novation

a substitution of contractual parties. Essentially, a novation allows one person to step into the contractual shoes of another. The novated party then takes on the obligations and entitlements of the party he or she has replaced.

Fergus buys a five-unit commercial building. All of the units are currently leased. In the lease agreement, the previous owner included a novation clause that allows for a change of ownership of the property. Accordingly, Fergus is substituted in for the previous owner, taking on all contractual obligations to the tenants and collecting the monthly lease fees.