Escrow arrangements
R.L. NARAYANAN
| It can be used for the purposes of closing sale, purchase, transfer,
leasing or other transactions relating to property. |
TRANSACTION: Escrow facilitates land sale.
Recently, you would have heard of the terms "Escrow", "Escrow
Agreements", "Escrow Payments" and so on. You may be wondering as to what the
term "Escrow" means. With the transactions getting larger and the time taken for
decisions getting reduced day by day, Escrow mechanism provides a solution for
protecting the interest of the parties concerned.
"Escrow" means a written document under which, an instrument,
cheque, money, deed or other items are delivered to a person, who is a stranger
to the transaction between two or more parties, to be delivered to one or more
transacting parties subject to performance of such condition.
Insofar as real estate transactions are concerned, Escrow
arrangements are usually employed in certain circumstances.
In a particular transaction, the holding of the original
documents may be of vital importance. In such transactions, the parties
concerned may appoint an Escrow Agent to hold the documents for the benefit of
the parties and hand over the documents to one or more of them on the
performance of an agreed obligation.
In another transaction, the payment of money may be critical.
The transaction concerned may involve the ability of the purchaser to bring in
the payments. The purchaser may have such ability, but may require clearance of
title or other obligations from the seller, which may take time. In order to
demonstrate the ability of the purchaser and also the intention of the purchaser
to purchase the property, the amount or a cheque or an instrument representing
the sale price or part thereof may be deposited with an Escrow Agent, to be
released to the other party on the completion of obligations undertaken by the
other party.
The above illustrations reflect simple type of arrangement.
However, the Escrow Agent may be required to assist the performance of
obligations in various stages depending on the instructions of the parties. The
Escrow Agent can be stated to be holding the documents, instrument or money in
trust and has to discharge the obligations under the Escrow Agreement from the
position of a trustee. The Escrow Agent has to strictly follow the instructions
contained in the document. In India, there is also the practice of appointing
the Escrow Agent as an arbitrator.
What is the benefit of the Escrow arrangement? Why should it
be employed? At the outset, it is to be noted that the Escrow Agent is usually a
person who is trusted by the parties concerned. Therefore, there is an
assumption on the part of the parties that the Escrow Agent will be objective in
his / her approach. The sellers of properties are usually protected against bad
cheques, non-sufficient funds, scams, fraud, etc. The sellers can also proceed
on the basis that the buyer is acting in good faith; has the ability to purchase
the property in question; and the issues as between the buyer and the sellers
are identified and a process of settlement alone is needed to close the
transaction. Insofar as the buyer is concerned, they can have the comfort that
the money has not gone out of their reach and the money can be safely returned,
if the seller fails to meet the obligations. There are no protracted legal or
other proceedings contemplated for return of the money, as it will be
incorporated in the terms of Escrow Agreement itself.
A further doubt may arise as to how the seller gets paid?
This is a fundamental and most important aspect for the seller. For this, the
payment modalities are incorporated in the Escrow Agreement and a demand draft
or an instrument already taken in the name of the seller is released to the
seller on written instructions of the buyer or on performance of certain
obligations which the Escrow Agent is informed, usually in writing by one or all
parties to the transaction.
In the case of Escrow Agent holding original documents, the
release of the documents is on the basis of joint instructions of the parties
concerned. One party alone cannot request for release of the documents unless
the party concerned has satisfied the pre-conditions.
Certain Banks also provide the facility of operating Escrow
accounts. Further, specific accounts can be opened on the basis of Escrow
arrangement entered into between parties. Such accounts can be operated either
by the Escrow Agent or by the parties jointly depending on the nature of the
transactions. The money received by a person for an Escrow transaction is
referred to as "Escrow Money" which has to be retained separately in a separate
account and cannot be mixed with the other money of the Escrow Agent. The Escrow
money is not the property of the Escrow Agent and care has to be taken to ensure
that there is clarity in the aspect of entrustment of the money as it is not
subject to execution, attachment or other orders if by the wordings in the
documents, it is made clear that the money does not belong to the Escrow Agent.
The Escrow Agent has to adhere to the instructions and should
not mix the documents or money of one escrow transaction with another or that of
his own. There must be a clear written understanding as to when the Escrow
arrangement is discharged or terminated. The Escrow Agent is to maintain
objectivity all along and if he / she is called upon to arbitrate and settle the
disputes as an arbitrator, will be required to disclose his/ her interest or
dealings with one or more parties, if any, to maintain transparency. The Escrow
Agent is also bound to act in accordance with orders of any Court or Arbitrator
which orders will have an overriding effect over the terms contained in the
Escrow Agreement.
The Escrow Agent will be entitled to a fee as agreed to
between the parties and the Escrow Agent. The Escrow Agreement should also
provide for a method to a discharge of escrow or termination of the Escrow
Agreement, in the event, one or more parties do not co-operate in the process.
The Escrow Agent is expected to be vigilant and protect the interest of all
parties concerned. Apart from Banks, Lawyers and professionals can be appointed
as Escrow Agents. The appointment may also arise from the domain expertise of
the Escrow Agent concerned. Escrow arrangements can be used for the purposes of
closing sale, purchase, exchange, transfer, discharge of encumbrances, leasing
or other transactions relating to any type of property.
If the conditions of the Escrow Agreement are clearly worded
and require your written instructions at every stage, such a type of agreement
will be best suited and in the best interest of the parties concerned.
The author is partner RANK Associates Advocates, Chennai
Courtesy: Property Plus, The Hindu
http://www.hindu.com/pp/2006/09/30/stories/2006093000240600.htm
