A guide on Escrow agreement

A guide on Escrow agreementMarcus Wallman

We are often asked by clients (and sometimes by third parties) if we can act as escrow agents. These requests arise in the context of a wide variety of transactions, but particularly in the context of commercial property transactions. In such instances, the parties will often consider this to be a simple request. However, it is often made when the parties themselves are not entirely clear what role they want us to play as escrow agent.

What is an escrow?

An escrow is an arrangement whereby a third party (the escrow agent) agrees to hold documents and/or funds on behalf of the buyer and seller and distribute them according to the instructions of those parties. Invariably, the escrow agent will enter into an escrow agreement with the buyer and the seller. This agreement sets out the basis on which any funds and/or documents are to be released and to whom. This may sound like a reasonably simple arrangement, however, it is one that places the escrow agent in a position of significant responsibility and should, therefore, be very precisely documented.

Key elements of an escrow agreement

The most important aspect of an escrow agreement is that it must be absolutely clear what the obligations of the escrow agent are with regard to any funds and/or documents it holds. This means that there cannot be any subjectivity required when determining what the escrow agent is required to do with any documents and/or funds it holds, or any circumstance where the agent's obligations would not be clear. The objectivity required to determine the ''triggers'' for the release of the documents or funds can cause issues between the parties involved.

Examples of objective release triggers

1) The issuance by a government department of a document that can be clearly and accurately described in the escrow agreement. For example, an updated title deed issued by the Dubai Land Department showing the buyer as the registered title holder of a plot or, in the context of a share sale, the issuance by the Dubai Department of Economic Development of an updated trade licence showing a certain party or parties as the registered holder of shares; or
2) A letter signed by one or both parties. If the letter is required to only be signed by one of the parties the escrow agreement will usually attach the form of letter required, so there is absolute clarity as to what form of letter the escrow agent expects to receive.

Subjective triggers

An example of a release trigger that is subjective and, therefore, unacceptable from an escrow agent's perspective would be a reference to release funds or documents on a certain date, but with conditions such as ''assuming that the seller is not in breach of the sale and purchase agreement''. The escrow agent cannot be put in a position where it would need to make a determination as to whether or not a breach had occurred.

One method of ensuring an escrow agent is certain of its responsibilities is to include a ''drop dead'' date, whereby if the other releasing trigger(s) in the documents have not occurred, then the escrow agreement states clearly what the escrow agent should do with any funds or documents received. The escrow agent cannot be placed in a position where it has an obligation to hold funds or documents that may be unlimited in time.

Being impartial

The escrow agent must be impartial, even if doing so may not be in the best interest of the escrow agent's client. In our experience, the most common circumstance for the use of an escrow agent is to deal with the timing of payment, and is considered when there is a procedure that may take some time for the title of the asset to be transferred. Buyers will only want to pay when they see that the title has been transferred, while sellers will want to receive the funds as soon as they have signed the documentation before the relevant authorities. It is in this scenario that the use of an escrow agent to hold funds during the transfer process is often seen as an acceptable compromise.

In summary, escrow agent can facilitate a smooth transaction. However, it is important for all parties to understand that the obligations of the escrow agent must be very clearly set out in an escrow agreement.

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Source: Marcus Wallman, Special to Property WeeklyPW

The author is a Partner of Al Tamimi & Company

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