- In an asset sale, liabilities the buyer hasn't expressly agreed to assume generally stay with the seller.
- An assignment transfers the seller's rights and benefits under a contract to the buyer.
- Novation is a three-way agreement — seller, buyer, and the original counterparty all have to agree — that extinguishes the original contract and replaces it with a new one in which the…
In an asset sale, contracts don't just come along for the ride. The buyer and seller have to actively deal with every material contract the business depends on — supplier agreements, customer contracts, equipment leases, software licences, and more. Two different legal mechanisms handle this, and they are not interchangeable: assignment and novation. Mixing them up can leave a seller unexpectedly on the hook for a contract long after closing.
This article explains what each mechanism actually does, when each one is used, and why the difference matters more than it might first appear.
Why Contracts Need Special Handling in an Asset Sale
In an asset sale, liabilities the buyer hasn't expressly agreed to assume generally stay with the seller. But contracts work a little differently: if the buyer wants the benefit of a supplier agreement, a lease, or a licence going forward, the parties need an active mechanism to move that relationship from seller to buyer — it doesn't happen automatically just because the underlying business is changing hands. Which mechanism they use changes who remains legally responsible if something goes wrong afterward.
What Is an Assignment?
An assignment transfers the seller's rights and benefits under a contract to the buyer. In many cases, the seller can assign a contract's benefits to the buyer without needing the counterparty's involvement at all — unless the contract itself says consent is required, which is extremely common for commercial contracts, leases, and licences.
The key limitation: an assignment doesn't automatically release the seller from its own obligations under the contract. Unless the counterparty agrees otherwise, the seller can remain on the hook if the buyer later fails to perform, even after the business has been sold and the seller has moved on.
What Is Novation?
Novation is a three-way agreement — seller, buyer, and the original counterparty all have to agree — that extinguishes the original contract and replaces it with a new one in which the buyer steps fully into the seller's shoes. Unlike a simple assignment, novation actually releases the seller from future obligations under the contract, because the counterparty has expressly agreed to accept the buyer as the new party instead.
The trade-off is that novation requires the counterparty's active cooperation, not just notice. A counterparty who doesn't want to renegotiate, or who prefers to keep the seller on the hook as a backstop, can simply decline to novate.
Comparing the Two
| Assignment | Novation | |
|---|---|---|
| Who has to agree | Often just buyer and seller, unless the contract requires consent | Seller, buyer, and the counterparty all have to agree |
| Does the seller stay liable? | Often yes, unless expressly released | No — the seller is fully released |
| Typical use | Simpler contracts, or ones where consent is straightforward to obtain | Contracts where ongoing seller liability is a dealbreaker for the seller |
| Counterparty's role | May need to consent, but isn't renegotiating the deal itself | Full three-party agreement, effectively a new contract |
Which Contracts Tend to Need This Most
- Commercial leases, which almost always require landlord consent before assignment
- Key customer and supplier agreements, especially long-term or exclusive ones
- Equipment leases and financing arrangements
- Software and intellectual property licences
- Any agreement with an explicit change-of-control or assignment clause
Practical Tips for Buyers and Sellers
- Identify every material contract early in due diligence — you can't plan for a consent process you didn't know you needed.
- Check each contract for its own assignment or change-of-control language rather than assuming a general rule applies.
- Decide, as a seller, which contracts you actually need to be released from through novation versus which ones a simple assignment is good enough for.
- Build consent-gathering into the closing timeline as a condition precedent where a contract is critical to the business.
- Get counterparties' responses in writing — a verbal "sure, that's fine" isn't the same as a documented assignment or novation.
Frequently asked questions
If a contract is silent on assignment, can it be assigned freely?
Not necessarily, and this depends on the specific wording and nature of the contract — some contract types have restrictions that apply even without express language. This is worth a lawyer's review rather than an assumption either way.
Does a share sale ever need contract assignment or novation?
Generally not, because the contracting corporation itself doesn't change in a share sale — its existing contracts continue with it. The exception is a contract with its own change-of-control clause, which can still trigger a counterparty's consent or notice rights even though no assignment is technically happening.
What happens if a key counterparty simply refuses to consent?
This can be a serious problem, particularly if the contract is central to the business. Purchase agreements often address this risk directly, sometimes by making certain consents a condition of closing, or by allocating the financial consequences if a consent can't be obtained.
Is novation always better for the buyer?
Not necessarily — novation benefits the seller most, by getting it fully off the hook. For the buyer, either mechanism can work depending on the contract, though a buyer relying heavily on a particular agreement may still prefer the certainty of a fresh, novated contract rather than an assigned one that could be challenged later.
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