Novation agreements

Novation agreements change the parties to a contract, transferring the benefits and obligations to another business or individual. Our agreements have been drawn for common situations where all parties to the contract (new and old) agree to the novation. Closely related to novation is assignment.

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Novation agreement: transfer of service contract

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Transfer a service contract between customers using this easy to use and effective novation contract. Although this novation agreement can be used to transfer any service contract, we have used the example of a transfer of website hosting services between hosting providers. Changes for other types of service agreement are very simple to make. The most common use for this agreement would be to change the parties to service contracts on the purchase of a business.

Novation agreement: transfer debt to new creditor

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Transfer the right to receive a debt repayment from creditor to his transferee. Common uses would be one-off transfer of a debt, or when factoring debt (buying the debts or loans owed to the seller) or when buying a business that has extended credit to customers. This is an easy to use, effective novation agreement.

Novation agreement: transfer debt to new debtor

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Transfer a debt obligation from one party to another with the creditor's permission, for example when restructuring debt or when selling a business and its obligations. This is an easy to use, effective novation agreement.

Novation agreement: transfer of architectural or building contract

Easy to use novation agreement for use where the customer of an architectural or construction contract changes part-way through the project (e.g. where the land and part-completed buildings are sold).

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Choosing whether to novate or assign

The basic law is that ‘A’ cannot transfer his obligations to ‘C’ that he has under a contract with ‘B’, without ‘B’ agreeing.

Novation is the legal mechanism where the rights and obligations are transferred with the permission of all parties (both new and old).

When it is possible to obtain the contractual consent of all three parties, use a standard, three-sided novation agreement.

If many contracts are being transferred at the same time, such as when one business buys another including customer contracts, it may be simply not practical to ask each other party (in our example, each customer) to sign a novation agreement.

So, the parties that are transferring the contracts sign an assignment agreement and hope that the other original parties not object.

So that the original parties cannot cancel the contract if they do object, most businesses that have large numbers of contracts make sure that the terms of each contract allow them to assign the contract without permission. In that case, there is no breach of contract and the other original party cannot cancel.

If a client or customer becomes aware that his supplier has changed, and he continues to accept services from the new supplier, he will be deemed to have accepted the new contract. There is no specific time period or circumstance when you can be sure this has happened.

Why novation should not be by deed?

You may hear or read of a “deed of novation”. Many documents that can be simply signed are also referred to as deeds. This is due in part to the continued mystification of the law in some quarters.

A novation never needs to be by deed. The deed format is used where one party to a contract receives no consideration. However, a novation is invariably "for value", and as such, a deed of novation confers little additional advantage.

In the unlikely event that a party agrees to novation out of pure kindness, the consideration can be entered as “one euro”, or a "peppercorn". The sum does not need to have any relation to the value of the debt being novated.

Novating a debt

A common misconception is that novating a debt cancels an old debt and creates a new one to the new owner. Instead, novation just changes the parties to the original contract. However, in most cases, novation is an easier option than cancelling an old agreement and drawing a new one.

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