mentioned earlier (that it is unconscionable for the debtor to reduce the assignee’s rights once he knows about the assignment).  It also accords with the practice of taking an assignment or a security interest over present and future debts: any notice would normally not differentiate between the two categories.

Further, as mentioned, the category of present debts is very wide, including debts which are payable, but also unearned rights to payment arising out of present obligations.  To distinguish between these and debts arising under future contracts seems perverse.  There is one qualification: the notice has to be of an ‘assignment’ (albeit inchoate, under the principle in Holroyd v Marshall ) rather than of a general agreement to assign, or of a floating charge.   There is authority establishing that it is only after the floating charge has crystallised (and notice given) that the debtor can no longer set off independent set-offs against the charge ( Biggerstaff v Rowatt’s Wharf Ltd [1896] 2 Ch 93).

The position argued for is also that which pertains under UCC Article 9 (9-404(a)(2) , the Canadian and New Zealand PPSAs, and the UNCITRAL draft Model law .  Under those instruments, notice (or knowledge) is of the ‘assignment’ or ‘security interest’ which can be given over future property.  Only under the Australian PPSA is the position potentially different, since section 80(1) provides that the cut-off point is ‘before the first time when payment by an account debtor to the transferor no longer discharges the obligation of the account debtor under subsection (8) to the extent of the payment’.  Presumably this point cannot arise until the relevant account has accrued, since only at that point can payment be made.

While it is a shame that the Bibby case did not prove a vehicle for deciding this point, the fact that it has not arisen directly for decision in an English law case shows that it does not cause all that many problems in practice.  This is, probably, partly because of the wider definition of ‘present debts’ and also partly because many set-offs relied upon in are equitable set-offs, which can be asserted against an assignee irrespective of the timing of notice.

In the context of notification receivables financing, notice of a facultative master agreement is unlikely to have any effect on set-off, as this would be merely a general agreement to assign (if that: it may be unilateral and therefore only binding if under seal) and not an assignment of future debts, that is, it would not have immediate effect once a debt came into existence.

Notice of a ‘whole turnover’ agreement, however, is more likely to raise the issue discussed above, as this agreement would be seen as an assignment in equity, taking effect as soon as the debts come into existence.  Of course, the terms of the contract are likely to be determinative.

Where financing is based on a fixed charge over receivables, this is likely to cover future debts, but notice to the debtors is unlikely to be given, except as a prelude to enforcement.

The issue discussed, therefore, is not an everyday problem, but a definitive answer (as provided in the codified systems mentioned) would improve certainty for assignees of debts (in whatever context) who wish to protect their value from future set-offs.

This article was first posted on the Commercial Law Centre blog. The original post can be found here .

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Federal Real Estate in a Turbulent Market, Part II

Special considerations for the purchase and sale of distressed assets leased to the government.

This is the second of a two-part series addressing special considerations for government lessors in the current commercial real estate market. Part I addressed the risks posed by government downsizing and early lease terminations. Part II discusses distressed assets and the unique challenges posed by distressed assets in two contexts: 1) lease expirations and government holdovers and 2) assignment of lessors' rights in the event of a change of ownership or assignment of claims.

As explained in detail below, distressed assets present a number of pitfalls and opportunities for lessors (and their lenders) with government tenants. The primary takeaway for all of the scenarios outlined below is that better outcomes will result from early, effective engagement and a sophisticated understanding of both the legal rules and the government's standard practices and policies.

Holdovers and Short-Term Extensions

Since the easing of the COVID-19 pandemic and the beginning of the government's return to office, there have been a number of acknowledgements from the White House, U.S. Office of Management and Budget (OMB) 1 and U.S. General Services Administration (GSA) that agencies should pause and reflect upon their space needs moving forward. The practical result of these policies has been that agencies have, for the past few years, been revisiting and reconsidering their long-term space needs, and this has resulted in a slowdown or, in some instances a pause, in procurements for new space.

The government's decision to pause its long-term lease procurements could not have come at a more inopportune time for government lessors. As noted in Part I of this series, commercial office vacancy rates in some markets are the highest they have been in decades, and many commercial real estate loans are coming due in 2024 and 2025. Against this backdrop of difficulties in the commercial real estate market, uncertainty with respect to government tenants' intentions at lease expiration has lessors seeking to understand their rights and remedies. In particular, once a government tenant goes into holdover, it becomes even more difficult to market or refinance a distressed asset. And it makes it nearly impossible to plan for a follow on tenant or – as is common with distressed assets – a complete redevelopment.

