Legal Definitions - defeasance

Defeasance refers to the act of nullifying or making void a legal right, agreement, or status upon the fulfillment of a specific condition. It essentially means that something previously valid becomes invalid or terminated because a pre-agreed condition has been met. This concept is particularly relevant in property law, where it can describe the termination of an estate or ownership interest if a certain event occurs.

A contractual provision that outlines such a condition is known as a defeasance clause.

• Example 1: Conditional Property Donation

  A wealthy benefactor donates a large tract of land to a local university for the sole purpose of establishing a wildlife sanctuary. The deed of gift includes a defeasance clause stating that if the university ever attempts to sell the land or use it for any commercial or residential development, ownership will automatically revert to the benefactor's heirs.

  This illustrates defeasance because the university's ownership of the land is conditional. Should the university violate the specified condition (using the land for commercial or residential development), their estate in the land would be defeated, meaning their ownership would be annulled, and the property would revert to the benefactor's heirs.

• Example 2: Bond Defeasance in Finance

  A corporation has outstanding bonds that are not yet due but carry a high interest rate. To improve its balance sheet and reduce future interest payments, the corporation places a sum of money, sufficient to cover all future principal and interest payments, into a special escrow account managed by an independent trustee. The bond indenture (the contract governing the bonds) contains a defeasance clause that states once these funds are irrevocably deposited, the corporation's obligations to the bondholders are considered satisfied, even though the bonds haven't been physically paid off yet.

  Here, defeasance occurs because the corporation's original obligation to the bondholders is effectively voided or terminated by fulfilling a specific condition: depositing adequate funds into an escrow account. This action "defeats" the original bond agreement, releasing the corporation from its direct liability, even though the bondholders will still receive their payments from the escrow.

• Example 3: Conditional Real Estate Sale

  A farmer sells a portion of their land to a solar energy company, but the sales contract includes a defeasance clause. This clause stipulates that if the solar energy company fails to secure the necessary environmental permits for its solar farm project within three years of the sale date, the land sale will be voided, and the property will revert to the farmer, with the purchase price returned to the company.

  This demonstrates defeasance because the solar energy company's ownership of the land is contingent upon obtaining specific permits. If this condition is not met within the agreed timeframe, the land sale is "defeated" or annulled, and the ownership status reverts to the original seller.