Escrow Agreement Basics

Although we think of escrow agreements as being unique to real estate transactions, they in fact are not—there are a number of other areas where escrow contracts are necessary or useful. But what is an escrow agreement, and if you are using an escrow agent or you are going to act as one, what kind of considerations should be in your escrow agreement?

What is an Escrow Agreement?

An escrow agreement is an agreement where a third party, and one that is neutral, will hold money for a designated purpose. The money cannot be distributed immediately, but only upon the happening of a designated occurrence.

As a simple example, imagine that someone is buying a business. The seller wants to know that the potential buyer has the assets to buy the business if and when the deal closes. The buyer does have the assets, but doesn’t want to just pay the money to the seller before the deal closes. So, the parties may agree for a neutral escrow agent to hold the funds—if the deal closes and everything checks out, the seller will get the money, and if not, the buyer will get the money back.

The escrow agent is a third party—neutral to the parties or their interests. That means that the escrow agent wants agreements that keep them out of the fray, in the event there is some kind of dispute.

Escrow Agreements

Escrow agreements are actually two (or more) agreements.

On the one hand, there is the agreement between the parties, which states that an escrow agent will be used, and may also state when, how, and if the funds being held in escrow get released. Additionally, there is the contract between the parties and the escrow agent—the party that is temporarily holding the funds.

Escrow agreements with the escrow agent should of course address the conditions upon which the funds will be released and to whom. The agreement should say whether funds get disbursed upon the occurrence of a specific, objective criteria or condition, or whether the escrow agent needs permission from both sides to disburse the assets.

If there is a dispute over who gets the funds, the escrow agreement should state what the escrow agent can or must do. Usually, this would involve the filing of an interpleader action in court by the escrow agent, but the escrow agreement might also mandate that the parties attend mediation before an action is filed.

Parties may also want to address what happens if the escrow agent disburses the funds being held in escrow wrongfully, or against one party’s wishes.

The agreement should also address what happens to the funds, if a stated condition never happens. For example, what would happen if one of the parties dies, or if a business that owns the escrow money were to dissolve before distribution.

Let us help you draft your escrow agreement. Call the West Palm Beach commercial litigation attorneys at Pike & Lustig help you.

Sources:

investopedia.com/terms/e/escrowagreement.asp

legalgps.com/transactional-agreements/blog/escrow-agreements-basics