Novation Agreement

Jump to section, what is a novation agreement.

A novation agreement is a legal contract that transfers contractual obligations of one party to a third party. It can also replace a contractual obligation with another one. Either way, the new obligation must be agreed upon by all parties involved. Generally, a transferee, transferor and counterparty, must agree to these changes.

Novation Explained

Novation is used in contract law and business law which defines the act of:

  • Replacing an obligation with another obligation
  • Adding an obligation to perform
  • Replacing a party with another in an agreement.

There are three main ways to make a novation:

  • Novation: A simple novation doesn’t involve entry of a third party. Instead, someone who owes debt enters in a new agreement with their lender. Basically, you substitute a new contract in place of the old one.
  • Expromissio: Expromissio involves entry of a third party on to an agreement. This new party takes on obligations of the original party. Usually, a creditor accepts a new debtor in place of the original debtor.
  • Delegation: In this case, the party to a contract transfers their responsibility to another party. For example, you hire a general contractor to perform work on your house. The general contract delegates their responsibilities to a subcontractor. The subcontractor now has a duty to you to complete the work.

Novation vs Assignment:

Novation in contract and business law is different from assignment .

Assignment is generally valid as long as the party is provided notice whereas a novation requires agreement of all parties. An assignment only passes along benefits. whereas a novation transfers both benefits and obligations. For instance, a sublease is an assignment. The landlord can still hold the primary renter responsible. In a novation, the primary party of the contract would also transfer all obligations and cannot be held accountable for the contract after novation is complete.

There are advantages and disadvantages to both a novation and an assignment. Assignment is often more convenient than a novation. Novation can protect sellers from future liabilities despite being a tedious process.

Want to learn more about novation? Here is an article on novation for you .

transfer novation agreement

Purpose of a Novation Agreement

Novation is used when a third party enters an agreement to replace a departing party in a contract. Usually, a new party would assume obligations to pay another party that the original party had intended to pay. This releases the debt from one party to another. There would generally be three parties involved: a transferee, transferor and the counterparty. All parties must sign the agreement.

Cancelling a contract can be messy and expensive. In such cases, one might find novation to be a better option. Through novation one party can simply find a third party to complete an original agreement. A few examples where a novation can be used are leases, transferring debt, real estate transactions, business deals, and construction projects.

There are certain risks of a novation. If the counterparty is unsure that the new party will be able to adequately complete obligations set under the contract, the counterparty might face consequences in the future but will not be able to hold the primary party accountable after novation.

Still not sure about the purpose of novation? Here is an article for you .

Examples of Novation

A few examples of novation can help you understand the process better. For instance, consider this case. Person A owes Person B $100. Person B already owes Person C $100. In this case, Person A and Person B can simply transfer their debt obligations through a novation. If all parties agree, Person A can just pay Person C $100. Person B will receive and pay no amount.

Novation can also allow for modified payment terms if all parties agree. Take the case of Person A, B and C mentioned above. Person C might agree to accept Person A’s jewelry as payment which has a value of $100–the debt amount. This transfer of jewelry can still constitute as repayment and resolution of all debt between the three parties.

Novation in mergers and acquisitions is common. A classic example is when a company, X, enters into a contract with another Company, Y. A novation can be included to ensure that if company Y sells, merges or transfers their business or parts of their business to another company, the new company that merges with or acquires company Y or parts of it, will assume obligations and liabilities of company Y in the contract with Company X. In this contract, a purchaser, merging party or transferee of Company Y will step into the role of Company Y in respect to their contract with Company X.

Novation is also used in financial markets. A bilateral transaction done through a clearinghouse intermediary in the derivatives markets is called novation. Here, sellers transfer securities to the intermediary or the clearinghouse which then sells the securities to buyers. The clearinghouse assumes the obligations and counterparty risk in case of a party defaulting. The clearinghouse also becomes responsible for vetting buyers based on creditworthiness.

Here is an article with more examples of novation .

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Who Should Sign a Novation Agreement?

A novation must be signed by all parties involved–the transferee, transferor and counterparty. The transferor transfers the obligations to the transferee in an agreement with the counterparty. One might consider signing a novation agreement in the following scenarios:

  • Unable to repay debt: If party A borrows money from party B, but is unable to repay the debt and has a third party, C, come in an offer to repay the debt, all parties can consider novation. Here party A would transfer all debt obligations to party C and walk away. Party B will receive the debt from Party C instead of Party A. In case of default, Party B will not be able to hold party A responsible.
  • Takeover transactions: In business transactions or corporate takeover, novation can be used to replace parties as per new takeover roles.
  • Sale of business: Novation during sale of a business is often used to replace or transfer business obligations between parties.
  • Financial Markets: Novation allows derivatives market to use bilateral transactions through an intermediary.

If you are looking to draw up a novation agreement, here is an example of a novation agreement .

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FAC Number: 2024-03 Effective Date: 02/23/2024

Subpart 42.12 - Novation and Change-of-Name Agreements

Subpart 42.12 - Novation and Change-of-Name Agreements

42.1200 scope of subpart..

This subpart prescribes policies and procedures for-

(a) Recognition of a successor in interest to Government contracts when contractor assets are transferred;

(b) Recognition of a change in a contractor’s name; and

(c) Execution of novation agreements and change-of-name agreements by the responsible contracting officer.

42.1201 [Reserved]

42.1202 responsibility for executing agreements..

The contracting officer responsible for processing and executing novation and change-of-name agreements shall be determined as follows:

(a) If any of the affected contracts held by the transferor have been assigned to an administrative contracting officer (ACO) (see 2.1 and 42.202 ), the responsible contracting officer shall be-

(1) This ACO; or

(2) The ACO responsible for the corporate office, if affected contracts are in more than one plant or division of the transferor.

(b) If none of the affected contracts held by the transferor have been assigned to an ACO, the contracting officer responsible for the largest unsettled (unbilled plus billed but unpaid) dollar balance of contracts shall be the responsible contracting officer.

(c) If several transferors are involved, the responsible contracting officer shall be-

(1) The ACO administering the largest unsettled dollar balance; or

(2) The contracting officer (or ACO) designated by the agency having the largest unsettled dollar balance, if none of the affected contracts have been assigned to an ACO.

42.1203 Processing agreements.

(a) If a contractor wishes the Government to recognize a successor in interest to its contracts or a name change, the contractor must submit a written request to the responsible contracting officer (see 42.1202 ). If the contractor received its contract under subpart  8.7 under 41 U.S.C. chapter 85 , Committee for Purchase from People Who Are Blind or Severely Disabled, use the procedures at 8.716 instead.

(b) The responsible contracting officer shall-

(1) Identify and request that the contractor submit the information necessary to evaluate the proposed agreement for recognizing a successor in interest or a name change. This information should include the items identified in 42.1204 (e) and (f) or 42.1205 (a), as applicable;

(2) Notify each contract administration office and contracting office affected by a proposed agreement for recognizing a successor in interest, and provide those offices with a list of all affected contracts; and

(3) Request submission of any comments or objections to the proposed transfer within 30 days after notification. Any submission should be accompanied by supporting documentation.

(c) Upon receipt of the necessary information, the responsible contracting officer shall determine whether or not it is in the Government’s interest to recognize the proposed successor in interest on the basis of-

(1) The comments received from the affected contract administration offices and contracting offices;

(2) The proposed successor’s responsibility under subpart  9.1 , Responsible Prospective Contractors; and

(3) Any factor relating to the proposed successor’s performance of contracts with the Government that the Government determines would impair the proposed successor’s ability to perform the contract satisfactorily.

(d) The execution of a novation agreement does not preclude the use of any other method available to the contracting officer to resolve any other issues related to a transfer of contractor assets, including the treatment of costs.

(e) Any separate agreement between the transferor and transferee regarding the assumption of liabilities ( e.g., long-term incentive compensation plans, cost accounting standards noncompliances, environmental cleanup costs, and final overhead costs) should be referenced specifically in the novation agreement.

(f) Before novation and change-of-name agreements are executed, the responsible contracting officer shall ensure that Government counsel has reviewed them for legal sufficiency.

(g) The responsible contracting officer shall-

(1) Forward a signed copy of the executed novation or change-of-name agreement to the transferor and to the transferee; and

(2) Retain a signed copy in the case file.

(h) Following distribution of the agreement, the responsible contracting officer shall-

(1) Prepare a Standard Form 30 , Amendment of Solicitation/Modification of Contract, incorporating a summary of the agreement and attaching a complete list of contracts affected;

(2) Retain the original Standard Form 30 with the attached list in the case file;

(3) Send a signed copy of the Standard Form 30 , with attached list to the transferor and to the transferee; and

(4) Send a copy of this Standard Form 30 with attached list to each contract administration office or contracting office involved, which shall be responsible for further appropriate distribution.

42.1204 Applicability of novation agreements.

(a) 41 U.S.C.6305 prohibits transfer of Government contracts from the contractor to a third party. The Government may, when in its interest, recognize a third party as the successor in interest to a Government contract when the third party’s interest in the contract arises out of the transfer of-

(1) All the contractor’s assets; or

(2) The entire portion of the assets involved in performing the contract. (See 14.404-2 (l) for the effect of novation agreements after bid opening but before award.) Examples of such transactions include, but are not limited to-

(i) Sale of these assets with a provision for assuming liabilities;

(ii) Transfer of these assets incident to a merger or corporate consolidation; and

(iii) Incorporation of a proprietorship or partnership, or formation of a partnership.

