Novation vs Assignment: Which Should You Use To Transfer A Contract?

Need to move a contract from one party to another? You’ll usually be choosing between two options under UK law: assignment or novation.

They sound similar, but they do very different things - and picking the wrong one can leave you exposed to claims, unpaid invoices, or unhappy customers.

In this guide, we’ll break down novation vs assignment in plain English, highlight the key differences, and give you practical steps so you can transfer contracts the right way.

What Is The Difference Between Assignment And Novation?

In short, assignment transfers rights; novation replaces a party.

• Assignment: You transfer some or all of your rights under a contract to a third party. Typically, this is the right to receive payments or other benefits. Your obligations (the things you must still do) usually do not transfer. You remain liable for performance unless the contract says otherwise.
• Novation: You substitute one contracting party for another. The original contract ends and a new contract on the same terms is formed between the remaining original party and the incoming party. Both rights and obligations move across.

Here are the headline differences small businesses care about:

• Consent: Assignment often doesn’t need the other party’s consent unless the contract forbids it. Novation always needs the consent of all parties (outgoing, incoming and the continuing counterparty).
• Liability: With assignment, the assignor normally stays on the hook for obligations. With novation, the outgoing party is released and the incoming party takes on the obligations.
• Scope: Assignment is best for transferring benefits (like receivables). Novation is best when you’re transferring the whole relationship (service delivery, warranties, risk).

Key UK legal points:

• A legal assignment of a debt or other “thing in action” must comply with section 136 of the Law of Property Act 1925 (in writing and notified to the debtor) to be enforceable at law; otherwise it takes effect as an equitable assignment.
• Novations are usually documented by a deed to avoid arguments about consideration and ensure clear release and substitution.
• The Contracts (Rights of Third Parties) Act 1999 doesn’t replace assignment/novation; it can give certain third parties rights, but it doesn’t transfer contracts.

If the parties actually want to change the terms rather than transfer the contract, you’re looking at an amendment rather than an assignment or novation. For that scenario, consider an amending contracts approach or an Addendum vs Amendment discussion with a lawyer.

When Should A Small Business Use Assignment Or Novation?

Use Assignment When:

• You’re transferring the right to be paid (e.g. selling receivables to improve cash flow).
• You’re moving benefits like insurance proceeds or warranty rights, but you’ll still perform the underlying obligations.
• The contract is difficult or slow to re-paper with the counterparty, and there’s no prohibition on assignment of rights.

Use Novation When:

• You’re transferring the entire relationship - both benefits and burdens - e.g. moving a portfolio of customer contracts to a buyer in an asset sale.
• You need to release the outgoing party from performance and liability (for example, when an old supplier is being replaced by a new one mid-term).
• The contract has a no assignment clause or “consent required” language, but the counterparty is open to a clean substitution.

Typical Small Business Scenarios

• Asset sale: You’re selling the trading name, website and customer contracts. Those customer contracts usually need a novation for a clean transfer, often alongside a Business Sale Agreement.
• Share sale: If a buyer acquires the shares in your company, your company remains the same contracting party, so you typically don’t need assignments or novations for existing contracts (subject to change-of-control clauses). This is handled at the deal level with a Share Sale Agreement.
• Invoice financing: Selling or assigning receivables to a financier can be a straightforward assignment of rights to payment (comply with the Law of Property Act 1925 formalities where applicable).
• Changing service providers: If a client is happy to switch service providers without re-tendering, a novation substitutes your business out and the new provider in - avoiding a gap in service.

How To Assign A Contract In The UK (Step-By-Step)

Before you assign, check the contract carefully - many prohibit assignment or require consent.

1) Review The Contract

• Look for assignment clauses (e.g. “not assignable without consent”) and any change of control provisions.
• Confirm what exactly can be assigned (rights to payment, step-in rights, warranties) and what cannot (personal services, obligations to perform).

2) Decide The Type Of Assignment

• Legal assignment (s.136 LPA 1925): In writing, absolute (not by way of charge), and written notice must be given to the counterparty.
• Equitable assignment: If you don’t meet the s.136 requirements, the assignment may still be effective in equity, but enforcement is more limited and the assignor may need to be joined in proceedings.

3) Prepare The Assignment Instrument

• Document the scope (which rights), effective date, and warranties about title to the rights.
• Include any ongoing cooperation obligations (e.g. to help the assignee enforce the rights).

4) Obtain Any Required Consent And Notify The Counterparty

• Where the contract requires consent, get it in writing. Even if consent isn’t required, give prompt written notice to the counterparty to perfect a legal assignment of debts.

5) Manage Data And Confidentiality

• If the assignment involves sharing customer data (for example, to let the assignee collect debts), ensure you have a lawful basis and the right safeguards under UK GDPR and the Data Protection Act 2018. In some cases, a Data Processing Agreement and a compliant Privacy Policy will be part of your compliance pack.
• When circulating contract details to potential assignees, use a Non-Disclosure Agreement to protect confidential information.

How To Novate A Contract (Step-By-Step)

Novation replaces a contracting party and requires everyone’s consent. It’s usually implemented with a deed for certainty.

1) Confirm The Commercial Position

• Align the outgoing party, incoming party and counterparty on the switch-over date, any accrued liabilities, and continuity of service.
• Check the original contract for consent mechanisms, notice periods and any transfer conditions.