What, then, are the landlord's remedies for government tenants in holdover? First, note that the government cannot be evicted, even in the event that it stays past the expiration of the lease term. Though there is an implied duty to vacate inherent in every lease, 2 a breach of this duty entitles the lessor only to monetary damages; eviction is unavailable as a remedy because it would constitute an order of specific performance of a contract obligation, and neither the U.S. Court of Federal Claims nor the Boards of Contract Appeals have jurisdiction to entertain such a request under the Contract Disputes Act. See Podlucky v. United States , 2021 WL 2627130, at *2 (Fed. Cl. June 21, 2021) ("Plaintiff is, essentially, asking the court to order defendant to specifically perform its obligations under the contract. But a request for specific performance is equitable in nature, and falls outside this court's jurisdiction."), aff'd , 2022 WL 1791065, at *1 (Fed. Cir. June 2, 2022); Harmonia Holdings Group, LLC v. United States , 157 Fed. Cl. 292, 301–02 (2021) ("[Plaintiff] cannot co-opt the Court's bid protest jurisdiction simply by reframing its claims as alleged violations of procurement law and requesting injunctive relief (which is not available under the CDA)." (emphasis added)); Tenaska Washington Partners II, L.P. v. United States , 34 Fed. Cl. 434, 443–44 (1995) ("[S]pecific performance is not a remedy available against the United States, because sovereign immunity has not been waived for such relief[.]"); Pellegrini v. United States , 103 Fed. Cl. 47, 55 (2012) ("Equitable relief is not available to enjoin an alleged taking of private property for public use, duly authorized by law, when a suit for compensation can be brought against the sovereign subsequent to the taking." (quoting Ruckelshaus v. Monsanto Co. , 467 U.S. 986, 1016 (1984) (citation omitted)).

However, landlords do have some small amount leverage in negotiating the terms of extensions and standstill agreements. First, in the event of a holdover, the lessor "is entitled to the fair market value of the premises for the holdover period less what GSA has paid appellant during the holdover period." 3 See Cafritz Co. v. GSA , GSBCA No. 13525-REM, 98-2 BCA ¶ 29,936 (Aug. 3, 1998) (citing Rupert v. GSA , GSBCA No. 10523, 93-1 B.C.A. (CCH) ¶ 25243 (June 30, 1992)) (emphasis added). Similarly, "[t]he rent in the lease is evidence of rental value, but a landlord may establish a rental value greater than [current contract] rent." See Rupert v. GSA , GSBCA No. 10,523, 93-1 BCA 25,243 (June 30, 1992). So, if the fair market value rent is significantly higher than the rent provided in the lease, then landlords have some leverage to negotiate favorable terms and conditions of any lease amendments that extend the term and keep the government out of holdover.

Next, there are internal policies and incentives in place at the GSA to encourage contracting officers to avoid holdovers. Following the release of a 2015 U.S. Government Accountability Office (GAO) Report on the prevalence of short-term extensions and holdovers in GSA leasing, GSA committed to implement a program of setting goals for reductions in holdovers and, as part of that program, GSA maintains a "Key Performance Indicator" database that tracks holdovers and credits contracting officers who keep their leases out of holdover. This also provides the lessor with some amount of leverage to negotiate favorable extension terms.

So, while short-term lease extensions and holdovers are becoming more and more common, there is an opportunity for lessors to take advantage of the – admittedly limited – leverage these situations provide to negotiate rental increases and other concessions. 4 The best practice in this scenario is to identify expiring leases early, consider under what terms lease extensions might be acceptable and engage with government tenants and the contracting officer long before lease expiration. Lessors seeking to re-let the premises to other tenants or redevelop the property should ensure the government is aware of these plans and that any lease extension memorializes the potential impact a holdover would have. This may provide some entitlement to consequential damages in the event of a subsequent holdover.

