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Novation Clause in Contract Law

Jack Woerner, Tisha Collins Batis
  • Author
    Jack Woerner

    BA in Political Science with Emphasis on Social Studies Education at Brevard College, 6 years experience (2 years online) teaching Economics, Personal Finance, APUS Government and more. Certified Gifted/Talented Teacher.

  • Instructor
    Tisha Collins Batis

    Tisha is a licensed real estate agent in Texas. She holds bachelor's in legal studies and a master's degree in criminal justice.

What is novation in real estate? What is a novation agreement? See the novation definition. Learn about the novation of a contract. See examples of it. Updated: 03/01/2022

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Novation: Definition

The novation definition in contract law is the process of replacing an original contract with a substitute contract. A novation of contract means that the associated parties are no longer legally bound to the terms laid out in the original contract. They also do not get to gain or benefit from any of the terms connected to the original contract. The original contract is completely void of any legal obligations and a new contract is created.

What is novation in real estate?

The novation real estate process works similar to regular novation in contract law. Where one agreement is replaced by a new contractional agreement. This happens most often when property or real estate is being bought and sold. One party may not like the price or the condition of the home and want to change the terms of the estate contract. This can also occur if someone is selling real estate and the buyer could not meet the requirements to follow through with the purchase in time. Novation in real estate can also occur in tenancy agreements between a tenant and a landlord through a rental agreement. The novation contract can change the date on the rent, rent fee, or the rental rules.

Origins and Etymology

The origins of novation date back to the Roman Republic. The Latin word novatio meant the substitution of a debt or delegation of a new contract. Over time, different societies and legal systems divided the word to mean more specific concepts. New debt or credit being assumed became known as assignments while merging or amending of terms became contract novation.

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  • 0:04 Defining Novation
  • 0:28 Legal Issues
  • 1:23 Examples of Novation
  • 4:24 Benefits of Novation
  • 5:02 Lesson Summary
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How Novation Works

Novating a contract works in a number of ways and changes depending on the laws of the jurisdiction where the contract is being novated.

Renegotiating Terms

The first step is for both parties to renegotiate the terms they want to see in a new contract. All parties must agree on changes made before the contract can move into the next step of novation.

Terminate Original Contract

The parties look through the terms they agreed on in the original contract and transfer these terms to the new contract. Once all parties are satisfied, they terminate the original contract agreement.

Novation Register

All parties must agree to the new terms before the new contract can be accepted. If all parties agree, they can then sign the new contract which all terms are now legally-binding, and the old contract is no longer valid.

Novation Clause

The novation clause of a real estate contract refers to the changing of parties associated with the contract. The clause eliminates the obligations and terms for the party that is leaving. A novation clause undergoes the same process as if terms in the contract were being changed. If something in the contract is being changed, all parties must agree before a new contract can replace it. If someone in the original contract is be replaced with another person, then a novation clause can occur to make sure there is an updated, and new contract including all new additions.

Reasons for Novation

There are many reasons for novation to occur in contract law, especially in real estate.

  • Financial concerns like not having enough money
  • Parties being added or removed
  • Changing business interests or objectives
  • An event occurs that causes a shift in terms for both parties
  • Current value in contract no longer benefits one or more parties
  • Life event occurs that drastically changes one of the party's status to uphold current terms

Examples of Novation

In addition to reasons for novation, there are numerous examples. Below are three examples of novation in real estate.

Example 1

A tenant experienced an unexpected job change where they have to move to another city two months before their lease agreement is up. The tenant discusses this with the landlord, and they come to an agreement that if the tenant can find another tenant before they move, then they can novate the contract and have the next tenant pick up the last two months.

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Frequently Asked Questions

How do you novate a contract?

To novate a contract, both parties come together to negotiate new terms. Once the terms are properly negotiated and if both parties agree, a new contract is signed and the old one becomes void.

What does Novation mean?

Novation means that an original contract is being replaced with a new one. Usually, many of the original terms are the same but there may be some small changes added in the new one.

What is a novation agreement?

A novation agreement is when parties related to an original contract agree to negotiate new terms. The novation will draw up new terms in a new contract to replace the old contract.

What is the meaning of Novation?

The meaning of novation is to change an old contract with a new contract. Novation happens because the terms or value of the old contract is no longer valid to one or more parties.

What a novation is used for?

Novation is used by individuals and businesses to change a contract in order to gain better terms in a new contract. Novation mostly happens in real estate contracts or business deals.

What is an example of Novation?

A common example of novation is real estate novation between a buyer and seller. A buyer may need more time to get money together and negotiates with the seller to add one more month on the deal, if the seller agrees, than a new contract is created.

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