What is a defeasance clause?
How do you legally define it?
What are the important elements that you must know!
In this article, we will fully answer the question “what is a defeasance clause”, so you know all there is to know about it!
Let’s dig into our legal dictionary!
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What is a defeasance clause
A defeasance clause is a contractual provision where a lending party retains title to a property and agrees to convey title to the borrower when all the borrowed funds have been reimbursed.
In other words, a mortgage lender will use a defeasance clause as leverage to ensure that the person borrowing funds to purchase a property will pay back the sums borrowed.
Once a borrower makes all the required payments in capital and interest to the mortgage lender, he or she can expect to receive free and clear title to the property.
You may not need to have a defeasance clause in your mortgage agreement if your state follows a “lien theory” as opposed to the common law “mortgage theory” or “title theory”.
Common law mortgage theory
Defeasance clauses are required in states following the common law theory of mortgages as opposed to a title theory.
Under this common law doctrine, a mortgage lender (mortgagee) lends money to a borrower (mortgagor) to purchase a property and receives a deed of defeasible fee to the property.
On the day the borrower made the full and complete payment of all the outstanding monies owed to the mortgage lender, the last deed of defeasible fee would be cancelled.
On the other hand, if the borrower defaulted on the mortgage payments or failed to pay the sums owed, the mortgagee’s title would become an estate in fee simple absolute giving the lender property ownership.
Here is what a defeasance provision means in summary:
- It’s a contractual provision
- Typically found in deed of mortgage or lending agreement
- Lender retains title to the property until money borrowed is reimbursed
- Borrower will get a free and clear title when the borrowed sums are paid back
With a defeasance clause, a homeowner obtains a full and unencumbered title to the property when he or she makes the last and final payment to the mortgage lender.