Escrow Services
The Escrow service is a fiduciary relationship based on trust. It involves the custody and safeguard of assets of any kind by the Escrow Agent until a predetermined condition takes place, in which case the assets will be transferred to the party entitled to them.
Normally, the Escrow is used to close important transactions, especially the purchase of real estate, ships and for the merger and acquisition of companies.
It has become popular in Internet transactions and is recommended as a protection against fraud, more so in transactions where the buyer and the seller don’t know each other. The Escrow Agent is a third, impartial party, not involved in the transaction, whose selection is made by both parties by common agreement. It is important to negotiate the conditions for transfer of the property and set out what the role of the Escrow Agent will be in every situation that may arise regarding the transaction. Conditions vary from case to case depending on the specific location of the parties, the purpose of the transaction and the form of payment.
The sale of real estate for instance, normally involves a period of time in which transfer of the property is registered with the corresponding authority and in which the owner or seller is not willing to transfer the property title to the buyer unless the latter pays the purchase price, and the buyer is not willing to pay the purchase price until the property title has been duly registered. The solution is to deliver the purchase price to an impartial Escrow Agent, with irrevocable instructions to transfer the cash from the buyer once the evidence that the property title in favor of the buyer has been registered, or to return the cash to the buyer in case on a specific date the property title is not registered, or other conditions agreed by the parties.
The same applies in the sale of a vessel. Most vessels are owned by a limited liability company whose shares are placed in Escrow together with the purchase price, until the property title is duly registered.
In the above examples, the Escrow works like an insurance policy for the transaction, as every party receives guarantee that fulfillment of the final obligation is in the hands of a person who is not a party to the transaction.
An Escrow may be established also to guarantee that the result of a specific transaction, which already take place, is the one expected by the parties. In a merger and acquisition for example, it is normal to place 10% of the purchase price of a corporation in Escrow for a year, as reserve against unforeseen creditors, defective equipment, etc., that the buyer or new owner may have to deal with. The expenses are deducted from the purchase price of the company and paid by the Escrow Agent. Once the Escrow Agreement expires, the remaining assets are transferred to the seller.
