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Financing term

Novation

The substitution of a new party or obligation for an old one, releasing the original party from liability.

Why Novation matters on the exam

This term belongs to Financing. The questions below are real items from Freehold's bank that use it - each one cites its source.

Exam questions using Novation

Every Freehold question shows why the right answer is right — and cites its source.

A broker deposits a client's earnest money into the brokerage's operating account. This violation is called:

  1. Conversion to personal use
  2. Commingling
  3. Novation
  4. Subordination
Show answer & explanation

Commingling — Commingling is mixing client trust funds with the brokerage's own operating funds. It is a license-law violation even if no client money is ever spent, because it puts trust funds at risk.

Source: PSI National Real Estate Exam Content Outline — Broker Supplement

The legal principle under which a broker may be held liable for the wrongful acts of an affiliated licensee performed within the scope of their real estate duties is called:

  1. Novation, substituting a new party or obligation in place of the original one entirely
  2. Subrogation, one party stepping into the legal shoes of another after paying a claim
  3. Escheat, property reverting to the state when an owner dies without heirs or a will
  4. Vicarious liability
Show answer & explanation

Vicarious liability — Vicarious liability holds a broker responsible for an agent's acts committed within the scope of the agency relationship, even without the broker's direct involvement.

Source: PSI National Real Estate Exam Content Outline — Broker Supplement

Vicarious liability in agency law is grounded in the legal doctrine known as:

  1. Caveat emptor
  2. Res ipsa loquitur
  3. Respondeat superior
  4. Novation
Show answer & explanation

Respondeat superior — Respondeat superior, meaning 'let the master answer,' is the doctrine holding an employer or principal responsible for an employee's or agent's acts within the scope of the relationship.

Source: PSI National Real Estate Exam Content Outline §5 General Principles of Agency

Related Financing terms

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