Derek Morgan
Derek Morgan
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Derek Morgan
Derek Morgan

    What does Novation mean in Real Estate?

    Novation is a legal term that refers to the replacement of one party, term, or obligation in a contract with another. The word novation comes from the Latin term "novus," translating to "new." When a contract is renegotiated and novation occurs, it's essentially creating a new agreement to replace the old one. Even though it happens regularly in both residential and commercial real estate, it's not as simple as just crossing something out and writing in new terms.

    Understanding Novation

    To renegotiate a real estate contract, all parties involved must sign the new contract to show agreement with the new terms. Any prior agreements are no longer legally binding as the old contract is considered invalid.

    Those who are new to real estate investing might jump to assume that a novation means the deal will fall through. Just remember: transactions rarely go through without a hitch. Novation simply means that further clarification or negotiation is needed so that all parties are in agreement with the terms and conditions for purchasing or renting the property.

    What exactly can be changed through novation? The list is quite extensive, but some of the most common things that can be changed include:

    • Property rent or price

    • Lease terms

    • Names of the purchaser, seller, landlord, etc.

    • Earnest money amount

    • Closing costs

    • Effective date

    Residential transactions are typically simpler, as they typically involve only two parties (the buyer and the seller). However, commercial real estate transactions often involve many parties, which can make novation a bit more complicated.

    Residential vs. Commercial Real Estate Novation

    As mentioned earlier, novation can occur in both residential and commercial real estate transactions. However, the process of novation is typically a bit simpler in residential transactions. This is because most residential transactions are conducted between only two parties: the buyer and the seller. In contrast, commercial real estate transactions often involve many parties, which can make the process of novation more complicated.

    For example, let's say a buyer has made an offer on a house and an inspection report comes back indicating that the fence around the pool is not high enough to meet regulations. In this scenario, there are two options: the owner can replace the fence or the sale price of the house can be renegotiated lower so that the onus of the new fence will be on the buyer. If the buyer and seller both agree to a lower price on the home, a new purchase agreement stating the new price is presented to both parties for signatures. The old agreement is voided, and the transaction moves forward with the new agreement.

    It's important to note that a novation voids the previous contract. For all intents and purposes, any prior contracts do not exist, and the new document is the only one that matters moving forward -- or until another novation is made.

    Keeping the Process Moving Smoothly

    As real estate transactions get closer to being finalized, it's important for both the buyer and the seller to be as available as possible. This is especially important when it comes to novation, as it's not uncommon for further clarification or negotiation to be needed during this stage of the process. By being easily available, both the buyer and seller can respond to novation requests quickly and efficiently, which helps to keep the process moving smoothly.

    On the other hand, if a seller takes too long to respond to a novation request, it can put the entire deal at risk. Buyers may become frustrated and decide to walk away from the offer if they feel that the seller is not being responsive. So, it's important for sellers to be as responsive as possible during the final stages of a transaction to avoid this scenario.

    Conclusion

    In conclusion, novation is the replacement of one party, term, or obligation in a contract with another.  Novation can involve a wide range of changes to a contract, from property rent or price, to lease terms, and more. 

    At Unreal Estate, we understand the importance of understanding novation in real estate transactions, and we hope that this article has helped to clear up any confusion you may have had about the topic. 

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