What Is Client Matter Novation and Why Does It Matter for Solicitors?

When you acquire a law firm, you are not just buying premises, goodwill, and work in progress. You are taking on a portfolio of client relationships, each governed by a retainer. That retainer is a contract between the client and the old firm. To transfer that contract to your new firm, you need a legal mechanism called novation.

Novation replaces the old firm with the new firm as the contracting party. Without it, the old firm remains liable for any ongoing work, and the new firm has no contractual right to charge the client or act on their behalf. For solicitors regulated by the SRA, novation is not optional. It is a regulatory requirement under the SRA Accounts Rules and the SRA Code of Conduct for Solicitors.

This guide explains the process step by step, covering client consent, documentation, and the accounting treatment of transferred matters. It is written for solicitors and law firm partners who are buying or merging a practice and need to get the matter transfer right.

When Does a Solicitor Need to Novate Client Matters?

Novation is required whenever the legal entity providing the service changes. Common scenarios include:

  • Purchase of a sole practitioner's practice where the buyer operates through a different entity (e.g., an LLP or limited company).
  • Merger of two partnerships where a new LLP is formed to carry on the combined practice.
  • Incorporation of an existing partnership into a limited company or LLP.
  • Acquisition of a block of work from a retiring solicitor, where the matters are transferred mid-stream.

In each case, the old firm's retainer ends, and the new firm enters into a fresh retainer with the client. The SRA does not permit a simple assignment of the retainer because that would leave the old firm potentially liable. Novation is the only compliant method.

The SRA's Position on Matter Transfer

The SRA Code of Conduct for Solicitors (paragraph 8.6) requires that when you cease to act for a client, you inform the client in writing and return any papers or money held. When you acquire a practice, you must ensure that each client has given informed consent to the transfer of their matter to the new firm.

The SRA Accounts Rules also apply. If client money is held on the transferred matters, it must be properly accounted for in the new firm's client account from the date of transfer. The old firm must reconcile and transfer the client ledger balances, and the new firm must record them as receipts from the old firm, not as new client receipts.

For a detailed breakdown of the accounting rules, see our SRA Accounts Rules Essentials guide.

The Novation Process: Step by Step for Solicitors

Step 1: Identify All Open Matters

Before the acquisition completes, the buyer and seller must jointly prepare a schedule of all open client matters. This includes:

  • Matter reference numbers and descriptions.
  • Client names and contact details.
  • Current stage of each matter (e.g., pre-exchange, post-completion, ongoing litigation).
  • Amounts held in client account for each matter.
  • Any unbilled work in progress (WIP).

This schedule forms the basis of the novation exercise. It also feeds into the practice valuation, as WIP and client account balances affect the purchase price. See our practice valuation services for more on how these items are valued.

Each client must receive a letter explaining:

  • That the old firm is ceasing to practise (or transferring the matter).
  • The name and SRA number of the new firm.
  • That the new firm will take over conduct of the matter under the same terms (or new terms if different).
  • That the client has the right to refuse and to take their file elsewhere.
  • What will happen to any client money held.

The letter should include a consent form for the client to sign and return. The SRA does not prescribe a specific form, but the consent must be informed and freely given. A simple "I agree" tick box is not enough. The client must understand the implications.

This is the most time-sensitive step. The SRA expects you to contact clients promptly. For ongoing matters, you should aim to obtain consent before the transfer date. For dormant or concluded matters, you may have more flexibility, but you still need consent to hold the file and any residual client money.

If a client does not respond after reasonable attempts, you cannot simply assume consent. The SRA's guidance is that you should treat the matter as terminated and return the file and any money to the client. In practice, many acquisition agreements include a mechanism for the seller to deal with non-responsive clients after completion.

For a practical checklist on this, see our post-merger integration guide.

Step 4: Execute the Novation Agreement

Once the client consents, a formal novation agreement is signed by three parties: the old firm, the new firm, and the client. This document records that the old firm is released from its obligations, the new firm assumes them, and the client agrees to the substitution.

The novation agreement should reference the original retainer terms. If the new firm intends to change the terms (e.g., a different fee structure or billing cycle), those changes must be separately agreed by the client. It is safer to novate on the existing terms and then vary them later with fresh consent.

