equitable assignment of mortgage

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.

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News & Insights

3 things borrowers and lenders should know about equitable mortgages.

Transactions involving real estate in New York generally must be in writing and in recordable form in order to be enforceable. New York, however, also recognizes the long-standing equitable principle which allows lenders, in certain circumstances, to claim a right to what is known as an “equitable mortgage.” The concept is that to the extent a borrower intends that the property is to be held, given or transferred as security for a loan, a court can impose an equitable mortgage even if the paperwork evidencing the loan is not properly executed or recorded. This exception is only available in limited situations. Here are 3 key things borrowers and lenders should know about an equitable mortgages:

• There must be an express or implied agreement. In order for a court to find that an equitable mortgage exists, there must be an express or implied agreement that there shall be a lien on specific identified property. The party claiming the equitable mortgage must clearly establish that the borrower intended to grant the lender a security interest in the borrower’s property.
• An equitable mortgage allows a lender to enforce a loan against a borrower. This issue will generally only arise if a lender seeks to foreclose on its interest as a result of some breach of the loan terms by the borrower and realizes there is a problem with the paperwork. The lender must have jurisdiction over all property owners as foreclosure can only be granted against a party who is liable under the mortgage (whether the same is legal or equitable).
• The legal (written) mortgage was not executed properly. Courts may recognize an equitable mortgage where technical or other errors were made in the paperwork or execution of the agreement.
• The lender paid the borrower the funds. In one case, a verbal agreement to place a mortgage on property which was never put into writing resulted in the Court finding that an equitable mortgage existed because the money was in fact paid to the Borrower.
• The lender filed satisfaction of the mortgage. In another case, a Lender which erroneously filed a satisfaction of mortgage in connection with a mortgage that had yet to been paid off was found to be an equitable mortgage holder.
• Some property owners did not sign the mortgage. In a recent case decided on August 8, 2018, the Appellate Division, Second Department in JPMorgan Chase Bank, N.A. v. Bank of America, et al . refused to dismiss a claim for imposition of an equitable mortgage against two (2) property owners who had not signed the mortgage documents. The mortgage had been signed by the third property owner and the funds represented by the mortgage were received. The Court found that it was premature to dismiss the claims against the non-signing owners because discovery had not yet been conducted on whether the non-signing owners intended that their property be used to secure the mortgage obligation.

This is not a complete list of all situations in which an equitable mortgage may be granted. If you have encountered any issues similar to those discussed in this article or wish to discuss the topic with one of our Real Estate attorneys, please contact us .

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A Cure for the Missing or Defective Assignment of Mortgage: The Doctrine of Equitable Assignment in Ohio

The Schwartzwald Case and the "Standing" Issue The recent Ohio Supreme Court case, Fed. Home Loan Mtge. Corp. v. Schwartzwald 1 delineated the requirement that an Ohio foreclosure plaintiff must establish its "standing" or the right to make the legal claim and seek judicial enforcement of its rights, as of the date the foreclosure action is commenced. Hence, a foreclosure action will be dismissed if the plaintiff cannot establish that it had an interest in the note or mortgage at the time it filed suit.

Complying with the requirements of the Schwartzwald case is not difficult, although a delay in commencing the case will be incurred, if necessary, to complete the chain of assignments.  If the plaintiff was the original lender, the note and mortgage attached as exhibits to the complaint will evidence the plaintiff's standing.   If the plaintiff has acquired the loan, the note (including the chain of executed indorsements or allonges), the mortgage, and the chain of assignments of the mortgage must be attached as exhibits to the complaint. 

Can a New Assignment Be Obtained? In some cases, the title exam may show that no assignment was ever recorded, or it was defective.  If the entity that sold the loan is still in existence and is cooperative, a new assignment of the mortgage can be obtained prior to commencing the foreclosure.  But if the entity is no longer in existence, or if for any other reason a new assignment cannot be obtained, the problem is not irreparable.

The Misconception Many parties in the industry mistakenly believe that filing a "lost assignment affidavit" with the County Recorder fixes the problem.  However, in Ohio, the law is clear that although an affidavit of facts relating to title can be used to explain an interest in the real property, it cannot create an interest in the real property.  Hence, the mere filing of a self-serving affidavit by the purchaser of the loan, that it is the holder of the mortgage because the assignment of the mortgage was lost before it was recorded, will be deemed a nullity, and will not constitute sufficient evidence to establish that it is the holder of the mortgage.

Equitable Assignment of the Mortgage The solution to the missing assignment problem lies in including a claim for a declaratory judgment in the foreclosure complaint, asserting that the plaintiff is entitled to a finding that it became and is the holder of the mortgage, based on the doctrine of "equitable assignment of the mortgage." 

