An Escrow is a contractual arrangement which allows contracting parties to use the services of an independent trusted third party “Escrow Agent”, who is appointed in order hold as security the consideration agreed between the parties within a transaction. Such consideration is kept in a special designed account “Escrow Account” up until the implementation of the purchasing and selling of goods, products, or services according to the agreed terms and conditions of the agreement.
The main parties engaged in an Escrow agreement are, the "depositor", the "Escrow Agent" and the "beneficiary". The common procedure followed is that the depositor trusts property or money with an Escrow Agent who holds the Escrow deposit until it may be released to the beneficiary upon completion of an agreed action, or upon performance a condition stated within the contractual agreement between the depositor and the beneficiary.
For instance, one of the most common scenarios is where it involves the deposit made for the purchase or sale of property where the contract may state within it that the buyer's deposit is paid to the buyers or seller’s lawyer which in turn is held in escrow. In such an event the buyer is the depositor and the seller is the beneficiary. The lawyer is the Escrow Agent, who undertakes to safeguard the deposit amount received in a special bank account until the contract has been performed. Where the purchase proceeds as planned, the Escrow Agent shall release the payment to the seller upon completion of the contractual arrangement. If cancelation of the contract is agreed between the parties, the Escrow shall return the money to the buyer, according to the terms of the agreement.
Escrow agreement should contain provisions which set forth:
The Escrow Agent act as a fiduciary who has duties to all the parties who have interest in the Escrow property. The Escrow Agent’s duty is to protect the amount in Escrow which has to be deposited in a specific bank account which shall be other than the Escrow Agent’s personal and business accounts.
The Escrow Agent has also a duty to provide the parties with a receipt for the Escrow property, a copy of the Escrow agreement and keep complete, accurate and updated records.
It is a legal duty to strictly comply with the terms and conditions of the Escrow agreement. Escrow property cannot be delivered to anyone, except in accordance with the provisions in the Escrow agreement and only upon completion of the agreements term and conditions.
An Escrow Agent is entitled to be paid for administering an Escrow account or property, fees and reimbursement of expenses for such Escrow services should be clearly set out in the Escrow agreement. The Escrow Agent cannot have any claims on the Escrow deposit for services rendered, unless the Escrow agreement provides for such fees etc. In general the Escrow Agent is a custodian of the Escrow property that has to be paid out according to what the Escrow agreement states.
Unless the Escrow agreement provides otherwise where interest is earned on an Escrow deposit, such shall be paid in accordance with the Escrow agreement or to the party which deposit has generated such interest.
Documents required for preparing an Escrow agreement