Lessors should also be aware that the government's timeline for developing new lease requirements for succeeding leases begins three years out from lease expiration. This process involves a number of stakeholders – to include the tenant agency and its real estate and finance teams, as well as GSA – and typically includes a cost-benefit analysis to determine whether a succeeding lease would yield cost savings over a competitive procurement. See 48 C.F.R. § 570.402-6. Early in this period, engagement with the government can effectively shape the evaluation of succeeding leases versus competitive procurements.

Assigning Government Leases in Distressed Assets

Unlike traditional commercial leases, leases with the federal government cannot be assigned, either through sales contracts or through operation of law, in the event of a foreclosure or a receivership. A group of statutes, collectively referred to as the Anti-Assignment Acts, have been enacted to ensure the government doesn't run into a bait-and-switch scenario in which the government contracts with one entity, only to have it assign the contract to another. The statutes expressly prohibit any such assignment:

The party to whom the Federal Government gives a contract or order may not transfer the contract or order, or any interest in the contract or order, to another party. A purported transfer in violation of this subsection annuls the contract or order so far as the Federal Government is concerned, except that all rights of action for breach of contract are reserved to the Federal Government. 5

What this means as a practical matter is that unlike traditional commercial leases, the tenant – in this case, the federal government – has the authority to refuse to acknowledge a successor in interest to a landlord who no longer has title or control of the leased asset.

But while there is a blanket prohibition on the assignment of government contracts and leases, the law and the lease language provide three mechanisms for ultimate recognition of a new owner – or at least payment of rent – whether that owner obtains title through sale, foreclosure or some other operation of law: Novation, Assignment of Claims and Attornment.

Each of these three pathways for assignment of interest in a government lease has its benefits and drawbacks, and for each of these pathways to assignment, the status of a distressed asset can impact the cost-benefit analysis. For example, the question of whether the owner of a distressed asset remains solvent or has wound down its operations may impact whether and how the new owner or receiver seeks to execute a novation agreement – which typically must be executed by both parties to the transfer – or seeks another route.

Below, we describe each of these pathways and their requirements.

In light of the prohibition on unilateral assignment of government contracts and leases described above, the government has implemented a process to allow for assignment once both parties to the asset transfer and the government have all agreed on the terms of the transfer: novation. 6

The purpose of the novation process is to protect the government's interests. The Federal Acquisition Regulation (FAR) explicitly acknowledges this purpose at 48 C.F.R. § 42.1204(a), which gives the government the right to recognize a third party as the successor in interest to a government contract when it is in the government's interest to do so. Conversely, the government may exercise its discretion not to approve transfer of a lease or contract. Specifically, 48 C.F.R. § 42.1204(c) indicates that when it isn't in the government's interest to approve a transfer, the original party to the contract (which seeks to transfer the contract or lease) shall remain under contractual obligation to the government, and the contract or lease may be terminated should the original lessor or contract party not perform.

In practice, particularly in real estate, the government only very rarely refuses to recognize a successor in interest following the purchase and sale of real property that is leased to a government tenant once the prospective lessor has offered some evidence of the purchase and its ability to perform under the terms of the lease. But the process requires three parties to actively participate: the original lessor, the new lessor and the government.

For distressed assets, this process can become problematic. The original lessor may not be a willing participant in any assignment and, in some cases, the original lessor may no longer exist. Alternatively, the property may be managed by a receiver or a special servicer with legal authority to maximize the value of the distressed asset.

These situations will require deviation from the standard novation practices laid out in FAR Part 42.12. 7 First, the standard novation language may need to be amended from three-party form into a two-party form. Additionally, many of the required document submittals outlined in the lease and the FAR (parts 42.1204(e) and (f)) may not be available. 8 Finally, purchasers or lenders foreclosing on a borrower should consider whether they are willing or able to accept liability for all of the previous owner's acts and omissions, as the standard novation language requires.

The best way to approach the novation in the event of a sale of a distressed asset is to address these concerns early in the process. Novations often take several months to complete and, if there are any deviations from the standard language or deliverables based upon the distressed nature of the asset, the novation process can take even longer. Additionally, it is a best practice to engage early in obtaining a System for Award Management (SAM.gov) registration, as this can take several weeks (or longer) and is often the reason for delayed novation approvals; contracting officers cannot and will not recognize new lessors until they have completed this registration.

