Transferring a loan by novation
Transferring a loan by novation

The following Banking & Finance guidance note provides comprehensive and up to date legal information covering:

  • Transferring a loan by novation
  • What is novation?
  • Advantages of novation
  • Novation—the consent requirement
  • Novation—documentation and logistics
  • Novation—impact on security
  • Novation—disclosure
  • Other issues to consider

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:

  1. Transferring a loan by legal assignment

  2. Transferring a loan by equitable assignment

  3. Transferring a loan by sub-participation

For a precedent novation agreement, see Precedent: Deed of novation: for an unsecured bilateral facility agreement

What is novation?

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