Novation agreement: transfer debt to new debtor

Transfer a debt obligation from one party to another with the creditor's permission, for example when restructuring or when selling a business and its obligations. This is an easy to use, effective agreement.

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

Use this agreement to change who will repay a debt. Common uses are when a business is sold and the purchaser takes on the liabilities of the seller, or when restructuring debt (a third party buys the obligation to repay a loan and interest).

A common misconception is that novating is the same as cancelling the original contract and creating a new one. In actual fact, it is simply changing th parties to the contract. In most cases, novation is an easier option than cancelling and drawing new agreements.

This is a simple yet comprehensive agreement that can be used for many situations, usually with only minimal editing.

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 using an agreement to assign may be an even simpler way of transferring your contract to someone else.

Why not a deed of novation?

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

To summarise the article, the deed format is used where one party to a contract receives no consideration. However, a novation is invariably "for value", and as such, using a deed confers little additional advantage.

In the unlikely event that a party agrees to transfer 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 debt being novated.

When to use this document

This contract can be used to transfer any loan or debt to an individual or company provided that the creditor agrees to the transfer.

You should use this agreement, rather than one of assignment if all parties to the contract agree to the changes. If in doubt, use this agreement and obtain consent from all involved.

Changing who will receive the debt repayments

If you want to transfer the debt to another creditor (i.e. change who will receive the repayments), then this agreement should be used.

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 document contains the following sections:

  • Details of the parties
  • Indemintity to protect both parties from loss, damage or legal liability once the contract is transferred
  • The novation
  • Existing claims: sets out how outstanding claims against the transferor 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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