National Real Estate Practice Exam

What does novation refer to in contract law?

1. Creating a new contract without termination of the old

2. Substituting a new obligation for an old one

3. Renewing an existing contract

4. Revising the terms of a current agreement

The correct answer is: Substituting a new obligation for an old one

Novation in contract law specifically refers to the process of substituting a new obligation for an old one, effectively replacing one party or the terms of a contract while extinguishing the original agreement. This unique characteristic is key to understanding how novation differs from other modifications or updates in contract relationships. When a novation occurs, the original contract is completely dissolved, and a new contract is created that involves a different party or obligation. This is particularly important in scenarios such as the transfer of lease obligations where the original tenant is replaced by a new tenant, thereby transferring all responsibilities and rights under the lease to the new party. This understanding of novation highlights its distinct nature compared to other actions within contract law, such as simply modifying terms or renewing contracts, where the original contract remains in effect.