Assignment of Claims

Though assignment of government contracts is prohibited, the same statute that prohibits such assignments – 41 U.S.C. § 6305 – expressly allows for the assignment of rents due under a federal contract or lease. Specifically, this statute allows for the assignment of all rents due to "a bank, trust company, Federal lending agency, or other financing institution." Id .

The FAR 9 clause that implements this statute – 48 C.F.R. § 52.232-23 – provides as follows:

The Contractor, under the Assignment of Claims Act, as amended, 31 U.S.C. 3727, 41 U.S.C. 6305 (hereafter referred to as "the Act"), may assign its rights to be paid amounts due or to become due as a result of the performance of this contract to a bank, trust company, or other financing institution, including any Federal lending agency. The assignee under such an assignment may thereafter further assign or reassign its right under the original assignment to any type of financing institution described in the preceding sentence.

This right is permissive, meaning the lessor has the right to assign its rents at its discretion, provided such assignment is a complete assignment and is to a "bank, trust company, or other financing institution." Notably, the government does not have the right to refuse such a request, provided the assignee meets the criteria outlined in the clause. The statute provides that "an assignment under this subsection is a valid assignment for all purposes." 41 U.S.C. § 6305(b)(7).

GSA publishes a Leasing Desk Guide (LDG) that "contains authorities, policies, technical and procedural guides, and administrative limitations governing the acquisition by lease of real property" and that "appl[ies] to all PBS personnel engaged in the acquisition and administration of lease contracts." Id . The LDG also "applies to agencies leasing space under delegated authority from the General Services Administration (GSA)." This guide provides as follows with respect to the mechanics of assigning claims under GSA leases:

Note that the lease should not designate a different payee, except under rare circumstances where the lessor has designated a different payee through an Assignment of Claims . In such an instance, a Lease Amendment is necessary to process a change in payee. Such a change must be documented through a Lease Amendment, along with the executed Assignment of Clams. 10

In its LDG, GSA also provides a proposed subordination, nondisturbance and attornment (SNDA) agreement that addresses assignments of claims and rental payments, and this template confirms that the government will not recognize the lender as the payee until and unless the lessor and the government execute a lease amendment memorializing the assignment:

In accordance with Paragraph __ of the General Clauses of the Lease, Assignment of Claims, (48 C.F.R. 52.232-23) the Lessor may assign its rights to be paid to the Lender. Following such assignment, to be made in accordance with the Assignment of Claims Act, as amended, 31 USC 3727, and following the execution of a Supplemental Lease Agreement changing the named Payee in the Lease, the Lessee shall pay all rent and all additional rent to the Lender. Such assignment shall not be deemed to (a) cause the Lender to succeed to or to assume any obligations or responsibilities as the landlord under the Lease, all of which shall continue to be performed and discharged solely by the Landlord, or (b) relieve Landlord of any obligations under the Lease. 11

Finally, note that an assignment of claims does not allow the landlord and lender to avoid one of the more onerous obligations for government landlords: the SAM.gov registration. The FAR clause governing SAM registrations – 48 C.F.R. § 52.204-13, which is included in the General Clauses of GSA leases – provides that "Assignees [of claims] shall be separately registered in the SAM." Just as with more traditional novations, as a best practice, lenders anticipating either an assignment of claims or attornment (or both) should begin their SAM registrations sooner than later, as these can take several weeks to complete.

For distressed assets, there are a number of additional considerations that lessors and lenders should take into account. First, establishing the correct assignee may be difficult for assets in foreclosure, governed by receivership or under a special servicer arrangement; understanding the relationship and the order of precedence of the various stakeholders is key. Second, a lessor that is in default or has ceased functioning as a viable business may not be a willing participant in an assignment, in which case lenders should consider their rights to attornment, laid out below.

For lenders seeking to foreclose or to obtain a deed in lieu of foreclosure, there is a third option for recognition as the landlord: attornment. However, while government leases typically include a provision governing attornment (explained below), it's extremely rare to see the government take advantage of this option and treat lenders as the landlord without further action. Accordingly, lessors and lenders should not expect a simple attornment process and should instead plan on a traditional novation, albeit with some tailoring to address the unique circumstances surrounding the change in title.

