National Real Estate Practice Exam

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If a party to an agreement is replaced due to novation, what is their liability?

They remain liable for the original contract
They are not liable anymore
They must negotiate a new contract
They retain some obligations

The correct answer is: They are not liable anymore

In the context of novation, when a party to an agreement is replaced, that party is effectively released from their obligations under the original contract. Novation occurs when all parties to a contract agree to replace one of the original parties with a new party, thereby extinguishing the original party's liabilities and rights. This change means that the original party is no longer bound to fulfill any agreements made under the previous contract. As a result, they are not liable for any responsibilities or potential breaches that may arise post-novation. The new party assumes the obligations and benefits of the contract, taking on any liability moving forward. Understanding this concept is critical in real estate transactions, as it determines how liability is managed and who is responsible for fulfilling contract terms once a party has been replaced.