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 debt or when selling a business and its obligations. This is an easy to use, effective novation agreement.

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About this novation agreement

Use this novation agreement to transfer a debt obligation from one party to another (i.e. change who will repay the 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 a novation of a debt is a cancellation of old debt in exchange for issuance of new. Instead, novation just changes the parties to the original contract and doesn’t create a new 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 to novate any debt, 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 assignment agreement may be an even simpler way of transferring your contract to someone else.

Why not a deed of novation?

The deed format is used where one party to a contract receives no consideration. 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 debt being novated.

When to use this novation agreement

This document 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 novation agreement, rather than an assignment agreement if all parties to the contract will agree to the change and sign the contract. Its usually easier just to get the transferring parties to sign an assignment agreement, but some contracts have non-assignment clauses that mean that novation is the only valid way of transferring the contract to someone else. 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 the following novation agreement will be more suitable:

Novation agreement: transfer debt to new creditor

Agreement features and contents

  • Suitable when either party is resident outside the New Zealand
  • 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;
  • 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 New Zealand law.

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