Learn something new every day More Info... by email
A release clause is a type of provision that is included in many types of contracts and agreements and makes it possible for one party to relinquish any claims against assets that are pledged as collateral. Use of this type of clause is most common in mortgage contracts, and makes it possible for a lender to partially relinquish a claim on the real estate held as security, when the remaining balance of the mortgage has fallen under a certain amount. This approach can be helpful for the borrower, in that once that portion of property is no longer pledged as collateral, he or she is free to sell that portion without the need to obtain permission from the lender.
One of the easiest ways to understand how a release clause functions within a mortgage agreement is to consider a developer who uses a mortgage to purchase a large amount of acreage for development. Over the course of the mortgage, the developer decides that selling off a few parcels of that acreage would be a good idea. By approaching the lender, it is possible to determine how much of the currently outstanding mortgage obligation must be settled in order for the lender to release any claims on those parcels of land. Once the borrower forwards the necessary payment to the lender and it is applied to the balance of the mortgage, the lender releases any claims to those specific parcels and the developer can proceed with the sale.
One of the benefits of including a release clause in a mortgage or other type of secured loan is that the borrower can recover full control over some portion of the asset pledged and be able to use that portion for some other type of financial pursuit. This means that if the acreage acquired by the developer has appreciated in value significantly since the mortgage was established, he or she may be able to sell the parcels of land that are no longer being used as collateral, and settle all or the majority of the remaining mortgage debt with those proceeds. Doing so would mean saving a great deal in interest while also positioning the developer to engage in another loan to develop a different piece of property.
The terms outlined in the release clause may refer to a specific percentage of the debt that must be settled before early release of a portion of the collateral will be granted by the lender. At other times, the clause may provide the grounds for negotiating that partial release. Typically, governmental regulations related to the buying and selling of assets, as well as the policies and procedures of the lender, will determine the exact structure of the release clause and what conditions must be met in order for that release to occur.