Release Clause

What Is a Release Clause?

A release clause is a term that refers to a provision within a mortgage contract. The release clause allows for the freeing of all or part of a property from a claim by the creditor after a proportional amount of the mortgage has been paid. A release clause may also be associated with a real estate brokerage transaction requiring a release of other offers if a specified offer has been accepted.

key takeaways

  • A release clause is a provision in a mortgage contract that frees a creditor from a portion of a collateral claim on real property.
  • The clause usually allows for this provision only after a proportional amount of the mortgage has been paid off.
  • A release clause can also refer to a release of other offers if a specified offer has been accepted.

Understanding a Release Clause

A borrower approved for a mortgage loan must agree to and sign a mortgage loan contract. Contract terms will be based on their credit application and mortgage collateral. The terms of the contract will also include the total length of time in which the loan will be paid off and the payment periods which typically are monthly. Since a mortgage loan is a type of secured loan, the mortgage contract will also include clauses regarding the mortgage title and a lien against the collateral, which gives the lender the right to take action on seizing the property in the case of a foreclosure.

Release clauses are another aspect of mortgage loan contracts. In real estate law, they refer to a provision releasing a creditor from a portion of a collateral claim on real property. This can give the mortgagor full rights to a portion of the property after a specified period of time. In real estate brokerage transactions, a release clause can allow a seller to obtain the best offer with acceptance of multiple offers.

Negotiating a Release Clause

A mortgage contract release clause can be negotiated by the mortgagor to protect them against the seizing of collateral. If a mortgagor includes a mortgage release clause in their mortgage contract then the lender is released from a specified claim after a certain portion of the mortgage has been paid. Generally a release clause could release the lien and property title making the remainder of the loan unsecured. In this situation, a lender would lose first order priority to the property after a specific payment milestone. This would cause the lender to seek standard collection procedures if a borrower defaults after a specified milestone has been reached.

Release clauses may also be commonly associated with housing developments including multiple tracts of land. This would allow the owner to sell off part of the property, as with a developer who wishes to subdivide land that is financed with a mortgage loan.

Types of Release Clauses

With a transaction release clause, a seller is given a specified amount of time in which they can accept an offer but continue to receive additional offers. Transaction release clauses are typically associated with a 72-hour time frame. This allows a seller to accept multiple offers within 72 hours of an initial offer. If multiple offers are given within the 72-hour period the seller has the right to accept the best offer and release other offers.

A partial release clause refers to a contract provision that allows some of the pledged collateral to be taken off the mortgage once a certain amount of the loan has been paid. It often requires the borrower to submit proof of payment, along with an appraisal of the current value of the property.