Businesses change. Companies merge, restructure, change ownership or move vehicles between different legal entities. But what happens when a business has vehicles on lease agreements that still have months, or even years left?

In some circumstances, novation may provide a solution.

Novating a vehicle lease allows an existing lease agreement to be transferred from one business to another, subject to approval from the leasing company or funder.

Here’s what businesses need to know.

What is novation in car leasing?

Novation is the process of transferring the rights and responsibilities of an existing vehicle lease agreement from one business to another.

Rather than terminating the original lease and arranging an entirely new agreement, the existing contract is effectively transferred to the new business.

Importantly, novation doesn't normally mean renegotiating the lease.

The existing contract terms will generally continue, including:

• The remaining contract length

• Monthly rentals

• Agreed annual mileage

• Maintenance arrangements, where applicable

• Other existing contractual conditions

The business taking over the agreement therefore needs to understand exactly what it is agreeing to before completing the transfer.

Why might a business need to novate a vehicle lease?

There are several circumstances where novation could be considered.

One of the most common is following a company acquisition, merger or restructuring, where vehicles need to move from one legal entity to another.

It may also be relevant where:

• A business changes its legal structure

• Operations or employees are transferred to another company

• Part of a business is sold

• Vehicles need to move between related companies or entities

Whether novation is available will depend on the individual funder and circumstances.

Can any vehicle lease be novated?

No. Novation isn't automatically available simply because both businesses agree to the transfer.

The leasing company or finance provider must approve it, and different funders have different policies and eligibility requirements.

Some funders allow business-to-business novations relatively routinely, while others may restrict the types of businesses they will accept or may not offer novation at all.

This is why it's important to check your individual agreement before making plans around a transfer.

What does the new business need to do?

The company taking over the lease will usually need to go through an application and credit approval process.

After all, the funder originally agreed to provide the vehicle based partly on the financial standing of the first business. Before transferring that responsibility, it needs to be satisfied that the new business can meet the remaining commitments.

Depending on the funder, information requested could include:

• Company details

• Companies House information

• Business accounts

• Bank details

• Director or partner information

• A new Direct Debit mandate

• Evidence of appropriate vehicle insurance

Additional information may also be requested as part of the underwriting process.

Are there eligibility requirements?

These vary between leasing companies, but there are some common considerations.

For example, a funder may require a minimum amount of time to remain on the lease before considering novation. They are also likely to expect the existing agreement to be fully up to date, with no outstanding rental payments or arrears.

The type of businesses involved can matter too. Some funders will only transfer agreements between particular types of business entity.

Approval should therefore never be assumed.

Does novation cost money?

It can.

Some leasing companies charge an administration or novation fee for transferring an agreement, while the amount charged varies between funders.

If several vehicles are being transferred as part of a company restructure or acquisition, it's worth establishing the total cost before beginning the process.

How long does novation take?

Novation isn't normally an instant process.

There may be application forms to complete, financial information to provide, credit checks to undertake and legal documents requiring signatures from both businesses.

The exact timescale depends on the funder and complexity of the transfer, so businesses planning a merger, acquisition or restructure should raise the issue of leased vehicles as early as possible.

Until the novation has formally completed, the original business will generally remain responsible for the existing lease.

What happens to mileage and vehicle condition?

This is an important consideration, particularly when a lease is already well underway.

The new business isn't simply taking responsibility for future monthly rentals; it is taking over an existing vehicle and its contractual obligations.

Before completing a transfer, both businesses should therefore establish the vehicle's:

• Current mileage

• Remaining mileage allowance

• Condition

• Existing damage

• Service and maintenance history

This helps everyone understand the position of the vehicle when responsibility changes hands.

The business taking over the agreement should also understand its potential end-of-contract responsibilities, including excess mileage and vehicle condition requirements.

Is novation the same as ending a lease early?

No.

With an early termination, the existing lease agreement is brought to an end before its scheduled completion date. Depending on the agreement, this can result in an early termination charge.

With novation, the lease continues, but responsibility for it transfers to another approved business.

If novation isn't available, early termination may be one of the alternatives worth discussing with your leasing provider.

What if a business is insolvent?

Insolvency is different from a standard business-to-business novation.

If the business currently responsible for the lease has entered, or is entering, insolvency proceedings, the relevant funder should be contacted directly. The options available will depend on the agreement and individual circumstances.

Can I novate my Salary Sacrifice Car?

If you're considering changing employer and currently have an electric vehicle through Salary Sacrifice, novation may be possible.

A Salary Sacrifice car is normally leased by the employer, with the employee agreeing to sacrifice part of their gross salary in return for the vehicle and associated benefits. This means the lease isn't simply an agreement that belongs to the employee.

If the employee leaves their employer while their vehicle is still within its lease term, the options available will depend on the Salary Sacrifice scheme, the leasing company and the circumstances of the move.

In some cases, novation may allow the vehicle lease to transfer from the employee's existing employer to their new employer, enabling them to keep the same car rather than returning it when they change jobs.

However, this isn't automatic. The new employer would generally need to be willing and eligible to take over the agreement, and the funder would need to approve the transfer.

Factors that may need to be considered include:

• Whether the new employer operates a compatible Salary Sacrifice scheme
• Whether the funder permits novation
• Credit approval for the new employer
• The remaining term of the vehicle agreement
• Existing mileage and vehicle condition
• Any administration or novation fees
• The Salary Sacrifice arrangements required by the new employer

Can I novate a personal lease?

In most cases, personal car leases cannot be novated or transferred to another person. This is because the finance agreement was originally approved based on your individual circumstances, including your credit history, income and affordability.

Considering Vehicle lease novation? 

If your business is restructuring, merging, being acquired or making another change that could affect its leased vehicles, it's worth considering your fleet arrangements early in the process.

Every funder has its own processes, eligibility requirements and timescales, so there isn't a single novation process that applies to every vehicle.

At Lease Electric, we can help you understand your existing vehicle agreements, establish what options may be available and liaise with the relevant funder where appropriate.