Updated October 13, 2020:

An escrow agreement is a contract that defines an arrangement between parties where one party deposits an asset with a third party. This third party then delivers the asset to the second party when the contract conditions are met.

What Is Escrow?

Originally, the term escrow only applied to the deposit of a document or formal instrument, but today, this term often describes a money deposit. Anything that has value can be put in escrow, such as the following:

  • Stock
  • Money
  • Deed
  • Written instrument
  • Mortgage
  • Promise to pay
  • Bond
  • License
  • Patent
  • Check

Either the owner of the asset or an obligor, promisor, or grantor places the escrow into the custody of a third party. The third party holds onto it until the promised performance or contingency occurs.

Escrow may also refer to a written document that's retained by a third party until the act or performance that's specified in the writing occurs.

The escrow agreement includes the directions given to the party who accepts delivery of the item or document. It's a binding agreement between the party who makes the promise and the one to whom the promise is made.

Written documents are held in escrow until the underlying agreement is accomplished. Once the condition outlined in the escrow agreement is met, the party that holds the written agreement hands it over to the party that's entitled to receive it, otherwise known as the second delivery. Any written document executed in accordance with all the necessary legal formalities may be put into escrow.

About Escrow Agreements

Escrow agreements outline the terms and conditions between involved parties. The arrangement is usually between three parties:

The agent keeps the asset and delivers it to the beneficiary when the conditions outlined in the contract are met. The agreement must include full details of the conditions.

Escrow agreements usually include the following information:

  • Identity of the appointed agent
  • Definitions for important expressions in the agreement
  • Escrow funds
  • Conditions for release of the funds
  • The agent's acceptable use of the funds
  • The agent's obligations and liabilities
  • The agent's expenses and fees
  • Jurisdiction and venue, in case legal action takes place

Courts are normally strict in requiring complete performance before releasing the deposit. However, there should be a reasonable period allowed for performance. The parties may agree that time is of the essence. In this instance, delays beyond the time specified in the agreement may forfeit the first party's rights to the property in escrow.

Who Uses Escrow Agreements?

Escrow agreements can be useful in business deals when one party decides it should only move forward if it has assurances that the other party will fulfill its obligations. Sellers want to be sure they receive payment if they send goods to buyers.

In an escrow agreement, they'll agree that the buyer will place funds in escrow and give detailed instructions on how and when to disburse funds to the seller when the goods arrive. Escrow agents, like attorneys, are bound by the agreement's terms.

In the securities industry, escrow agreements are usually used to deliver stock. They may be used in the context of initial public offerings or when they're granted under stock option plans. Stocks may be held in escrow because a minimum amount of time needs to pass before their owners can freely trade them.

Real estate deals also often use escrow agreements. The following typically act as escrow agents in real estate deals:

  • Attorneys (anywhere in the world)
  • Title agents (in the U.S.)
  • Notaries (in countries with civil law)

These agents hold the seller's deed, allowing the buyer to perform due diligence, such as conducting inspections, while giving sellers the assurance that buyers have the ability to close the deal.

Escrow agreements, like contracts, can be complex. However, they provide important assurances to the involved parties. When you consider the value that escrow may hold, having these assurances in place can provide peace of mind. No one wants to lose out on valuable property or funds, and a trusted escrow agent helps to make sure the transaction goes smoothly.

Escrow agreements help make sure that both parties in a transaction hold up their end of the deal. If you need help understanding escrow agreements, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.