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escrow

[n. es-kroh, ih-skroh; v. ih-skroh, es-kroh]

Instrument, such as a deed, money, or property, that constitutes evidence of obligations between two or more parties and is held by a third party. It is delivered by the third party only upon fulfillment of some condition. In commercial usage, this condition is most often the performance of an act (e.g., payment) by the party who is to receive the instrument. Escrow is also used in family transactions (e.g., when a death in the family results in an instrument being delivered to another family member).

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Encyclopedia Britannica, 2008. Encyclopedia Britannica Online.

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Escrow

Escrow is a legal arrangement in which an asset (such as cash, real property or other tangible assets) is deposited into safekeeping (e.g., a bank account) under the trust of a neutral third party (escrow agent) pending satisfaction of contractual contingency or condition. Once the condition has been met, the escrow agent will deliver the asset to the party prescribed by the contract.

Alternative definitions of a escrow account are 'an account established by a broker under the provisions of the license law for the purpose of holding funds on behalf of the broker's principle or some other person until the consummation or termination of a transaction' or 'a trust account held in the borrower's name to pay obligations such as property taxes and insurance premiums'.

Types of escrow

Escrow is best known in the United States in the context of real estate (specifically in mortgages where the mortgage company establishes an escrow account to pay property tax and insurance during the term of the mortgage). Escrow companies are also commonly used in the transfer of high value personal and business property, like websites and businesses, and in the completion of person-to-person remote auctions (such as eBay). In the UK escrow accounts are often used during private property transactions to hold solicitors' client's money, such as the deposit, until such time as the transaction completes.

Escrow is also known in the judicial context. So-called escrow funds are commonly used to distribute money from a cash settlement in a class action or environmental enforcement action. This way the defendant is not responsible for distribution of judgment monies to the individual plaintiffs or the court-determined use (such as environmental remediation or mitigation). The defendant pays the total amount of the judgment (or settlement) to the court-administered or appointed escrow fund, and the fund distributes the money (often reimbursing its expenses from the judgment funds).

In some jurisdictions, real estate brokers are considered to act as escrow agents when they accept deposits or earnest money for the purchase of real property. In many jurisdictions, the duties of such agents are codified.

Escrow is also used in the field of automated banking and vending equipment. One example is automated teller machines (ATMs), and is the function which allows the machine to hold the money deposited by the customer separately, and in case he or she challenges the counting result, the money is returned. Another example is a vending machine, where the customer's money is held in a separate escrow area pending successful completion of the transaction. If a problem occurs and the customer presses the refund button, the coins are returned from escrow; if no problem occurs, they fall into the coin vault.

Digital assets

Source code escrow agents hold source code of software in escrow just as other escrow companies hold cash. The highly valuable (and often secret) source code is only released by the agent to either party upon specific terms of the escrow agreement (such as failure to maintain the application, transfer of ownership of the intellectual property rights, or the liquidation of the owner of the source code).

Legal implications

Not all escrow agreements impose the duties of a legal trustee on the escrow agent, and, in fact, in many such agreements, escrow agents are held to a mere gross negligence standard and benefit from indemnity and hold harmless provisions.