Novation

Key Takeaways

• Novation substitutes a new contract, or a new party, for one that already exists, and every party has to agree to the swap.
• After a valid novation the original obligation is discharged, so the party who stepped out owes nothing further under it.
• Assignment transfers rights but leaves the assignor liable if the new party fails to perform. Novation is the one that releases the original party.
• A novation is itself a contract, so it has to meet the same requirements as the agreement it replaces.

What It Means

Novation is the substitution of a new contract, or of a new party, for one that already exists, with everyone involved agreeing to the swap. The point of a novation is the release. Once it takes effect the original agreement is discharged and the party who stepped out owes nothing further under it. The replacement agreement stands on its own.

Novation sits alongside the other ways a contract can end. Cancellation is both parties agreeing to stop. Rescission unwinds the deal and returns the parties to their original positions. Novation does something different: it keeps the transaction alive and puts a substitute in place.

The comparison that matters most is with Assignment. An assignment hands your rights under a contract to somebody else, but you stay liable to the other side if that person fails to perform. A novation replaces you outright. That is why a buyer who wants out of a Purchase And Sale Agreement cannot get there by assignment alone. The seller has to agree, in writing, to let the original buyer go and take the new one. In residential practice most buyers exit through a contingency instead, covered in this walkthrough of earnest money and contingencies.

How It Works in Washington

Novation comes out of contract common law rather than from one section of the Washington code. What Washington does regulate closely is the paperwork a novation creates, and that is where brokers get into trouble.

If the novation touches a listing agreement or the commission, it has to be in writing. RCW 19.36.010 makes an agreement authorizing or employing an agent or broker to sell or purchase real estate for compensation or a commission void unless that agreement, or some note or memorandum of it, is in writing and signed by the party to be charged.

Once the replacement document is signed, RCW 18.85.285 governs what happens next. Subsection (3) requires every real estate licensee to deliver, or cause to be delivered, to all parties signing the same, within a reasonable time after signing, purchase and sale agreements, listing agreements, and all other like or similar instruments signed by the parties. Subsection (1) requires the designated broker to keep adequate records of the firm's transactions, including a copy of the purchase and sale agreement, so the novation belongs in the Transaction File alongside the agreement it replaced. On the agency side, RCW 18.86.030(1)(c) requires a broker to present all written offers, written notices, and other written communications in a timely manner, regardless of whether the property is already subject to an existing contract for sale. A practical system for running that paperwork is laid out in this contract review guide.

Example

Marisol Reyes is under contract to buy a 1968 rambler in Kent for $585,000, with $10,000 in earnest money and closing set for June 12. Three weeks in, her employer transfers her to Boise. Her cousin Tomas Vega wants the house on the same terms. If Marisol simply assigns the contract to Tomas, she stays liable to the sellers if Tomas fails to close. So all three sides sign a novation instead. The sellers, Jim and Dana Kirby, agree in writing to release Marisol, accept Tomas as the buyer, and keep the $585,000 price, the $10,000 earnest money, and the June 12 closing date. The original agreement is discharged and the new one takes its place. Marisol's broker delivers a signed copy to every person who signed it, files it with the original agreement, and escrow reissues the closing documents in Tomas's name. If the deal later collapses, Marisol owes the Kirbys nothing. Under a bare assignment she still would.

Common Mistakes and Exam Traps

• Novation and assignment are the classic swapped pair. Assignment moves rights but keeps the original party liable, while novation discharges that party.
• Novation is not rescission. Rescission unwinds the deal and returns the parties to their original positions, while novation puts a replacement contract in place of the old one.
• Every party has to consent, including the one being released and the one being added. A buyer cannot impose a novation on a seller by giving notice.
• Swapping in a new contract between the same two parties is still a novation. The parties do not have to change for a novation to occur.