Key Takeaways

  • A partial release clause allows borrowers to release specific parcels or units from a blanket mortgage once certain payment conditions are met.
  • It’s widely used in real estate development, subdivision projects, and commercial lending to enable the sale or refinancing of individual lots while keeping the main loan intact.
  • Lenders use conservative release formulas to protect their security interests and maintain adequate collateral coverage.
  • Key considerations include appraisal values, release fees, and documentation requirements in the mortgage agreement.
  • Borrowers and lenders must be aware of potential pitfalls, including title defects, inadequate collateral, or disputes over release terms.

Partial Release Clause

A partial release clause entails an addendum to a mortgage or note that states that lenders will release a parcel when a mortgage balance is paid down to a certain amount. The following is an example of a partial release clause:

  • Completed lots or individual houses that can be sold and released on an individual basis based on payment of a partial release fee equivalent to 1.5 percent of an amount prepaid, and the paying down of the principal higher than 87 percent of a sales price or 125 percent of the value of the loan designated to each unit, home, parcel, or lot.

How much would the borrower need to pay down to get the unit or property released? First, a lender will designate a loan value to all units, homes, and properties.

  • Unit A: $42,000
  • Unit B: $26,000
  • Unit C: $84,000

Let’s say that an owner discovers a buyer for unit A and is willing to pay $63,000. The lender has given a loan value to unit A in the amount of $42,000. If the lender has a 125 percent release stipulation, this would mean that the borrower must pay down the loan by 125 percent of the $42,000, or $52,500. Various lenders will also have differing partial release methods.

For instance, a lender may only have a 115-percent partial release mandate. This would mean that the owner of unit A would have to pay down the loan by 115 percent of the $42,000 or $48,300 if he or she wishes to sell off the property.

Why do commercial lenders require such a formula? You may also ask why not simply prorate the loan among various units and release each unit for a paydown that’s relative to the loan’s value attached to a unit (ex. unit A for a paydown of $42,000)?

The answer is that an appraiser assigning the loan value to all units are not perceived well by the marketplace. Units D and E do not have an ocean view, and Units F and G are next to a landfill.

When and Why Partial Release Clauses Are Used

A partial release clause plays a crucial role in real estate financing, particularly in projects involving multiple parcels or phased development. It gives borrowers flexibility to sell, refinance, or transfer parts of the secured property without repaying the entire loan. This is especially beneficial for:

  • Subdivision Developments: Developers can sell lots individually as they are completed, using proceeds to pay down the loan while continuing to finance the remaining property.
  • Commercial Projects: Businesses holding multiple buildings or parcels can release and refinance one asset to fund improvements or expansion elsewhere.
  • Agricultural and Large Land Sales: Landowners dividing large tracts into smaller parcels for sale can do so incrementally while keeping the rest under financing.

Lenders also benefit because these clauses encourage faster loan repayment and make the loan more appealing to borrowers. However, they carefully draft release terms to ensure sufficient collateral remains on the loan as parcels are released.

Conservative Partial Release Formula

Without a sound partial release system, Units A, B, and C may each sell for $200,000 and would be released quickly.

This may leave a lender with $200,000 in remaining loan balances that blanket all four units that value $140,000 together. Conservative partial methods permit the lender to make a profit every time the unit gets sold. In addition, the blanket loan gets paid down in a disproportionate manner every time a unit is sold, which leaves a lender with more security.

Legal Risks and Common Pitfalls

While a partial release clause can benefit both borrower and lender, it can also create legal complications if not handled properly:

  • Inadequate Collateral Coverage: If too many parcels are released early, the remaining collateral might not fully secure the loan, increasing lender risk.
  • Title Issues: Failure to properly record a release can cloud title, complicating future sales or refinances.
  • Ambiguous Terms: Vague language about valuation or payment requirements can lead to disputes or litigation.
  • Loan Workout Complications: In distressed loan situations, partial releases can limit a lender’s ability to recover losses or restructure terms.

Because of these risks, both parties should seek legal counsel before signing or invoking a partial release clause, ensuring the terms are clearly drafted and properly executed.

