Defeasance is a clause most common in a commercial mortgage that gives the borrower the right to prepay a commercial mortgage by purchasing US Treasuries to held in an escrow account to pay off the ongoing debt service.
Because a borrower that defeases through a substitution of collateral does not actually prepay the debt, concerns about prepayment penalties and other issues that might trigger a prepayment penalty generally do not arise in defeasance scenarios. However, defeasance raises its own legal issues that have to be analyzed.