The Gray Case and the Cure On July 30, 2013, the Court of Appeals for the 10th district of Ohio applied this doctrine in U.S. Bank Natl. Assn. V. Gray 2 .  The plaintiff in the case had become the holder of the note by having possession of the note, which contained an indorsement in blank.  However, the assignment of the mortgage to the plaintiff had been executed not by the original mortgage holder, but by a second entity with a similar name.  An assignment of the mortgage to the second entity was recorded a few months later, but because the two assignments were not recorded in the correct order, the second entity had no recorded interest in the mortgage when it executed the previous assignment to the plaintiff.  Consequently, the assignment of the mortgage to the plaintiff was a nullity.    When the plaintiff proceeded with the foreclosure action, the borrower relied on the defective chain of assignments of the mortgage in arguing that the plaintiff lacked the required standing.

The court, citing prior cases, stated that under Ohio common law where a promissory note is secured by a mortgage, the note is evidence of the debt and the mortgage is a mere incident of the debt. Therefore, the proper transfer of a note operates as an equitable assignment of the mortgage, even though the mortgage is not assigned or delivered. In other words, the mortgage follows the note.  Hence, the plaintiff’s standing to prosecute the foreclosure action was established.

The court also answered a question that the legal community has been pondering since the Schwartzwald case was issued.  The Schwartzwald case stated that to have standing to pursue a foreclosure action, a plaintiff must establish an interest in the note or mortgage at the time it filed suit and cannot rely on events occurring after the filing of the complaint.  Did the Ohio Supreme Court intentionally use the words  "note or mortgage" and not the words "note and mortgage," thereby implying that the plaintiff has standing even in cases where at the time it filed its complaint , the plaintiff was the holder of the note, but not the mortgage, and the mortgage was subsequently assigned to the plaintiff?  The Gray decision answered this question by essentially stating that "or" means "or," and therefore, an interest in the note alone is sufficient to establish standing.

Preventive Medicine Ensuring that the documentation to complete the chain of transfers of the note and mortgage was executed with precision, and that the necessary originals of the documents were physically transferred, and properly recorded and retained, are due diligence items that can avoid delays or roadblocks in the foreclosure process.

If you have any questions on this matter, please contact Mr. Larry R. Rothenberg, Esq. Larry is the partner in charge of Weltman’s Real Estate Default Unit in the Cleveland office. He can be reached at 216.685.1135 and [email protected] .

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Equitable Mortgages: What Are They, When They May Arise, and Their Effects

I recently wrote an article on the different types of mortgages  that are available within the real estate market sphere. These types of mortgages are all secured and require registration. An equitable mortgage is on the opposite side of the spectrum to a registered mortgage and indeed an interesting concept. Let us take a closer look.

A registered mortgage is a type of mortgage in which the lender registers a secured interest against the property title. Such an interest is registered via the Land Registry Office under whose jurisdiction the property is situated and requires the assistance of a lawyer. Once registration is completed, it gives the lender priority to recover the loan amount over unsecured creditors in the event that the purchaser defaults in payment of the loan.

The word “equitable” is derived from the word “equity ”, which simply means in the interest of justice. An equitable mortgage arises out of a transaction that has the intent but not a form of a formal mortgage that the Courts nevertheless will treat as a mortgage. Under this regime, the lender does not acquire a legal interest in the mortgaged property because the borrower’s initial interest in the property is equitable or the borrower has legal interest but a mortgage was created informally by a deposit of the title transfers/deeds (i.e., if the borrower owns a piece of land or property, they can pledge it as security by giving the lender the title-deed to the property. This means that if the borrower cannot repay the loan, the lender can take ownership of the property).

An equitable mortgage is unregistered and does not form a secured interest against a property. It merely represents a promise by the borrower to reserve the relevant equity in the property for the lender when the property is sold. This arrangement should be evidenced via a written agreement between the borrower and the lender outlining certain contractual obligations binding both parties. This type of mortgage is enforceable through the principles of equity and does not require registration before it can be enforced. Enforcement proceedings are brought via a motion in the Superior Court of Justice. The intention of the parties is a crucial component that the Courts will look at to determine if an equitable mortgage has been created and whether it is enforceable.

An equitable mortgage may arise out of the following scenarios:

• If a borrower has only an equitable interest in a property, she/he can only grant an equitable interest (i.e., a mortgage granted by a beneficiary under a trust can only be equitable because a beneficiary only holds the beneficial interest in a property and not the legal interest);
• if a transfer/deed is not registered in the Land Registry Office under which the property is situated. Such a document evidences a registration of a legal interest in the name of individuals or corporations; and
• if a mortgage is not registered against title evidencing a secured interest in the property in favour of a lender, therefore, it takes effect only in equity.

Listed below are crucial points of difference between registered and equitable mortgages:

I hope that this article has provided you with some helpful information. If you have any questions, please do not hesitate to contact me at [email protected] .

