What does defeasance mean?
Defeasance is a formal legal and financial term referring to the act of nullifying or rendering void a contract, deed, or obligation. Its most prominent modern use is in finance, where defeasance describes a transaction in which a borrower sets aside a portfolio of cash or government securities in a trust, sized so that the investment income will cover all remaining interest and principal payments on a debt. This allows the borrower to treat the liability as discharged—often removing it from the balance sheet and releasing associated covenants—without actually repaying the debt early. The term appears frequently in bond indentures through 'defeasance clauses,' which spell out the conditions under which such a discharge is permitted. Derived from Old French via Latin roots meaning 'to undo,' defeasance shares ancestry with words like 'defeat' and 'feasible.' It remains a specialist term of art, valued by lawyers and treasurers for the precision it brings to the quiet business of unwinding obligations.
nounThe legal act of rendering something void or nullifying an obligation, especially a contract or deed; in finance, the setting aside of cash or securities sufficient to discharge a debt without formally repaying it.
- Law: the act of rendering a deed, contract, or obligation void or of defeating its effect.
- Finance: an arrangement in which a borrower sets aside cash or risk-free securities in trust to satisfy a debt's future payments, allowing the debt to be removed from the balance sheet.
"The company achieved defeasance of its outstanding bonds by placing government securities in trust to cover all future interest and principal payments."
"Under the defeasance clause, the issuer could extinguish the covenant obligations by funding a trust with Treasury securities."
"The trustee confirmed that defeasance of the municipal bonds was complete once the escrow account was fully funded."
Rarely pluralized; the term usually functions as an uncountable mass noun referring to the act or process itself.
"The prospectus described several defeasances completed over the past decade."
Bond investors invented a way for a company to be 'out of debt' on paper while the debt still technically exists — they call it defeasance, and it's one of finance's most elegant legal fictions.
Reviewed by Deb Chak, Editor. AI-assisted content curated by RJS Tech Solutions LLP.
Etymology of defeasance
Defeasance entered English from Anglo-Norman and Old French 'defaissance,' derived from the verb 'desfaire' ('to undo'), which traces back to Vulgar Latin forms built on 'dis-' plus 'facere' ('to do or make'). It was established in English legal usage by the late medieval period as a term for instruments that defeated or annulled the effect of a prior conveyance. The same Latin root gives English a wide family of words including 'defeat,' 'defect,' 'feasible,' and 'feature,' all ultimately concerned with doing, making, or undoing.
Related word forms
How defeasance is actually used
A technical term used almost exclusively in legal and financial contexts, particularly corporate bond indentures and real estate financing. In American commercial mortgage practice, 'defeasance' often specifically refers to substituting Treasury securities for a property as loan collateral. It carries a formal register and is rarely encountered in everyday speech.
Easily confused with defeasance
Defamation is the act of damaging someone's reputation by false statements, whereas defeasance is the legal annulment of an obligation or the financial arrangement to discharge a debt.