Novation
Definition
Novation is the substitution of a new contract for an existing one, or the replacement of one party with a new party, with the consent of all parties involved. The original party is completely released from all obligations.
Example
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.
Exam Tip
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 Contracts Terms
Purchase Agreement / Sales Contract
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
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.
Counteroffer
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
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 Deposit
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.
Contingencies
Contingencies are conditions written into a real estate contract that must be met before the transaction can close. If a contingency is not satisfied, the buyer can typically cancel the contract without penalty.
Frequently Asked Questions
Test Your Contracts Knowledge
Practice with exam-style questions to make sure you can apply Novation and other contracts concepts.