What is Escrow? (Civ. Code § 1057)

Underwood-Blog-Images-300x300An escrow is a tool used in real estate transactions to ensure that the purchase and sale of property occur as intended. At its core, it is merely the “holding” of significant property documents (like the deed) and the down payment for a piece of property. This ensures that the actual purchase of the property is not completed until all the conditions of the sale are actually met, such as the buyer officially obtaining a loan for the transaction.

As the California statutes put it, monies and evidence of title to property are “held by a third person until the happening of a specified event or the performance of the prescribed condition.” (Fin. Code § 17003.)

Escrow has numerous upsides, though it is admittedly an added expense on what it already an expensive transaction. Considering the importance of buying real estate, however, it is a safe option that ensures both buyer and seller leave the transaction satisfied.

Why do people use Escrow?

Real estate transactions are some of the most paper-intensive and complicated dealings out there. And, of course, the end goal is of monumental importance. If you’re buying a home, then naturally, you would like the ability to ensure that the money for the purchase is not transferred to the seller until the deed is ready to be transferred over to you.

Escrow is the means of ensuring this transaction takes place fairly. This way, buyers and sellers are both protected. By depositing the money and deed to the property into escrow, respectively, parties to a property sale are ensured that both are delivered only on the occurrence of some condition; that being, the money for the property is ready at the same time the deed is ready to be delivered. (Summit Financial Holdings, Ltd. v. Continental Lawyers Title Co. (2002) 27 Cal.4th 705, 711.)

What is an Escrow Holder?

If someone wants to deposit their documents or money into an escrow account, then they must first select an escrow “holder” to do so.

When people think of escrow companies, they usually default to the largest organizations that act as both title insurers and escrow holders. Companies like First American Title are ubiquitous in the escrow industry, and there are many advantages to hiring their services. For instance, these companies tend “to have experienced escrow officers and can easily coordinate escrow work with the title side of the transaction.” (Rutter, Cal. Prac. Guide Real Prop. Trans. Ch. 4-F. § 4:568.) These companies, due to their size, are also subject to various statutory restrictions on their behavior and conduct. (Ins. Code § 12404.)

Escrow holders, however, are not limited to massive title insurance companies. There are plenty of local unaffiliated escrow companies across the state, and even attorneys can act as escrow holders should the parties to the transaction so choose. That said, this is a risky endeavor, even for a competent attorney. Conflicts of interest are bound to arise if there are any problems with closing the transaction, especially when the attorney has been formally retained by only one of the parties.

What does the Escrow Holder do?

Because escrows are based on contract, and due to the nature of the transaction, escrow holders are what are legally referred to as “fiduciaries” to the parties. (Hannon v. Western Title Ins. Co. (1989) 211 Cal.App.3d 1122, 1128.) This means that an escrow holder has legal “duties” to specifically follow whatever escrow instructions the parties agree upon.

Typically, the escrow holder’s main duty is to receive the down payment from the buyer and place it into an account. But the holders can also obtain title reports for the parties, help procure title insurance, “record” the relevant title documents with the county recorder, and do anything else for which the escrow instructions provide.

What are Escrow Instructions?

In order for an escrow to be created, parties must sign and deliver “escrow instructions” to the escrow holder. (Civ. Code § 1057.) These instructions are paramount to the transaction, ultimately dictating every term of the escrow.

They will provide for which documents are to be delivered, the terms of the transaction itself, whether the down payment will be placed in an interest-bearing account, attorney’s fees provisions, and much more.

And while escrow instructions do not need to be written to be legally effective, it is more than advisable to use written instructions to protect against ambiguities and competing interpretations. After all, escrow holders have a legal duty to follow escrow instructions to a tee. It is, therefore, best practice for both buyer and seller to agree to written instructions.

How do You Close Escrow?

Escrow instructions almost universally include a closing date. This is the date by which the deed must be recorded and the down payment received. Failure to abide by the closing date can throw the entire transaction into flux, causing significant headaches for all involved.

If time is not of the essence, however (and this is a rare case), then the failure of the escrow holder to perform all the conditions of the transaction isn’t necessarily fatal to the transaction as a whole.

That said, most escrow instructions do include a “time is of the essence” clause. Thus, an essential time for performance may be mandated when so required by the very nature of the underlying escrow contract. (Conservatorship of Buchenau (2011) 196 Cal.App.4th 1031, 1039.)

Another key feature of closing escrow is the costs and fees. Almost always, these fees will include those of the holder, recording fees, and transfer taxes, to name a few. (Rutter § 4:629.) How these costs are distributed is up to the parties and can often be a source of debate when drafting or negotiating the escrow instructions. Whatever the case may be, closing fees are perhaps the biggest downside to the use of escrow in the first place. They can be wildly expensive, especially for more complicated transactions involving a significant purchase.

How can the Attorneys at Underwood Law Assist You?

Buying or selling property is both exhilarating and stressful. For those doing it for the first time, the process can appear daunting. Mountains of paperwork need to be signed, deals can fall through, and closing a sale can be draining and time-consuming.

As each case is unique, property owners would be well-served to seek experienced counsel familiar with the complexities of escrow and disputes stemming from it. At Underwood Law, our knowledgeable attorneys are here to help. If you are concerned about whether your escrow instructions are fair, worried that your escrow holder has violated their fiduciary duties, or if you just have questions, please do not hesitate to contact our office.

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