Novation requires the agreement of all original parties and the new party. Unlike assignment, where the original party remains secondarily liable, novation completely extinguishes the original party's obligations. Novation is commonly seen when a buyer assumes a seller's existing mortgage with the lender's approval, releasing the original borrower from liability.
A homeowner has a mortgage with ABC Bank. A buyer purchases the home and wants to assume the mortgage. ABC Bank agrees to release the original homeowner and substitute the buyer as the new borrower. This is a novation — the original borrower is completely freed from the mortgage obligation.
The exam's favorite distinction: assignment keeps the original party liable, while novation releases them entirely. Use this mnemonic: Novation = New party, No liability for the old party. Remember that novation requires consent of ALL parties, whereas assignment generally does not.
Related Terms
Related Concepts
A purchase agreement is a legally binding contract between a buyer and seller that outlines the terms and conditions for the sale of real property. It is also commonly called a sales contract, purchase and sale agreement, or earnest money agreement.
Offer and acceptance is the process by which one party proposes specific terms for a contract and the other party agrees to those exact terms, creating mutual assent. This mutual agreement, also called a meeting of the minds, is an essential element of every valid contract.
A counteroffer is a response to an original offer that changes one or more terms of the offer, effectively rejecting the original offer and creating a new offer. The party who makes the counteroffer becomes the new offeror.
Consideration is something of value exchanged between parties to a contract, making the agreement legally binding. It can be money, a promise to act, a promise to refrain from acting, or anything else of value.
Earnest money is a deposit made by the buyer at the time of the offer or shortly after to demonstrate good faith and serious intent to purchase the property. It is also called a good faith deposit.
Frequently Asked Questions
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