Events and variables during a real estate deal are generally subject to change. Anything from alterations in home prices, closing costs, inspection issues and financing can cause you to rethink your current real estate contract. This could make it necessary to seek a novation.
Novation refers to the act of replacing or substituting an existing term, party or obligation within a legal contract with something new. In real estate deals, novation frequently occurs when buyers and sellers need to renegotiate parts of an existing purchase agreement.
Novation voids and replaces contracts
A novation does not simply edit or alter selected words or numbers in a real estate contract. The entire original agreement becomes void and invalidated. A new contract then replaces the old one, incorporating the updated terms. All involved parties must review and sign this replacement contract for it to become legally binding.
Common real estate novation scenarios
Some situations may trigger novations. If a property inspection uncovers defects requiring seller repairs, you might need a revised purchase agreement. If the property appraises for less than the purchase price, renegotiating the price downward can keep you from incurring higher closing costs. Changes to down payments, interest rates or other financing provisions could also necessitate novation.
In addition, your property might manifest title problems. Previously unknown liens, easements or other title issues often surface during closing. You can adapt your purchase agreement to address these contingencies. Additionally, if a different buyer assumes the transaction or an heir inherits and sells the property, you will have new parties who must sign a new agreement with you to keep the deal going.
Novations can maintain progress
According to survey information provided by the National Association of Realtors, 5% of real estate contracts fell through in the last quarter of 2022, with 15% seeing delays. Given that it is possible for real estate deals to collapse, using legal tools such as novation may be necessary to keep agreements on track.
As contract renegotiations and novations approach closing dates, prompt attention and availability help prevent an unnecessary termination of the contract. Prioritizing novation requests and signatures keeps real estate transactions progressing smoothly toward completion.