What is a deed of novation?

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What is a deed of novation?
A deed of novation allows for the transfer of contracts. (hipoteca americana image by caironbohemio from Fotolia.com)

Novation is a legal contractual term that means replacement or substitution. A deed of novation is the legally binding official document that allows novation to take place.

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Novation

Novation is a process through which one party transfers all of its contractual obligations and debts from another party to a third party. For example, if you owe money to a business, and that business is bought out by someone else, all of your remaining debts are transferred to the new business owners.

Deed of novation

Although this process can be done without documentation, the third party is usually asked to demonstrate that it is willing to take part in the transfer. In such an instance, a deed of novation is drawn up to demonstrate that the original contract has been annulled and that a new contract is being created between the debtor and the third party.

Legal consideration

Legal consideration is any object of value that is promised to someone else in the making of a contract. Like most legal contracts, novation usually has to show some form of legal consideration, or the contract isn't considered valid. However, if a deed of novation is created to validate the exchange, then consideration is no longer needed.

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