(b) A novation agreement is unnecessary when there is a change in the ownership of a contractor as a result of a stock purchase, with no legal change in the contracting party, and when that contracting party remains in control of the assets and is the party performing the contract. However, whether there is a purchase of assets or a stock purchase, there may be issues related to the change in ownership that appropriately should be addressed in a formal agreement between the contractor and the Government (see 42.1203 (e)).

(c) When it is in the Government’s interest not to concur in the transfer of a contract from one company to another company, the original contractor remains under contractual obligation to the Government, and the contract may be terminated for reasons of default, should the original contractor not perform.

(d) When considering whether to recognize a third party as a successor in interest to Government contracts, the responsible contracting officer shall identify and evaluate any significant organizational conflicts of interest in accordance with subpart  9.5 . If the responsible contracting officer determines that a conflict of interest cannot be resolved, but that it is in the best interest of the Government to approve the novation request, a request for a waiver may be submitted in accordance with the procedures at 9.503 .

(e) When a contractor asks the Government to recognize a successor in interest, the contractor shall submit to the responsible contracting officer three signed copies of the proposed novation agreement and one copy each, as applicable, of the following:

(1) The document describing the proposed transaction, e.g., purchase/sale agreement or memorandum of understanding.

(2) A list of all affected contracts between the transferor and the Government, as of the date of sale or transfer of assets, showing for each, as of that date, the-

(i) Contract number and type;

(ii) Name and address of the contracting office;

(iii) Total dollar value, as amended; and

(iv) Approximate remaining unpaid balance.

(3) Evidence of the transferee’s capability to perform.

(4) Any other relevant information requested by the responsible contracting officer.

(f) Except as provided in paragraph (g) of this section, the contractor shall submit to the responsible contracting officer one copy of each of the following documents, as applicable, as the documents become available:

(1) An authenticated copy of the instrument effecting the transfer of assets; e.g., bill of sale, certificate of merger, contract, deed, agreement, or court decree.

(2) A certified copy of each resolution of the corporate parties’ boards of directors authorizing the transfer of assets.

(3) A certified copy of the minutes of each corporate party’s stockholder meeting necessary to approve the transfer of assets.

(4) An authenticated copy of the transferee’s certificate and articles of incorporation, if a corporation was formed for the purpose of receiving the assets involved in performing the Government contracts.

(5) The opinion of legal counsel for the transferor and transferee stating that the transfer was properly effected under applicable law and the effective date of transfer.

(6) Balance sheets of the transferor and transferee as of the dates immediately before and after the transfer of assets, audited by independent accountants.

(7) Evidence that any security clearance requirements have been met.

(8) The consent of sureties on all contracts listed under paragraph (e)(2) of this section if bonds are required, or a statement from the transferor that none are required.

(g) If the Government has acquired the documents during its participation in the pre-merger or pre-acquisition review process, or the Government’s interests are adequately protected with an alternative formulation of the information, the responsible contracting officer may modify the list of documents to be submitted by the contractor.

(h) When recognizing a successor in interest to a Government contract is consistent with the Government’s interest, the responsible contracting officer shall execute a novation agreement with the transferor and the transferee. It shall ordinarily provide in part that-

(1) The transferee assumes all the transferor’s obligations under the contract;

(2) The transferor waives all rights under the contract against the Government;

(3) The transferor guarantees performance of the contract by the transferee (a satisfactory performance bond may be accepted instead of the guarantee); and

(4) Nothing in the agreement shall relieve the transferor or transferee from compliance with any Federal law.

(i) The responsible contracting officer shall use the following format for agreements when the transferor and transferee are corporations and all the transferor’s assets are transferred. This format may be adapted to fit specific cases and may be used as a guide in preparing similar agreements for other situations.

Novation Agreement

The ABC Corporation (Transferor), a corporation duly organized and existing under the laws of __________ [ insert State ] with its principal office in ____________ [ insert city ]; the XYZ Corporation (Transferee), [ if appropriate add "formerly known as the EFG Corporation" ] a corporation duly organized and existing under the laws of _________ [ insert State ] with its principal office in ____________ [ insert city ]; and the United States of America (Government) enter into this Agreement as of ____________ [ insert the date transfer of assets became effective under applicable State law ].

(a) The parties agree to the following facts:

(1) The Government, represented by various Contracting Officers of the ______________ [ insert name(s) of agency(ies) ], has entered into certain contracts with the Transferor, namely: ____________ [ insert contract or purchase order identifications ]; [ or delete "namely" and insert "as shown in the attached list marked ‘Exhibit A’ and incorporated in this Agreement by reference." ]. The term "the contracts," as used in this Agreement, means the above contracts and purchase orders and all other contracts and purchase orders, including all modifications, made between the Government and the Transferor before the effective date of this Agreement (whether or not performance and payment have been completed and releases executed if the Government or the Transferor has any remaining rights, duties, or obligations under these contracts and purchase orders). Included in the term "the contracts" are also all modifications made under the terms and conditions of these contracts and purchase orders between the Government and the Transferee, on or after the effective date of this Agreement.

(2) As of ____________, 20___, the Transferor has transferred to the Transferee all the assets of the Transferor by virtue of a __________ [ insert term descriptive of the legal transaction involved ] between the Transferor and the Transferee.

(3) The Transferee has acquired all the assets of the Transferor by virtue of the above transfer.

(4) The Transferee has assumed all obligations and liabilities of the Transferor under the contracts by virtue of the above transfer.

(5) The Transferee is in a position to fully perform all obligations that may exist under the contracts.

(6) It is consistent with the Government’s interest to recognize the Transferee as the successor party to the contracts.

(7) Evidence of the above transfer has been filed with the Government. [ When a change of name is also involved; e.g.,a prior or concurrent change of the Transferee’s name, an appropriate statement shall be inserted (see example in paragraph(8) of this Agreement) ].

(8) A certificate dated _________, 20___, signed by the Secretary of State of ___________ [ insert State ], to the effect that the corporate name of EFG Corporation was changed to XYZ Corporation on _____________, 20__, has been filed with the Government.

(b) In consideration of these facts, the parties agree that by this Agreement-

(1) The Transferor confirms the transfer to the Transferee, and waives any claims and rights against the Government that it now has or may have in the future in connection with the contracts.

(2) The Transferee agrees to be bound by and to perform each contract in accordance with the conditions contained in the contracts. The Transferee also assumes all obligations and liabilities of, and all claims against, the Transferor under the contracts as if the Transferee were the original party to the contracts.

(3) The Transferee ratifies all previous actions taken by the Transferor with respect to the contracts, with the same force and effect as if the action had been taken by the Transferee.

(4) The Government recognizes the Transferee as the Transferor’s successor in interest in and to the contracts. The Transferee by this Agreement becomes entitled to all rights, titles, and interests of the Transferor in and to the contracts as if the Transferee were the original party to the contracts. Following the effective date of this Agreement, the term "Contractor," as used in the contracts, shall refer to the Transferee.

(5) Except as expressly provided in this Agreement, nothing in it shall be construed as a waiver of any rights of the Government against the Transferor.

(6) All payments and reimbursements previously made by the Government to the Transferor, and all other previous actions taken by the Government under the contracts, shall be considered to have discharged those parts of the Government’s obligations under the contracts. All payments and reimbursements made by the Government after the date of this Agreement in the name of or to the Transferor shall have the same force and effect as if made to the Transferee, and shall constitute a complete discharge of the Government’s obligations under the contracts, to the extent of the amounts paid or reimbursed.

(7) The Transferor and the Transferee agree that the Government is not obligated to pay or reimburse either of them for, or otherwise give effect to, any costs, taxes, or other expenses, or any related increases, directly or indirectly arising out of or resulting from the transfer or this Agreement, other than those that the Government in the absence of this transfer or Agreement would have been obligated to pay or reimburse under the terms of the contracts.

(8) The Transferor guarantees payment of all liabilities and the performance of all obligations that the Transferee-

(i) Assumes under this Agreement; or

(ii) May undertake in the future should these contracts be modified under their terms and conditions. The Transferor waives notice of, and consents to, any such future modifications.

(9) The contracts shall remain in full force and effect, except as modified by this Agreement. Each party has executed this Agreement as of the day and year first above written.

United States of America,

By _______________________________________________

Title _____________________________________________

ABC Corporation,

[ Corporate Seal ]

XYZ Corporation,

Certificate

I, ___________, certify that I am the Secretary of ABC Corporation, that ________________, who signed this Agreement for this corporation, was then _____________ of this corporation; and that this Agreement was duly signed for and on behalf of this corporation by authority of its governing body and within the scope of its corporate powers. Witness my hand and the seal of this corporation this day of __________________ 20 ___.

I, ____________, certify that I am the Secretary of XYZ Corporation, that ________________, who signed this Agreement for this corporation, was then _____________ of this corporation; and that this Agreement was duly signed for and on behalf of this corporation by authority of its governing body and within the scope of its corporate powers. Witness my hand and the seal of this corporation this day of ____________________20___.

42.1205 Agreement to recognize contractor’s change of name.

(a) If only a change of the contractor’s name is involved and the Government’s and contractor’s rights and obligations remain unaffected, the parties shall execute an agreement to reflect the name change. The contractor shall forward to the responsible contracting officer three signed copies of the Change-of-Name Agreement, and one copy each of the following:

(1) The document effecting the name change, authenticated by a proper official of the State having jurisdiction.

