Legal Definitions - reverter guarantee

A reverter guarantee is a specialized clause found within a mortgage agreement. Its purpose is to protect the lender (known as the mortgagee) from financial loss if the ownership of the mortgaged property unexpectedly returns to a previous owner.

This situation arises when a property's original transfer included a specific condition, creating what is legally termed a "possibility of reverter." This means that if a particular event occurs or a condition is violated, the property's title automatically reverts to the original grantor (the person or entity who initially gave the property) or their heirs. The reverter guarantee acts as a safeguard for the lender, ensuring their investment is protected even if the borrower loses ownership of the property due to such a "terminating event."

Here are some examples to illustrate how a reverter guarantee works:

• Community Land Grant: Imagine a city donates a parcel of land to a non-profit organization for the exclusive purpose of building and operating a public park. The deed explicitly states that if the land is ever used for any other purpose, or if the park ceases to operate for more than a year, ownership will automatically revert to the city. The non-profit then takes out a mortgage loan from a bank to fund the construction of the park's facilities. The bank, recognizing the conditional nature of the land ownership, would likely require a reverter guarantee. If, years later, the non-profit decides to sell the land to a private developer for commercial use, the property would revert to the city. The reverter guarantee would then protect the bank from losing its collateral (the land) and its outstanding loan amount.

• Historic Preservation Easement: Consider a private individual who purchases a historic mansion from a preservation trust. The deed includes a strict condition that the exterior facade and certain interior elements must be maintained in their original historical state, and that no significant alterations can be made without the trust's explicit approval. If these conditions are violated, the property reverts to the preservation trust. The new owner obtains a mortgage to finance the purchase and approved renovations. The lender, aware of the reverter clause, would insist on a reverter guarantee. If the owner later demolishes a protected wing of the mansion without permission, triggering the reverter, the property would return to the trust. The reverter guarantee would then compensate the bank for the loss of its security interest in the property.

• Agricultural Land Use: A large family estate sells a portion of its farmland to a new farmer, with a deed restriction stipulating that the land must always be used for agricultural purposes. The deed specifies that if the land is ever developed for residential or commercial use, it will revert to the original estate. The farmer takes out a mortgage from a rural bank to purchase new farming equipment, using the land as collateral. The bank, understanding the conditional nature of the land's title, would require a reverter guarantee. If the farmer later sells a section of the land to a developer who begins construction of houses, the land would revert to the estate. The reverter guarantee would then protect the bank from the financial loss incurred by losing its collateral.