Legal Definitions - assumption clause

An assumption clause is a specific provision within a contract or legal agreement that addresses the transfer of an existing obligation from one party to another. It typically specifies whether a new party can take over, or "assume," the responsibilities and liabilities of an original party, and often outlines the conditions under which such a transfer is permitted or prohibited.

This clause serves two primary functions:

• It can prohibit the transfer of an obligation without the express permission of the original creditor or party.
• It can stipulate that a new party explicitly agrees to take on the obligations of another party as part of a larger transaction.

Here are some examples illustrating how an assumption clause works:

• Example 1: Mortgage Transfer

  Imagine a homeowner, Maria, wants to sell her house to David. Maria has an existing mortgage with a very favorable, low interest rate. David is interested in taking over Maria's mortgage to benefit from that rate instead of applying for a new loan himself.

  Maria's original mortgage agreement with her bank likely contains an assumption clause (often referred to as a "due-on-sale" clause). This clause states that if Maria sells the property, the entire outstanding balance of the mortgage becomes immediately due and payable unless the bank specifically approves David to assume the loan. The bank would then evaluate David's creditworthiness and might require new terms or fees.

  This example illustrates how an assumption clause protects the original lender by preventing a new borrower from taking over an existing loan without their explicit consent and review.

• Example 2: Business Acquisition

  Consider a large corporation, "Global Innovations Inc.," that decides to acquire a smaller startup company, "Future Tech Solutions." Future Tech Solutions has several ongoing contracts with clients, outstanding invoices from suppliers, and a lease for its office space.

  The acquisition agreement between Global Innovations Inc. and Future Tech Solutions would include an assumption clause. This clause would explicitly state that Global Innovations Inc. agrees to assume all of Future Tech Solutions' existing client contracts, supplier debts, and the office lease obligations as part of the acquisition deal.

  In this scenario, the assumption clause ensures that the acquiring company clearly takes on the financial and contractual responsibilities of the company it is purchasing, providing clarity on who is liable for these obligations post-acquisition.

• Example 3: Commercial Lease Assignment

  A small restaurant, "The Daily Spoon," has a five-year commercial lease for its storefront. After two years, the owner decides to sell the business, including the location, to a new entrepreneur who wants to open "Gourmet Bites."

  The original commercial lease agreement between The Daily Spoon and the landlord contains an assumption clause. This clause specifies that The Daily Spoon cannot assign or transfer its lease obligations to a new tenant (Gourmet Bites) without first obtaining written permission from the landlord. The landlord might then review Gourmet Bites' financial stability and business plan before agreeing to the assumption of the lease, potentially requiring new terms or a higher security deposit.

  This example demonstrates how an assumption clause gives the landlord control over who occupies their property and who is responsible for the lease terms, ensuring they approve any new party taking on the tenant's obligations.