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Understanding the Assignment of Mortgages: What You Need To Know

3 minute read • Upsolve is a nonprofit that helps you get out of debt with education and free debt relief tools, like our bankruptcy filing tool.  Think TurboTax for bankruptcy. Get free education, customer support, and community. Featured in Forbes 4x and funded by institutions like Harvard University so we'll never ask you for a credit card.  Explore our free tool

A mortgage is a legally binding agreement between a home buyer and a lender that dictates a borrower's ability to pay off a loan. Every mortgage has an interest rate, a term length, and specific fees attached to it.

Written by Attorney Todd Carney .  Updated November 26, 2021

If you’re like most people who want to purchase a home, you’ll start by going to a bank or other lender to get a mortgage loan. Though you can choose your lender, after the mortgage loan is processed, your mortgage may be transferred to a different mortgage servicer . A transfer is also called an assignment of the mortgage. 

No matter what it’s called, this change of hands may also change who you’re supposed to make your house payments to and how the foreclosure process works if you default on your loan. That’s why if you’re a homeowner, it’s important to know how this process works. This article will provide an in-depth look at what an assignment of a mortgage entails and what impact it can have on homeownership.

Assignment of Mortgage – The Basics

When your original lender transfers your mortgage account and their interests in it to a new lender, that’s called an assignment of mortgage. To do this, your lender must use an assignment of mortgage document. This document ensures the loan is legally transferred to the new owner. It’s common for mortgage lenders to sell the mortgages to other lenders. Most lenders assign the mortgages they originate to other lenders or mortgage buyers.

Home Loan Documents

When you get a loan for a home or real estate, there will usually be two mortgage documents. The first is a mortgage or, less commonly, a deed of trust . The other is a promissory note. The mortgage or deed of trust will state that the mortgaged property provides the security interest for the loan. This basically means that your home is serving as collateral for the loan. It also gives the loan servicer the right to foreclose if you don’t make your monthly payments. The promissory note provides proof of the debt and your promise to pay it.

When a lender assigns your mortgage, your interests as the mortgagor are given to another mortgagee or servicer. Mortgages and deeds of trust are usually recorded in the county recorder’s office. This office also keeps a record of any transfers. When a mortgage is transferred so is the promissory note. The note will be endorsed or signed over to the loan’s new owner. In some situations, a note will be endorsed in blank, which turns it into a bearer instrument. This means whoever holds the note is the presumed owner.

Using MERS To Track Transfers

Banks have collectively established the Mortgage Electronic Registration System , Inc. (MERS), which keeps track of who owns which loans. With MERS, lenders are no longer required to do a separate assignment every time a loan is transferred. That’s because MERS keeps track of the transfers. It’s crucial for MERS to maintain a record of assignments and endorsements because these land records can tell who actually owns the debt and has a legal right to start the foreclosure process.

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Assignment of Mortgage Requirements and Effects

The assignment of mortgage needs to include the following:

The original information regarding the mortgage. Alternatively, it can include the county recorder office’s identification numbers. 

The borrower’s name.

The mortgage loan’s original amount.

The date of the mortgage and when it was recorded.

Usually, there will also need to be a legal description of the real property the mortgage secures, but this is determined by state law and differs by state.

Notice Requirements

The original lender doesn’t need to provide notice to or get permission from the homeowner prior to assigning the mortgage. But the new lender (sometimes called the assignee) has to send the homeowner some form of notice of the loan assignment. The document will typically provide a disclaimer about who the new lender is, the lender’s contact information, and information about how to make your mortgage payment. You should make sure you have this information so you can avoid foreclosure.

Mortgage Terms

When an assignment occurs your loan is transferred, but the initial terms of your mortgage will stay the same. This means you’ll have the same interest rate, overall loan amount, monthly payment, and payment due date. If there are changes or adjustments to the escrow account, the new lender must do them under the terms of the original escrow agreement. The new lender can make some changes if you request them and the lender approves. For example, you may request your new lender to provide more payment methods.

Taxes and Insurance

If you have an escrow account and your mortgage is transferred, you may be worried about making sure your property taxes and homeowners insurance get paid. Though you can always verify the information, the original loan servicer is responsible for giving your local tax authority the new loan servicer’s address for tax billing purposes. The original lender is required to do this after the assignment is recorded. The servicer will also reach out to your property insurance company for this reason.  

If you’ve received notice that your mortgage loan has been assigned, it’s a good idea to reach out to your loan servicer and verify this information. Verifying that all your mortgage information is correct, that you know who to contact if you have questions about your mortgage, and that you know how to make payments to the new servicer will help you avoid being scammed or making payments incorrectly.

Let's Summarize…

In a mortgage assignment, your original lender or servicer transfers your mortgage account to another loan servicer. When this occurs, the original mortgagee or lender’s interests go to the next lender. Even if your mortgage gets transferred or assigned, your mortgage’s terms should remain the same. Your interest rate, loan amount, monthly payment, and payment schedule shouldn’t change. 

