In the context of REITs and property investments, a novation is when the landlord either:

• replaces a current lease agreement in favor of a new lease agreement or
• replaces a current lease agreeement in favor of a new tenant

before the current lease agreement with the current expires. For a novation to be legitimate, it must receive the consent of both the tenant and the landlord. A novation cannot take place should either party object to any of its terms and conditions.

There are several reasons why a novation might be negotiated between landlord and tenant. Most common of these is the acquisition of a tenant by another business, hence rendering the previous lease agreement that the tenant has with the landlord null. When this happens, a novation will occur to replace the current lease agreement with the acquiring business unit as the new tenant.

There may be times when a novation can occur due to adverse business conditions either to the detriment of the tenant or the landlord. For example, business might be so bad that the tenant has problems keeping up with rent. A novation might be executed when both parties are in favor for a new lease agreement.

Visit the REITs 101 page for more investment terms explained in the context of property investments.