Nomination vs Novation – what is the difference?

Written by Rebecca Clark - Solicitor (Property) Cavell Leitch Christchurch 

Nomination- How does it work?

We thought it timely to give a recap on how nominations work under the ADLS Agreement for Sale and Purchase (agreement). Under the agreement a vendor can agree to sell a property to a purchaser but that purchaser “nominates” a third party to actually settle the purchase.

The ability to nominate is a useful tool for purchasers for a number of reasons. For example, purchasers buying as a couple, with only one person available at the time of entering into the agreement. They may also decide for asset protection, tax reasons or otherwise that the purchasing entity should be a family trust, or other separate entity. It is quite important, particularly in places like Queenstown where clients are purchasing properties for the intention of renting or Air BnB that purchasers seek professional advice about the best type of entity for tax reasons.

For these reasons we always suggest that, where possible, the “and/or nominee” option is left untouched on the front page of the agreement, to allow our clients the freedom to decide how to proceed.

Rights under nomination

A nominated party can enforce the agreement in the same way as the original signing party. So for instance a nominated purchaser has the benefit of the warranties under clause 7 of the agreement, and can still enforce those warranties against the vendor.

A vendor may have concerns trusting a nominated purchaser they know nothing about. The original purchaser under the agreement will remain liable to the vendor under the agreement in the event the nominated purchaser defaults and does not complete settlement.

We think this should provide some comfort to both purchasers and vendors alike who are found in this situation.

Novation

Novations and nominations sound similar, and both give the purchaser the ability to transfer their interest in the agreement to a third party. However, a novation requires the agreement of the vendor. Unlike a nomination, novation will release the original purchaser from all liability under the contract. Essentially a novation creates a new contract entirely between the novated purchaser and the vendor. When acting for a vendor we are usually wary of novations for this reason.

Whether acting for a vendor or purchaser, we would suggest it is best to leave available the option to nominate under the agreement. The vendor is protected if the nominee defaults, but it provides a purchaser with greater flexibility in the transaction and may mean a more successful outcome for a purchaser client in the long term.