What Is Novation in Real Estate and When Should You Use It?

What Is Novation in Real Estate?

In real estate, novation refers to the process of replacing an existing contract with a new one, transferring both the rights and obligations from one party to another. This legal action requires the consent of all involved parties: the original contract holder, the new party, and the counterparty (such as a seller, landlord, or lender).

Once a novation is executed, the original agreement becomes void and is completely substituted by the new one. This mechanism is particularly helpful when one party needs to exit a deal without causing a breach of contract.

Common Scenarios Where Novation Is Used

Novation is most often seen in commercial real estate transactions but can also be applied in residential contexts. Here are typical use cases:

Lease transfers: A landlord or tenant wants to transfer a lease to a new occupant.
Mortgage takeovers: A property owner sells a home, and the buyer assumes the mortgage obligations.
Price renegotiations: After an inspection, the buyer and seller agree to a price adjustment.
Entity substitutions: A real estate investor wants to replace their name with a newly created LLC.
Subcontractor arrangements: A contractor delegates work to a subcontractor with the client's approval.

In each situation, a novation ensures that the original contract terms are either renegotiated or reassigned formally and legally.

Novation vs. Assignment: What’s the Difference?

Though similar, novation and assignment serve different legal purposes:

In a novation, the original party is completely released from any obligations, and the new party takes full responsibility. All three parties must agree.
In an assignment, only the benefits of the contract are transferred, not the liabilities. The original party remains liable if the new party fails to perform.

Example:Imagine Mary signs a lease with Bob. If Mary assigns the lease to Carl, she’s still liable if Carl defaults. But if they execute a novation, Carl becomes the sole responsible tenant, and Mary is no longer involved.

Benefits of Using Novation in Real Estate

Using novation can simplify complex situations and avoid legal complications:

Cleaner exits for investors or tenants
Better credit and reputation protection
More flexibility in deal structuring
Avoidance of defaults or breaches

However, novation is not always easy to implement. It requires mutual agreement from all parties and often involves legal review. Lenders, in particular, may hesitate if the new party has a weaker financial background.

When Novation Makes Sense

Real estate professionals consider novation in these circumstances:

An investor restructures ownership under a new legal entity
A buyer wants to assume the seller’s mortgage
A party wishes to avoid default but can’t continue under the original contract terms

In all cases, a novation provides a legal path to adapt the contract without starting over or risking litigation.

Things to Keep in Mind

Always consult a legal advisor before initiating a novation.
Ensure clear communication with all parties.
Review whether a novation is better than alternatives like assignments or amendments.