(2) The opinion of the contractor’s legal counsel stating that the change of name was properly effected under applicable law and showing the effective date.

(3) A list of all affected contracts and purchase orders remaining unsettled between the contractor and the Government, showing for each the contract number and type, and name and address of the contracting office. The contracting officer may request the total dollar value as amended and the remaining unpaid balance for each contract.

(b) The following suggested format for an agreement may be adapted for specific cases:

Change-of-Name Agreement

The ABC Corporation (Contractor), a corporation duly organized and existing under the laws of __________ [ insert State ], and the United States of America (Government), enter into this Agreement as of __________ [ insert date when the change of name became effective under applicable State law ].

(1) The Government, represented by various Contracting Officers of the _______________ [ insert name(s) of agency(ies) ], has entered into certain contracts and purchase orders with the XYZ Corporation, namely: ____________ [ insert contract or purchase order identifications ]; [ or delete "namely" and insert "as shown in the attached list marked "Exhibit A" and incorporated in this Agreement by reference." ]. The term "the contracts," as used in this Agreement, means the above contracts and purchase orders and all other contracts and purchase orders, including all modifications, made by the Government and the Contractor before the effective date of this Agreement (whether or not performance and payment have been completed and releases executed if the Government or the Contractor has any remaining rights, duties, or obligations under these contracts and purchase orders).

(2) The XYZ Corporation, by an amendment to its certificate of incorporation, dated _________ 20___, has changed its corporate name to ABC Corporation.

(3) This amendment accomplishes a change of corporate name only and all rights and obligations of the Government and of the Contractor under the contracts are unaffected by this change.

(4) Documentary evidence of this change of corporate name has been filed with the Government.

(b) In consideration of these facts, the parties agree that-

(1) The contracts covered by this Agreement are amended by substituting the name "ABC Corporation" for the name "XYZ Corporation" wherever it appears in the contracts; and

(2) Each party has executed this Agreement as of the day and year first above written.

I, ___________, certify that I am the Secretary of ABC Corporation; that ___________, who signed this Agreement for this corporation, was then _____________ of this corporation; and that this Agreement was duly signed for and on behalf of this corporation by authority of its governing body and within the scope of its corporate powers. Witness my hand and the seal of this corporation this ________ day of ____________ 20___.

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What Is Novation?

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Novation: Definition in Contract Law, Types, Uses, and Example

transfer novation agreement

Investopedia / Julie Bang

Novation is the replacement of one of the parties in an agreement between two parties, with the consent of all three parties involved. To novate is to replace an old obligation with a new one.

For example, a supplier who wants to relinquish a business customer might find another source for the customer. If all three agree, the contract can be torn up and replaced with a new contract that differs only in the name of the supplier. The old supplier relinquishes all rights and obligations of the contract to the new supplier.

Key Takeaways

  • To novate is to replace an old obligation with a new one.
  • In contract law, a novation replaces one of the parties in a two-party agreement with a third party, with the agreement of all three parties.
  • In a novate, the original contract is void. The party that drops out has given up its benefits and obligations.
  • In the financial markets, using a clearinghouse to vet a transaction between two parties is known as a novation.
  • Novation is different than an assignment, where the original party to the agreement retains ultimate responsibility. Therefore, the original contract remains in place.

In legal language, novation is a transfer of both the "benefits and the burdens" of a contract to another party. Contract benefits may be anything. For example, the benefit could be payments for services. The burdens are the obligations taken on to earn the payment—in this example, the services. One party to the contract is willing to forgo the benefits and relinquish the duties.

Canceling a contract can be messy, expensive, and bad for an entity's reputation. Arranging for another party to fulfill the contract on the same terms, with the agreement of all parties, is better business.

Novations are often seen in the construction industry, where subcontractors may be juggling several jobs at once. Contractors may transfer certain jobs to other contractors with the client's consent.

Novations are most frequently used when a business is sold, or a corporation is taken over. The new owner may want to retain the business's contractual obligations, while the other parties want to continue their agreements without interruption. Novations smooth the transition.

Types of Novations

There are three types of novations:

  • Standard : This novation occurs when two parties agree that new terms must be added to their contract, resulting in a new one.
  • Expromissio : Three parties must be involved in this novation; a transferor, a counterparty, and a transferee. All three must agree to the new terms and make a new contract.
  • Delegation : One of the parties in a contract passes their responsibilities to a new party, legally binding that party to the terms of the contract.

A novation is an alternative to the procedure known as an assignment .

In an assignment, one person or business transfers rights or property to another person or business. But the assignment passes along only the benefits, while any obligations remain with the original contract party. Novations pass along both benefits and potential liabilities to the new party.

For example, a sub-lease is an assignment. The original rental contract remains in place. The landlord can hold the primary leaseholder responsible for damage or non-payment by the sub-letter.

Novation gives rights and the obligations to the new party, and the old one walks away. The original contract is nullified.

In property law, novation occurs when a tenant signs a lease over to another party, which assumes both the responsibility for the rent and the liability for any subsequent damages to the property, as indicated in the original lease.

Generally, an assignment and a novation require the approval of all three parties involved.

A sub-lease agreement is usually an assignment, not a novation. The primary leaseholder remains responsible for non-payment or damage.

Novation Uses

Because a novation replaces a contract, it can be used in any business, industry, or market where contracts are used.

Financial Markets

In financial markets, novations are generally used in credit default swaps, options, or futures when contracts are transferred to a derivatives  market clearinghouse. A bilateral transaction is completed through the clearinghouse , which functions as an intermediary.

The sellers transfer the rights to and obligations of their securities to the clearinghouse. The clearinghouse, in turn, sells the securities to the buyers. Both the transferor (the seller) and transferee (the buyer) must agree to the terms of the novation, and the remaining party (the clearinghouse) must consent by a specific deadline. If the remaining party doesn't consent, the transferor and transferee must book a new trade and go through the process again.

Real Estate

Contracts are a part of real estate transactions, so novation is a valuable tool in the industry. If buyers and sellers enter into a contract, novation allows them to change it when issues arise during due diligence, inspection, or closing.

Commercial and residential rental contracts can be changed using novation if tenants or renters experience changes that affect their needs or ability to make payments.

Government Contracting

Federal, state, and local governments find it cheaper and beneficial for the economy to contract specific tasks rather than create an official workforce. Contracts are critical components for private or public companies who win a bid to do work for governments. If the contractor suddenly can't deliver on the contract or other issues prevent it from completing its task, the contractor can ask the government to recognize another party to complete the project.

A novation is not a unilateral contract mechanism. All concerned parties may negotiate the terms until a consensus is reached.

Banks use novation to transfer loans or other debts to different lenders. This typically involves canceling the contract and creating a new one with the exact terms and conditions of the old one.

Example of Novation

Novation can occur between any two parties. Consider the following example—Maria signed a contract with Chris to buy a cryptocurrency for $200. Chris has a contract with Uni for the same type of cryptocurrency for $200. These debt obligations may be simplified through a novation. By agreement of all three parties, a novation agreement is drawn, with a new contract in which Chris transfers the debt and its obligations to Maria. Maria pays Uni $200 in crypto. Chris receives (and pays) nothing.

Novations also allow for revisions of payment terms as long as the parties involved agree. For example, say Uni decided not to accept crypto but wanted cash instead. If Maria agrees, a novation occurs, and new payment terms are entered on a contract.

What Is a Novation?

In novation, one party in a two-party agreement gives up all rights and obligations outlined in a contract to a third party. As a result, the original contract is canceled.

What Is The Meaning of Novation Agreement?

In novation, the rights and obligations of one party to a two-party contract are transferred to a third party, with the agreement of all three parties.

Is Novation a New Contract?

Yes, because the old contract is invalidated or "extinguished" when the new contract is signed.

In a novation, when all parties agree, one party in a two-party agreement gives up all rights and obligations outlined in a contract to a third party. As a result, the original contract is canceled.

Novation differs from an assignment, where one party gives up all rights outlined in the contract but remains responsible for fulfilling its terms. The original contract remains in place.

International Swaps and Derivatives Association. " ISDA Novation Protocol ."

General Services Administration. " Subpart 42.12 - Novation and Change-of-Name Agreements ."

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Creating a Novation Agreement: A Step-by-Step Guide

14 May 2021

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A novation agreement is a three-way contract, where one original party transfers his/her contractual rights and obligations to a new party, following the consent of the other party in the original contract (the "counterparty"). All parties must consent to the contract. This is different from an assignment, where the obligations of a contract cannot be transferred.

Understanding when to use a novation contract or an assignment is crucial. Since creating novation agreements can be a complex process, business owners must understand what constitutes a valid novation and how it differs from an assignment.

This article will explain what novation is and how to write a novation agreement, and clarify how it differs from an assignment.  

What is a novation agreement?

Novation is a contract in which a third party takes up the obligations and rights of one of the original parties to the original contract. Through this process, the original contract is extinguished and replaced by a new contract. The obligations of the third party in this new contract will be identical to the rights and obligations of one of the original parties under the original contract.

In a novation, both the rights and obligations of a contract are transferred to a third party. Rights (or benefits) refer to the entitlements of a party under a contract. Common examples of rights include the right to sue and the right to seek compensation. Obligations (or burdens) refer to the duties a party must fulfil under a contract. Common examples of obligations include making payments and delivering goods.

