Novation Deed: What It Is, When To Use It, And How To Do It Right

If your business needs to swap out a party to a contract - for example, when you’re selling your business, changing suppliers, or transferring a client agreement to a new entity - a novation deed is often the cleanest way to do it.

Handled well, novation lets you replace one contracting party with another, without leaving gaps in obligations or creating avoidable risk. Handled poorly, you can end up with disputes about who’s responsible for what, unpaid invoices, or even the original contract being unintentionally terminated.

In this guide, we’ll explain what a novation deed is in plain English, how it differs from an assignment, common situations when small businesses use it, the steps to complete a novation properly, and the key clauses to include to protect your position.

What Is A Novation Deed?

A novation deed is a three-party agreement that replaces one contracting party with another, and transfers both the rights and the obligations under the original contract to the incoming party. The effect is that the original contract is “extinguished” and a new contract on substantially the same terms continues between the remaining party and the incoming party.

Because all parties must agree, novation is different to simply assigning the benefits of a contract. It’s a full substitution - not just a handover of the right to be paid.

In Australia, a novation is commonly documented as a deed (rather than a simple agreement). A deed offers extra certainty about enforceability and doesn’t require consideration (payment or value) to be binding. If you’re new to deeds, it can help to skim what a deed is in Australian law via this primer: What Is a Deed.

Novation vs Assignment: What’s The Difference?

Many business owners use “novation” and “assignment” interchangeably, but they are legally distinct - and choosing the wrong one can create unwanted liabilities.

• Assignment transfers the benefit (e.g. the right to receive payment) to another party. Unless the contract says otherwise, you generally can’t transfer burdens (e.g. the duty to perform services) by assignment alone. For a deeper breakdown, see this overview of assignment of contracts.
• Novation transfers both benefit and burden by substituting one party for another, with the consent of the continuing party. After novation, the outgoing party is released from ongoing obligations (subject to any carve-outs you agree in the deed).

A quick rule of thumb: if you need the incoming party to take over performance (not just collect payments), you’ll usually be looking at a novation. If you only need to transfer a receivable, assignment may suffice.

Also note: some contracts restrict or prohibit assignment or novation. Always check the “assignment” or “transfer” clause in your original contract. If the contract requires written consent, build that into your process and paperwork.

When Would A Small Business Use A Novation Deed?

Novations pop up in many day-to-day scenarios. Common examples include:

• Selling your business or book of clients. If you’re transferring client contracts to a buyer, the cleanest path is often to novate each client contract to the purchaser so service and billing continue seamlessly. Pairing the sale paperwork with a Deed of Novation for each customer can avoid gaps.
• Changing your business entity. If you started as a sole trader and now operate through a company, you may wish to novate key supplier or client contracts to your company so the company (not you personally) is responsible going forward.
• Replacing a subcontractor or service provider. If your business is the “head contractor” and you want a new subcontractor to step into an existing services contract, novation ensures the new provider takes on both the duties and the liabilities.
• Restructures within a group. Moving contracts between related entities (for example, to consolidate operations) is often done by novation so that performance and warranty obligations move as well.
• Premises and leases. While leases are a special area, a similar concept applies using a lease-specific document (often called a deed of assignment of lease). If you’re transferring a lease, use the appropriate lease instrument (e.g. a Deed of Assignment of Lease) and follow the landlord’s requirements.

Important: employment contracts aren’t usually “novated” in Australia in the same way. If you’re transferring employees to a new entity, separate rules can apply (e.g. transfer of business under Fair Work), and you’ll typically issue new Employment Contracts rather than try to novate existing ones.

How Do You Novate A Contract? Step-By-Step

Novation isn’t complicated, but there are a few moving parts to get right. Here’s a practical roadmap.

1) Check The Original Contract

Look for any clause dealing with transfer, assignment, or novation. Some contracts prohibit novation; others allow it with consent or impose specific conditions (e.g. notice periods, form of document). If a condition is triggered (like obtaining written consent), make sure you satisfy it before completion.

2) Decide If Novation Is The Right Tool

If you only need to tweak terms (price, scope, dates), you might just vary a contract. If you’re transferring only the right to receive payments, a Deed of Assignment could be enough. If you need a full substitute performer and a release for the outgoing party, novation is usually the right choice.

3) Prepare A Novation Deed

Use a deed structure that clearly identifies the three parties (Outgoing, Incoming, and Continuing) and sets the novation date. Your deed should attach or describe the original contract and confirm that, from the novation date, the Incoming Party steps into the Outgoing Party’s shoes on the same terms (subject to any agreed changes).

4) Deal With Releases, Arrears, And Risk Allocation

Address who is responsible for amounts owing or breaches before the novation date and how claims will be handled after. It’s common to include mutual releases, indemnities, and warranties so everyone is clear about what happens to pre-novation issues versus post-novation performance.

5) Get It Properly Signed

Because it’s a deed, execution formalities matter. Companies should sign in accordance with the Corporations Act - many businesses use signing under section 127 - or appoint authorised signatories. Ensure the signing blocks match each party’s structure (company, sole trader, trust, etc.) and that any required witnesses are included.

6) Complete Handover And Notices

Send any required notices under the original contract and make sure practical handover items (logins, files, keys, direct debits, point of contact) are transferred. If personal information is involved, update your Privacy Policy and data handling processes so customers know who now handles their data.

What Should A Novation Deed Include?

Every deal is different, but robust novation deeds usually include the following building blocks.

