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 The term novation when used in a real estate context simply means to replace. If you were doing a refinance of a property you would be replacing the terms of one lender with the terms of the new lender or Mortgage Company. The actual word novation is taken from the legalese of the ancient Romans. It means to replace or substitute.
If you look at modern English this makes perfect sense. A novation is a vehicle where one party transfers all benefits and obligations of a contract to a third party. The new third party effectively replaces the original party of the contract. When a contract is novated the other party will need to be left in the same position as they were before the novation occurred. For a novation to occur you need agreement from all three parties. A deed of novation or agreement to novate will usually include a letter that is sent to the third party explaining what the particulars of the transaction are and a request for their agreement by signing and returning the letter.
What Is A Deed Of Novation?
When a novation occurs the original contract between the creditor and debtor is annulled and it is changed with a new agreement between the third party and the debtor. Think of a mortgage refinance. You bring a new third party Mortgage Company to take out the original creditor. To be valid the new contract must provide consideration. This is the same for all contracts.
Consideration is typically inferred to be the discharge of the original contract and the creditors contractual obligation. To be safe, a deed of novation is used. The deed simply gets rid of the requirement for there to be consideration in the agreement. This will make it impossible later for parties to argue that there was no contract due to no consideration.
Article By Dave Mason. Dave has been in the real estate and mortgage industries s1nce 1988. He has been a real estate agent and a loan officer. This Article is designed to be of general interest and should not be considered legal advice. The specific information discussed may not apply to you. Before acting on any matter contained herein, you should consult with your personal legal adviser.
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