Briefing Note: The difference between a loan assignment & a loan novation. When is each needed?
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An assignment is the transfer of an existing right or interest in intangible property from one person to another. IP (Intellectual Property) would be an example of intangible property eg. patents, trademarks, copyrights, franchises & licences and digital assets such as domain names or software licences.
A novation is the means of transferring a party’s rights & obligations under a contract to a third party, with the consent of all parties involved.
So when would they be used?
An assignment would be used in business sales or intra-group reorganisations that are structured as a business sale, when the benefits of the business’s contacts needs to be transferred to the buyer.
After assignment, the assignee is entitled to claim and enjoy the benefit of the contract and to enforce its rights against the other contracting party. However, because assignment only transfers existing rights and does not create new ones, the assignee cannot enforce rights that the assignor did not have.
Because the burden of a contract cannot be assigned, the assignor remains liable post assignment to perform any part of the contract that has still to be fulfilled. In practice, the assignee will usually agree to assume the performance of an ongoing contract after assignment and often agrees to indemnify the assignor against any breach or failure to perform by the assignee. The assignor will typically remain liable for obligations and liabilities incurred before the assignment.
The benefits of some contracts are non-assignable, such as personal, employment and contracts between authors and publishers.
In general, a loan assignment must:
- Be absolute (unconditional)
- Not purport to be by way of charge only
- Not relate to only part of a debt, or other legal chose in action [personal rights over property which can only be claimed or enforced by action (eg to sue), and not by taking physical possession]
- Be in writing and signed by the assignor
- Make sure the other party/parties to the agreement are given notice of the assignment
In a business acquisition, contracts are commonly novated in a business acquisition structured as an asset purchase transaction, where the seller needs to transfer its rights and obligations under the business’s contracts to the buyer.
Consent is key to novation
All the parties to the original contract (the outgoing and the continuing parties) and the incoming party, must consent to the novation for it to be valid. This is another factor distinguishing novation from assignment: in principle, the benefit of a contract can be assigned without obtaining the continuing party’s consent or even the assignee’s.
A continuing party may be reluctant to consent to a novation because they prefer to be able to pursue the outgoing party in the event of default, particularly if the incoming party is unknown to them, or has fewer financial resources than the outgoing party
A continuing party who objects to a proposed novation should state formally, in writing, that they do not consent to the novation. They should also refuse to deal with the incoming party, as this may be deemed to amount to consent.
As novation (typically) extinguishes one contract and replaces it with another, consideration (or cause) must be provided for both the discharge of the original contract and the new contract. The various promises between the parties to the novation agreement are generally regarded as being adequate consideration (cause)