2) Draft And Agree The Novation

• Use a Deed of Novation that clearly states the release of the outgoing party, the assumption of liabilities by the incoming party, and the survival of terms (e.g. confidentiality, IP, limitations of liability).
• Deal expressly with accrued rights (e.g. unpaid invoices) and historic breaches - who is responsible?

3) Execute The Deed Properly

• Follow the execution formalities for companies (e.g. two authorised signatories or a director plus witness) and ensure correct signatories for each party.
• Record the effective date and file the document securely.

4) Operational Handover

• Notify end customers and stakeholders of the change in contracting party, service contacts and payment details.
• Transfer operational assets and credentials as needed (e.g. service accounts, licences, access keys).

5) Data Protection And IP

• Map any personal data that will move to the incoming party and ensure you have a lawful basis for the transfer under UK GDPR (contractual necessity, consent, or legitimate interests, as appropriate).
• If the novation is part of a wider asset transfer, consider whether separate IP assignments (e.g. trade marks, software) are required alongside the novation instrument.

Key Risks, Clauses And Pitfalls To Watch

No-Assignment And Consent Clauses

Many commercial contracts prohibit assignment or require written consent. If you assign in breach of that clause, you risk a breach of contract claim. Novation can be a cleaner route where the counterparty will consent to a substitution.

Staying On The Hook After Assignment

Assignment doesn’t transfer obligations unless the contract states otherwise - you could still be liable if the assignee underperforms. If the commercial intent is for you to be released, novation is the safer mechanism.

Legal vs Equitable Assignment

If you’re assigning receivables, aim for a legal assignment under the Law of Property Act 1925 by putting it in writing and notifying the debtor. Without notice, the debtor can validly discharge by paying the original creditor.

Accrued Liabilities And Historic Breaches

Novation documents should say who is liable for pre-novation breaches and unpaid sums. This allocation is often negotiated as part of the wider deal documentation (e.g. a Business Sale Agreement in an asset sale).

Change Of Control Triggers

Even if you’re doing a share sale (where novations aren’t typically needed), some contracts have “change of control” clauses that require consent or give the counterparty termination rights. Always review key contracts early.

Data Protection And Confidentiality

Transferring customer contracts usually involves personal data. Ensure transparency and a lawful basis under UK GDPR, and put appropriate processing terms in place (a robust Data Processing Agreement can help). When you’re sharing contract packs for diligence or consent, protect them with a Non-Disclosure Agreement.

When It’s Not A Transfer At All

Sometimes the right answer isn’t assignment or novation - it’s changing the existing contract. If the parties want to tweak scope, price or terms, use a structured change process via an amendment or variation rather than a transfer. Legal tools like an amendment or a deed of variation can capture the changes cleanly without disturbing the party identities.

Practical Checklists: Assignment Or Novation?

Assignment Checklist

• Contract reviewed for anti-assignment language and notice requirements
• Scope limited to rights (e.g. receivables) - no obligations being shifted
• Assignment documented in writing (consider deed if needed)
• Written notice given to all affected counterparties (for legal assignment)
• Data sharing assessed and protected (UK GDPR, confidentiality)

Novation Checklist

• All parties aligned commercially on effective date, handover and liabilities
• Deed of Novation prepared with clear release and assumption wording
• Accrued rights and historic breaches allocated between parties
• Executed correctly by each party with proper authorities
• Operational and data transitions planned and communicated to customers

Examples To Bring It To Life

• Example 1 - Assigning Invoices: You’ve finished a project and are owed £50,000 across three invoices. You assign those receivables to a financier. That’s an assignment of rights to payment, not your obligations under the service contract.
• Example 2 - Switching Service Providers: Your client loves your solution but you’re exiting the market. You arrange a novation so the client continues seamlessly with a trusted partner, and you’re released from future obligations.
• Example 3 - Selling Your Business: You’re selling assets (brand, website, customer contracts). Each key customer contract is either novated to the buyer or replaced. The wider deal is covered by a Business Sale Agreement.
• Example 4 - Share Sale: An investor buys 100% of your company’s shares using a Share Sale Agreement. Your company remains the same legal party to contracts, so no novations are needed (watch for any change-of-control clauses).

Key Takeaways

• Assignment transfers rights (often the right to be paid); novation substitutes a party and transfers rights and obligations.
• Assignment may not need consent unless the contract says so, but novation always requires consent from all parties and is best documented by a deed.
• If you want the outgoing party released from liability, novation is the safer mechanism. Assignment generally leaves the assignor on the hook.
• For receivables, aim for a legal assignment under the Law of Property Act 1925 and don’t forget written notice to the debtor.
• In asset sales, expect multiple novations to transfer customer and supplier relationships; in share sales, contracts usually stay put (subject to change-of-control clauses).
• Protect data and confidentiality during any transfer with the right paperwork - a Data Processing Agreement, Privacy Policy and Non-Disclosure Agreement are common parts of a compliant approach.
• If your aim is to change terms rather than move the contract, use an amendment rather than assignment or novation.

If you’d like tailored help choosing between assignment or novation - or you need documents like a Deed of Novation or a comprehensive Business Sale Agreement - you can reach us on 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.