Published on:

A Novation Is Not A Car

“You need a novation,” I say.

I can hear the client literally scratching his head on the other end of the line.

“You mean I need an crappy old Chevy?” He asks, clearly puzzled.

“No, no, no,” I say. “You’re thinking of a Nova, or maybe a Citation. I’m talking about a novation. It’s an agreement in which a new party is substituted in for another.”

Because we are discussing a real estate lease in this case, I go on to explain the nuances of the law about privity of contract and privity of estate. I tell the guy that an assignment of the lease to another party gets his business out of “privity of estate” but it does not get him out of “privity of contract.”

“Since your business made a contract with the landlord, you are in privity of contract with the guy,” I tell him.

“You promised the landlord you would do certain things, like pay the rent every month and keep the premises insured. You can’t get out those obligations just by assigning the lease to someone else, even if the landlord approves of the assignment. The transfer of possession breaks the privity of estate you have but not the privity of contract. You have to get the landlord to let you out of privity of contract through a novation.”

He asks: “What if I skip that part and just let the new company move in? As long as the landlord gets his rent he will be happy, I think.”

“Well, the landlord could claim a breach of the assignment provision in your lease and evict the new guys.” I caution him. “More importantly, you could face liability down the line. How many more years does your lease have to run?”

“Another seven years,” he says. “But we need a bigger space, which is why I had my real estate gal find this new company to take over.”

“Well, you are on the hook for the next seven years, whether you want to be or not, unless you do a novation,” I say. “If the new company defaults on the lease anytime in the next seven years, the landlord can come after you. So down the road, this lease that you thought you were all done with could come back to haunt you.”

“OK, OK,” he concedes. “You talked me into it. Write up your crappy old Chevy agreement.”

275redchevy.jpg“I’ll be glad to.” I say. “But you’ve got to talk your landlord into accepting it along with the new company.”

“Besides,” I add. “A mid-sixties Chevy Nova SS with a small block V8 shoehorned under the hood and four on the floor was a legitimate muscle car. It was a thing of beauty, as long as you were going in a straight line.”

“Spare me the history lesson,” he tells me. “Just get me out of this lease!”