The following Banking & Finance practice note provides comprehensive and up to date legal information covering:
Novation is a means by which a lender can transfer its interest in a loan to another lender.
This Practice Note looks at what is meant by novation before discussing the advantages as compared with other transfer methods. It then looks at issues to consider including consent, documentation and impact on security.
For an overview of key issues in loan transfers more generally, see Practice Note: Key issues in loan transfers.
The following Practice Notes contain detailed information on other methods of loan transfer:
Transferring a loan by legal assignment
Transferring a loan by equitable assignment
Transferring a loan by sub-participation
For a precedent novation agreement, see Precedent: Deed of novation: for an unsecured bilateral facility agreement
Under English law novation is the only way for a lender to transfer both its contractual rights and its contractual obligations to a new lender.
In a sense, referring to novation as a method of 'transfer' is misleading. Novating a loan means that the existing lender's rights and obligations are completely cancelled and discharged and the new lender assumes new, but identical, rights and obligations in their place. For this reason, novation isn't actually a transfer. Instead, it is a means of creating a distinct contractual relationship between the new lender and the original transaction parties. As a new contract is formed, consideration is required at the time of the novation.
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