What is a defeasance clause?

A defeasance clause is a provision in a debt contract that enables the borrower to pay off the outstanding debt by putting aside a certain amount of cash, securities, or other assets in an escrow account. The purpose of the defeasance clause is to release the borrower from its obligations under the debt contract and transfer ownership of the collateral to the borrower, subject to certain conditions. The terms of the defeasance clause may vary depending on the type of debt instrument and the parties involved. It is typically used in commercial real estate financing, where the borrower wants to refinance a property but does not want to sell it. Defeasance clauses are complex legal provisions that may require the assistance of legal and financial experts to properly execute.