What Is Novation in Real Estate?

Every novation question, answered

Every question above with its correct answer and the reasoning behind it. Read the explanations for the ones you answered correctly too. A lucky guess and knowing the rule look identical on a score report. These are sample questions from our larger bank.

1. 1. Which of the following is NOT one of the four government powers over real estate?

   • AEscheat
   • BTaxation
   • CNovationcorrect
   • DPolice power

   Why: The four powers are Police power, Eminent domain, Taxation and Escheat (PETE). Novation is a contract concept: substituting a new party or agreement.

   Property ownership

   Key terms: escheat, eminent domain, police power

2. 2. A novation occurs when:

   • Aa new party or obligation is substituted with intent to release the original party.correct
   • Ba party transfers contract rights while remaining liable for performance.
   • Cthe parties correct a clerical error in the legal description.
   • Done party performs and the other pays, discharging the contract.

   Why: Novation substitutes a party or an obligation and, critically, releases the original obligor, which takes the consent of everyone involved including the party owed performance. Transferring rights while staying on the hook is an assignment instead.

   Contracts

3. 3. Novation of a mortgage loan is significant to a seller because it:

   • ARemoves the lender's lien from the property
   • BConverts the loan into a contract for deed
   • CLowers the interest rate on the existing note to the current market rate for new loans
   • DReleases the original borrower from further liability on the debtcorrect

   Why: Novation substitutes the new borrower for the old one with the lender's consent, releasing the seller from liability. It does not remove the lien, because the property continues to secure the debt in the new borrower's hands.

   Financing

   Key term: lien

4. 4. A Louisiana debtor signs a replacement writing concerning an existing payment obligation. The parties dispute whether they intended to extinguish that original obligation. What standard governs a claimed novation under Article 1880?

   • ANovation is presumed unless the creditor expressly reserves the original obligation in the new writing.
   • BNovation is established by probable extinguishing intent even if that intent remains equivocal.
   • CThe intention to extinguish the original obligation must be clear and unequivocal; novation is not presumed.correct
   • DEvery later signed writing automatically extinguishes the earlier obligation, even without that intention.

   Why: Article 1880 requires clear and unequivocal intention to extinguish the original obligation and rejects presumed novation. A new document alone does not establish that intention. The proposed presumption reverses the Code’s rule.

   Contracts

5. 5. A Louisiana creditor discharges the original debtor and accepts a new debtor in the original debtor's place. The original debtor objects. Is the novation still accomplished?

   • ANo, because the original debtor must always agree to it
   • BYes, unless the original debtor had an interest in performing the obligationcorrect
   • CYes, if the new debtor posts security for the old debt
   • DYes, after a court approves the substitution in writing

   Why: Civil Code art. 1882 says a new obligor substituted for a discharged prior obligor accomplishes novation even without the prior obligor's consent, unless that person had an interest in performing the obligation himself.

   Contracts

6. 6. A Louisiana debt secured by a third person's mortgage is extinguished by novation. May the creditor carry that security over to the new obligation?

   • AOnly with the agreement of the parties who gave the securitycorrect
   • BYes, the security follows the debt to the new obligation automatically
   • CYes, if the new obligor accepts the security in writing
   • DNo, the creditor must first release the security before the novation

   Why: Civil Code art. 1884 provides that security given for the extinguished obligation may not be transferred to the new obligation without the agreement of the parties who gave the security. The new obligor's willingness alone is not enough.

   Contracts

7. 7. A Louisiana obligor delegates performance of a debt to a third person, who binds himself to perform. When does the delegation effect a novation?

   • AWhen the third person binds himself to perform
   • BWhen the original obligor notifies the creditor of the delegation
   • CWhen the obligee expressly discharges the original obligorcorrect
   • DWhen the third person makes the first payment

   Why: Civil Code art. 1886 makes a delegation effective when the third person binds himself to perform, but it effects a novation only when the obligee expressly discharges the original obligor. Without that discharge the original obligor remains bound.

   Contracts

8. 8. Substituting a new party for an original party to a contract, releasing the original party entirely, is:

   • AAssignment
   • BNovationcorrect
   • CRescission
   • DSubordination

   Why: Novation substitutes a party AND releases the original one. Under a mere assignment the assignor stays secondarily liable (the distinction the exam tests).

   Contracts