Below you will find standard defeasance language as seen in either Promissory Notes or Deeds of Trust. Although each deal will have specific language, this should provide a general overview of the defeasance requirements and language standard to most conduit loans.
- 1.0 Prepayment: Defeasance
Prior to the Lockout Expiration Date (defined as the date two years following the first monthly loan payment), this Note may not be prepaid, either in whole or part, provided, however, Borrower shall have the right and option to release the Security Property (as hereinafter defined) from the lien of the Security Instrument (as hereinafter defined) in accordance with the terms and conditions of the Defeasance provisions set forth below.
- Subject to the terms and conditions set forth in this Section 1.0 Borrower may defease the entire amount of the Principal (a “Defeasance”); provided, that no Defeasance may occur prior to the Lockout Expiration Date (2 years following the first full monthly loan payment). Such Defeasance shall be subject in each case to the satisfaction of all of the following conditions precedent:
- Borrower will give Lender not less than thirty (30) days prior written notice (the “Defeasance Notice”) specifying a date (the ”Defeasance Date”) on which a Defeasance Deposit (hereinafter defined) is to be made, provided, however, Borrower shall have the right cancel such Defeasance Notice or extend the Defeasance Date stated in such Defeasance Notice, in each case by written notice to Lender so long as such written notice is received by Lender prior to the purchase of the U.S Obligations (as defined below).
- Payment to Lender of all accrued and unpaid interest on the unpaid Principal of the Note to and including the Defeasance Date; provided that if the Defeasance Date is not a Payment Date then on the Defeasance Date Borrower shall also pay to Lender interest on the unpaid Principal of the Note from the Defeasance Date to but not including the next Payment Date.
- Payment to Lender of all other sums, not including scheduled interest or Principal payments, then due and payable under the Note and the other Loan Documents.
- (i) Payment to Lender of an amount equal to the sum of (x) an amount sufficient to purchase U.S Obligations which provide payments that will meet the Scheduled Defeasance Payments (as defined below), (y) costs and expenses incurred or to be incurred in the purchase of the U.S Obligations and (z) any revenue, documentary stamp or intangible taxes or any other tax or charge due in connection with the Defeasance (the “Defeasance Deposit”) or (ii) if Borrower exercises its right to purchase the U.S Obligations pursuant to the Borrower Purchase Right (as defined below), delivery to Lender of the U.S Obligations which provide the Scheduled Defeasance Payments.
- Payment to Lender of all costs and expenses incurred by Lender in connection with such Defeasance (regardless of whether or not the Defeasance is actually consummated), including reasonable attorneys’ fees.
- Payment to Lender of the Exit Fee applicable to the Principal amount being defeased.
- Delivery to Lender of: (A) pledge and security agreement, in form and substance satisfactory to Lender, creating first priority lien in favor of Lender on the Defeasance Deposit and the U.S Obligations purchased by or on behalf of Borrower with the Defeasance Deposit in accordance with this provision of this paragraph (the “Security Agreement”); (B) an Officer’s Certificate of Borrower certifying that the requirements set forth in Section 1.a have been satisfied; (C) an opinion of counsel for Borrower in form and substance reasonably satisfactory to Lender stating, among other things, that Lender has a perfected first priority security interest in the Defeasance Deposit and the U.S Obligations purchased by or on behalf of Borrower, that the Security Agreement is the legal, valid and binding obligation of Borrower enforceable against Borrower in accordance with its terms and that the Defeasance will not adversely affect the status of any REMIC Trust formed in connection with a Secondary Market Transaction; (D) a certificate in form and substance reasonably acceptable to Lender from a firm of independent certified public accountants acceptable to Lender which certifies that the U.S Obligations are sufficient to make the Scheduled Defeasance Payments; (E) a Rating Comfort Letter from each applicable Rating Agency with respect to such Defeasance; and (F) such other certificates, opinions, documents or instruments as Lender may reasonably request which are customary with defeasance of loans included in REMIC Trusts.
- In connection with the conditions set forth in this Section 1.a, Borrower hereby appoints Lender as its agent and attorney-in-fact for the purpose of using the Defeasance Deposit to purchase U.S Obligations which provide payments (A) on or prior to, but as close as possible to, all successive Payment Dates after the date of calculation through the Stated Maturity Date and (B) in amounts sufficient to pay the Debt Service required under the Note together with the unpaid Principal of the Note payable on the Stated Maturity Date (such payments, the “Scheduled Defeasance Payments”); provided, however, that (x) Borrower reserves the right to purchase with the Defeasance Deposit (in lieu of paying the Defeasance Deposit to Lender) the U.S Obligations which provide the Scheduled Defeasance Payments (the “Borrower Purchase Right”) and (y) Lender will not exercise its appointment as Borrower’s agent and attorney-in-fact to purchase such U.S Obligations if Borrower notifies Lender in writing in the Defeasance Notice that Borrower will be purchasing such U.S Obligations. Borrower, pursuant to the Security Agreement or other appropriate document, shall authorize and direct that the payments received from the U.S Obligations may be made directly to Lender and applied to satisfy the obligations of Borrower under the Note. Any amounts received in respect of the U.S Obligations in excess of the amounts necessary to make monthly payments hereunder (“Excess Payments”) shall be invested by Lender in Permitted Investments selected by Lender (any interest earned in connection such investments is referred to herein as the “Excess Payments Interest”). Such Excess Payments and Excess Payment Interest shall be retained by Lender until payment in full of the Debt (and upon payment in full of the Debt any such Excess Payments and Excess Payments Interest retained by Lender and not previously applied to the Debt shall be paid over to Borrower). Semi-annual payments in respect of the U.S Obligations shall be applied to the payments under the Note as the same become due thereunder.
- In connection with Defeasance, Borrower shall transfer and assign all Obligations, rights and duties under and to the Note together with the pledged U.S Obligations to successor entity, which successor entity shall be acceptable to Lender (the “Successor Borrower”). The Lender shall have the sole right to establish or designate the Successor Borrower. The Successor Borrower shall assume all obligations under the Loan Documents and the Security Agreement, and Borrower shall be relieved of its obligations thereunder. Borrower shall pay a minimum $1000 fee to any such Successor Borrower as consideration for assuming such obligations. Notwithstanding anything herein to the contrary, no other assumption fee shall be payable upon transfer of the Note in accordance with this Section 2.3.3 but Borrower shall pay all reasonable out of pocket costs and expenses incurred by Lender, including Lenders reasonable attorneys’ fees and expenses incurred in connection with this Section 1.0.
- 1.1 Release on Defeasance
If Borrower has completed Defeasance in accordance with Section 1.0, and all of the requirements of Section 1.0 have been satisfied, the Property shall be released from the Lien of the Mortgage (or, if requested by Borrower, Lender shall deliver an assignment of the Mortgage to Borrower’s designee without recourse, representation or warranty, duly endorsed by Lender to Borrowers designee, pursuant to documents in form and substance satisfactory to Lender), and the U.S. Obligations pledged pursuant to the Security Agreement shall be the sole source of collateral securing the Debt. In connection with such release, Borrower shall submit to Lender, not less than twenty (20) days prior to the Defeasance Date, a form of release for execution by Lender appropriate in the State and in form and substance reasonably satisfactory to Lender, and all other documentation Lender requires to be delivered by Borrower (each at the expense of Borrower), together with an Officer’s Certificate certifying that such documentation (i) is in compliance with all Legal Requirements and (ii) will effect such release in accordance with the terms of this Agreement.