Your original lender isn’t required to notify you or get your permission prior to assigning your mortgage. But you should receive correspondence from the new lender after the assignment. It’s important to verify any change in assignment with your original loan servicer before you make your next mortgage payment, so you don’t fall victim to a scam.

Attorney Todd Carney

Attorney Todd Carney is a writer and graduate of Harvard Law School. While in law school, Todd worked in a clinic that helped pro-bono clients file for bankruptcy. Todd also studied several aspects of how the law impacts consumers. Todd has written over 40 articles for sites such... read more about Attorney Todd Carney

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Pledge vs Hypothecation vs Lien vs Mortgage vs Assignment

The difference between pledge, hypothecation, lien, mortgage, and assignment lies in the security charge that can be created on any asset held by a lender against the money lent (usually called the collateral). The type of asset charge defines whether the agreement can be classified as a pledge, lien, or mortgage. Let us see in detail the difference between pledge vs hypothecation vs lien vs mortgage vs assignment.

There are several types of security interests that can be adopted by banks or lenders depending upon the collateral involved and the circumstances. Different forms of creating charges on assets are as follows:

Hypothecation

Short summary table.

Pledge is commonly used for goods or securities such as gold, stocks, certificates, etc. The lender (pledgee) holds the actual possession of such securities until the borrower (pledger) has the borrowed amount with him. Once the borrowed amount has been returned, the securities are returned as well. If the pledger defaults on the loan amount, the pledgee can sell off the goods pledged to him as security in order to recover the principal and the interest amount. In this case risk of lending comparatively reduces because possession of assets is with the lender.

Hypothecation is usually when the charge is on movable assets rather than having a charge on fixed assets. However, hypothecation is different from pledges in the sense that the possession of such movable security stays with the borrower. Hence, in the event of default, the lender is first required to take possession / seize such property or asset in order to recover the principal and interest. An example of hypothecation is vehicle financing, where the lender has the asset that has been hypothecated against the loan with a bank. If the borrower defaults, the bank then takes possession of the vehicle after sufficient notice to recover the money.

Also Read: Hypothecation

Under a lien, the lender gets the right to hold up a property or machinery used as collateral against funds borrowed. However, unless the contract states otherwise, the lender doesn’t have the right to sell the property or the asset if the borrower defaults on the loan. Examples of lien include rent receivable, unpaid fees, etc. It is a right given to the creditor to retain/possess the security until the loan amount g. Since possession is with the creditor, it is the strongest form of security. Lien can be on both movable and immovable property. But generally, lending companies choose to have mortgages on immovable property and lien on movable security like shares, gold, deposits, etc.

Under a mortgage , the legal ownership of the asset can be transferred to the lender if the borrower defaults on the loan amount. However, the borrower continues to remain in possession of the property. A mortgage is usually used for immovable assets (example: house, land, building, or any property which is permanently fixed to the earth or attached to the land). Home loans classify as mortgages.

An assignment is another type of charge on current assets or fixed assets. Under assignment, the charge is created on the assets held in the books. It is another mode of providing security against borrowing. Examples of assignments include life insurance policies, books of debts, receivables, etc., which the bank can finance. For example – A bank can finance against the book debts. The borrower assigns the book debts to the bank in such a case.

To get an idea about the difference between pledge vs hypothecation vs lien vs mortgage vs assignment, refer to the table below.

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Sanjay Bulaki Borad

MBA-Finance, CMA, CS, Insolvency Professional, B'Com

Sanjay Borad, Founder of eFinanceManagement, is a Management Consultant with 7 years of MNC experience and 11 years in Consultancy. He caters to clients with turnovers from 200 Million to 12,000 Million, including listed entities, and has vast industry experience in over 20 sectors. Additionally, he serves as a visiting faculty for Finance and Costing in MBA Colleges and CA, CMA Coaching Classes.

5 thoughts on “Pledge vs Hypothecation vs Lien vs Mortgage vs Assignment”

Really simple and so easy to refer .Especially good for nonfinance people who aims to move to general top management .

Thanks for sharing. I really like your explanations.

Tysm sir it helps me easily to understand n differentiate between all type of securities

Really great way illustration. It helped me a lot.

I love the concept; so very easy to understand.

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The Doctrine of Equitable Assignment is Alive and Well in Wisconsin

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Mortgage Priority: And What About Equitable Subrogation?

Stambaugh v. PNC Bank, N.A. (In re Stambaugh), 532 B.R. 572 (Bankr. M.D. Pa. 2015) –

A chapter 13 debtor sought to establish the priority of certain mortgages, and the bank that held all of the mortgages attempted to reorder the priority based on equitable subrogation and subordination claims.

