Contract Terms
Novation and Assignment: Who Remains Liable
Consent requirements, permitted contract language and the effect of an assumption vary by jurisdiction and by the form in use. Confirm the rule your state tests against your commission's statute and rules and the current candidate handbook from your exam vendor.
Both devices move a contract obligation toward somebody new. Only one of them lets the departing party walk away clean, and that single fact decides almost every exam item on the subject.
Work these questions by asking who is still answerable if the newcomer stops paying. If the answer is nobody but the newcomer, a release was granted and you are looking at novation. If the original party could still be pursued, you are looking at an assignment.
Terms the Exam Uses Precisely
Four terms carry the weight here. Learn each one by what it does to liability, not by its dictionary sense.
Novation
An agreement among every affected party that swaps one obligor for another and discharges the departing obligor. The prior agreement ends; a fresh agreement stands in its place. Because someone is being let go, everyone must consent, including the party entitled to performance.
Assignment
A handoff of contract rights from an assignor to an assignee. The underlying agreement keeps running on its original terms. Absent a written release, the assignor stays answerable behind the assignee if performance fails.
Assumption of Mortgage
An arrangement in which a purchaser takes on the repayment duty under a loan already secured by the property. Whether the departing borrower is freed turns on the lender: a written release makes the transaction a novation, while silence from the lender leaves that borrower exposed to a deficiency.
Due-on-Sale (Alienation) Clause
Loan language letting the lender call the unpaid balance when ownership changes hands. It is the reason a purchaser cannot simply step into an existing loan; the lender has to agree first. Also referred to as an alienation provision.
Release Is the Whole Test
Picture a purchase agreement that a buyer hands off to someone else before closing. Rights move. Duties do not evaporate. If the seller never signed anything discharging the first buyer, the seller may still look to that first buyer when the replacement fails to perform. Candidates lose the item by assuming the handoff itself ended the obligation.
Now add a lender. A purchaser agrees to keep paying a loan already recorded against the property. Until the lender puts a discharge in writing, the person who signed the note remains the person the lender can sue. Paperwork labeled an assumption is not a release, and the exam likes that gap.
Notice also what novation does to the paper trail. The earlier agreement is extinguished rather than amended, so its terms stop governing and the replacement document controls. That is why a novation needs signatures from all sides while an amendment needs only the existing parties.
Working the Item in Under a Minute
These questions arrive as short fact patterns. Run the same sequence every time and the distractors fall away.
Name the obligation that is moving. Payment under a note, performance under a purchase agreement, and occupancy under a lease each behave differently.
Find the release. Look for wording such as discharged, relieved, or substituted. No such wording means no novation, whatever label the fact pattern puts on the transaction.
Count the consenting parties. A novation requires agreement from the party owed performance. If the stem says one side acted alone, the answer is assignment.
Check for restrictive language in the underlying agreement. Many forms bar a handoff outright or condition it on written approval, which makes an unapproved transfer a breach rather than a valid assignment.
Decide who the injured party may pursue. Two possible obligors points to assignment. One points to novation.
Watch for a lender in the facts. Loan language calling the balance due on transfer means nothing happens without lender participation, so a valid substitution of borrowers is rare on these items.
Questions Candidates Ask
Does the party owed performance have to approve a handoff of rights?
It depends on what the agreement says. Many residential purchase forms condition any transfer on written approval, and some prohibit it entirely. Where the form is silent and no statute intervenes, rights are often transferable while duties are not. Read the form the fact pattern describes rather than applying a blanket rule.
How does a sublease differ from handing a lease to a new tenant?
Handing over the lease moves the tenant's entire remaining interest to a replacement tenant, who then deals with the landlord directly. A sublease keeps the original tenant in the chain: that tenant becomes a landlord to the subtenant and still owes the property owner everything the lease required. Liability, again, is the dividing line.
Is a novation just a heavily rewritten amendment?
No. An amendment adjusts named provisions and leaves the agreement standing, so the original document continues to control everything it did not change. A novation retires the agreement and substitutes a new one, which is why it takes consent from every party rather than only from those changing a term.
Why do investors care about transferring a purchase agreement?
Because the contractual right to buy has value on its own. An investor who ties up a property below market can hand that right to an end purchaser for a fee instead of closing, funding the renovation, and reselling. Whether that practice is permitted, licensed or regulated is decided by state law, so check your statute rather than assuming it is open.
If the newcomer defaults, who does the injured party sue first?
After a novation, only the substituted party, because the original obligor is gone from the agreement. After an assignment with no release, the injured party may look to the assignee under the transferred duty and to the assignor on the original promise. Exam stems often describe the second situation and offer the first as a distractor.