Legal Definitions - release clause

A release clause is a provision found in certain legal agreements, primarily in real estate, that allows one party to be freed from a specific obligation or a portion of an agreement under defined conditions.

It typically refers to two distinct situations:

• 1. In a Blanket Mortgage: This provision allows a borrower who has a single mortgage covering multiple properties or a large, divisible property to obtain a release of a specific portion of that property from the mortgage's lien. To do so, the borrower must pay a predetermined amount to the lender, which is often more than a simple pro-rata share of the loan amount for that specific portion. This clause is usually contingent on the borrower not being in default on any other part of the mortgage.

  • Example A: A real estate developer secures a single "blanket mortgage" to finance the purchase and development of a large parcel of land intended for 100 residential lots. The mortgage includes a release clause. As the developer builds and sells individual homes on these lots, they can pay a specified amount (e.g., 1.5% of the total loan principal for each 1% of the land area) to the bank. This payment releases that specific lot and home from the blanket mortgage, allowing the new homeowner to obtain clear title and their own separate mortgage.

    Explanation: This illustrates how the developer uses the release clause to incrementally sell off parts of the larger property, freeing each sold portion from the original overarching mortgage without having to pay off the entire loan.

  • Example B: A family owns a large ranch with several distinct sections, all covered by one blanket mortgage. They decide to sell a small, undeveloped corner of the ranch to a neighboring farmer. Their mortgage contains a release clause. By paying a specific sum to their lender, they can have that particular corner parcel legally removed from the mortgage's lien, enabling them to sell it with a clear title while the rest of the ranch remains under the original mortgage.

    Explanation: Here, the release clause allows the landowners to divest a specific part of their mortgaged property without needing to refinance or pay off the entire mortgage on the remaining land.

• 2. In a Purchase Agreement (often called a "Kick-Out Clause"): This provision allows a seller who has accepted an offer that includes a contingency (a condition that must be met, such as the buyer selling their current home) to continue marketing the property. If the seller receives a second, more favorable offer, the original buyer is given a specified, short timeframe (e.g., 48 or 72 hours) to either waive their contingency and proceed with the purchase unconditionally, or release the seller from the initial agreement. If the original buyer does not act within the specified time, the seller can then accept the second offer.

  • Example A: Maria makes an offer to buy a house, contingent on her successfully selling her current condominium within 60 days. The seller accepts Maria's offer but includes a release clause in the contract. Two weeks later, another buyer makes an all-cash offer with no contingencies. The seller activates the release clause, giving Maria 72 hours to either remove her contingency (meaning she commits to buying the house regardless of whether her condo sells) or the seller will terminate their agreement and accept the cash offer.

    Explanation: This demonstrates how the release clause protects the seller by allowing them to pursue a stronger offer if the original buyer is unwilling or unable to remove their contingency.

  • Example B: A small business owner agrees to purchase a commercial building, with the contract contingent on obtaining a specific permit for their planned renovations. The seller includes a release clause. While the business owner is awaiting permit approval, another interested party makes a higher offer with no contingencies. The seller then notifies the original buyer, invoking the release clause, and gives them 48 hours to either waive the permit contingency (and proceed with the purchase at their own risk regarding the permit) or allow the seller to move forward with the second offer.

    Explanation: This example shows the release clause in a commercial context, enabling the seller to avoid being tied up indefinitely by a buyer's contingency if a more attractive offer emerges.