The debtor owned real property valued at $200,000. A bank held four mortgages on the property securing the following principal amounts: (1) $31,750, (2) $175,000, (3) $225,050 and (4) $63,950. The debtor sought a determination that the $175,000 mortgage was senior (since the $31,750 was junior to it under a subordination agreement), while the bank claimed that the $225,050 mortgage should be senior.

The bank’s equitable subrogation argument was based on its contention that a part of the $225,050 mortgage loan was supposed to pay off the $175,000 mortgage – although that did not in fact happen, apparently due to an error which the bank claims the debtor took advantage of. The court acknowledged that equitable subrogation is a state law remedy that is available in a bankruptcy court.

Although generally priority is determined based on the dates that documents are recorded, equitable subrogation is an exception to the “first in time” rule. Under applicable state law the criteria were as follows:

• Claimant paid the creditor to protect its own interests;
• Claimant was not a volunteer;
• Claimant was not primarily liable for the debt;
• Subrogation will not “cause injustice to the rights of others.”

The court also noted a rule that “the courts of equity will not relieve a party from the consequences of an error due to his own ignorance or carelessness when there were available means which would have enabled him to avoid the mistake if reasonable care has been exercised.”

In this case the court determined that equitable subrogation was not available to the bank because it had the ability to assure that the $175,000 mortgage was paid off and satisfied of record. The court also noted that the bank was not asserting that it made payments to a different creditor.

The bank next attempted to argue that a subordination agreement gave the $225,050 priority. However, the agreement in question was executed almost six years after the $175,000 mortgage and more than five years after the $225,050 mortgage.

Under Section 510(a) of the Bankruptcy Code subordination agreements are enforceable to the same extent as under non-bankruptcy law. Applying general contract principles, the agreement had to be interpreted to give effect to the intent of the parties, and if a contract is clear and unambiguous, intent should be determined from the express language. Here the court determined that there was no ambiguity: the intent was to subordinate only the $31,750 mortgage to the $225,050 mortgage. The $175,000 mortgage was not even mentioned.

Finally the bank attempted to argue that the debtor was pursuing an equitable action and certain misconduct barred it from maintaining the action. Apparently the debtor was employed by the bank’s predecessor in various capacities, including house closing auditor, loan closer and loan officer. In addition the bank claimed that the debtor misrepresented his income. However, the “unclean hands doctrine” is not applicable unless there is a proceeding in equity.

In this case the debtor was seeking a declaratory action. Although a declaratory judgment seeking specific performance or injunctive relief is equitable, a declaratory judgment seeking damages or other legal remedies is a legal action entitling the plaintiff to a jury trial. The court found that this case was “essentially an inverted lawsuit” (?) as opposed to a traditional equitable claim, so the debtor was asserting a legal claim.

The court noted that it was not condoning the alleged misconduct. The allegations would have been more applicable in an action to seek non-dischargeability of the loan. However, the deadline for filing non-dischargeability complaints had already passed.

Thus, the court determined that the $175,000 mortgage loan held first priority, and the $31,750 loan was subordinate to the $225,050 loan based on the subordination agreement. It expressed no opinion about the relative priority of the fourth loan for $63,950.

One might find it odd that anyone cared about the priority given that all of the mortgages were held by the same mortgagee. The answer appears to lie in the debtor’s strategy for obtaining control of an apparent escrow account surplus of around $33,000 – $35,000. In objecting to the bank’s $275,000 claim, among other things the debtor noted the pending adversary proceeding with the comment that if he was successful the escrow surplus would become associated with the $175,000 loan as the first lien mortgage instead of the $275,000.

Vicki R. Harding, Esq.

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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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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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Equitable Assignment: The question is how the parties viewed the transaction not how the transaction was recorded

Business Finance Pty Ltd (receiver and manager appointed) v Partner Invest Pty Ltd (in liquidation) [2022] NSWSC 1 was a dispute between the external administrators of the plaintiff and defendant companies. Marcus Ayres was the appointed receiver and manager of Business Finance Pty Ltd ( Business Finance ) and Andrew Sallway was the liquidator of Partner Invest Pty Ltd ( Partner Invest ).

In a transaction that occurred before the external administrators were appointed, there was a question as to whether Partner Invest had assigned its rights as a lender, mortgagee, and secured party in a particular loan to Business Finance as an equitable assignment for value.

These two companies were related and shared a common director, Frankie McDad. At the time of the loan, Partner Invest was wholly owned by McDad, who was the sole director. In September 2016, Business Finance was incorporated and wholly owned by Partner Invest. The primary business of both companies was to raise funds from private investors to use in providing non-bank business loans which were secured by mortgages, caveats, general security agreements, and personal guarantees. Business Finance and Partner Invest executed an Administrative Services Agreement on 28 September 2016, and accordingly, Partner Invest was involved in administering Business Finance’s loans.

