Seller’s Defense Against the Flip: Restricting Purchase Agreement Assignment Rights
Sellers of commercial real estate generally loathe dealing with flippers. What constitutes a flip? A flip occurs when the “original buyer” enters into a purchase contract and then assigns the purchase agreement to the “ultimate buyer” prior to the closing. First, the original buyer/flipper, if successful, makes a profit that the seller believes they should be pocketing. Second, if the flipper cannot close the transaction on its own, a higher probability exists that the sale will not close at all, resulting in a waste of seller’s time, resources and money. This article examines ways in which a seller can defend against its property being tied up by a flipper.
In order for a buyer to profit from flipping by assignment, the flipper must be able to assign the purchase agreement to the ultimate buyer. The right for an original buyer to assign the purchase agreement is not inherently harmful to a seller. In fact, prior to the closing, most original buyers (who are not flipping) assign the purchase agreement to a new entity formed by the original buyer solely for the purpose of acquiring and owning the property. Such newly formed entities are often created to shield other assets from risk or to satisfy a lender’s requirements for the property to be owned by a single purpose/single asset entity.
Crafting a Protective Assignment Provision for Sellers
A well-crafted assignment provision allows the original buyer to assign the purchase agreement to a new entity formed by the original buyer solely for the purpose of acquiring and owning the property, and prohibits the original buyer from flipping the purchase agreement to an unrelated third party for a profit.
In order to protect against the flip, Sellers should craft an assignment provision in the purchase agreement that:
- Permits assignments by the original buyer to an entity owned and controlled by the original buyer (or, if the original buyer is an entity, to an entity owned and controlled by the owners of the original buyer).
2. Prohibits assignments by the original buyer to an entity not owned and controlled by the original buyer (or, if the original buyer is an entity, to an entity not owned and controlled by the owners of the original buyer).
3. Prohibits, if the original buyer is an entity, the transfer of ownership interests in the original buyer as a subterfuge to avoid the restriction provisions described in paragraph 2, above.
4. Prohibits the original buyer from entering into an agreement to sell the property prior to the closing.
It is wise for a seller to start negotiations with a strong “anti-flipping” assignment provision. If the assignment restrictions are objectionable to the original buyer, the seller can quickly flesh out the original buyer’s true intentions regarding the acquisition. Also, as with all negotiations, the parties can always agree to modify the “starting” assignment provisions in a manner that makes sense for the transaction.
If you have any questions or comments, email Rick.
Disclaimer: This article is provided by Angel Law Offices for general education purposes only. The information should not be relied on as legal advice, nor does it serve to create an attorney-client relationship. Laws vary from one state to another. For legal advice on a specific matter, consult an attorney.