So what is a Deed of Novation?
A Deed of Novation is simply a deed (a type of formal contract) that makes the novation process happen. So let’s use an example.
Say A and B have entered into a contract but A wants out of the contract and wants to substitute Z in its place – the parties A, B and Z would all enter into a Deed of Novation that transfers all the benefits and obligations that A has under the contract to Z. Thus the deed (once signed by all parties) creates a new contract between B and Z.
Sounds simple – and it can be, as long as it is done right.
So who would want to enter into a Deed of Novation?
One of the most common reasons for a Deed of Novation is where a party decides to sell their business. Let’s use another example.
- Con the cleaner has a large cleaning business.
- In order to protect himself (and also to make his business more valuable to a potential purchaser) he enters into cleaning contracts with all his clients.
- Con has 25 contracts to provide cleaning services to various buildings around the city.
- Con decides to sell his business.
- The purchaser, Sam, recognises the value of the 25 cleaning contracts and when he takes over Con’s business he wants to continue providing cleaning services under the 25 contracts.
- To make this happen Con, Sam and each client (i.e. each of the 25 people who Con cleans for) enter into a Deed of Novation for their respective cleaning contract.
- Doing this creates a new cleaning contract between Sam and the respective client.
- Con is happy – he sells his business for what it’s worth, Sam is happy because he has 25 new clients which gives him immediate cash flow.
A Deed of Novation can help your business. If you have any questions please get in touch with us.