Step 5: Transfer Client Money and Files

On the transfer date, the old firm must:

  • Prepare a final client ledger balance for each matter.
  • Transfer the money from its client account to the new firm's client account.
  • Provide a detailed breakdown of the transfer to the new firm.
  • Send the client file (physical or electronic) to the new firm.

The new firm records the receipt of client money as a transfer from the old firm, not as a new client receipt. This distinction matters for the SRA Accounts Rules reconciliation. The new firm must also update its client database and matter records to reflect the novation.

For COFAs managing this process, our COFA compliance support page covers the accounting and reconciliation requirements in detail.

Tax and Accounting Treatment of Novated Matters

Work in Progress

When matters are novated, the WIP is typically sold by the old firm to the new firm. The old firm recognises a disposal of WIP, which is taxed as part of its trading profit. The new firm capitalises the purchased WIP and recognises it as income when the work is billed.

If the WIP is valued at cost, the new firm's profit on completion will be the full fee less the cost of the purchased WIP. If the WIP is valued at a higher amount (e.g., a proportion of the expected fee), the new firm's margin will be lower. The purchase price allocation should reflect this.

Client Account Balances

Client money is not income. It remains a liability of the firm until it is applied to the client's matter or returned. When client money is transferred from the old firm to the new firm, the new firm records a corresponding liability to the client. No tax arises on the transfer itself.

However, if the old firm has earned interest on client money (where permitted by the SRA Accounts Rules), that interest is taxable in the old firm's hands. The new firm does not inherit the tax liability on interest earned before the transfer.

Goodwill

The novation of client relationships is a key component of goodwill. When you buy a law firm, the price paid for goodwill reflects the expectation that clients will novate their matters to you. If a significant number of clients refuse to novate, the goodwill value may be impaired. This is a risk that buyers should address in the acquisition agreement, often through a price adjustment mechanism or earn-out.

For more on how goodwill is valued and taxed, see our practice valuation services.

Common Pitfalls in Client Matter Novation

Some solicitors assume that because the client has a long-standing relationship with the firm, they will automatically consent to the transfer. This is not guaranteed. Clients may have personal loyalty to the retiring solicitor and may choose to instruct a different firm. You must give them the choice.

Failing to Document the Novation Properly

An oral agreement is not sufficient. The SRA expects a written novation agreement signed by all three parties. Without it, the old firm remains liable, and the new firm has no contractual basis to act. This can create problems if a claim arises later.

Overlooking the SRA Accounts Rules

The transfer of client money must be recorded correctly. If the new firm simply records the receipt as a new client deposit, the client ledger will not match the old firm's records, and the reconciliation will fail. The COFA should oversee this process to ensure compliance.

Ignoring Conflicts of Interest

When a firm acquires another practice, it may inherit matters that conflict with its existing clients. The SRA Code of Conduct requires you to identify and manage conflicts before accepting the novation. If a conflict cannot be managed, you must decline the matter and refer the client elsewhere.

How a Solicitor Accountant Can Help

Client matter novation is as much an accounting exercise as a legal one. The transfer of WIP, client money, and goodwill all have tax and regulatory implications. A solicitor accountant who specialises in law firm acquisitions can help you:

  • Value the WIP and client money correctly for the purchase price.
  • Structure the novation to minimise tax liabilities.
  • Ensure the SRA Accounts Rules are followed during the transfer.
  • Prepare the COFA's report for the new firm's first accounting period.

At Accounts for Lawyers, we work exclusively with UK solicitors and law firms. We understand the SRA requirements and the tax treatment of practice acquisitions. If you are buying or merging a law firm, contact us to discuss how we can support the novation process.

Final Thoughts

Client matter novation is a critical step in any law firm acquisition. It protects the client's interests, ensures regulatory compliance, and establishes the new firm's contractual right to act. The process requires careful planning, clear communication with clients, and meticulous record-keeping.

By following the steps outlined above, you can complete the novation efficiently and avoid the common pitfalls. And if you need specialist advice, a solicitor accountant can provide the technical support you need to get it right.