There are five main legal documents normally involved in a defeasance. These have become relatively standardized and are typically prepared by Servicer Counsel.
Defeasance Pledge and Security Agreement
Parties: Borrower, Servicer, and Securities Intermediary
This document pledges the defeasance securities portfolio as collateral to secure the loan. In this agreement, the Borrower pledges the government-backed securities to the Securitization trust, the Servicer is granted a power of attorney to act on behalf of the Borrower in connection with the pledged securities, and the Securities Intermediary makes certain representations with regard to the pledged securities its holds on behalf of the Securitization trust.
Defeasance Account Agreement
Parties: Borrower, Securities Intermediary, Successor Borrower, and Servicer
In this agreement, the parties establish the account into which the defeasance collateral securities will be deposited, and set forth the obligations of the Securities Intermediary in connection with its administration of the account. These duties include holding the securities, investing the account cash balance, collecting proceeds (interest income and principal) from the defeasance securities portfolio, and paying the monthly loan payments and the final balloon payment due at maturity.
Defeasance Assignment, Assumption and Release Agreement
Parties: Borrower, Successor Borrower, Servicer, and Securities Intermediary
The Borrower uses this agreement to assign the securities from the Original Borrower to the Successor Borrower and also transfers the Borrowers’ obligtions and rights to the Successor Borrower. This agreement evidences the assumption by the Successor Borrower of the loan obligations of the Borrower, the Borrower’s assignment of the pledged securities to the Successor Borrower, and the obligation of the Securitization trust to release its interest in the mortgaged real estate upon the effectiveness of the assignment.
Defeasance Certificate (or Certificate of Borrower)
Parties: Borrower and Servicer
The Borrower confirms that all of the conditions to the defeasance set forth in the original loan documents have been met and that the Borrower has complied with all of its obligations in connection with the defeasance. The certifications track the defeasance requirements in the original loan documents except those that are waived in the Waiver and Consent Agreement (see below)
Waiver and Consent Agreement
Parties: Borrower and Servicer
In this document, the Servicer agrees to waive certain burdensome or impractical defeasance provisions in the Borrower’s original loan documents that limit the Borrower’s ability to complete the defeasance transaction. These waived provisions typically relate to timing, notification, roles in the defeasance and payment requirements. This document also evidences the Servicer’s consent to release the lien on the Borrower’s property.
You can read more about other defeasance documents by clicking here.
