Novation
Definition and meaning of Novation in real estate.
A novation is a legal process where an existing contract is canceled and replaced with a new contract, transferring the rights and obligations to a new party. Unlike an assignment, which transfers rights but keeps the original party liable, a novation completely releases the original party from all future liabilities.
In more detail
This process requires the mutual consent of all original parties as well as the new incoming party. In real estate, novation often occurs when a buyer assumes an existing mortgage and the lender agrees to release the original seller from liability. It also arises in commercial leasing, when a new business takes over a lease from a tenant and the landlord signs a new agreement releasing the original tenant.
Because a new contract is created, the old agreement is legally extinguished, preventing any future lawsuits against the departing party.
Key facts
| Category | Legal, Titles & Closing |
|---|---|
| Required by | Consent of all parties involved |
| Watch out for | Extinguishes the original contract completely |
| Applies to | Contracts, leases, and mortgages |
A home seller allows a buyer to assume their mortgage, and the bank executes a novation to release the seller from the loan obligations and hold the buyer solely responsible.
Frequently asked questions
What is the difference between novation and assignment?
In an assignment, the original party transfers their rights but remains secondarily liable if the new party defaults. In a novation, the original contract is destroyed, and the original party is completely freed from liability.
Does a novation require a brand new contract?
Yes, a novation always requires the creation of a new agreement that replaces the original contract, rather than just amending the existing one.