Darrell owns a parcel of land that is encumbered by a mortgage held by the First National Bank. Darrell agrees to sell the land to Paul for $50,000. Darrell and Paul together go to the First National Bank to discuss the sale and purchase with the banker. Darrell, Paul, and the banker sign an agreement stating that Paul will assume the mortgage and that Darrell will be discharged from all further liability on the mortgage. In this case:
A) the bank is a third party donee beneficiary.
B) the bank can collect from Darrell if Paul defaults.
C) Darrell is a third party beneficiary of the agreement between Paul and the bank.
D) the agreement among the three is a novation.

Question

Quizplus · Accepted Answer

The agreement among Darrell, Paul, and the bank that Paul will assume the mortgage and Darrell will be discharged from all further liability is a novation. A novation occurs when a new contract replaces an old one, discharging the original party from the contract and substituting a new one in their place. In this case, Paul assumes the mortgage obligations, and Darrell is released from them, with the bank's agreement, constituting a novation.

Darrell Owns a Parcel of Land That Is Encumbered by a Mortgage