Deed of Novation: Everything You Need to Know
A deed of novation can be used to transfer the responsibility of paying off a mortgage loan to another person.3 min read
A deed of novation can be used to transfer the responsibility of paying off a mortgage loan to another person.
What Are Deeds of Novation?
When real property is sold, purchased, or transferred, a title and a deed will be used. To buy real property, many people choose to use a mortgage loan, which the person would then be legally obligated to repay. If you want to transfer this obligation to another person, you would need to use a deed of novation.
Deeds of novation can be used when one person wants to transfer their contractual obligations and rights to another party without having to alter the original contract. With a deed of novation, the person that wishes to leave a contract will be absolved of their responsibilities because the incoming party is assuming these duties. From the perspective of the other person in the contract, nothing has been changed. However, this remaining party will need to agree to the transfer before it can occur.
You can transfer mortgage obligations to either a third party or a completely new borrower by using a deed of novation. Once the formal novation has been approved, you will no longer be responsible for your loan.
Before using a deed of novation, there are several factors that you need to consider:
- Does the contract include language allowing parties to transfer their rights and responsibilities?
- Is approval from the remaining party required before novation?
- Is there a provision preventing the remaining party from unreasonably withholding their approval?
- Does terminating the original contract and entering a new contract make more sense from a commercial standpoint?
- Will you or the new borrower be responsible for a default that takes place before the transfer occurs?
- Will you use a pre-arranged date for the novation effective date or will the date of agreement suffice?
It's possible you won't receive approval to novate your mortgage responsibilities to a third party. When attempting to novate a mortgage loan, you, the third party, and the lender must agree to transfer the obligations. In most cases, lenders deny requests to novate loan responsibilities. If a lender does approve the request, they will usually have their own process for reviewing and approving the novation.
Are Assignments and Novation Different?
There is a big difference between an assignment and a novation. With an assignment, the original person in the contract retains their liability. With a novation, all liability is assumed by the new party to the contract. Assignments are used to transfer only rights; novation transfers both liability and rights.
Three-party consent is required for novation, the new party, the outgoing party, and the remaining party must all agree to the transfer. The approval of the remaining party may not be required for assignment depending on how the contract is worded.
Deeds of Novation and Your Business
When a business person wants to exit an agreement or contract, it may be possible for them to find a new person to assume their obligations. Many businesses choose to use deeds of novation because they are much simpler than ending one contract and forming a new one.
There are countless reasons that a business might use a deed of novation. As mentioned, the primary reason business people use novation is to exit a contract. A deed of novation will allow the businessperson to leave the contract by transferring their responsibilities to a new party.
Another reason business people use deeds of novation is the need to transfer contracts after selling their business. For example, let's assume that you own a small market that regularly supplies fresh produce to offices in your area. If you sell your market to another person, you would also need to transfer your contracts with the offices so that the new owner can continue the produce deliveries.
With a deed of novation, the new owner of your business is accepting the responsibilities of the contracts to which you were once a party. From the standpoint of the offices receiving the deliveries, the contract remains the same. The only difference is that a new person is now responsible for upholding the terms of the contract.
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