• Parties and Background to identify the Outgoing Party, Incoming Party, and Continuing Party, and to describe the Original Contract being novated.
• Novation Clause stating that, from the novation date, the Incoming Party assumes all rights and obligations of the Outgoing Party under the Original Contract.
• Release and Discharge so the Continuing Party releases the Outgoing Party from post-novation obligations, and the Outgoing Party releases the Continuing Party for post-novation performance (subject to any carve-outs).
• Pre-Novation Liabilities addressing responsibility for accrued fees, defects, or breaches before the novation date (for example, the Outgoing Party remains liable for pre-existing breaches).
• Warranties from the Outgoing Party that it has performed to date, disclosed disputes, and has authority to novate; and from the Incoming Party that it has capacity and resources to perform.
• Indemnities so the appropriate party covers losses arising from their period of responsibility (pre- or post-novation).
• Continuity confirming the Original Contract continues on unchanged terms (unless explicitly varied) between the Continuing Party and the Incoming Party.
• Transitional Matters such as transfer of records, IP, equipment, or security, and communication with customers or third parties.
• Confidentiality and Privacy obligations to maintain confidentiality and ensure lawful handling of any transferred personal information.
• Execution as a Deed with correct signing blocks and witness requirements.

If the original agreement sits alongside other documents (e.g. service schedules, purchase orders, or a Heads of Agreement that led to the contract), make sure your novation deed captures the entire suite so nothing is accidentally left out.

Common Pitfalls To Avoid

Most novations are straightforward, but these are the gotchas we see most often.

Assuming Consent Isn’t Needed

You can’t force novation on the other party. If your original contract doesn’t allow transfer without consent, get the Continuing Party to sign the deed. An email saying “that’s fine” usually isn’t enough.

Leaving Pre-Novation Debts Unclear

Spell out who pays what when, especially where invoices straddle the novation date. It’s common to apportion fees, but write it down to avoid finger-pointing later.

Forgetting Third-Party Approvals

Some arrangements depend on third-party approvals (for example, government contracts, software licences, or landlord consents). Build those conditions into your novation timeline so you don’t breach another agreement by transferring too soon.

Mixing Up Assignment And Novation

Using an assignment where a novation is needed can leave the Outgoing Party still on the hook for performance. If you’re unsure, get a quick check - a short consultation is cheaper than a dispute.

Not Capturing Linked Documents

If your deal relies on related documents (SOWs, addendums, change orders), make sure your novation expressly covers them and that versions are correctly identified. Where changes are needed, pair your novation with a targeted variation clause or a short-form contract amendment.

Alternatives To Novation (And When To Use Them)

Novation is powerful, but it’s not always necessary.

• Deed of Assignment: Use when you only need to transfer a benefit (for example, the right to be paid) and the Continuing Party doesn’t need the assignee to perform any obligations. A Deed of Assignment is typically simpler and doesn’t require the Continuing Party to sign (unless the contract says otherwise).
• Variation/Amendment: If the parties remain the same and you just want to update a scope, price, or date, a short variation can be enough. Here’s a useful explainer on how to legally vary a contract.
• Termination And New Agreement: In some cases, it’s cleaner to end the old contract and sign a new one with the new party. If you go down this path, consider a Deed of Termination and then put the replacement agreement in place immediately to avoid gaps.
• Full Transaction Documents: For business or asset sales, novation is often just one piece of the puzzle alongside your sale contract. If you’re selling the business, ensure your Business Sale Agreement maps out which contracts must be novated and when completion can occur.

Data, IP, And Other Compliance Considerations

When contracts change hands, compliance obligations can shift too. Keep an eye on:

• Privacy And Data: If personal information will flow to the Incoming Party, ensure your privacy notices are updated and that the Incoming Party meets Privacy Act requirements. Updating your public-facing Privacy Policy is a simple but important step.
• Intellectual Property: If the original deal includes licences or ownership of IP, confirm those rights transfer properly on novation and that any third-party licences allow substitution.
• Security And Guarantees: Check for bank guarantees, parent guarantees, or security interests tied to the original party. Your novation may need to replace or release them to avoid dangling obligations.
• Execution Formalities: Because you’re using a deed, ensure proper execution blocks and processes are followed (including company signings and witnesses). If you need a refresher on company signing options, see signing under section 127.

Do You Always Need A Tailored Novation Deed?

Templates can be a useful starting point, but novations often involve deal-specific issues like unpaid amounts, warranties, indemnities, or regulatory approvals. A short, tailored Deed of Novation drafted for your situation can save significant time and reduce risk, especially where the relationship is ongoing and reputation matters.

If you’re already negotiating a broader contract, you can also build a novation mechanism into your master agreement so that future transfers are more efficient. And if you’re comparing options (novate, vary, assign), a quick contract review can help you choose the cleanest path.

Key Takeaways

• A novation deed replaces one party to a contract with another and transfers both rights and obligations, with the consent of all parties.
• Choose novation when performance must move to the incoming party; use assignment if you only need to transfer the benefit (like the right to be paid).
• Before you novate, check the original contract for transfer restrictions and any required approvals or notices.
• A solid novation deed should cover releases, who is liable for pre-novation issues, continuity of terms, and execution as a deed.
• Across business sales, restructures, and supplier changes, plan the handover carefully - including privacy, IP, and security - to avoid gaps.
• Where a lighter touch will do, consider a targeted variation or a Deed of Assignment instead of full novation.
• Getting a tailored Deed of Novation and quick legal advice up front is a low-cost way to prevent future disputes.

If you’d like a consultation on preparing a novation deed for your business, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.