Definition
Novation is a legal process in which an existing contract is replaced by a new one, transferring rights and obligations from one party to another. In real estate, novation is often used when a buyer assumes a seller’s mortgage or when a new party replaces an existing one in a contractual agreement.
Explanation
Novation differs from assignment in that it completely replaces the original contract, releasing the original party from any future obligations. It is commonly used in:
- Mortgage Assumptions – A new borrower takes over an existing mortgage, and the lender releases the original borrower from liability.
- Real Estate Purchase Agreements – A buyer backs out of a contract, and the seller replaces them with a new buyer.
- Lease Agreements – A tenant transfers their lease obligations to another tenant with the landlord’s approval.
For novation to be legally binding, all parties involved—including the lender or property owner—must agree to the new terms in writing.
Key Benefits of Novation:
- Releases the original party from financial and legal responsibility.
- Prevents disputes by ensuring all parties formally agree to changes.
- Can be used to renegotiate contracts without starting over.
Example
A homeowner with a 3% fixed-rate mortgage wants to sell their home. Instead of getting a new loan, the buyer assumes the mortgage through a novation agreement. The lender releases the seller from liability, and the buyer takes over the loan under the same terms.