diff --git a/Code/Framework/AzToolsFramework/AzToolsFramework/Prefab/Instance/InstanceUpdateExecutor.cpp b/Code/Framework/AzToolsFramework/AzToolsFramework/Prefab/Instance/InstanceUpdateExecutor.cpp
index fa03ab22e5..e0d29f2ab1 100644
--- a/Code/Framework/AzToolsFramework/AzToolsFramework/Prefab/Instance/InstanceUpdateExecutor.cpp
+++ b/Code/Framework/AzToolsFramework/AzToolsFramework/Prefab/Instance/InstanceUpdateExecutor.cpp
@@ -134,9 +134,13 @@ namespace AzToolsFramework
                             }
                         }
 
-                        auto findInstancesResult = m_templateInstanceMapperInterface->FindInstancesOwnedByTemplate(instanceTemplateId)->get();
+                        auto findInstancesResult = m_templateInstanceMapperInterface->FindInstancesOwnedByTemplate(instanceTemplateId);
+                        AZ_Assert(
+                            findInstancesResult.has_value(), "Prefab Instances corresponding to template with id %llu couldn't be found.",
+                            instanceTemplateId);
 
-                        if (findInstancesResult.find(instanceToUpdate) == findInstancesResult.end())
+                        if (findInstancesResult == AZStd::nullopt ||
+                            findInstancesResult->get().find(instanceToUpdate) == findInstancesResult->get().end())
                         {
                             // Since nested instances get reconstructed during propagation, remove any nested instance that no longer
                             // maps to a template.
diff --git a/Code/Framework/AzToolsFramework/AzToolsFramework/Prefab/Link/Link.cpp b/Code/Framework/AzToolsFramework/AzToolsFramework/Prefab/Link/Link.cpp
index e0834ed53b..308749ab28 100644
--- a/Code/Framework/AzToolsFramework/AzToolsFramework/Prefab/Link/Link.cpp
+++ b/Code/Framework/AzToolsFramework/AzToolsFramework/Prefab/Link/Link.cpp
@@ -182,16 +182,16 @@ namespace AzToolsFramework
             else
             {
                 AZ::JsonSerializationResult::ResultCode applyPatchResult = AZ::JsonSerialization::ApplyPatch(
-                    linkedInstanceDom,
+                    sourceTemplateDomCopy,
                     targetTemplatePrefabDom.GetAllocator(),
-                    sourceTemplatePrefabDom,
                     patchesReference->get(),
                     AZ::JsonMergeApproach::JsonPatch);
+                linkedInstanceDom.CopyFrom(sourceTemplateDomCopy, targetTemplatePrefabDom.GetAllocator());
                 if (applyPatchResult.GetProcessing() != AZ::JsonSerializationResult::Processing::Completed)
                 {
-                    AZ_Error("Prefab", false,
-                        "Link::UpdateTarget - "
-                        "ApplyPatches failed for Prefab DOM from source Template '%u' and target Template '%u'.",
+                    AZ_Error(
+                        "Prefab", false,
+                        "Link::UpdateTarget - ApplyPatches failed for Prefab DOM from source Template '%u' and target Template '%u'.",
                         m_sourceTemplateId, m_targetTemplateId);
                     return false;
                 }
diff --git a/Code/Framework/AzToolsFramework/AzToolsFramework/Prefab/PrefabPublicHandler.cpp b/Code/Framework/AzToolsFramework/AzToolsFramework/Prefab/PrefabPublicHandler.cpp
index 200a5c96fb..e6bb8c7dee 100644
--- a/Code/Framework/AzToolsFramework/AzToolsFramework/Prefab/PrefabPublicHandler.cpp
+++ b/Code/Framework/AzToolsFramework/AzToolsFramework/Prefab/PrefabPublicHandler.cpp
@@ -122,11 +122,14 @@ namespace AzToolsFramework
 
                 AZ::EntityId containerEntityId = instanceToCreate->get().GetContainerEntityId();
 
-                // Parent the entities to the container entity. Parenting the container entities of the instances passed to createPrefab
-                // will be done during the creation of links below.
-                for (AZ::Entity* topLevelEntity : entities)
+                // Parent the non-container top level entities to the container entity.
+                // Parenting the top level container entities will be done during the creation of links.
+                for (AZ::Entity* topLevelEntity : topLevelEntities)
                 {
-                    AZ::TransformBus::Event(topLevelEntity->GetId(), &AZ::TransformBus::Events::SetParent, containerEntityId);
+                    if (!IsInstanceContainerEntity(topLevelEntity->GetId()))
+                    {
+                        AZ::TransformBus::Event(topLevelEntity->GetId(), &AZ::TransformBus::Events::SetParent, containerEntityId);
+                    }
                 }
 
                 // Update the template of the instance since the entities are modified since the template creation.
@@ -142,11 +145,25 @@ namespace AzToolsFramework
                     AZ_Assert(
                         nestedInstanceContainerEntity, "Invalid container entity found for the nested instance used in prefab creation.");
 
+                    AZ::EntityId parentId;
+                    AZ::TransformBus::EventResult(
+                        parentId, nestedInstanceContainerEntity->get().GetId(), &AZ::TransformBus::Events::GetParentId);
+
+                    auto entityIterator = AZStd::find_if(
+                        entities.begin(), entities.end(), [parentId](AZ::Entity* entity) { return entity->GetId() == parentId; });
+
+                    // If the previous parent entity of the nested instance is not part of the entities of the newly created prefab,
+                    // then set the parent of the nested prefab as the container entity of the newly created prefab.
+                    if (entityIterator == entities.end())
+                    {
+                        parentId = containerEntityId;
+                    }
+
                     // These link creations shouldn't be undone because that would put the template in a non-usable state if a user
                     // chooses to instantiate the template after undoing the creation.
                     CreateLink(
                         {&nestedInstanceContainerEntity->get()}, *nestedInstance, instanceToCreate->get().GetTemplateId(),
-                        undoBatch.GetUndoBatch(), containerEntityId, false);
+                        undoBatch.GetUndoBatch(), parentId, false);
                 });
 
                 // Create a link between the templates of the newly created instance and the instance it's being parented under.