First, most government leases 12 include a provision governing SNDAs 13 that provides as follows:

In the event of any sale of the premises or any portion thereof by foreclosure of the lien of any such mortgage, deed of trust or other security instrument, or the giving of a deed in lieu of foreclosure, the Government will be deemed to have attorned to any purchaser, purchasers, transferee or transferees of the premises or any portion thereof and its or their successors and assigns, and any such purchasers and transferees will be deemed to have assumed all obligations of the Lessor under this lease, so as to establish direct privity of estate and contract between Government and such purchasers or transferees, with the same force, effect and relative priority in time and right as if the lease had initially been entered into between such purchasers or transferees and the Government; provided, further, that the Contracting Officer and such purchasers or transferees shall, with reasonable promptness following any such sale or deed delivery in lieu of foreclosure, execute all such revisions to this lease, or other writings, as shall be necessary to document the foregoing relationship.

As a practical matter, the requirement that "transferees shall … execute all such revisions to this lease, or other writings, as shall be necessary to document the foregoing relationship" typically means that lenders seeking attornment or purchasers at a foreclosure sale will have to go through the novation process outlined above.

GSA's LDG confirms that the government will likely seek to effectuate a novation as part of the attornment process. In Chapter 17, it provides a draft SNDA agreement that states:

If the Lender forecloses the Loan or acquires title to the Real Property by deed in lieu of foreclosure, or in any other manner succeeds to the interest of the Lessor under the Lease, or if the Lender shall take possession of the Leased Premises, the Lessee shall attorn to the Lender as its Landlord under all of the terms, covenants, and conditions of the Lease for the balance of the term thereof remaining and any extensions thereof which may be effected in accordance with any option therefore as set forth in the Lease, with the same force and effect as if the Lender were the Lessor under the Lease. Such attornment shall be effective and self-operative immediately upon the Lender's succeeding to the interest of the Lessor, whereupon the Lessee shall recognize the Lender, or any person claiming by through or under the Lender (immediate or remote), as the lessor under the Lease without the execution of any further instruments on the part of any of the parties hereto. The Lease shall at all times continue in full force and effect, and the respective rights and obligations of the Lessee and the Lender upon such attornment shall be governed by the Lease. However, the Lessee agrees to execute, acknowledge, and or deliver to Lender any certificate or other instrument that Lender reasonably requests to confirm such attornment. Likewise, the Lender agrees to execute a Novation Agreement in the form required by FAR Part 42.12.

LDG, Ch. 17, Attachment 4 (emphasis added)

For distressed assets, the process can become more complicated. Specifically, nonfunctioning or defaulting lessors may be unable or unwilling to participate in the novation process or to execute the novation agreement, which typically requires commitments from both the current owner and prospective owner. Effective outreach to GSA contracting officers and counsel is vital in these cases, because it involves deviating from regulatory requirements and lease provisions.

Conclusion and Takeaways

The first and most important takeaway for exercising rights in connection with a distressed asset under a GSA lease is to understand those rights and the obligations that come with them. While these rights differ dramatically from typical commercial leases, there are nonetheless a number of powerful protections available for lessors and lenders.

Next, early and effective engagement with GSA will typically yield better outcomes. Once the parties identify a need for an assignment or an attornment, they should consider an immediate outreach to the contracting officer and – when appropriate – regional counsel.

Distressed assets present a number of unique challenges, but ultimately, those challenges have no impact upon the lessor's and lender's rights under the terms of GSA leases.

Holland & Knight's  GSA Leasing & Federal Real Estate Team is experienced and available to discuss how best to engage with the government to ensure a successful outcome when the lease involves a distressed asset. For more information, contact the authors. 

Part 1: When the Government Leaves Early , April 2, 2024

Part 2: Special Considerations for the Purchase and Sale of Distressed Assets Leased to the Government , August 15, 2024

1   OMB Agency-Wide Capital Planning Memorandum No. M-22-14 .

2  "The general rule is that 'an implied duty to vacate is an inherent part of every fixed term lease agreement unless the parties explicitly express an intention to the contrary.'" Allenfield Assocs. v. United States , 40 Fed. Cl. 471, 486 (1998) (quoting Prudential Ins. Co. of Am. v. United States , 801 F.2d. 1295, 1298-99 (Fed. Cir. 1986) cert. denied , 107 S.Ct. 1289 (1987)). For such a breach, the landlord's damages are calculated as the fair market rental value minus the rent actually paid. Cafritz Co. v. GSA , GSBCA No. 13525-REM, 98-2 BCA ¶ 29,936 (Aug. 3, 1998). In order to bring a suit against the government to recover these damages, lessors must adhere to the requirements of the Contract Disputes Act, discussed in Part I.

