Contract Relationships and Third-Party Rights

Assignment transfers one party's rights and obligations under a contract to a third party. In real estate, assignment is commonly used by wholesalers who contract to purchase property and then assign their purchase rights to an end buyer. The original contract typically must permit assignment (or not prohibit it) for an assignment to be valid. When a contract is assigned, the assignor remains liable for the contractual obligations unless released by the other party.

Novation is a substitution of a new contract or a new party for an existing one, with the consent of all parties. Unlike assignment, novation completely releases the original party from liability. Novation is commonly used when a buyer wants to substitute a different entity (such as an LLC) as the purchaser. The distinction between assignment and novation matters primarily for liability — with assignment, the original party remains on the hook; with novation, they are fully released.

A single real estate transaction typically involves multiple interrelated contracts: the purchase agreement, the listing agreement, the buyer representation agreement, the mortgage commitment, the title insurance commitment, and potentially an inspection agreement, repair agreement, and home warranty contract. These contracts interact in important ways — for example, the closing date in the purchase agreement must align with the rate lock expiration in the mortgage commitment, and the inspection results may trigger amendment of the purchase agreement.

When contract provisions conflict, the specific provision generally controls over the general provision, later-dated provisions control over earlier ones, and handwritten provisions control over pre-printed form language. However, these rules of construction are not absolute, and ambiguity in contract terms can lead to disputes. Agents should be alert to potential conflicts between overlapping contracts and bring them to the attention of the parties and their attorneys.

Generally, only the parties to a contract have the right to enforce it — a principle known as privity of contract. However, third-party beneficiaries may have enforcement rights if the contract was made for their benefit. In real estate, examples include a lender that is a named beneficiary of a title insurance policy, a homeowner who is a beneficiary of a contractor's warranty, and a tenant whose lease provisions survive a property sale.

The doctrine of privity also limits liability: parties who are not in privity with the contract generally cannot be held liable for breach. This is relevant when disputes arise about who is responsible for contractual obligations — for example, a buyer typically cannot sue the seller's agent for breach of the purchase agreement because the buyer is not in privity with the listing agreement. The buyer would need to base their claim on tort law (such as negligent misrepresentation) rather than contract law.