Contract Terms
Novation and Assignment in Real Estate Contracts
Novation and assignment are two ways to transfer contract rights and obligations — and they have very different legal consequences. Mixing them up is a common exam mistake.
Key Definitions
Novation
The substitution of a new party for an original party in a contract, with the agreement of all parties, completely releasing the original party from all obligations. The original contract is extinguished and a new one takes its place.
Assignment
The transfer of contract rights from one party (assignor) to a new party (assignee). The original party (assignor) remains secondarily liable unless specifically released. The contract itself continues.
Assumption of Mortgage
When a buyer agrees to take over the seller's existing mortgage obligations. If the lender approves and releases the seller, it's a novation. If the seller remains liable, it's an assumption without release (not a true novation).
Due-on-Sale Clause
A mortgage provision requiring the full loan balance to be paid when the property is sold. Prevents assumption without lender consent. Most conventional mortgages have this clause.
The Critical Distinction
The key difference: novation releases the original party; assignment does not. This matters most with mortgage assumptions. If a seller's mortgage is assumed by the buyer but the lender doesn't formally release the seller, the seller remains liable if the buyer defaults.
In a purchase contract context: if a buyer assigns their purchase contract to a new buyer, the original buyer remains liable unless the seller explicitly releases them (novation). Assignment without novation means the original buyer is still on the hook.
Novation & Assignment FAQ
Can a seller refuse to agree to an assignment?
Usually yes. Purchase contracts often require the seller's consent for assignment. Some contracts are explicitly non-assignable. If the contract allows assignment, the original buyer can assign their interest to a new buyer.
Is a lease assignment the same as a sublease?
No. In a lease assignment, the original tenant transfers all their remaining lease rights to a new tenant. In a sublease, the original tenant creates a new tenancy with a sublessee while remaining responsible to the landlord.
How is novation different from an addendum?
An addendum modifies specific terms of an existing contract while keeping the original contract in place. Novation replaces the entire contract (or substitutes a party), extinguishing the original agreement.
When would a buyer want to assign a purchase contract?
Real estate investors who enter contracts with the intent to assign them to end buyers (wholesaling) use assignment. This allows the investor to profit from the price spread without closing on the property themselves.