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A release clause allows one party to release interest in another party’s property. Release clauses can be used in multiple situations, including within a mortgage contract and when selling a property.
Let’s take a look at release clauses, how they work, and what they mean for you.
A release clause is a provision in a contract that releases one party’s interest in another party’s property. There is more than one type of release clause, although you’ll find these most commonly used in real estate transactions.
When used in reference to a mortgage contract, a release clause allows the borrower to remove a lender’s interest from their property. This provision can be added into the actual mortgage contract or signed independently, but will specify the conditions that must be met in order for the interest to be released. Usually, this means that the borrower has made a payment of a designated amount to the loan.
A good example of this is when a developer completes a tract of land and begins to sell the homes they’ve built. Blanket mortgages are typically used to finance this activity, which is a type of loan that covers multiple properties at once.
As each property is sold, the developer makes payments to the blanket mortgage lender. The lender will then release their interest in each specific parcel that has been sold.
Another example occurs when selling a property. In this example, commonly referred to as a “72-hour clause,” a seller accepts an offer on their home without being exclusive. During the 72-hour period following the acceptance, a seller can continue to receive and even accept other offers, though the original buyer still retains the first right of refusal.
Let’s say you and your spouse have decided to put your home on the market. Your realtor has informed you that it’s a seller’s market, so you’re likely to attract a lot of attention on the property. While that may have been true for other houses, you’re getting a little worried as interest has seemed sluggish. However, within a week, an offer comes in.
The offer is a bit lower than you’d like and includes a contingency that the buyers sell their own home first. After talking it over with your spouse, you agree to accept the offer.
When the two of you approach your realtor, however, they seem surprised. It’s just been a holiday weekend, the realtor explains, so properties are moving slowly. Although it’s still your choice, the realtor suggests that you wait for a better offer.
Still, you two are pretty risk-averse, so you choose to accept the offer as is. Before writing up the sales agreement, the seller makes another suggestion: Include a release clause, which will allow you to accept the current offer while keeping your home on the market. In this example, the release clause is also known as a 72-hour clause.
Keeping your home listed allows you to entertain prospective buyers and even accept another offer without repercussions, therefore achieving the best of both worlds—security for your family without locking yourself into an exclusive contract.
A release clause comes in multiple forms. If you’re a developer looking to develop a tract of land, you’ll likely need funding. If you’re opting for a blanket loan, a release clause will allow you to pay off each property as it’s sold, thus releasing your lender’s interest in each parcel. This may be a less common scenario for the average person; land developers occupy a much smaller demographic than homeowners.
Those who have purchased a home and are looking to sell can also take advantage of a release clause. This clause allows them to accept an offer while keeping the house on the market in case of further interest. While beneficial to a seller, as a buyer you may want to be wary of 72-hour clauses; agreeing to one may leave you in a less secure position when signing your sales agreement.
