What Is a Novation Agreement?

Want to transfer the rights and obligations of your contract onto another person, but not sure how to? A novation agreement can help you with that.
What-is-a-Novation-Agreement-PropertyGuru-Singapore

When it comes to transferring legal rights for big-ticket things such as property, it is always important that parties involved come to a consensus on the terms and conditions.

In such situations, official written agreements become necessary. Otherwise, there’d be no way to verify and keep track of what all parties have committed to.   

Legal agreements come with all sorts of different names, and the meaning behind them might not be easily understood by most, unless you’re a lawyer.  

A fitting example of this might be ‘novation agreements’. In this article, we take a closer look and what this agreement does.

What does a novation agreement do?

A novation agreement is a legal arrangement where the contractual obligations and rights of an existing party are transferred onto another party.

Mergers, acquisitions, and bank loans in the corporate world often involve novation agreements. They are for reassigning partnerships, or for transferring complete ownership between parties. 

A novation is never presumed, and all relevant parties involved in this type of contract must first and foremost consent to the changes being made to the contract.

When do you need a novation agreement?

A novation agreement is required when you wish to transfer the obligations and rights of your contract to another person.

In property law, novation takes place when an existing tenant signs the remainder of their lease onto another person. The new tenant then becomes responsible for paying rent. They can also be held accountable for property damage, if any. 

Who is involved in a novation agreement?

Typically, there are three parties involved in a novation agreement:

  • Assignee - the person who receives the agreement being transferred
  • Assignor - the person from whom the agreement is being transferred
  • A third party - another party involved in the agreement

The assignee and assignor are the primary parties involved in a novation. The other party acts as a beneficiary - they are less involved but receive the benefits of the novation agreement. 

Under the novation agreement, it is imperative that all three parties involved must consent to the changes, and sign on the agreement.

Novation agreements typically involve three parties – PropertyGuru Singapore

Novation agreements typically involve three parties

 

What do you need to consider when it comes to novation agreements? 

Here are some things you need to keep in mind if you plan to novate an agreement. 

Validity of existing agreement 

Since a novation enables you to transfer both your rights and obligations to another person, it is worth bearing in mind that the previous contract will effectively be declared invalid. A new agreement will be created to take its place. 

The right to novate

Sometimes, your existing agreement might exclude or limit your right to novate your agreement. 

Therefore, you should check if your existing agreement contains any clauses or conditions that restrict your right to novate your agreement in the first place.

Implementing a novation

Another thing to consider before novating your agreement, is that a novation can be implemented formally through a written agreement. It can also arise through the parties’ conduct, such as sending a notice of novation to other parties involved in the original agreement. 

Regardless of the situation, consent of all parties is required to make changes to the original agreement.

What are the differences between a novation and an assignment?

Do note that a novation is not to be confused with an ‘assignment’, which is also another means of transferring a contract in Singapore.  

The following are the key differences.

Transfer of obligations and rights 

A novation agreement enables one to transfer both obligations and rights. An assignment does not transfer obligations. It only transfers a party's contractual rights. 

Since an assignment only transfers the contractual rights, the original assignor will still retain obligations under the contract. 

Consent to the new contract

A novation agreement involves three parties. All three parties must physically consent to the changes by signing on the new agreement.

An assignment does not require the consent of the third party. There is also no need for a new agreement as the assignee (the person who has been assigned the contract) will not be a party to the contract.

Now that you know all about novation agreements, learn more about the conveyancing Process in Singapore.

 

To get more guides like this, check out PropertyGuru.

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