Novation is particularly common in the sale of business transactions. In a sale of a business transaction, the seller transfers the ownership of all its assets to the buyer, including contracts with third parties. Novation is often used to achieve this, as it transfers both the rights and obligations of a contract to the other party.

Another key point to note with novation agreements is that all three parties must agree to the novation. This means that all three parties must sign. The three parties are:

Transferor: The party who is transferring rights and obligations as part of a novation.

Transferee: The party to whom rights and obligations are being transferred as part of a novation.

Counterparty: The party against whom the rights and obligations being transferred are held. The counterparty is the other party to the original contract along with the transferor.

Example of a novation agreement

Here is an example of a novation agreement: 

Andy enters a contract to sell a motorbike to John. The contract specifies that Andy is to deliver the bike to John in a week and receive John’s payment in a week.

Before John pays Andy, John enters a contract to sell the motorbike to Mary for its purchase price, on the same terms.

Now, John has obligations to both Andy and Mary – he must pay Andy for the motorbike and sell the motorbike to Mary.

John convinces both Andy and Mary to enter into a novation agreement, signed and agreed to by all three of them. As a result of this novation agreement, the contract between Andy and John is extinguished and no longer exists. A new contract between Andy and Mary has been created, where Mary has the same rights and obligations to Andy as John previously had and owed to Andy.

Mary has essentially taken over John’s place in the transaction.

What happens after a novation agreement is completed?

When a novation agreement is agreed to and signed by all three parties, the original contracting parties (i.e. the transferor and the counterparty) are released from liabilities arising from the original agreement before the date that the novation is to become effective.

transfer novation agreement

How do I write a novation agreement?

There are many things to remember when writing a novation agreement. In this section, we will walk you through the key components of every novation agreement.

1) Preamble of the agreement

The preamble of an agreement constitutes the first section of an agreement, which states the names and places of business of the parties.

Unlike typical agreements which have two parties, a novation agreement has three. The three parties include the two original parties to the contract (i.e. the transferor and the counterparty) and the new party to whom the rights and obligations will be novated (i.e. the transferee).

The preamble should include details of all three parties, such as the names and principal places of business.

2) Novation

This clause will effectuate the novation.

This clause will state that the transferee shall become a party to the agreement at issue in the place of the transferor. It will state that the transferee is to be subject to the same obligations as the transferor under the original agreement and is to benefit from the same rights as the transferor under the original agreement.

3) Further assurances

This is a boilerplate clause that states that all three parties to the novation agreement will do what is necessary to ensure that the novation agreement will be effective.

4) Counterparts

This clause ensures that even if the parties sign two separate copies of the same agreement, the two copies will be taken together and will constitute one complete agreement.

This is an example of a boilerplate clause. Boilerplate clauses are a set of commonly found clauses in a contract. You can learn more about what boilerplate clauses are here .

5) Mutual Release

Novation agreements often have mutual releases . This means that the transferor and the counterparty will release each other from all liabilities arising from the performance of the original agreement.

6) No Third-Party Rights Under Agreements

A clause is usually included in novation agreements limiting the ability of third parties (persons who are not a party to the contract) to enforce any rights in the contract.

7) Governing Law

This clause specifies which jurisdiction’s laws the contract is to be subject to and interpreted in accordance with.

You can learn more about governing law and jurisdiction clauses here .

transfer novation agreement

Novation Agreement Template 

Drafting a novation agreement is challenging and it is easy to miss out on key information. Don’t worry - we have prepared a sample novation agreement for you to use. There are two types of novation agreements - one for a full transfer and release and another for a partial transfer and release .

A novation agreement for full transfer and release involves the transfer of all rights and obligations to a third party. You can find this agreement here .

A novation agreement for partial transfer and release involves the transfer of only some of the rights and obligations to a third party. You can find this agreement here .

What is an assignment?

An assignment is a process wherein a party transfers its rights under a contract to another third party.

Generally, a party to a contract (i.e. the assignor), can assign its rights under a contract to a third party (i.e. the assignee) without the consent of the party against whom the rights are held (i.e. the counterparty).

This is unless the contract between the assignor and the counterparty prohibits or otherwise limits the assignment of rights. Often, contracts restrict the assignment of rights unless the written consent of the counterparty is obtained. An exemplar clause to this effect looks like this:

“Neither party hereto may assign any of its rights or obligations hereunder to any other person, without the prior written consent of the other party hereto.”

Example of an assignment

Andy enters a contract to sell a painting to John for $100. The contract states that Andy will give John the painting and will receive payment from John in one week.

Andy also owes $100 to Mary. The last date to repay Mary is also in one week. Andy does not expect to have any money to pay Mary.

To resolve this situation, Andy proceeds to assign his rights under his contract with John to Mary by entering into an assignment agreement with Mary.

Now, Mary is entitled to receive the $100 from John, ensuring that she is fully repaid by Andy.

It is important to remember that only rights can be transferred through an assignment. As such, Andy would still be subject to certain obligations under his agreement with John, which include selling the painting to John in one week.

What is the difference between an assignment and a novation?

Novation and assignment are similar concepts and are, therefore, often confused between one another.  

Novation involves three parties. All three parties (i.e. the transferor, the transferee, and the counterparty) must agree to the novation. An assignment, on the other hand, only needs to be signed by the assignee and the assignor - it is a two-party agreement.   The counterparty does not have to sign.

Furthermore, both rights and obligations can be transferred through a novation, while an assignment only transfers rights .

transfer novation agreement

What are the downsides to using a novation?

A novation can be difficult to execute. The difficulty arises from the fact that all three parties involved in a novation must agree to the novation. Generally, it is not very difficult to obtain the consent of the transferor and the transferee.

However, it can be difficult to obtain the consent of the counterparty. This is because the counterparty may think that they will not benefit in any way from such a novation. This may lead to the counterparty renegotiating key points in the agreement to obtain certain concessions in the agreement.

On the other hand, in an assignment, the counterparty’s consent is not necessary . Usually, only consent from the assignor and the assignee is necessary. The assignor simply needs to provide notice to the counterparty to inform them of the assignment.

Assignment agreement template 

If you are looking to assign your rights under a contract, you will need to draft an assignment agreement.

We have created one for you to use for any commercial contract. You can find it here .

We have also created a sample assignment agreement specifically for assigning intellectual property rights. You can find it here .

We also have an assignment agreement specifically for assigning patent rights. You can find it here .

Please note that this is a general summary of the position under common law and does not constitute legal advice. As the laws of each jurisdiction may be different, you may wish to consult your lawyer.

Pooja Batra

Pooja has more than 8 years of in-house legal experience in large mnc’s. she has advised on a wide range of corporate and commercial matters including drafting, reviewing and negotiating a variety of commercial contracts and other agreements across various business lines. if you would like to become a contributor to docpro, please click the link below:, novation agreement, agreement to novate, assignment agreement, agreement to assign, what is novation, novating contracts, novating a contract, contract for novation, assignment vs novation, novation vs assignment, novation real estate, novation agreement format, what is a novation agreement, novation contract, related posts.

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Introduction

Legally transferring contractual rights and obligations between two or more parties is a complex task that requires a novation agreement. This document allows for the formal and binding transfer of rights from one party to another without needing the other party to sign off on it. It can also be used in cases of merger or acquisition, allowing for the transfer of contractual rights and obligations from the original parties to a new one, as well as modifying existing agreements without needing to sign new documents; in these cases, it’s particularly helpful when parties are unable to agree on changes.

Enter Genie AI - founded in 2017 and ‘the world’s largest open source legal template library’, Genie AI uses millions of datapoints to teach its AI what a market-standard novation agreement looks like. With its database and community template library, anyone can draft high quality legal documents quickly and easily - without paying costly lawyer fees!

By understanding why novation agreements are necessary when transferring contracts between parties, we ensure all interests are protected with legally binding documentation. That’s why the Genie AI team provides step-by-step guidance on how to draft your own novation agreement, giving you complete peace of mind that you have adequate protection in place for your business or contractual needs. Plus, you don’t even need an account with us - our mission is simply ensuring that everyone has access to top quality legal documents when they need them! Discover how easy it is by accessing our template library today at https://genieai.com/ .

Definitions (feel free to skip)

Novation Agreement: A legally binding document used to transfer rights or obligations from one party to another. Substitution: When the obligations and rights of the original parties are completely transferred to the new parties. Addition: When the obligations and rights of the original parties are partially transferred to the new parties. Researching the relevant laws and regulations: Investigating the laws and regulations that may affect the agreement. Writing the agreement: Outlining the parties involved, the assets to be transferred, the terms and conditions of the agreement, and any additional clauses that may be necessary in the agreement. Making sure the agreement is legally valid: Ensuring that all of the necessary clauses and provisions are included, and that they comply with the relevant laws and regulations. Signing the agreement: Having each party sign the agreement in the presence of a witness to make the agreement legally binding. Witnessing the agreement: Having a third party sign the agreement to attest that the parties involved have agreed to the terms. Registering the agreement: Submitting forms, documents, and paying applicable fees to register the agreement with the relevant government or regulatory body. Unforeseen liabilities: Legal or financial liabilities that the parties may not be aware of. Breach of contract: When one of the parties does not abide by the terms of the agreement. Legal disputes: Arguments over the terms of the agreement or disputes over the ownership of assets. Seeking legal advice: Consulting a lawyer to ensure that the dispute is resolved in a manner that is legally binding and compliant with all applicable laws and regulations.

