What is a Deed of Novation?

Consider this – you have entered into a contract to purchase a property, but for various reasons, the property no longer suits you.  But it will suit your parents perfectly.  So can you transfer the contract over to your parents, so that your parents are the purchasers?

Also consider this – your business has a really valuable commercial contract, supplying services to a large organisation.  However you are moving interstate and closing up the business, but rather than letting the valuable commercial contract lapse, you would like to instead transfer the benefits (and obligations) under it to a friend’s business which is operating within the same industry.

So how are these transfers dealt with legally?  With a Deed of Novation.

A Deed of Novation is used when a party wishes to transfer or assign its rights and obligations under an existing contractual arrangement to another party – that is, the outgoing party is substituted for the incoming party without changing the original rights and obligations under the original agreement.

The effect of such a Deed is that the outgoing party is released from its obligations under the contract, and the various rights and obligations under the contract are transferred to the incoming party.

From the point of view of the other party to the contract, nothing changes – although they would need to consider and consent to the transfer (see below)Question

What is the difference between novation and assignment?

  • Novation transfers both rights and obligations under the contract to the incoming party, whereas assignment transfers rights only.
  • Novation requires tri-partite consent (that is, the consent of all parties – the outgoing party, the incoming party and the remaining party), whereas assignment may not require the remaining party’s consent (subject to the actual wording of the contract)
  • Novation results in a new agreement on the same terms as the original agreement, whereas assignment doesn’t necessarily discharge the original agreement, meaning that the outgoing party will remain bound by any obligations

Points to consider

It is important to consider the following points when considering a deed of novation:

  • does the original contract allow one party to novate its rights and obligations to another party?
  • does the novation require pre-approval from the remaining contractual party?
  • is there a requirement for pre-approval not to be unreasonably withheld?
  • would it make more commercial sense to terminate the existing contract, and replace it with a new contract?
  • who will be liable for past performance or default prior to the novation?  Will the incoming party take on the rights and obligations pre-dating the novation?
  • what will be the effective date of the novation?  The date of the agreement, or some other pre-determined date?

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Contact the team at Shire Legal on 9526 3444 or info@shirelegal.com.au if you have any questions about Deeds of Novation, or commercial agreements generally.