Partial Release Example

  • A commercial banking lender issues a $2 million loan to a group of developers located on a residential subdivision. The developers use the funds to get a subdivision map, commence improvements (curbs, gutters, water, power, etc.) and to advertise the 100 homes. When the developers are finished, they can sell off the first lot at $40,000. However, the buyer of the lot will not pay $40,000 unless the developers would give the lot free and clear of a mortgage. The bank took out a $2 million loan, including the remaining 99 lots. How could we dispel the $2 million loan with only the benefits of a $40,000 sale? The sale would be achieved using a partial release provision found with the loan agreements.

The partial release clause entails an agreement between the borrower and commercial lender in the respect that the mortgage that covers two or more parcels would be released from a certain parcel when the commercial lender is paid on the sum of an agreed-upon sum. For instance, a commercial lender agreed to release the mortgage against lot 17 upon the payment of $20,000.

The bank receives $20,000 from the proceeds of the sale form lot 17 (which is a cul de sac lot), and the developers can pocket that remaining $20,000 in the form of profit. However, what if the new subdivision has 15 cul de sac lots and 10 suitable lots with nice views and the rest are low-quality? If the developer could sell all 25 nice lots for $40,000 each and give the bank half of all proceeds, that would mean $500K for the developer and $500,000 for the bank. After, the bank is owed $1.5 million, and the loan is assured by the remaining 75 lots.

Best Practices for Negotiating a Partial Release Clause

To maximize the benefits and reduce the risks associated with a partial release clause, consider the following best practices:

  • Negotiate Early: Discuss partial release terms at the loan origination stage, not after the project begins.
  • Use Appraisals: Independent property appraisals help establish fair release values and prevent disputes.
  • Plan Release Timing: Stagger parcel sales strategically to maintain collateral strength throughout the loan term.
  • Include Detailed Terms: Specify payment amounts, release procedures, and documentation requirements clearly in the agreement.
  • Consult Legal Counsel: Both parties should have attorneys review the clause to ensure compliance with state property and lending laws.

Essential Elements of a Partial Release Clause

To protect both parties and avoid future disputes, a well-drafted partial release clause typically includes several key components:

  1. Payment Conditions: Specifies how much must be repaid before a release occurs, often as a percentage of the property’s appraised or loan-assigned value.
  2. Valuation Method: Outlines how each parcel’s value is determined—through appraisal, loan allocation, or sale price.
  3. Release Fee: Some agreements require an additional fee or percentage payment beyond the principal reduction.
  4. Documentation Requirements: Formal release documents must be prepared and recorded to clear title and confirm the lender’s consent.
  5. Timeframes and Deadlines: Establishes how quickly the lender must process a release request after conditions are met.

Including these terms in writing helps avoid common legal issues, such as disputes over whether sufficient payment was made or delays in title clearance.

Frequently Asked Questions

  1. What is the main purpose of a partial release clause?
    It allows a borrower to release individual parcels from a larger mortgage by making specified payments, enabling sales or refinancing without repaying the full loan.
  2. Who benefits more from a partial release clause—lenders or borrowers?
    Both benefit: borrowers gain flexibility, while lenders can accelerate repayment and attract more financing deals.
  3. Can a lender refuse a partial release if conditions are met?
    Generally, no. If the borrower satisfies all agreed-upon terms, the lender must execute the release as outlined in the contract.
  4. What happens if a release is not properly recorded?
    Failure to record can lead to title issues, preventing sales or transfers and potentially exposing parties to legal disputes.
  5. Should partial release clauses be reviewed by an attorney?
    Yes. Legal counsel is highly recommended to ensure the clause is enforceable, clearly drafted, and compliant with state property and lending laws.

To learn more about a partial release clause, you can post your job on UpCounsel’s website. UpCounsel’s lawyers will give you a helping hand in all matters pertaining to contract law and your rights as a buyer or seller. Moreover, they will read over any contracts on your behalf before another party compels you to sign the paperwork.