What a novation agreement is and why it is important

The different types of novation agreement, parties involved in a novation agreement, identifying the original parties, identifying the new parties, how to draft a novation agreement, researching the relevant laws and regulations, writing the agreement, making sure the agreement is legally valid, what should be included in a novation agreement, the parties involved, the assets to be transferred, the terms and conditions of the agreement, acknowledgement of the transfer of assets, how to execute the novation agreement, signing the agreement, having the agreement witnessed, keeping a copy of the agreement, how to register the novation agreement, determining if registering the agreement is necessary, understanding the registration process, completing the registration process, potential risks associated with a novation agreement, unforeseen liabilities, breach of contract, legal disputes, what to do if a dispute arises related to a novation agreement, reviewing the agreement, attempting to resolve the dispute, seeking legal advice if necessary, get started.

  • Understand what a novation agreement is and why it is important: A novation agreement is a contract that transfers one party’s rights and obligations to another. It is important because it allows the transfer of obligations without the consent of the original party, which can be beneficial in certain situations.
  • Research the legal implications of a novation agreement: Research what laws and regulations apply to novation agreements in your jurisdiction. Be sure to identify any potential risks or liabilities associated with the agreement.
  • Discuss the agreement with the parties involved: Make sure that all parties understand the agreement and are in agreement with its terms. This is especially important if one party is taking on the obligations of the other.
  • Seek legal advice or assistance: If you are unsure of any of the legal implications of a novation agreement, seek legal advice or assistance.
  • Draft the novation agreement: Once you have discussed the agreement with all parties involved, draft the novation agreement. Be sure to include all necessary details, such as the parties involved, the obligations being transferred, and any other relevant information.

How you’ll know when you can check this off your list and move on to the next step: When the novation agreement has been drafted and all parties involved have agreed to its terms and conditions, you can check this off your list and move on to the next step.

  • Learn about the different types of novation agreements, such as a complete novation, partial novation, and novation by consent
  • Understand the significance of each type of novation agreement and how it can be used for a particular purpose
  • Be aware of the advantages and disadvantages of each type of novation agreement
  • Comprehend the legal implications of each type of novation agreement
  • When you understand the different types of novation agreements and their uses, you can check this step off your list and move on to the next step.
  • Identify the three parties involved in the novation agreement: the original party, the new party and the third party
  • Make sure all parties are legally capable of entering into a contract
  • Establish the roles and responsibilities of each of the three parties in the agreement
  • Check that all parties are in agreement and have understood the terms of the novation agreement
  • Once all parties have agreed and signed the agreement, you can check this step off your list and move on to the next step.
  • Determine who are the current parties involved in the original agreement
  • Record the name and contact information of the original parties
  • Identify the roles and responsibilities of the original parties
  • Ensure the original agreement does not contain any clauses that might prevent the novation
  • When all of the above has been accomplished, you can move on to the next step of identifying the new parties.
  • Ensure that all relevant parties involved in the novation agree to the new arrangement.
  • Confirm the new party’s legal name, address, and contact details and make sure it is accurately reflected in the agreement.
  • Check whether the new party is aware and has accepted the responsibilities that they will be taking on as part of the novation.
  • When the new party has been identified and the details have been confirmed, this step can be marked as complete.
  • Identify the parties to the novation agreement and their respective roles and responsibilities
  • Gather all relevant documents and information necessary for drafting the agreement
  • Draft the novation agreement according to the relevant laws and regulations, ensuring all necessary clauses are included
  • Ensure that all parties involved are aware of their respective rights and obligations under the agreement
  • Have the agreement reviewed by a qualified legal professional to ensure it meets all requirements and is legally binding
  • Have all parties sign and date the agreement
  • Store the agreement in a safe and secure location

Once all of the above steps have been completed, you can check this off your list and move on to the next step.

  • Research relevant laws and regulations specific to the novation agreement in the jurisdiction the agreement will be executed
  • Consult with a legal professional to ensure the agreement meets all applicable laws and regulations
  • Review cases, articles, and other resources to gain a better understanding of the laws and regulations
  • Once you have a thorough understanding of the applicable laws and regulations, you can move on to the next step of writing the agreement.
  • Identify all parties involved in the novation agreement, including the transferor, the transferee, and the other party.
  • Set out the terms of the novation agreement, such as the date the agreement will take effect, the obligations of each party, and the date of termination.
  • Set out the consideration for the novation agreement, such as cash, services, or other assets.
  • Include any additional provisions that the parties may require.
  • Ensure that the parties sign and date the novation agreement.

How you’ll know when you can check this off your list and move on to the next step:

  • Once all parties have signed and dated the novation agreement, you can move on to the next step in the process, which is making sure the agreement is legally valid.
  • Ensure that the agreement meets all of the legal requirements for a valid novation agreement, including that it must be in writing and signed by all parties.
  • Check that the agreement is in the appropriate form, contains all required information, and has been drafted correctly.
  • Make sure that all parties to the agreement have the legal capacity to enter into the agreement and have received independent legal advice where necessary.
  • Review the agreement and ensure that all parties understand their rights and obligations.
  • When you have completed all of the above steps, you can be confident that the agreement is legally valid and can proceed to the next step.
  • A clear description of the parties that are transferring the contract, and the parties that will be receiving the contract
  • A detailed list of the rights and obligations that are being transferred
  • A clause detailing the date of the novation agreement
  • An acknowledgement that the original contract is being terminated
  • A clause outlining the consideration, if any, to be exchanged between the parties
  • A clause that specifies the laws that will govern the novation agreement
  • A clause that both parties must sign to make the agreement legally binding

Once you have included these elements in the novation agreement, you can check this step off your list and move on to the next step.

  • Establish the parties involved in the novation agreement: the original party, the new party, and the other party to the original agreement
  • If there are multiple parties to the original agreement, make sure to list them all
  • Confirm that all parties involved in the novation agreement have agreed to the terms
  • Once all parties have been established and the terms have been agreed to, the novation agreement can be finalized and signed off on by all parties involved
  • Identify the assets to be transferred in the agreement
  • List the assets to be transferred, such as equipment, contracts, rights, or services
  • Include the details of the assets, including quantity and value
  • Include any other information relevant to the assets, such as any warranties or restrictions
  • When you have identified and listed all the assets to be transferred, you can check this step off your list and move on to the next step.
  • List out the specific terms of the novation agreement, such as the fee to be paid, any warranties, and any other conditions
  • Ensure that the agreement complies with applicable laws and regulations
  • Specify the governing law, jurisdiction, and any other relevant legal information
  • Include a choice of law clause and a venue selection clause
  • Make sure that the agreement is legally binding and enforceable
  • Include any specific provisions needed for the transfer of assets
  • Check that all parties agree to the terms and conditions of the agreement
  • Confirm that all parties have signed the agreement
  • When all of the above steps are completed, you can move on to the next step of acknowledging the transfer of assets.
  • Determine which assets are being transferred in the novation agreement
  • Identify the relevant parties to the novation agreement, including the transferor, the transferee, and the other parties
  • Include a clause in the novation agreement that acknowledges the transfer of assets
  • Make sure the clause includes language that describes the transfer in detail and specifies the date the transfer takes place
  • Have all the parties involved in the novation agreement sign and date the agreement
  • Check that all the parties have signed and dated the novation agreement before moving onto the next step

You’ll know you can check this off your list and move on to the next step when all the parties involved have signed and dated the novation agreement.

  • Prepare the agreement: Decide who will be the novated party, the assignee, the assignor, and the third party. Ensure the agreement is in writing and signed by all the involved parties.
  • Get all the necessary documents: Gather all the necessary documents, like title deeds, security documents, and evidence of title, so that they can be transferred.
  • Transfer the documents: Transfer the documents and assets to the assignee as specified in the novation agreement.
  • Obtain the release of third party obligations: Obtain the release of any third-party obligations, such as a bank loan, if there are any.
  • Check completion of transfer: Verify that the transfer of documents and assets has been completed, and that all parties have signed the agreement.
  • Record the novation: Record the novation agreement in the relevant registries or offices.

You will know that you have completed this step of the process when all the documents have been transferred, all the parties have signed the agreement, and the novation has been recorded.

