What is defeasance clause?

A defeasance clause is a provision in a legal contract that outlines the conditions under which the contract can be voided or cancelled. In the context of financial instruments such as bonds, a defeasance clause may describe the process by which a borrower can satisfy a debt obligation by setting aside money or securities in trust until the debt is repaid. This mechanism is often used in connection with bond issuances where a borrower wants to retire an outstanding bond issue but does not have the cash to do so. By depositing a sufficient amount of money or securities into an escrow account, the borrower can avoid paying additional interest on the old bond and issue a new bond in its place.