3  For many lessors, this remedy will not provide adequate redress, particularly in situations where the lessor seeks to either empty the building and redevelop the property or has a follow-on tenant waiting for the government to vacate the premises. Damages stemming from the lost opportunity for follow-on leases or redevelopment are called "consequential" damages, and it is difficult to recover these damages under applicable U.S. Court of Appeals for the Federal Circuit precedent.

4  One concession lessors should consider is a one-time escalation of operating costs. Government leases typically escalate the operating costs portion of the rent using a Consumer Price Index (CPI) multiplier from the U.S. Department of Labor's Bureau of Labor Statistics. This multiplier has not kept up with the pace of inflation of operating costs in the years following the COVID-19 pandemic. Specifically, energy costs in many markets have risen at a rate that exceeded the historical CPI multiplier, often dramatically. In light of this, the government may agree to an escalation in these costs, which will benefit lessors due to the continuing annual escalation of these costs.

5  41 U.S.C. § 6305.

6  For previous discussed the novation process in detail in partnership with LexisNexis, see Holland & Knight's previous guidance .

7  The standard GSA lease form L100 incorporates this portion of the FAR by reference.

8  While the standard GSA Lease form L100 expressly incorporates FAR Part 42.1204 in the "Change of Ownership" section, in practice GSA has adopted a Novation Checklist with an abbreviated set of deliverables that is more tailored to real estate transactions.

9  The FAR does not generally apply to leasehold acquisition (see 48 C.F.R. § 570.101(d) ), but government leases will often expressly incorporate FAR clauses that implement applicable statutory mandates, such as this one.

10  LDG, Ch. 17 at 17-25 (emphasis in original). The LDG also notes that "Regional counsel must be consulted prior to processing an Assignment of Claims." Id .

11   Id. at Attachment 4. This is not a lease or statutory requirement, but rather an internal GSA policy. As noted above, the statute expressly provides that "an assignment under this subsection is a valid assignment for all purposes" provided it meets the statutory requirements in 41 U.S.C. § 6305(b)(6)).

12  The language cited herein governing SNDAs comes from the GSA Form 3517B – General Clauses . The GSA serves as the procuring agency for most of the federal government's commercial office space leasing needs, as it possesses the statutory authority to enter into leases with terms of up to 20 years, while most other government agencies may only enter lease subject to annual appropriations, which has the practical effect of forcing other agencies into one-year lease terms with multiple one-year renewal options. Compare 40 U.S.C. § 585(b) (providing that the GSA administrator may enter into leases of up to 20 years) with 31 U.S.C. § 1341 (limiting the obligation of funds to existing (annual) appropriations).

13  The General Clause language governing SNDAs also provides that "[i]t is the intention of the parties that this provision shall be self-operative and that no further instrument shall be required to effect the present or subsequent subordination of this lease." However, the government also commits to executing other "reasonable" instruments upon request by the lessor and lender:

Government agrees, however, within twenty (20) business days next following the Contracting Officer's receipt of a written demand, to execute such instruments as Lessor may reasonably request to evidence further the subordination of this lease to any existing or future mortgage, deed of trust or other security interest pertaining to the premises, and to any water, sewer or access easement necessary or desirable to serve the premises or adjoining property owned in whole or in part by Lessor if such easement does not interfere with the full enjoyment of any right granted the Government under this lease.

In practice, the approval process can take significantly longer than 20 days, and it requires the approval of GSA regional counsel.

Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem, and it should not be substituted for legal advice, which relies on a specific factual analysis. Moreover, the laws of each jurisdiction are different and are constantly changing. This information is not intended to create, and receipt of it does not constitute, an attorney-client relationship. If you have specific questions regarding a particular fact situation, we urge you to consult the authors of this publication, your Holland & Knight representative or other competent legal counsel.

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