A deed of novation is an agreement which transfers one party’s rights and obligations under a contract or agreement to a new third party. The terms of the agreement remain the same, but the identity of one party changes.
Application for business people
In simple terms, a deed of novation is a way of substituting one party to a valid contract with another party. If a business person wishes to get out of a contract or agreement, they may be able to find a new party to take it on. In these cases a deed of novation may be the appropriate course of action.
If a business owner buys a business from somebody else, deeds of novation may be used to transfer the contracts that the previous owner had with other parties to the new owner. The effect of the deed of novation is to release the previous owner from his or her obligations under the contracts, and to transfer the rights and obligations to the new owner.
The deed of novation represents the new party’s acceptance of the terms of the contract. The position of the other party to the contract doesn’t change at all. He or she is simply dealing with a different person or company. All parties to the original agreement need to agree to the deed of novation.
It is important to distinguish the difference between assignment (in which the liability remains with the original contracting party) and novation (in which the one of the original parties is released from all liability and the new party assumes all responsibility for the contract performance).
6 key things to consider
Before entering into a deed of novation, it is important to consider the following six key factors:
- Does the original agreement or contract allow for novation?
- What are the terms of the original agreement?
- Do all three parties agree to the novation?
- Will the novation have any impact on other agreements?
- On what date will the deed of novation take effect? At signing or at some future point in time?
- Will the novation involve any additional expenses (such as stamp duty) and if so, who will be responsible for paying?
Joe Kafrouni, Legal Practitioner Director, Kafrouni Lawyers
The information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. Business people should always consult their own legal advisors to discuss their particular circumstances. Kafrouni Lawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.
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