When selling a business, handling existing lease agreements is a critical consideration. Two primary methods exist for transferring lease obligations: reassignment and novation. While they may seem similar, the legal implications and processes differ significantly.

Lease reassignment occurs when the original tenant (the seller) transfers their leasehold interest to a new tenant (the buyer) while remaining secondarily liable for lease obligations. The original tenant essentially steps aside but remains "on the hook" if the new tenant defaults. The landlord's consent is typically required, but the original lease agreement remains intact with only the tenant changing.

In contrast, novation represents a complete legal substitution. This process terminates the original lease agreement and creates an entirely new contract between the landlord and the buyer. The key distinction is that novation fully releases the original tenant from all future obligations. Once novation is complete, the seller walks away with no lingering liability for the leased property.

For business sellers, novation generally offers the cleaner exit strategy, eliminating contingent liabilities that could resurface years later. However, landlords often prefer reassignment since it preserves their recourse against the original tenant if problems arise.

The choice between these options frequently depends on negotiating leverage. A buyer with strong financials might secure a novation more easily than one with limited credit history. Landlords may demand additional security deposits or personal guarantees when agreeing to novation.

When structuring a business sale, parties should clearly specify whether lease transfers involve reassignment or novation. This distinction affects not only immediate transaction details but also long-term risk allocation between buyer and seller. Proper documentation and landlord involvement remain essential regardless of the chosen approach.​​​​​​​​​​​​​​​​