The loan that was the subject of the case was to JML Property Group ( JML ). In 2017, JML borrowed funds from Partner Invest for the purposes of constructing two townhouses and to purchase a sand quarry (the JML Loan ). The security of the loan was first-ranking mortgages in favour of Partner Invest over properties in Kangaroo Flat, Bendigo, and Golden Square. Personal guarantees were also provided by the family members of the sole director and shareholder of JML and further, a security interest was granted by JML over all present and after-acquired property.

In the lead up to settlement, Business Finance transferred $830,000 from their operating account to Partner Invest’s solicitors trust account with the description ‘Buy Loan 652’. These funds were recorded in the trust account statement as received from Partner invest and described as ‘Mortgage – Advance from Partner Invest to JML’.

Intercompany Transfers

As the companies were related, other intercompany transfers did take place. From 27 October 2016, funds were credited to Business Finance’s account from Partner Invest. Mr Sallway reconstructed Partner Invest’s trust accounts, which revealed that at the time of the JML Loan, Business Finance had received $2.7 million from Partner Invest. By August 2018, Partner Invest had transferred $4.25 million and emails from McDad indicated the purpose was to sponsor equity to boost Business Finance’s loan book amount to $34 million.

Equitable Assignment

Mr Ayers submitted on behalf of Business Finance that the JML loan had been equitably assigned by Partner Invest, by reason of the $830,000 transfer from Business Finance. Mr Sallway however, put forward that Mr Ayers evidence was miscellaneous, unsigned correspondence that had been cobbled together.

There was no record of an agreement to assign the loan or show any intention to assign or transfer the JML Loan to Business Finance. However, the records kept by Business Finance and Partner Invest, as noted a number of times by Her Honour, were poor and incomplete. Further, the records kept by Partner Invest’s solicitors were ‘something of a mess.’ [1]

As a purported assignment in equity, the transaction should take the form of and be intended as an immediate transfer of the beneficial interest, distinct from an agreement to assign it. [2] Except where writing is required by the Statute of Frauds , no formality is necessary beyond a clear expression of an intention to make an immediate disposition. The JML Loan is an interest in land, so section 53 of the Property Law Act 1958 (Vic) and section 126 of the Instruments Act 1958 (Vic) were relevant. Section 126 states that an agreement can be evidenced by a memorandum or note of the agreement so long as it is signed by the person to be charged.

In considering the existence of an equitable assignment, Justice Rees asked two questions:

• Was there a manifestation by Partner Invest of an intention to transfer the equitable interest in the JML Loan and associated security to Business Finance in a manner binding upon itself?
• Was there a clear expression of an intention to make an immediate disposition?

Based on the transaction documents, Her Honour considered that Partner Invest intended to immediately sell and Business Finance intended to immediately buy the JML loan and associated securities. Although the documents were executed by Partner Invest as lender and mortgagee, when the time came to complete the transaction it was apparent that the loan would be a Business Finance loan and would form part of its portfolio. Partner Invest wanted to support the establishment of Business Finance’s portfolio of loans, which is evidenced by providing funds to Business Finance and transferring loans as sponsor equity.

Justice Rees was less interested in how the companies and Partner Invest’s solicitors recorded the transactions and considered how the parties to the transaction viewed the matter. By doing so, her Honour ordered that on 2 January 2018, by equitable assignment for value, Partner Invest had assigned to Business Finance all of its rights as the lender under the JML Loan. As a result, Business Finance holds an equitable mortgage over the Kangaroo Flat and Bendigo properties and a charge over the property subject to the PPSR.

Key Takeaway

The existence of an equitable assignment for value does not necessarily turn on how the documents record the transaction. Instead, it is important how the parties to the transaction view the matter and whether they would consider that the transfer was for an equitable interest and for immediate disposition.

If you found this insight article useful and you would like to subscribe to Gadens’ updates, click here .

Authored by:

Guy Edgecombe, Partner Caitlin Miller, Graduate

[1] Business Finance Pty Ltd (receiver and manager appointed) v Partner Invest Pty Ltd (in liquidation) [2022] NSWSC 1 (7 January 2022) at [5].

[2] Norman v Federal Commissioner of Taxation (1963) 109 CLR 9 at 30–1; [1963] HCA 21.

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PAUL SHEA vs. FEDERAL NATIONAL MORTGAGE ASSOCIATION & others. [Note 1]

87 mass. app. ct. 901, february 18, 2015.

Real Property, Mortgage. Assignment. Mortgage, Real estate, Assignment, Foreclosure. Practice, Civil, Motion to dismiss.

