What is a defeasance clause?

A defeasance clause is a provision in a loan or mortgage agreement that allows for the cancellation of the borrower's obligation to repay the debt, typically upon the establishment of a separate fund to pay off the loan. This clause is commonly used in commercial real estate financing, where the borrower can set aside sufficient funds in an escrow account to cover the remaining loan balance. Once the conditions of the clause are met, the lender's claim against the property is released. This mechanism provides a way for borrowers to manage their liabilities and provides security for lenders.