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Difference Between Assignment & Novation

Difference Between Assignment & Novation

We sometimes hear of certain rental cases where leases are transferred due to a sale with tenancy or in cases where a new incoming tenant intends to take over the existing lease. Let us find out what are the options available for the transfer of lease from one party to another.

Assignment of Lease

An assignment of lease is an agreement which transfers rights of the tenancy from one landlord to another landlord. For example, if a warehouse or factory is sold with tenancy to a new owner who is also the new landlord of the industrial unit. In simple terms, in a transaction where a property owned by owner 1 is sold with tenancy to owner 2, the lease will be assigned to owner 2 upon completion of the sale. In this case, the lease is taken over by owner 2 or assigned to owner 2.

Novation of Lease

A novation of lease usually involves three parties and is a tripartite agreement. For example, in a case where tenant 1 of a warehouse or factory unit intends to allow tenant 2 to take over the existing lease and the landlord is also supportive of the arrangements. In this case, a novation of lease between tenants can be done. The novation agreement is in such a way where the contract between landlord and tenant 1 is rescinded and is replaced by a new contract between landlord and tenant 2 who is taking over the lease based on the same terms and conditions. However, do note that for novation, all 3 parties must be in agreement before the novation can take place.

Why it is Important to Know the Difference

As contracts are legally binding, it is important to use the right type of agreement whether assignment or novation agreement for different scenarios so that the rights or obligations or both are transferred correctly between parties of the contract.

Sale with tenancy and takeover of lease sometimes happen and it will be good to understand the difference so that we are well equipped with the right knowledge when it happens.