Assumption clause

Example

John is having financial difficulties, so he decides to sell his house to his friend, Julia. John also wants to transfer his mortgage to Julia. Under an assumption clause, Julia is allowed to assume responsibility for John’s mortgage.

Case Examples

What happens if a contract is silent on assumption? In that case, a person buying a property will not be held responsible for the mortgage on the property unless they have a personal obligation for the debt. See Webster Bank, N.A. v. Watson, No. 23-CV-5427 (KMK), 2025 WL 2732826, at *4 (S.D.N.Y. Sept. 25, 2025).

In Watson, a couple sold their home “as is”. The sales contract did not mention whether the new owner would assume the mortgage obligations. After the house was sold, the bank pursued the Watsons for the remaining balance on the mortgage. Id. The Watsons argued that the new owner was obligated to pay. Id. However, the Court disagreed, stating that the new owner had no personal obligation to the bank to pay off the mortgage as there was no assumption clause in the contract. Id. Therefore, the Watsons were still responsible for paying the remaining balance on the mortgage of the home, even though they had sold it. Id.

Environmental Liabilities and Future Lawsuits

Companies are permitted to include assumption clauses in contracts to facilitate the sale of businesses in the event of environmental liability. See White Consol. Indus., Inc. v. Westinghouse Elec. Corp., 179 F.3d 403, 410 (6th Cir. 1999).

In White, the plaintiff corporation got sued for environmental violations committed by the purchased company prior to the purchase. Id. The corporation argued that it was not responsible because the violations occurred before the sale, and any assumption clause making it liable was deemed illegal. Id. The Court disagreed, stating that the assumption clause in the contract was enforceable as it was broad enough to encompass the violations at issue. Id.

Intellectual property

Companies can also create assumption clauses for the use and payment of intellectual property. See Am. Fed'n of Musicians of the United States & Canada v. Rural Media Grp., Inc., No. 3:20-CV-00318, 2021 WL 848699, at *6 (M.D. Tenn. Mar. 5, 2021).

In that case, RFD, the original buyer of the right to use the music, also agreed to assume the responsibilities of paying the artists who made the music. Id. However, they failed to do so after entering into a related agreement with another company. Id. The Court found RFD responsible for paying the musicians and held them liable for any additional damages to the third parties involved due to their breach of the original contract. Id.