  • Both parties should sign the agreement with their full names and title or capacity
  • Have two witnesses present at the signing of the agreement, who are not parties to the contract
  • Witnesses should also sign and date the agreement
  • Once the agreement is signed, it is binding and both parties must adhere to the agreed terms
  • When the agreement is complete and all parties have signed, you can check this off your list and move on to the next step.
  • Have both parties present when the agreement is being signed
  • Get a witness to sign the agreement in the presence of both parties
  • Make sure the witness is over the age of 18 and is not a party to the agreement
  • Have the witness sign a statement confirming they witnessed the execution of the agreement
  • When done, you can now move on to the next step of keeping a copy of the agreement.
  • Make sure to make two copies of the signed agreement.
  • Have each party keep one copy of the agreement.
  • After each party has a copy of the agreement, you can check this step off your list and move on to the next step.
  • Contact the relevant government agency, such as the Companies House in the UK, to complete the registration process
  • Ensure that all necessary documents are included in the registration process
  • Pay the relevant fees associated with the registration
  • After the registration is complete, receive a confirmation notice from the relevant government agency
  • Check that the novation agreement is officially registered and on file with the relevant government agency
  • Once the registration is complete, you can check this step off your list and move on to the next step.
  • Assess the parties and their roles in the agreement - Is one party in the existing agreement exiting and being replaced with a new one?
  • Research the laws in the jurisdiction where the agreement is based to determine if registration is necessary
  • Check if the agreement is required to be filed with a court or government office
  • Consult with a lawyer to confirm that the agreement is structured properly and that registration is not necessary
  • Once all necessary information is gathered, you will be able to make an informed decision on whether the agreement needs to be registered or not.
  • Understand the legal definition of a novation agreement
  • Become familiar with the applicable laws of your jurisdiction, as they may affect the registration process
  • Check if you need to register the agreement in order to make it legally binding
  • Gather the necessary documents required for registration, such as a copy of the novation agreement
  • Make sure all parties involved sign the agreement prior to registration
  • You will know you have completed this step when you have all the documents necessary for registration.
  • Submit the completed novation agreement to the relevant parties.
  • Make sure to include all necessary signatures from the relevant parties.
  • Ensure that the novation agreement is in full compliance with all applicable laws.
  • Ensure that all parties involved are fully informed of their rights and obligations under the agreement.
  • Once all the necessary signatures have been obtained and the novation agreement is in full compliance with applicable laws, the registration process is complete.
  • Understand and identify the liabilities associated with the novation, including any tax implications
  • Determine other risks associated with the novation, such as potential disputes between parties
  • Account for any additional risks that may arise as a result of the novation, such as changes in regulations or laws
  • Ensure that the liabilities, risks and costs associated with the novation are understood and accepted by all parties involved
  • Make sure that appropriate insurance coverage is in place to cover any potential losses

You will know you have completed this step when you have identified and addressed all potential risks associated with a novation agreement.

  • Research the applicable laws and regulations in the jurisdiction of the novation agreement
  • Determine any specific liabilities that may not be covered in a typical novation agreement
  • Draft language to address these specific liabilities in the novation agreement
  • Review the language with all parties involved in the novation agreement
  • Once all parties have agreed to the terms, you can check this off your list and move on to the next step.
  • Draft a clause outlining the remedies available to the parties in the event that either party breaches the novation agreement
  • Include any applicable penalties or damages that the non-breaching party is entitled to
  • Specify a time frame for the breach to be rectified or the novation agreement terminated
  • Once the clause is drafted, review it with legal counsel to ensure it meets the requirements of the novation agreement
  • When the clause is finalized and approved, you can move on to the next step: Legal disputes.
  • Become familiar with the relevant laws, regulations, and case law related to contractual disputes
  • Seek legal advice if you are uncertain about any aspect of the dispute
  • Determine if a dispute is likely to arise related to the novation agreement
  • If the parties are unable to resolve the dispute through negotiation, consider initiating a formal dispute resolution process such as arbitration or litigation
  • Ensure that the dispute resolution process is properly documented
  • Monitor the progress of the dispute resolution process and take any necessary action to ensure that the dispute is resolved in a timely manner

You’ll know that you can check this off your list and move on to the next step when you have taken all the necessary steps for dispute resolution and the matter has been resolved.

  • Seek legal advice from a qualified lawyer experienced in contract law.
  • Consider other dispute resolution options such as mediation, arbitration or negotiation.
  • Research the governing law and relevant case law related to the agreement.
  • Draft a response to the dispute in accordance with the relevant legal principles.
  • Present your response to the other party and work with them to resolve the dispute.

When you have completed this step, you will have researched and responded to the dispute according to the governing law and relevant case law. You will have presented your response to the other party and worked with them to resolve the dispute.

  • Understand the existing agreement and the obligations of the parties
  • Be aware of the new agreement, including the new parties and their obligations
  • Check that there are no conflicting provisions in the new agreement
  • Ensure that each party has received proper legal advice
  • Confirm that all the necessary documents are in place
  • Make sure that all parties involved have agreed to the novation

When you have completed the review of the novation agreement, you can check it off your list and move on to attempting to resolve the dispute.

  • Contact the other parties directly and discuss the dispute
  • Ask each party to provide their side of the story
  • Consider any suggestions or solutions presented by the parties
  • Research relevant case law, legislation and industry standards to inform your decision
  • When both parties have had the chance to express their views and you feel confident that you have enough information to make an informed decision, you can move on to the next step.
  • Research and consult a qualified attorney to determine the best course of action for the novation agreement.
  • Ask for a cost estimate to complete the agreement.
  • Ask the attorney to review the agreement to ensure all the necessary elements are included and to help with any questions or concerns you may have.
  • When you are comfortable and have all the necessary information, you can proceed with checking this off your list and moving on to the next step.
  • Review the final version of the Novation Agreement and ensure that all terms and conditions are in line with the initial parties’ agreement
  • Ensure that all parties have signed the document and that it has been properly witnessed and/or notarized if necessary
  • Make copies of the Novation Agreement and distribute these to all parties involved
  • Store the original Novation Agreement in a safe and secure place
  • Once all of the above is completed the Novation Agreement will be legally binding and the parties will be legally bound by the terms and conditions stated in the document

Once the above is completed, you can check this off your list and move on to the next step.

Q: What is a novation agreement?

Asked by Charlie on April 21st, 2022. A: A novation agreement is a contractual arrangement which creates an obligation for one party to fulfill the contractual obligations of a second party. This type of contract is generally used when parties wish to transfer the rights and obligations of a contract between them, such as when a new company takes over the assets of an old company. The agreement typically includes provisions related to warranties, liabilities and indemnities, as well as any third parties who may be involved in the transaction. It is important to ensure that all parties involved understand and agree to the terms of the novation agreement prior to entering into it.

Q: When should I use a novation agreement?

Asked by Noah on October 7th, 2022. A: Novation agreements are typically used in situations where two or more parties need to transfer rights and obligations from one party to another. Common uses include when a business is sold and transferred from one owner to another, when a business partner leaves and another partner takes their place, or when a supplier changes from one company to another. In each case, it is important that any existing contracts are updated accordingly and that all parties understand the new terms and conditions.

Q: What should I include in my novation agreement?

Asked by Emma on December 3rd, 2022. A: When drafting a novation agreement, it is important to ensure that all relevant information is included. This includes details of who will be taking over the contractual obligations of the other party, details of any warranties or liabilities associated with the transfer, any indemnity agreements that may need to be put in place, and any specific clauses related to third parties who may be involved in the transaction. It is also important to ensure that the agreement is legally binding and that all parties are aware of their respective rights and responsibilities under it.

Q: Are there any differences between UK, US and EU novation agreements?

Asked by William on February 6th, 2022. A: Yes, there can be differences between novation agreements depending on where they are being used. Generally speaking, UK novation agreements will be based on English law whereas US agreements will be based on US law. Similarly, EU-based agreements will reflect the laws of the EU member states in which they are being used. As such, it is important to ensure that any novation agreement you draft complies with applicable laws in your jurisdiction before entering into it.

Q: What are some common mistakes to avoid when drafting a novation agreement?

Asked by Ava on August 5th, 2022. A: One common mistake when drafting a novation agreement is failing to provide sufficient detail about who is taking over the contractual obligations from whom. It is also important to ensure that all parties understand their respective rights and responsibilities under the agreement prior to entering into it. Furthermore, it is essential that any indemnity clauses are properly drafted so as not to expose any of the parties involved in the transaction to unnecessary liability or risk. Finally, it is essential that all documentation related to the transaction has been properly reviewed by legal counsel prior to signing off on any final documents or agreements.

Example dispute

Raising a lawsuit involving a novation agreement.

  • The plaintiff must be able to prove that the novation agreement was legally binding and that the defendant has breached the agreement in some way.
  • The plaintiff can demonstrate that the defendant has failed to meet their contractual obligations, such as failing to make payments or providing goods or services in a timely manner.
  • The plaintiff must be able to prove that they have suffered damages as a result of the defendant’s breach of the novation agreement.
  • The plaintiff must provide evidence of the damages they have suffered, such as lost income or expenses incurred due to the defendant’s failure to fulfill the novation agreement.
  • The plaintiff may also be able to seek punitive damages if the defendant acted in bad faith or with malicious intent.
  • If the plaintiff can demonstrate that they have suffered damages as a result of the defendant’s breach of the novation agreement, they may be able to win the lawsuit and receive compensation for their losses.

Templates available (free to use)

City Of London Law Society Novation Agreement Novation Agreement For The Conversion Of A General Partnership To An Llp

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Novation agreement template

Novation agreements ensure that rights and obligations transfer seamlessly from one party to another. This free novation agreement template can support with the transition.

transfer novation agreement

Novation agreements ensure a smooth transition of rights and obligations from one party to another. That's why it's important to get them right first time.

This guide talks about all things novation contract agreement – we even have a free novation agreement template below for you to use as a starting point.

What is a novation contract agreement?

Novation is when a party to a contract transfers their rights, obligations, or liabilities to someone else who wasn’t involved in the original contract

A novation agreement is a legal contract involving three parties. It enables the transfer of rights and responsibilities from one party to another with the full consent of everyone involved.

This means, the party that initially held certain rights and obligations (termed the 'outgoing party' or 'transferor') can pass these on to another party (termed the 'incoming party' or 'transferee').

An example, of novation may be when a small supplier/business changes location and finds their business customer another source to replace them directly.

