Novation agreement: transfer debt to new creditor

Transfer the right to receive a debt repayment from creditor to his transferee. Common uses would be one-off transfer, or when factoring debt (buying the debts or loans owed to the seller) or when buying a business that has extended credit to customers. This is an easy to use, effective agreement.

Suitable for use in: England & Wales and Scotland
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About this document

Use this agreement to change who will be repaid a debt. Common uses are when a business is sold and the purchaser takes on the assets of the seller (of which a debt owed is one), or when buying those of another party.

This is a simple yet comprehensive agreement that can be used to novate any right to be repaid, usually with only minimal editing.

The basic law is that A cannot transfer to C the obligations he has under a contract with B, without B agreeing. So what happens is that all three agree to "novate", whereby the proposed transfer is made with B’s permission. Usually, B will want payment or some concession for his agreement.

The consent of all three parties - the transferee, the transferor and the other contracting party - is required to effect any novation. Unless you specifically require the consent of the other contracting party (perhaps because your contract has a non-assignment clause), our assignment agreement may be an even simpler way of transferring your contract to someone else.

Why not use a deed of novation?

We have a longer article about when to use a deed and why that explains why a deed of novation is unlikely to be required in practice.

To summarise, a deed should be used where one party to a contract receives no consideration (nothing in return). However, a novation is invariably "for value", and as such, a deed of novation confers little additional advantage.

In the unlikely event that a party agrees to novation out of pure kindness, the consideration can be entered as “one pound”, or a "peppercorn". The sum does not need to have any relation to the value of the amount owed.

When to novate

A common misconception is that novating cancels an old debt and creates a new one to the new owner. Instead, novation just changes the parties to the original contract.

In most cases, novation is an easier option than cancelling and drawing new agreements.

This agreement can be used to transfer any debt between a creditor and a new party provided that the debtor agrees to the transfer.

Changing who will repay the debt

If you want to transfer the debt to another debtor (i.e. change who will do the repaying), then this agreement will be more suitable.

Features and contents

  • Suitable when either party is resident outside the UK
  • Ensures a legal transfer as it is drawn as an agreement between all parties
  • Comprehensive provisions provide ideas for you to mould

The agreement contains the following sections:

  • Details of the parties
  • Indemnity to protect both parties from loss, damage or legal liability once the debt is transferred
  • The novation
  • Existing claims: sets out how outstanding claims will be dealt with
  • Costs: identifies who will bear costs incurred to date
  • Other usual legal provisions in plain English
Draftsman

This document was written by a solicitor for Net Lawman. It complies with current English law.

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