Escrow in Contracts: A Plain-English Explanation
What Is Escrow?
Escrow is an arrangement where a neutral third party holds money, documents, or assets on behalf of the contracting parties until specified conditions are met. Once those conditions are satisfied, the escrow agent releases the held items to the appropriate party.
You encounter escrow in many situations: real estate closings, business acquisitions, software source code deposits, and online marketplace transactions.
How Escrow Works
- The parties agree on escrow terms, including release conditions, in their contract
- A neutral escrow agent (often a bank, title company, or specialized escrow firm) is selected
- Funds or assets are deposited with the escrow agent
- The escrow agent verifies that release conditions have been met
- Upon verification, the agent distributes the held items per the agreement
Common Types of Escrow
- Real estate escrow — Holds the buyer's deposit and distributes funds at closing when title transfers
- M&A escrow — Holds a portion of the acquisition price to cover potential indemnification claims post-closing
- Software escrow — Holds source code that gets released to the licensee if the vendor goes bankrupt or fails to maintain the product
- Construction escrow — Holds project funds and releases them as construction milestones are completed
What to Look For
- Escrow agent selection — Both parties should agree on a reputable, independent escrow agent
- Release conditions — These must be clearly defined and objectively verifiable
- Dispute procedures — What happens when parties disagree about whether conditions are met
- Fees — Who pays the escrow agent's fees, and how much they are
- Interest — Whether the deposited funds earn interest and who receives it
When to Consult a Lawyer
Consider consulting an attorney when escrow terms are complex or when significant amounts are at stake. A lawyer can help ensure the release conditions are clearly drafted and that the escrow agreement protects your interests.
This article is for informational purposes only and does not constitute legal advice. Consult a licensed attorney for guidance specific to your situation.