HMA Bites: Assignment and transfer clauses

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Welcome to HMA Bites! In each edition of Check-In we will take a concise look at an issue relating to hotel management agreements ("HMAs") and provide insight, tips and advice based on our experience in practice. In this edition, we will be taking a look at assignment and transfer clauses in HMAs.

As with any commercial contract, assignment clauses are a standard (and important) part of an HMA, and future-proof the underlying commercial arrangement by anticipating (and legislating for) exits, sales, restructurings and other events which a party may undergo.

A typical assignment clause in an operator-friendly HMA might read as follows:

"The Operator may assign its rights and/or obligations under this Agreement to an Affiliate who has the ability to perform Operator's obligations hereunder, without prior written notice to the Owner."

Often the word "assign" may be replaced or accompanied by words such as "transfer" or "novate" – or may even contain all three.

It is easy to think that these words are more or less synonymous, and can therefore be used interchangeably or in combination to the same end. It is also easy to think that these words can apply equally to a party's rights and to its obligations. In some jurisdictions, this is true. But if your HMA is governed by English law, you must choose these words carefully – and your assignment clause must be drafted carefully so as to cater for the appropriate formalities.

Under English law, an "assignment" refers to the transfer of a contractual right from one party to another. This enables the transferee to enjoy the benefit of the right which has been transferred, and to enforce that right against the contracting party which owes the corresponding obligation in accordance with the terms of the contract.

English law permits the benefit of a contract to be assigned freely. This means that a party to an HMA can (unless the HMA states otherwise) assign its right under the HMA without the requirement for consent or notice. An example of a contractual right which a party might wish to assign to another party is the right to receive payment under a contract. A party might wish to direct payment to be made to another group entity for internal accounting purposes, or it might wish to assign receivables to a lender as part of a financing arrangement.

But whilst contractual rights can be assigned, English law does not permit the burden of a contract (i.e. a contractual obligation) to be "assigned". Instead, the transfer of a contractual obligation requires a "novation" – whereby the party benefitting from the relevant obligation must be aware of and must consent to the proposed transfer.

A novation therefore requires a tri-partite agreement to be entered into between the incoming party (i.e. the transferee of the obligations), the outgoing party (i.e. the transferor of the obligations), and the remaining contracting party (i.e. the beneficiary of the obligations being transferred).

Under the terms of the novation agreement:

  • the outgoing party will cease to be a party to the contract
  • the incoming party will replace the outgoing party as a party to the contract
  • the remaining party will agree to release the outgoing party from future obligations under the contract
  • the incoming party will agree to perform the future obligations under the contract.

In light of the above, parties to an English-law governed HMA should review the transfer clauses carefully to ensure that "assignment" and "novation" are dealt with separately and correctly.

A common approach is as follows:

  • a party may assign any or all of its rights under the HMA (but not its obligations) – either with or without consent, and either with or without notice
  • a party may novate all of its rights and obligations under the HMA – in which case the parties will (and the outgoing party will ensure that the incoming party will) enter into an agreed form of novation agreement.

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