When buying or selling commercial real estate, each party depends on the other to honor the terms of their agreement. One key mechanism that provides this assurance is the use of escrow provisions within an Earnest Money Contract or Purchase and Sale Agreement (PSA). What should sellers and buyers alike know about the role that escrow plays in commercial real estate transactions?
What is escrow?
Escrow is a legal arrangement where, until both parties in an agreement fulfill their obligations, a neutral third party temporarily holds money, documents or assets. This third party, the escrow agent, ensures that all obligations are met before the transaction is completed.
These arrangements can benefit buyers and sellers in a variety of ways:
- Risk mitigation: Escrow provisions protect both buyers and sellers by ensuring secure handling of all funds and documents.
- Confidence and trust: Having a neutral third party manage the transaction fosters trust between the parties.
- Structured process: The clear guidelines and timelines provided by escrow provisions help streamline the transaction process, reducing the likelihood of delays or misunderstandings.
What details should escrow provisions outline?
An escrow provision in a purchase and sale agreement outlines a variety of key details. These include:
- Information about the escrow agent: The agreement should name a trusted and neutral escrow agent, who manages the escrow account and follows the agreement's terms. It should also explain how to handle the agent's fees.
- Deposit requirements: The agreement will state how much money the buyer needs to deposit in escrow, often called "earnest money," to show commitment. It will also explain the requirements for a refund or forfeiture of this money.
- Conditions for release: The agreement must clearly state what needs to happen before the release of the escrow funds. This can include finishing inspections or getting approvals.
- Timeframes and deadlines: Escrow provisions will set specific times for each step of the transaction to keep things moving and ensure everyone knows their duties and deadlines.
- Dispute resolution: If there is a disagreement about releasing escrow funds, the agreement should explain how to solve it, possibly through litigation or arbitration.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
