- An assignment transfers the seller's rights and benefits under an existing contract to the buyer.
- An assignment, on its own, generally does not release the seller from its own obligations under the contract unless the counterparty expressly agrees to that release.
- List every contract that matters to the deal.
When a business sale involves moving contracts from a seller to a buyer, people often use "assign" and "novate" as though they mean the same thing. They don't, and the difference decides whether a seller can genuinely walk away from a contract once the deal closes, or whether it stays quietly on the hook if the buyer later drops the ball. Getting this right at the drafting stage — not after a dispute arises — is one of the more overlooked parts of structuring an asset purchase.
This article sets out the practical difference and offers a simple way to decide, contract by contract, which mechanism your deal actually needs.
The Core Difference in Plain Terms
An assignment transfers the seller's rights and benefits under an existing contract to the buyer. The original contract keeps existing; only who is entitled to enforce it — and often, who must still perform it — changes hands.
A novation replaces the original contract entirely with a new one, and requires all three parties — seller, buyer, and the original counterparty — to agree. Because the counterparty is agreeing to release the seller and accept the buyer as the new contracting party, novation is the only one of the two that reliably gets the seller off the hook going forward.
Why the Difference Matters After Closing
An assignment, on its own, generally does not release the seller from its own obligations under the contract unless the counterparty expressly agrees to that release. A seller who simply assigns a contract without more can find itself still legally responsible if the buyer later fails to perform, long after the sale has closed and the seller has moved on. A properly executed novation avoids this, because the counterparty has actively agreed to look to the buyer alone.
A Simple Way to Work Through Which One You Need
- List every contract that matters to the deal. Don't rely on memory — pull the actual documents.
- Check each one for its own assignment language. Some contracts prohibit assignment outright, some require consent, and some are silent.
- Ask whether the seller genuinely needs to be released. If the seller is winding down, distributing sale proceeds, or simply wants a clean exit, release matters far more than if the seller is staying active in some other form.
- Decide whether the counterparty is likely to cooperate. Novation needs their active agreement, not just notice, so an unresponsive or difficult counterparty may make novation impractical regardless of preference.
- Build the process into the closing timeline, since both consents and novation agreements take time to collect.
When Novation Is Usually Worth the Extra Effort
- Long-term leases, especially where the seller has given a personal guarantee
- Loan or financing arrangements where the seller remains a named borrower or guarantor
- Major customer or supplier contracts where ongoing exposure would be significant
- Any contract the seller specifically wants off its books before winding down entirely
When a Straight Assignment Is Usually Enough
- Shorter-term or lower-value contracts where residual seller exposure is minimal
- Contracts the seller is comfortable staying loosely connected to
- Situations where the counterparty is known to be slow or unwilling to formally novate, and the practical risk of proceeding without it is low
A Note on Share Purchases
None of this usually comes up in a straightforward share purchase, because the corporation that holds the contracts doesn't change — its contracts simply continue with it. The exception is a contract with its own change-of-control clause, which can give the counterparty rights even though no assignment or novation is happening at all.
Frequently asked questions
Can a contract be novated without the counterparty's consent?
No. Novation is a three-party agreement by definition — without the original counterparty actively agreeing to release the seller and accept the buyer, there is no novation, only, at most, an assignment.
What if a contract says nothing about assignment at all?
Silence doesn't automatically mean free assignability. Some types of contracts carry restrictions that apply regardless of the wording, and personal-service or highly specific contracts are more likely to be affected. This is worth a lawyer's review rather than an assumption.
Is novation slower or more expensive than assignment?
It generally takes more coordination, since it needs the counterparty's active participation rather than just notice or a simpler consent — but the extra time is usually worthwhile for contracts where ongoing seller liability is a real concern.
Does it matter whether the deal is an asset purchase or a share purchase?
Yes. Novation and assignment issues are primarily an asset-purchase concern, since that's where individual contracts change hands. In a share purchase, the contracting corporation itself doesn't change, so this analysis usually isn't needed except for change-of-control clauses.
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