The most important thing to note here is that the original agreement gets superseded by this new arrangement, effectively forming a fresh contract between the continuing party and the incoming party.

Why are novation agreements important?

Novation agreements are especially important when:

  • selling or transferring the ownership of a company or its assets;
  • adjusting debt agreements; or
  • amending service contracts when outsourcing. 

By ensuring a legal and mutual transfer of obligations and rights, novation agreements reduce potential disputes and enable smoother transitions.

When is a novation agreement required?

A novation agreement comes into play in various situations where it's necessary to transfer the rights and obligations of an existing contract to a new party. Below, we've listed some of the most common scenarios where a novation agreement might be required:

  • Change of service provider: If your business decides to switch service providers, a novation agreement will be crucial to transfer the existing contract from the current service provider to the new one. ‍
  • Business sale or merger: During the sale, merger, or acquisition of a company, novation contract agreements allow for the smooth transfer of contracts associated with the business from the old owner(s) to the new one(s). ‍
  • Debt restructuring: In the case of debt restructuring or refinancing, novation agreements can be used to replace the debtor while keeping the remaining terms of the loan intact. ‍
  • Property lease transfers: When a tenant wants to move out before the end of the lease term, a novation agreement can be used to replace the original tenant with a new one in the lease agreement. (Need a property management agreement template ?) ‍
  • Contractual risk management: If a party to a contract is at risk of not being able to fulfil their contractual obligations , a novation agreement can be used to replace them with a party who can. ‍
  • Employee role changes: If an employee's role changes significantly, such as a promotion or transfer to another department, a novation agreement can be used to replace the original employment contract with a new one that reflects the new role.

transfer novation agreement

In essence, anytime you need to replace one party in a contract with another, while keeping the rest of the contract intact, you should consider using a novation agreement.

However, it's essential that you obtain legal advice to ensure that a novation agreement is appropriate for your specific circumstances.

What should a novation agreement template include?

A novation agreement must contain specific elements to ensure it is legally valid and to clearly outline the rights and obligations of all parties involved. A novation agreement should include:

1. Identification of parties

‍ Clearly identify all three parties involved - the outgoing party (the one transferring the obligations and rights), the incoming party (the one receiving the obligations and rights), and the remaining party (the one whose relationship with the outgoing party will end and begin afresh with the incoming party).

2. Details of the original contract

‍ The agreement should specify and reference the original contract that's being replaced. This includes its date, the parties involved, and its essential terms and conditions. The objective is to clearly establish the foundation upon which the novation is occurring.

3. Novation details

‍ The agreement should explicitly state that the rights and obligations of the outgoing party are being transferred to the incoming party. The incoming party should accept these obligations and rights, and the remaining party should consent to the replacement of the outgoing party.

4. Release clause

‍ There should be a clear statement that the continuing party releases the outgoing party from any future obligations under the original contract. This absolves the outgoing party of any liability for future performance of the contract .

5. Indemnity clause

‍ The agreement should include an indemnity clause where the incoming party agrees to indemnify, or compensate, the outgoing party for any losses arising from any breaches of the contract that occur after the novation.

This ensures the outgoing party isn't held responsible for actions of the incoming party after the novation takes place.

6. Governing law

‍ Specify the jurisdiction or the legal system that will interpret the novation agreement and manage any disputes that may arise. This is often the same jurisdiction as the one specified in the original contract.

7. Execution details

‍ Finally, the agreement should contain a place for all parties to sign and date. The signatures indicate all parties' acceptance of the novation agreement.

transfer novation agreement

Remember, these are just the standard elements of a novation agreement. Depending on the circumstances and the jurisdiction, more detailed terms may be required.

Always consult with a legal professional when drafting a novation agreement to ensure it accurately reflects the intent of all parties and complies with applicable laws. After all, novation agreements are versatile and can be used in a wide variety of scenarios. No template will or can be one-size-fits-all.

How do novation agreements typically work?

The creation and management of novation agreements, when handled manually, can be a complex and time-consuming process.

iIt often involves various steps that demand careful attention. Which include:

1. Identifying the need for a novation agreement

‍ This is the initial stage of novation. This stages determines if the responsibilities and rights of an existing contract should be transferred from one party to another or not.

This usually involves a lot of consideration and a discussion with various stakeholders to decide which course of action to take.

2. Consulting with legal teams

Consulting with your in-house legal team is crucial to making sure you understand the nuances of novation and the implications of the new arrangement. Missing this important step may land you in difficulty later down the line.

3. Drafting the novation agreement

Once you've established how you want the novation to work, you need to draft the novation agreement. How you do this varies depending on whether you have a novation agreement template in place or not.

If you do, you'll need to populate and edit the novation agreement template manually to tailor it to your specific needs. This involves describing the original contract, the parties involved, and the exact obligations and rights being transferred.

But if you don't have a novation agreement template to hand, you'll need to ask your legal team to draft one from scratch for you. This can take a while given that legal teams often report feeling buried in low value work.

4. Reviewing and negotiation

‍ This stage often involves multiple rounds of review and amendments to ensure all parties are satisfied with the terms of the agreement.

This is a repetitive process that happens across multiple different tools, with redlines, comments and suggestions bouncing back and forth via email and across new versions of the novation agreement.

5. Signing the agreement

‍ After extensive reviews and negotiations, the agreement is manually signed by each party, thereby cementing the terms legally.

Traditionally, the novation agreement would be signed in wet ink . However, it's often signed using an electronic signature tool today since this gives parties the freedom to sign contracts online.

6. Post-signature contract management

‍ After the agreement is signed, it needs to be managed. This ranges from monitoring the compliance of the incoming party with the transferred obligations and ensuring the outgoing party is released from their obligations to manually tracking any breaches or disputes that might arise.

This post-signature contract management process is completed through physical filing systems or spreadsheets, which can be challenging to keep organized and updated.

How can Juro help to manage your novation agreement template?

1. automated contract drafting.

We can help. Juro enables you to automate your novation agreement templates, simplifying the contract drafting process . The platform's intuitive editor allows parties to generate novation agreements in seconds using automated contract templates .

transfer novation agreement

2. Collaborative review and negotiation

‍ Juro offers a collaborative workspace where contract terms can be discussed, negotiated, and agreed upon in real-time - all within your browser. This eliminates the need for lengthy email threads, reduces miscommunication, and accelerates the agreement process.

3. Electronic signing

Juro's native electronic signature enables signatories to sign novation agreements on any device, rather than them having to be present in-person to sign the contract in wet ink.

Not only is this convenient, but it also speeds up the signing process considerably compared to manual signing.

transfer novation agreement

4. Secure storage and tracking

‍ Juro's software keeps all your contracts in one place, ensuring that monitoring contract compliance , tracking obligations, and managing potential disputes is made easier and more efficient.

Juro also integrates seamlessly with platforms you already use, like Salesforce , Google Drive , and Slack , enabling data to move seamlessly between platforms.

5. Automated reminders and notifications

‍ Juro takes the task of manually remembering key dates and actions off your shoulders by providing automatic reminders and notifications for your novation agreements.

Automate your Novation Agreement with Juro

To find out more about Juro and how it empowers businesses to create, agree, update and manage contracts more efficiently, hit the button below.

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The Breakdown: Novation Agreements for Contractors and Subcontractors

Main topics:

Understanding Novation Agreements in Construction - A Comprehensive Guide

Navigating novation agreements key considerations for construction industry professionals, demystifying novation agreements in construction: what you need to know, how novation agreements impact project delivery and performance in the construction industry.

Novation agreements are a common practice in the world of contracting and subcontracting. Essentially, a novation agreement is a three-party contract in which one party transfers all of their obligations and rights from a contract to another party. In simpler terms, this means that a contractor or subcontractor can transfer their work and obligations to another party entirely.

The Breakdown: Novation Agreements for Contractors and Subcontractors

The Benefits of Novation Agreements

The risks of novation agreements, the key takeaway, what is a novation agreement, why are novation agreements used in construction, advantages of novation agreements in construction, key takeaways for understanding novation agreements in construction, key considerations for navigating novation agreements, advantages of navigating novation agreements in the construction industry, key takeaways, what are novation agreements, how do novation agreements work, what you need to know before signing a novation agreement, advantages of novation agreements, what are novation agreements, impact on project delivery, impact on performance, in conclusion.

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Transferring a loan by novation

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Key definition:

Loan definition, what does loan mean.

An advance of funds from one party (the creditor ) to another party (the debtor ) for a period of time. The funds can be advanced for an agreed period or be repayable upon demand. Interest is usually paid on the advance which can be secured or unsecured

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Loan Novation Agreement: Everything You Need to Know

A loan novation agreement is a contract between parties in which one of the obligations under the contract is replaced with another requirement. 3 min read updated on January 01, 2024

A loan novation agreement is a contract between parties in which one of the parties is replaced with another, or one of the obligations under the contract is replaced with another requirement. This is the exact definition of novation. It is similar to the concept of an assignment; however, there are some key differences between the two.

Novation vs. Assignment

There are 3 key differences between a novation and assignment, as follows:

1.Transferring of responsibility

2.Consent requirement

3.Termination of the original contract

Novation involves transfers of the obligations and responsibilities under the contract, whereas an assignment doesn’t transfer such responsibilities. Furthermore, the assignment of a contract doesn’t generally require consent of the benefiting party; novation does require such consent. Lastly, assignment doesn’t terminate the original contract where novation does in fact terminate the original contract, and the loan novation agreement steps in as the refreshed version.