At issue is whether a judge properly dismissed [Note 2] the plaintiff's claims [Note 3] attacking the validity of a mortgage foreclosure to which Eaton v. Federal Natl. Mort. Assn., 462 Mass. 569 (2012), does not apply. [Note 4] The plaintiff contends that the foreclosure was void because the mortgage was not validly assigned to OneWest Bank FSB (OneWest), the foreclosing mortgagee. He argues that the assignment was invalid because (1) the assignor never held the underlying note, and (2) the assignment was not specifically authorized by the owner of the debt. [Note 5] We affirm. [Note 6]

Background. [Note 7] The plaintiff (and another person who is not a party to this case) purchased the property at issue in April 2005. In 2007, as part of a

refinancing of the property, the plaintiff granted a mortgage to IndyMac Bank, FSB (IndyMac) to secure a loan in the amount of $281,600. In pertinent part, the 2007 mortgage contained the following provisions.

The mortgage defines IndyMac, which is the owner of the debt, as the "Lender." The mortgage defines Mortgage Electronic Registration System, Inc. (MERS), as "a separate corporation that is acting solely as a nominee for Lender and Lender's successors and assigns. MERS is the mortgagee under this Security Instrument " (emphasis in original).

A section entitled "TRANSFER OF RIGHTS IN THE PROPERTY" provides that the mortgage secures both the repayment of the loan and the borrower's performance of covenants and agreements to the Lender. That section continues as follows:

"Borrower does hereby mortgage, grant and convey to MERS (solely as nominee for Lender and Lender's successors and assigns) and to the successors and assigns of MERS , with power of sale . . . .

"Borrower understands and agrees that MERS holds only legal title to the interests granted by Borrower in this Security Instrument, but, if necessary to comply with law or custom, MERS (as nominee for Lender and Lender's successors and assigns) has the right: to exercise any or all of those interests, including, but not limited to, the right to foreclose and sell the Property; and to take any action required of Lender including, but not limited to, releasing and canceling this Security Instrument." (Emphasis supplied.)

On November 11, 2009, MERS assigned the mortgage to OneWest, which, after other events we set out in the margin, [Note 8] foreclosed the property under its power of sale. OneWest then assigned its successful bid to the Federal National Mortgage Association (Fannie Mae) and conveyed the property to Fannie Mae by foreclosure deed on October 21, 2011.

Discussion. The plaintiff argues that the assignment from MERS to OneWest was void for two reasons. [Note 9] First, he contends that, despite the fact that the mortgage provides that "MERS is the mortgagee under this Security Instrument"

and that MERS holds "legal title to the interests granted by Borrower in this Security Instrument," MERS did not obtain the status of mortgagee because MERS never held the note. We have recently rejected this precise argument in Sullivan v. Kondaur Capital Corp., 85 Mass. App. Ct. 202 , 210 (2014), where we stated that "[n]othing in Massachusetts law requires a foreclosing mortgagee to demonstrate that prior holders of record legal interest in the mortgage also held the note at the time each assigned its interest in the mortgage to the next holder in the chain." MERS's interest as mortgagee was not "inherently invalid because it was separated from ownership of the underlying debt." Ibid.

Second, we are equally unpersuaded by the plaintiff's argument that the assignment to OneWest was void because MERS did not receive specific authorization from IndyMac (the note holder) before executing the assignment. [Note 10] Under our law, "a mortgage and the underlying note can be split." Eaton v. Federal Natl. Mort. Assn., supra at 576. Although the note holder possesses an equitable right to demand and obtain an assignment of the mortgage, U.S. Bank Natl. Assn. v. Ibanez, 458 Mass. 637 , 652 (2011), "[a]bsent a provision in the mortgage instrument restricting transfer[,] . . . a mortgagee may assign its mortgage to another party." Culhane v. Aurora Loan Servs. of Neb., 708 F.3d 282, 292 (1st Cir. 2013). In other words, despite IndyMac's right (as note holder) to demand and obtain an assignment of the mortgage in order to enforce its security interest and collect the debt, MERS (as mortgagee) retained the right to assign the mortgage unilaterally absent any restriction in the mortgage document. [Note 11] No restriction appears in the mortgage at issue here.

The motion to dismiss was properly allowed.

Judgment affirmed.

Thomas B. Vawter for the plaintiff.

Marissa I. Delinks for Federal National Mortgage Association.

Scott C. Owens for Harmon Law Offices, P.C.

[Note 1] Mortgage Electronic Registration Systems, Inc.; One West Bank, FSB; and Harmon Law Offices, P.C.

[Note 2] We see no merit in the plaintiff's contention that the judge improperly, and sub silentio, converted the motion into one for summary judgment. Without converting the motion into one for summary judgment, the judge was permitted to take into account "matters of public record, orders, items appearing in the record of the case, and exhibits attached to the complaint," Schaer v. Brandeis Univ., 432 Mass. 474 , 477 (2000), quoting from 5A Wright & Miller, Federal Practice & Procedure § 1357, at 299 (1990). See Mass.R.Civ.P. 12(b), 365 Mass. 754 (1974). See also Golchin v. Liberty Mut. Ins. Co., 460 Mass. 222 , 224 (2011). Here the relevant documents were attached as exhibits to the complaint.

