ESCROW AGREEMENTS

ESCROW AGREEMENTS

    Now that you have gotten your Deed properly prepared, and the Encroachment Agreement has been signed by the seller and the adjoining property owner and recorded at the register of deeds, the date of closing is upon us.  The agent for the buyer calls one hour p  rior to closing at the walk through and describes for you the serious repairs that need to be made prior to closing.  The real estate agent goes on to state that the seller will be leaving town in two hours for a missionary trip to the Middle East and will not be available for closing at any subsequent time.  The seller has greed to set aside money necessary to effect the repairs and the buyer is agreeable to the same.  The parties desire that you as the attorney prepare an agreement whereby you hold the money until such time as the repairs are made.

    If the buyer is obtaining a loan to purchase of the property, it is important to first contact the lender to see whether or not the lender will allow the escrow of money for the purpose of repairing items on the subject home after closing.  As a general rule, lenders do not mind the escrow of money as long as the particular loan type does not also forbid the same.  Lenders involved in VA and FHA loans may prove to be more difficult in allowing the escrow of money.

    Assuming the lender allows you to escrow the money, the real estate practitioner should keep in mind several important factors in drafting the escrow agreement.  Attached hereto is a copy of an escrow agreement which we generally use in my office.  As in all other forms, identification of the parties is important but in this case, being that it is the buyer and seller, the real estate practitioner should have these names readily available in his file.  The Escrow Agreement should first an foremost thoroughly and completely identify the repairs for which money is being set aside.  Once the purchaser moves into the home and discovers additional repairs which need to be made, it is important to note that the money being held in escrow is only for those items set forth in the Escrow Agreement.

    If the parties have agreed to a contractor who will perform the repair, identify the contractor, the scope of work to be performed, and if it all possible, attach a copy of his quote to the Escrow Agreement to further identify the work to be performed.  If no quote has been obtained, then my office follows a general rule that we escrow one and one-half times the anticipated amount of money necessary to effect the repairs.  In doing so, we acknowledge the fact that it is the seller’s obligation to have made the repairs prior to closing and the additional sums of money are there to protect the purchaser should the cost of repairs exceed the anticipated amount.

    Another important factor to include in the Escrow Agreement is a time limitation in respect to the repairs.  In setting forth a time restriction, the real estate practitioner must consider the complexity of the repairs and the availability of contractors either due to the season or weather problems.  The attorney should strive to allow the seller adequate time to complete the repairs, but at the same time, keep an emphasis on completing the repairs in a timely manner.  For example, if the seller is obligated to replace a screen door, my office would probably allow a couple of days to a week in time for the seller to complete the repairs.  If however, the seller is obligated to replace the roof on the subject home, my office may allow from a week to 30 days to effect such a repair.  In our Escrow agreement, if the repairs are not made in a timely manner, then we as the escrow agent are given the right to distribute the sums held in escrow directly to the buyer and allow the buyer to utilize said funds for the purpose of effecting the repairs.

    Also note that as an escrow agent you are undertaking an additional liability.  It is important to limit your liability as best as possible by including a paragraph whereby you as escrow agents cannot be held responsible for breaching your duties as escrow agents unless you act wantonly and with intent to harm one of the parties.

    Another important consideration is to set forth whether or not the monies being escrowed constitutes the sole remedy of the buyer should the repairs not remedy the problem.  If at the closing you are representing the purchaser, be sure to include language that the amounts held in escrow are believed to be sufficient for the purposes of repairing the defects in the subject property but that if additional items or monies are necessary to effect the repairs, that the seller shall remain obligated to said additional efforts.  If the seller conversely is your client, you should strive to have the buyer agree that the sums escrowed are payment in full of the problem and that the buyer will hold the seller and the seller’s agent harmless against any additional expense above the escrowed amounts.  The inclusion of this language again lends support to a thorough and complete agreement of the parties being set forth in the written instrument regarding the escrow.