The Transfer of Obligations Under a Deed of Novation

By E. Dims

A deed of novation is a legally binding document which enables a party to transfer its contractual obligations and debts from another party to some third party. The word "novation" means "substitution, replacement". The document can be needed when a party owes money to a company, and the company is bought by a third person or party. Then all the debts of the owing party are transferred to the new owner or owners of the business.

The deed of novation can also be carried out without supporting documentation, by asking the third person or party to demonstrate that they are willing and consent to the transfer. The drawing up of a deed of novation document is needed to prove that the original contract concerning the debt has been made null and void, and the debtor and the third party are to enter a new relationship governing the debt. The new contract serves to extinguish the obligations that have been valid under the previous contract.

The novation situation should be distinguished from a situation that arises when another party or person provides guarantees that the debtor will fulfill his or her obligations and will pay the amount owed to the creditor of the amount. It should be pointed out that in the event of a novation need the original debtor is to be released from the obligation regarding the debt, and the debt is transferred to another party.

Novation need cases also include situations in which the original parties intend to continue the obligations they have with respect to each other, and they have drawn a new agreement which is to substitute the old agreement they have concluded.

It should also be noted that the novation deed cases can cover loans, and then a deed of novation of a loan is drawn up. This type of deed is a tripartite agreement which entitles the lender to transfer the rights and obligations he or she has with respect to a specific loan agreement to a third party which will become the new lender.

Under the loan novation circumstances, there should be only a single lender as well as a single borrower. It should be noted that the loan has to be unsecured, and it has to be non guaranteed. The rights that the new lender acquires comprise not only the right to receive the repayment amounts for the loan, but also to receive the interests on it. The lender's obligations can also comprise the obligation to make the further advances to the borrowing party, if applicable. There are, however, cases when there is no need for further advances under the loan. Then a deed of assignment should be used instead of a novation deed. Such an assignment serves to transfer the lender's rights which have been set out in the original agreement to the third party. But it should be pointed out that an assignment does not serve to transfer the lender's obligations; hence an assignment deed will not be suitable in cases when there are more advances to be made in the future.

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