[Note 3] This is in essence an action to quiet title, although the plaintiff's complaint asserts claims for (1) unfair debt collection practices under 15 U.S.C. §§ 1692(a) et seq.; (2) unfair debt collection practices under G. L. c. 93, §§ 49 et seq.; (3) trespass; (4) intentional infliction of emotional distress; (5) declaratory relief; and (6) an action to quiet or establish title under G. L. c. 240, § 6.

[Note 4] Eaton v. Federal Natl. Mort. Assn., supra at 589, applies "only to mortgage foreclosure sales for which the mandatory notice of sale has been given after" June 22, 2012. Here, the foreclosure was completed in 2011. In Galiastro v. Mortgage Electronic Registration Sys., Inc., 467 Mass. 160 , 161 (2014), the Supreme Judicial Court extended the Eaton holding to cases "in which the issue was preserved and an appeal was pending in the Appeals Court on June 22, 2012, the date of the rescript in Eaton." This case was entered on the Appeals Court docket on October 11, 2013.

[Note 5] The plaintiff agrees that all of his claims rise and fall on the two points he raises here.

[Note 6] Our review is de novo. See, e.g., Massachusetts State Police Commissioned Officers Assn. v. Commonwealth, 462 Mass. 219 , 221 (2012).

[Note 7] The facts are drawn from the well-pleaded allegations of the complaint, which we accept, arguendo, to have been verified, although it is not clear from the record that a signature page verifying the complaint was filed contemporaneously with it. Nothing in our decision turns on whether the complaint was properly verified.

[Note 8] OneWest, acting through the Harmon Law Offices, P.C. (Harmon), began foreclosure proceedings by filing a complaint in the Land Court in November 2009. Judgment entered on the Land Court complaint on March 23, 2010. On June 16, 2011, OneWest, through Harmon, sent the plaintiff a notice of the mortgage foreclosure sale and of deficiency.

[Note 9] Because the plaintiff here argues that the assignment to OneWest was void (not merely voidable), he has standing. See Sullivan v. Kondaur Capital Corp., 85 Mass. App. Ct. 202 , 205-206 (2014) (mortgagor had standing to challenge the foreclosing entity's chain of legal title); Culhane v. Aurora Loan Servs. of Neb., 708 F.3d 282, 291 (1st Cir. 2013) (mortgagor had standing to raise claim "premised on the notion that MERS never properly held the mortgage and, thus, had no interest to assign"). A mortgagor's standing to challenge the assignment of his or her mortgage is limited to those defects that render the assignment void, not merely voidable. The Bank of N.Y. Mellon Corp. v. Wain, 85 Mass. App. Ct. 498 , 502 (2014). In other words, the mortgagor's challenge must contest the foreclosing entity's status as mortgagee. "[A] mortgagor does not have standing to challenge shortcomings in an assignment that render it merely voidable at the election of one party but otherwise effective to pass legal title." Culhane v. Aurora Loan Servs. of Neb., supra.

[Note 10] The argument appears to be based on a misreading of Eaton, which held prospectively that in order to foreclose, the foreclosing mortgagee must either hold the note or act as an authorized agent for the note holder. Eaton v. Federal Natl. Mort. Assn., supra at 586.

[Note 11] Of course, any assignment of the mortgage requires a writing signed by the grantor, G. L. c. 183, § 3, and must otherwise comply with the requirements of G. L. c. 183, § 54B.

• Practical Law

Equitable assignment

Practical law uk glossary 2-107-6540  (approx. 3 pages).

• The assignor can inform the assignee that he transfers a right or rights to him.
• The assignor can instruct the other party or parties to the agreement to discharge their obligation to the assignee instead of the assignor.
• General Contract and Boilerplate
• Breach of Lease Covenants
• Security and Quasi Security

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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.

• Construction Contracts
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• United Kingdom

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What is the significance of an equitable assignment in the context of the assignment of future rights under a contract (or a chose in action)?

An assignment is the transfer of a right or an interest vested in one party (assignor) to another party (assignee). The effect of a valid assignment is to entitle the assignee to demand performance of a contractual obligation.

Assignments may be legal or equitable.

A legal assignment is one which meets the requirements set out in section 136(1) of the Law of Property Act 1925 (LPA 1925). It must be:

absolute and unconditional and not purport to be by way of charge only

made in writing and signed by the assignor

expressly notified in writing to the obligor

equitable assignment s may arise in the following circumstances:

where there is an intention to assign, but not all of the formalities of a legal assignment are met under LPA 1925, s 136(1), the assignment may still be valid as an equitable assignment. The formalities for an equitable assignment to be effective are far less stringent

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Related legal acts:

• Law of Property Act 1925 (1925 c 20)

Key definition:

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.

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