In a purchase transaction, an escrow arrangement is usually used to protect both the buyer and seller. The escrow agent’s responsibility is to ensure that the funds and property involved in a transaction are being exchanged as agreed, based on certain pre-agreed conditions. The escrow agreement’s main objective is to protect each side’s interests by ensuring that they get what they have contracted for, free from disputes and delays.
In California, when a business acquisition contract includes an escrow arrangement, it must be governed by the Escrow Law (California Civil Code Section 1057). This law establishes binding standards for interim or “escrowing” transactions and restrictions on how it may be used.
What is the Escrow Process?
Escrow is a third-party process that requires the payment of a fee to an independent person or entity that acts as the “escrow agent”. The agent is responsible for holding the funds and property until a specified condition is met. If all goes well, the funds and property are turned over to one or both parties. If the contract is not fulfilled, all or a portion of the Escrow may be returned to the payer.
What is the Purpose of Escrow?
The escrow process provides essential protection by ensuring that the parties actually receive what they have contracted for, and can manage their risk. When a business involves assets or funds, having an escrow agent serve as a temporary custodian of the assets protects both buyer and seller against claims of breach of contract when the escrow agent returns any portion of Escrow to either party. This way, if something goes wrong with the transaction, for example, if one party does not fulfill his or her contractual obligations, there will still be enough money to pay for litigation costs and damages.
What are the Two Types of Escrow Processes in California?
There are two types of instructions employed in escrow arrangements:
A bilateral escrow is an arrangement in which each party to a transaction is granted an equal right to request the escrow agent to hold the funds and property in question during the transaction.
A unilateral escrow is an arrangement in which only one party can request that the escrow agent hold the funds and property.
The 3 Requirements of a Valid Escrow
Now, let’s discuss the three requirements a valid escrow must have.
1. The Contract between the Grantor and the Grantee.
The agreement between the parties, whether an actual written agreement or verbal one, must clearly state that an escrow is involved. And both parties should agree to the terms of Escrow.
2. Delivery of the Deposited Item to a Depositary.
For an arrangement to be valid, the grantor’s item must be delivered by him or her to someone who he or she authorizes to hold it during the pendency of the transaction.
3. Communication of the Agreed Conditions to the Depositary.
The terms of Escrow must be relayed to the escrow agent so that they may be aware of what conditions must be met before they turn over possession of the property to either party.
How Long Does Business Escrow Take?
Business escrow usually takes approximately 4 to 8 weeks to complete. However, this time frame varies depending on a number of factors, including the complexity of the transaction and the involvement of regulatory agencies. Your escrow agent can provide a better estimate of the Escrow’s duration.
Generally, the following factors may also cause delays:
• Unavailability of the property due to any legal action that arose after the transaction was made.
• Refusal by the other party to perform his or her obligations under the contract.
• Proposed changes to agree upon terms that must be negotiated with each party.
• Unfamiliarity with California’s escrow law.
• Lack of records for both parties for transactions made prior to escrowing them.
However, delays can be avoided if a thorough background check of the parties involved has been made.
Who Handles Escrow in California?
In California, the escrow agreement is usually handled by a licensed Escrow Officer or Escrow Agent. This person will be your representative in the escrow process, and he or she will keep track of the transfer of funds and property and any other important information.
The body that licenses escrow agents in California is the Department of Business Oversight (DBO). The DBO ensures that escrow agents are properly educated about all aspects of Escrow and are experts in the relevant business laws.
Who Owns the Money in an Escrow Account?
Escrows are handled solely by the escrow agent, and they are considered to be the “owner” of the funds and property covered by it. However, the funds belong to one of the parties participating in the contract. The party who deposits money into an escrow account is considered a “grantor,” while the other party is considered a “grantee.”
The grantor gives up control over his or her funds when he or she deposits them into an escrow account with his or her grantee. That is why grantors and grantees must clearly understand how an escrow works before executing one.
What is an Escrow Agent and What Do They Do?
A licensed escrow agent is a neutral third party who acts as the custodian of funds or property for a business transaction. The agent will manage the payment and transfer of funds and property during Escrow, following the instructions of both parties.
Escrow agents are legally required to follow very specific procedures to ensure that funds and property are transferred between buyers and sellers in a timely manner.
The State of California must license escrow agents, and they must adhere to certain ethical standards and professional policies.
The escrow agent is obligated to:
1. To hold the funds or property in their escrow account until a specific date.
2. To keep records of all transactions and the condition of those funds or property.
3. To make sure that either party to the agreement pays any taxes due on any money they receive through a transaction handled by an escrow agent.
4. To return any money owed to either party at the end of Escrow, unless otherwise stated in their agreement with both parties, in accordance with California’s escrow law.
5. In certain types of transactions, to report important information about certain properties or assets to regulatory agencies for appropriate action.
How Much Does Escrow Cost?
Generally, the cost will range from 1% to 3% of the gross money to be handled by the Escrow. However, it is important that you calculate your escrow fees in advance, as well.
What are some other factors that can affect the cost of Escrow?
• The time it takes for an escrow agent to complete a transaction.
• The complexity of the transaction itself, as well as any other regulatory requirements that might affect it.
• The market conditions in which the escrow agreement is made.
What are the Cons of Escrow?
As much as Escrow protects both parties to a transaction, it also has its disadvantages. Here are some of the cons that you need to consider before deciding whether or not to escrow a deal.
• Escrows take up a lot of legal resources, both from the parties involved and from the escrow agent.
• Personal relationships can be damaged due to the lack of transparency and communication in an escrow agreement.
• The harsh laws regarding escrows may cause buyers and sellers to become too wary of dealing with each other.
Escrows can cause buyer’s remorse among those not keen on doing business with others over the Internet or phone following an initial agreement or discussion about their intent to do so.
Get the Help of a California Escrow Attorney
Escrow is a powerful tool that can help business owners overcome the risk of dealing with strangers over the phone or the Internet. Business escrow allows for due diligence from both sides of an agreement, which improves communications and trust between parties.
Before making one, it is important to ensure that you understand how an escrow works. And it is equally important for you to select the right escrow officer or agent to handle your business transactions. Your choice should be based on knowledge and experience and licensed by state regulatory agencies like the Department of Business Oversight (DBO) in California.