Novation Agreement: An Overview

The novation is a way to transfer debt to a wholly unique party, who will then step in and take the place of the original party in the contract. Such change requires consent of both parties, including the party that is benefiting from the change. An example of this would be if a person obtains a loan from a lending bank for coverage of student fees. Thereafter, while the student (debtor) is paying back the loan, the lender will sell the remainder of the loan to another lending institution. This is common in student loans as well as home mortgages. Thereafter, the old lender will have no obligation under the original contract; it will be as if the original contract ceased to exist and is replaced with the new loan agreement.

When engaging in novation, the parties will cancel the original contract and create a brand new contract. However, the same terms and provisions must be kept in the agreement, since it would be too burdensome for the debtor to modify the repayment terms. With that said, the lender might continue to keep some obligations that the debtor hasn’t taken advantage of. This could occur if the debtor hasn’t used loan funding that was previously available via a revolving credit facility.

Novation Agreement Examples

For example, if John owes Sue $100, but Sue owes George $100, the responsibility under both parties could be subject to a novation in which John will directly pay George $100 rather than have Sue involved. Thus, John, Sue, and George can all come to an agreement that instead of Sue being involved in the payments, John will pay George the $100 without involving Sue in the transaction. As such, John and George might come up with their own agreement, i.e., John might offer George a $100 gift card that George might accept as a form of payment.

Novation could also occur in property arrangements whereby a tenant signs an annual lease with a landlord. During such lease, the tenant might wish to sublet the apartment to a third party, so long as the landlord agrees. If the landlord agrees to this, then the person subletting and landlord could enter a novation removing the original tenant from the contract, and starting their own contract. However, this is only if all parties agree, including the original tenant.

Novation agreements can also be found in construction contracts . An example of this would be if a contractor transfers duties to another contractor, i.e., subcontracting, with the client’s approval. If the subcontractor takes over full responsibilities for the contractor, then the client and subcontractor might enter into a loan novation agreement discharging the original contractor from his duties.

In the derivative market industry , novation will have a different meaning. It refers to an agreement with a clearing house. Instead of transacting directly with buyers, the seller transfers his securities to the clearing house, which in turn will sell them to the buyer. Therefore, while the transaction is bilateral, the clearing house will still act as the middle man. This reduces the credit risk for participants of the transaction who might be unable to identify the credit rating or worthiness of the other party involved. The only risk on the part of both parties is that the clearing house will be insolvent.

If you need help learning more about a loan novation agreement, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.

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Content Approved by UpCounsel

  • What is Novation of Contract
  • Novation Agreement
  • Contract Novation Letter
  • Contract Novation
  • Deed of Novation
  • Novation of Contract
  • Contract Novation Agreement
  • Assignment vs Novation
  • Contract Transfer
  • Novation Contract Example

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COMMENTS

  1. Novation Agreement: What is a novation agreement (2023)?

    Novation is used in contract law and business law which defines the act of: Replacing an obligation with another obligation. Adding an obligation to perform. Replacing a party with another in an agreement. There are three main ways to make a novation: Novation: A simple novation doesn't involve entry of a third party.

  2. 42.1204 Applicability of novation agreements.

    42.1204. Applicability of novation agreements. (a) 41 U.S.C.6305 prohibits transfer of Government contracts from the contractor to a third party. The Government may, when in its interest, recognize a third party as the successor in interest to a Government contract when the third party's interest in the contract arises out of the transfer of-.

  3. Subpart 42.12

    The contracting officer responsible for processing and executing novation and change-of-name agreements shall be determined as follows: (a) If any of the affected contracts held by the transferor have been assigned to an administrative contracting officer (ACO) (see 2.1 and 42.202), the responsible contracting officer shall be- (1) This ACO; or (2) The ACO responsible for the corporate office ...

  4. Novation Agreement: Everything You Need to Know

    Usually, novation happens when a new party assumes an obligation to pay that an original party had incurred. The debts transfer to someone else, releasing the original debtor from the obligation. The nature of the transaction depends on the agreement that the parties make. Three parties are involved in a novation: The transferee. The transferor.

  5. Novation

    Novation agreements are used in the sale of businesses, takeovers, and mergers and acquisition transactions. How Novation Works. ... Also, novation is a consensual transfer of rights and obligations that requires all contracting parties to agree and sign the agreement. On the contrary, for an assignment to be completed, it does not require the ...

  6. Novation: Definition in Contract Law, Types, Uses, and Example

    Novation is the act of replacing one party in a contract with another, or of replacing one debt or obligation with another. It extinguishes (cancels) the original contract and replaces it with ...

  7. Novation agreements

    A novation agreement transfers both the benefits and the obligations of a contract to a third party. In contrast, an assignment does not transfer the burden of a contract. This means the outgoing party remains liable for any past liabilities incurred before the assignment. For more information, read Assigning a contract .

  8. Creating a Novation Agreement: A Step-by-Step Guide

    Novation Agreement Template . Drafting a novation agreement is challenging and it is easy to miss out on key information. Don't worry - we have prepared a sample novation agreement for you to use. There are two types of novation agreements - one for a full transfer and release and another for a partial transfer and release.

  9. Novation Agreement for the Transfer of Ownership

    Overview. The Novation Agreement for the Transfer of Ownership is an agreement between the parties to novate the time charter party from the original owners to the new owners on terms set out in the agreement. The latest edition of this contract is the Novation Agreement for the Transfer of Ownership, issued in 2016.

  10. Novation Contract Example: Everything You Need to Know

    Novation contracts transfer one of the contractual party's rights and obligations to another party. The second contracting party remains the same. The new party basically takes the place of the departing entity. ... Two different novation agreements exist: a standard contract and an ab initio novation contract. In a standard agreement, the new ...

  11. PDF Novation Agreements Guiding Principles

    2.1.1 Is a Novation Agreement Required? Federal law prohibits the transfer of government contracts to a third party (discussed in paragraph 2.4). Nevertheless, under certain circumstances, FAR 42.1204(a)(2) identifies three situations in which the Government may consent (through the execution of a formal "Novation Agreement") to the ...

  12. Drafting a Novation Agreement

    A: Novation agreements are typically used in situations where two or more parties need to transfer rights and obligations from one party to another. Common uses include when a business is sold and transferred from one owner to another, when a business partner leaves and another partner takes their place, or when a supplier changes from one ...

  13. Transferring supply chain contracts

    Novation agreement: a novation agreement, or letter, signed by all three parties is the most complete approach. Obviously this is a relatively cumbersome and costly approach as the existing company would have to send out agreements to all its customers. ... Deemed acknowledgement of transfer: a novation does not need to take the form of a ...

  14. Novation Agreement

    The Novation Agreement is structured as a letter addressed to the remaining party. Therefore, it starts by identifying and addressing this party. Transfer of agreement. This section introduces the intended novation. First, it clearly identifies the original contract that the Novation Agreement applies to by noting its date, parties, and purpose.

  15. Assignment vs Novation: Everything You Need to Know

    A novation occurs when a party would like to transfer both the benefits and the burden within a contract to another party. Similar to assignment, the benefits are transferred, but unlike assignment, the burden is also transferred. When a novation is completed, the original contract is deleted and is replaced with a new one.

  16. Novations: A Simple Checklist For A Not So Simple Requirement

    The FAR identifies three situations in which the Government may consent (through the execution of a formal "Novation Agreement") to the transfer of a federal contract: The sale of all a contractor's assets, or the entire portion of the assets involved in performing a contract with a provision for assuming liabilities;

  17. Novation agreement template

    September 29, 2023. Novation agreements ensure that rights and obligations transfer seamlessly from one party to another. This free novation agreement template can support with the transition. Click on the image above to find out how you can try the full novation agreement template in Juro. Our templates are for general information only.

  18. Assignment and novation

    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 ...

  19. The Breakdown: Novation Agreements for Contractors and Subcontractors

    Novation agreements are a common practice in the world of contracting and subcontracting. Essentially, a novation agreement is a three-party contract in which one party transfers all of their obligations and rights from a contract to another party. In simpler terms, this means that a contractor or subcontractor can transfer their work and obligations to another party entirely.

  20. Transferring a loan by novation

    The note explains that novation differs from assignment as it allows the existing lender to transfer both its rights and obligations. The key advantage is the new lender gets a direct contractual relationship with all parties. Consent of the borrower is required, but loan agreements often provide this upfront.

  21. Novation of contract : what you need to know

    There are three parties that sign a novation agreement:- ... How does novation work. Novation involves the transfer of contractual liability from the original party to a third party. Mutual consent between the parties to go through with the novation is an essential ingredient. Generally, novation takes place when the performance of the contract ...

  22. Loan Novation Agreement

    There are 3 key differences between a novation and assignment, as follows: 1.Transferring of responsibility. 2.Consent requirement. 3.Termination of the original contract. Novation involves transfers of the obligations and responsibilities under the contract, whereas an assignment doesn't transfer such responsibilities.

  23. Assignment and Novation: Transferring Contracts in Singapore

    There are 2 methods of transferring a contract in Singapore. If you want to transfer just the rights under the contract, you can perform an assignment of the contract.; On the other hand, if you want to transfer both the rights and obligations under the contract, you can perform a novation of the contract.; Assignment: Transferring Only Your Rights Under the Contract to a Third-Party