Understanding novation is important in creating real estate contracts. Whether you are a real estate agent or a buyer, it’s important to at least understand the concept of it.
But studying legal matters can be confusing. That’s why this article is here to help! After you read this, you are sure to understand what exactly is novation real estate!
Understanding Novation: The Meaning And Definition
Novation, in short, is a legal term that refers to switching one obligation or party with another.
Rather than just add to changing an existing contract, it replaces the old agreement with another legal agreement.
Novation agreements require a valid previous contract and agreement from ALL PARTIES to substitute a new contract with an old one. When the new document is made, all parties MUST agree to it.
You cannot settle for a verbal agreement either, the original agreement has to be replaced.
Novation in Real Estate
In real estate, a novation agreement is normally used to transfer complex property leases.
It is used to replace one party in a contract or agreement or substitute new terms or contracts in place of old ones. This is done through the mutual consent of all involved parties.
3 Types of Novation in Real Estate
There are 3 types of novation to take note of when it comes to studying for your real estate exam.
Standard novation is a mutual agreement that involves two parties, where new terms are added to a formal contract. This forms a new contract.
Exprossimo is when three parties are involved in the transfer of rights.
These are the transferor, the transferee, and the counterparty.
All of the parties must agree to new contract terms in order to move forward with the process. If even one party disagrees, they will have to draft a new agreement.
Delegation is when the contractual responsibilities and benefits of the old creditor are transferred to a new creditor.
This discharges the original debtor from their debts to the first creditor and legally binds the new party to the obligations of the original debtor.
If the original owner had debts during his/her term, upon delegation, the new owner now assumes responsibility for these debts.
Examples of Novation in Real Estate
Here are some examples of situations where you will need to use novation in real estate.
- When the buyer encounters a financial or operating difficulty and have to change the deposit amount. In this case, the seller agrees to the new price. This is an example of standard novation.
- Another example for standard novation is when the parties have to renegotiate the price of the house for any reason. One reason could be the inspection report found foundational problems in the house. This could cause the property to become a lower price.
- An example of exprossimo is when someone sells a property with unpaid mortgages. In this situation, the seller, buyer, and bank has to agree on the terms, usually after an extensive background and financial check occurs. This includes the mortgage payments.
- To continue the previous example, delegation would be where the original party transfers responsibility to the new owner once all parties agree to the new terms.
Contract Negotiations That Can Be Changed by Novation
This is a list of what can be changed by novation in real estate.
- Property rent
- Property price
- Lease terms
- Name of buyer, seller, landlord, or anyone involved
- Earnest money amount
- Closing costs
- Effective date
Novation in Residential and Commercial Real Estate Transactions
Novation is used in both a residential and commercial real estate, however it is much simpler with residential real estate transactions.
When it comes to a commercial real estate transaction, there are often more parties involved.
Every time something is changed in the contract, the new document has to be signed by everyone involved.
In residential real estate novation, less people are involved, so things are a little more straightforward.
Important: Novation voids prior contracts, and the new one becomes legally binding.
When You Should Novate a New Contract
When you agree to new terms, that’s when you should novate a contract.
When terms of agreement is changed by the buyer or seller, it is important to draft another contract to match these new terms.
There are many reasons for this, but one example could be a change of price due to inspection problems.
Another reason is that sellers may sometimes want more earnest money deposit, and would have to change it in the agreement.
When novation occurs, the old contract is nullified.
What Is the Difference Between Assignment and Novation?
Simply put, novation is the COMPLETE TRANSFER of contractual rights and obligations to a new party, while assignment is the transfer of SOME RIGHTS to a new party while the contractual obligations stay with the original parties .
The original contract remains valid with assignment, while in novation, it becomes null.
Third Party Consent
An assignment does not require the consent of the third party, while novation does.
In assignment, the assignor is responsible if the assignee fails to fulfill obligations.
Novation in real estate is an important process, and anyone looking to buy a house or sell a house should know what it is and how it works.
When a new agreement has to be made, novation occurs.
Hopefully you learned more about real estate novation from this article! If you have any other questions, feel free to leave a comment below!