Contract Assignment vs. Novation in Real Estate

Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

Contracts are at the center of real estate transactions. In this lesson, you'll learn about a contract assignment and a novation. We'll discuss the similarities and differences between the two and provide illustrative examples.

Contracts - A Quick Refresher

Boiled down to its essential essence, a contract is simply a legally enforceable promise. You'll find contracts everywhere in real estate transactions. A listing agreement between a seller and a broker is a contract. The purchase agreement between the buyer and seller is a contract. If you have a property professionally inspected before purchase, you'll have a contract with the home inspector. The title insurance policy you buy for your house at closing is a contract between you and the insurance company. Even the loan provided by your lender to purchase the house is a contract, as is the mortgage you gave to the bank to secure the loan.

Contract Assignment - Definition & Example

A contract assignment occurs when some or all of the rights and obligations under a contract are legally transferred to someone else. For example, you may enter into a purchase agreement to buy a duplex for investment purposes, but you transfer your right to purchase the property to another person. The person doing the transferring is called an assignor and the person receiving the transfer is called the assignee. Most contracts can be transferred so long as the contract doesn't have a provision that prohibits assignments.

One important exception to the general rule that contracts can be freely assigned is personal service contracts. For example, if you contracted with a famous architect to design your new home, the architect can't assign his obligation to design it without your consent even if the contract doesn't prohibit assignments in general. This is because the contract involves a personal service that is unique to that individual. You didn't contract just for any architect; you wanted this one to design your home.

You also need to be aware of another very important caveat to contract assignments. Assuming your contract doesn't prohibit assignments, you are free to assign your rights and benefits under the contract to someone else, but you are not free to rid yourself of the burdens and obligations imposed upon you by the contract. In order to assign your obligations under a contract, the other party to the contract must agree. An example will help illustrate.

You've entered into a purchase contract to buy the duplex we discussed above. But you run short on cash and decide to assign your right to a friend who is willing to purchase the duplex in your stead. Since the purchase agreement doesn't prohibit assignment you can successfully transfer the benefit of the contract to him, which means he will have the legal right to force the sale. However, your friend ends up short on cash himself and reneges on the purchase. The seller can turn around and demand that you perform and purchase the property unless the seller has previously agreed to the assignment of your obligation to purchase.

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