What is novation?
Novation is a three-party agreement that replaces an old contract with a new one or substitutes a new party for an original one.
Novation replaces a party or obligation in a contract with a new one, releasing the old one.
Where the word "Novation" comes from
Novation comes from the Latin novare, to make new. It describes the act of replacing an existing obligation with a fresh one, with the consent of all involved, a device recognized in Roman law and carried into modern contract practice.
Why Novation matters
It lets parties restructure deals without breaching them. When a business is sold or a contractor is replaced, novation transfers the obligations cleanly, so the outgoing party is released and the incoming party assumes the duties.
Common confusion about Novation
Novation is not an assignment. An assignment transfers rights, often without the other party's consent and without releasing the assignor; a novation requires everyone's consent and substitutes a new contract, fully releasing the original party, so the two are very different in effect.
A real-world example of Novation
A landlord, a tenant, and a new tenant sign a novation transferring the lease. The original tenant is released from future rent, and the new tenant steps into the lease, with the landlord's consent to the substitution.
A worked example of Novation
A homeowner hires Contractor A for a remodel, but A becomes unavailable and suggests Contractor B. All three sign an agreement stating that B takes over the contract and A is released. Because this is a novation, the homeowner cannot later sue A for the remodel's defects, and B is solely responsible. Without the three-party consent, the deal would merely be an assignment, and A would remain liable for performance.
How Novation works in practice
When transferring a contract to someone else, get the other side's written consent and state that the original party is released, because an assignment alone leaves the original party on the hook. If you are asked to accept a substitute, confirm in writing that the new party assumes all obligations and that you release the old one. Document the novation clearly to avoid future claims against either the old or the new party.
Questions about Novation
Does everyone have to agree?
Yes — all affected parties must consent to the novation.
Is novation the same as assignment?
No — assignment moves rights; novation swaps a party and releases the old one.
Example?
A buyer’s lender pays off the seller’s loan and substitutes itself.