A contract is a legally binding agreement which dictates rights and obligations between parties. In some cases, a party might wish to transfer these rights and obligations to a third party. This is where a deed of novation comes in. The terms of the agreement remain the same, but the identity of one party changes.
Why use a Deed of Novation?
Novating a contract is a good way to release someone from a contract without terminating it. It might be used to transfer a lease agreement, or for a new owner of a business to take over existing contracts with suppliers. The position of the other party remains the same, they are now dealing with a new entity and the original party is released from their obligations.
Novation vs Assignment
Assignment is another useful tool to change a contractual arrangement. Under a deed of assignment, a party will transfer its rights and benefits to another party. An example of this might be where a financier transfers their right to recover debt to a third party.
The main distinguishing difference between these two types of deeds is that with assignment the liability remains with the original contracting parties while with novation, responsibility for contract performance is assumed by the new party.
Signing a Deed
Deeds of novation typically require that both the original parties to a contract and the new third party execute the deed. Under assignment, rights might be transferred to another party without obtaining consent from the original party, depending on the terms of the original contract.
Assignments and novations often require physical meetings involving witnesses in order to be signed and executed property.
To Sum Up
Determining whether a Deed of Assignment or Deed of Novation is most appropriate in the circumstances requires consideration of the matter as a whole and the terms of the original agreement. These considerations can be complex, particularly where leases are involved as there are additional legal issues to consider.
If you have any further questions about novation and assignment deeds or need drafting a deed, get in touch with our commercial lawyers. You can call us on 1300 337 997, or fill in the contact form on this page.
Phil is a director at OpenLegal. He has over 16 years experience working in private practice and in-house counsel in Sydney and London, giving him expertise in employment law, IP, finance, leases, dispute resolution, insurance and contracts.
Ryan works with OpenLegal as paralegal. His main legal interests are Corporate, Property and Employment Law.
