What is Novation in Florida Real Estate?

Contract terms are generally considered to be unchangeable once all parties sign their names. However, that isn’t always the case. Your purchase and rental agreements may be amendable through a legal instrument known as a novation.

What is a Novation?

A novation is an agreement between parties to a contract. It provides new terms that override the existing terms in the contract, and it replaces and nullifies the original contract.

All parties must agree to the changes – it cannot be a unilateral decision. Specifically, Florida case law has established that there are four elements that must be present for a valid novation to be created:

1. A previously valid contract must have existed;
2. All parties must agree to void the first contract;
3. All parties must agree to replace the first contact with the new one; and
4. The new contract must be valid and enforceable.

Consent to replace the old contract does not have to be written or explicitly stated; it may be implied.

What Terms Can a Novation Change?

Novations are not uncommon in Florida real estate transactions. They can be used to change existing terms and also to add terms that were not included in the original contract. Any part of a real estate contract can be changed by a novation if the required elements, such as the agreement of the parties, are met.

In recent years, novation has become an even more popular strategy used by real estate investors. The investor will sign a contract with a seller. Afterward, the investor will find a buyer and use the novation strategy to cancel the first contract with the seller and replace it with a subsequent contract with the new buyer. Sometimes, powers of attorney will also be used to market the property on behalf of the seller. The investor will often collect a novation fee at closing. To ensure that the novation closing is handled properly, it is important to work with an investor friendly title company such as Marina Title.

Novation in purchase contracts may take place due to changes in the contract terms, such as the  buyer, purchase price, or closing date. For lease agreements, a novation may be a result of a change to the monthly rental amount, tenant, move-in date or move-out date.

• Closing costs
• Names of involved parties

These are common changes, but any terms are subject to revision and novation if everyone involved agrees to the changes.

Novations in Florida Real Estate

Investors involved in Florida real estate transactions may use the novation strategy to switch out contracts as the parties negotiate different terms. A novation can be utilized in numerous other scenarios, including transferring a lease to a new tenant, lowering the purchase price after an inspection report, or changing the owner’s name from an individual to a business entity. Sometimes, one party may want to back out of a deal without incurring penalties, and a novation can offer a way for a new party to take their place.

Not all changes to a contract result in a novation. There are situations in which a modification can be made to a contract rather than implementing a novation. The original contract is still valid and enforceable in these situations, and only the modified terms have changed. In these situations, a contract addendum is used instead of novation.

HOW MARINA TITLE CAN HELP

Novation may be a useful strategy for real estate investors, but care should be taken to ensure that the novation documents are properly drafted, and that the closing is handled in an efficient manner.

For assistance with your Florida real estate transactions, including novation closings, contact our investor friendly title company, Marina Title. We have the real estate knowledge and experience to ensure a seamless closing for your title, escrow, and settlement needs.

For more information about our services or to get started, please call us at (800) 604-1871 or send an email to [email protected].