Novation in Real Estate
Originally from the Latin word Novus, which means new, novation is the negotiation and renegotiation of contract terms to suit the recent changes. Novation in real estate does not imply an error in the contract or fulfilment process but a shift in circumstances that should reflect on paper.
Residential and commercial real estate differ in novation terms due to the differences in parties involved. Commercial real estate involves more parties and is, therefore, more complicated to draft a novation process.
All prior contracts become null and void when a novation is drafted, forwarded, and duly signed.
Let us now delve into three aspects that could be affected by a novation agreement:
The property value (price, lease, or rent). Perhaps one of the most important reasons a novation could be implemented is if there is a change in the financial aspects of the property. An apt example would be a drainage defect in a residential property, such as pipe leaks. If the seller does not agree to fix this issue, the buyer could seek a novation to reduce the property’s value. Therefore, a buyer must request a viewing or an inspection date for whatever real estate they intend to purchase. A novation might as well save the day.
For the parties involved, if there is a change in the buyers or sellers in the original contract, a novation is necessary. Quite simply, in the instance where one party opts out of the agreement, a new third party could take the place of the outgoing one and fulfil all financial (or otherwise) requirements as stated in the novation.
A perfect instance of this is where two buyers buy a commercial property and sign a contract with the seller. One buyer defects from the agreement for personal reasons. If another buyer wishes to buy the same property but has specific demands agreed upon by the remaining two parties, a novation is drafted, and the new changes are effected.
The Lease. A party might want to change their lease agreement, transfer it to a third party or entirely do away with the lease and opt to rent. In this case, a novation is required to reflect these new changes into the contract.
Tenants may pass lease tenures to other parties. What happens in such a case is that the new tenant solely takes over the responsibilities of the previous tenant. However, for properties with strict anti-subleasing rules, lease novations may not be encouraged.
Changes in lease agreements are one of the primary reasons why a novation is vital.
As we have seen so far, a novation is a fully-fledged contract with legal and financial requirements. It might be a substitute but not inferior to the original contract. Novation could happen in three ways; standard novation, exprossimo, and delegation.
A standard novation involves two parties and additional terms.
Expressimos involves three parties – the transferor, transferee, and counterparty. There has to be a mutual agreement between all three.
On the other hand, a delegation is a complete transfer of the contract from one party to another.
Novation is a daily player in the real estate industry. Every day, new buyers eye a property on sale, but either do not agree to the contractual obligations or want something added. A novation is well-suited and tailored to meet the desired changes.
Immortalized by Jeffrey Fry, ‘A contract is only as good as the people signing it.’ And in our discourse on novations, we see how true that statement is to date.