What is Novation?

Nomination versus novation

Contracts for the sale of property may provide for the transfer of title to the purchaser or its nominee.

If a nomination is made the vendor must transfer the property to the nominee, however a new contract does not come into existence between the vendor and the nominee.

In contrast a novation occurs when a new contract takes the place of the original contract.

The effect of a novation is upon the obligations of both parties to the original contract.

To determine whether there has been a novation it is necessary to examine whether it has been agreed that a new contract is to be substituted for the old and the obligations of the parties under the old agreement are to be discharged.

Requirements for a novation

In a contract between vendor and purchaser a novation to substitute the original purchaser will not be established unless there is a subsequent ‘tripartite’ agreement between the 2 original parties and the substituted purchaser:

1. agreement by the substituted purchaser with the vendor that, upon the vendor’s releasing the original purchaser from his obligation to purchase, the substituted purchaser will accept and perform, as against the vendor, the obligation to purchase undertaken at inception by the original purchaser (including the obligation to pay the balance of the purchase moneys);

2. agreement by the vendor with the substituted purchaser to sell to the substituted purchaser and to accept the substituted purchaser’s promise to perform the purchase obligation in place of the original purchaser’s obligation;

3. agreement between the vendor and the original purchaser with the concurrence of the substituted purchaser, that the purchase obligation undertaken by the original purchase at inception is discharged.

It is also essential that the vendor intends to discharge the original purchaser.

Note that it is not correct to describe novation as involving the succession of a third party to the rights of the purchaser under the original contract.

Nor is it correct to describe a third party undertaking the obligations of the purchaser under the original contract as a novation.

Greg Carter Litigation Lawyer Perth

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