What is an 'Escrow Agreement'

An escrow agreement is a legal document that outlines the terms and conditions between parties involved in an escrow arrangement. An escrow agreement defines the arrangement by which one party deposits an asset with a third person (called an escrow agent), who, in turn, makes a delivery to another party if and when the specified conditions of the contract are met.

BREAKING DOWN 'Escrow Agreement'

An escrow agreement must fully detail the conditions of the escrow arrangement between the parties. It normally includes such information as the identity of the appointed escrow agent, definitions for any expressions pertinent to the agreement, the escrow funds and detailed conditions for the release of these funds, the acceptable use of funds by the escrow agent, the duties and liabilities of the escrow agent, the escrow agent's fees and expenses, and the jurisdiction and venue in the event of a legal action.

Practical Uses of Escrow Agreements

In the context of a business transaction, there may come a time when it is in the best interest of one party to move forward only if it knows with absolute certainty that the other party can fulfill its obligations. This is where the use of an escrow agreement comes into play.

For example, a company purchasing goods internationally wants to be certain that its counterpart can deliver the goods. Conversely, the seller wants to ensure that it gets paid if it sends the goods to the buyer. To resolve the issue, the parties can put an escrow agreement in place. In this agreement, they can agree that the buyer will deposit the funds in escrow with an agent and give irrevocable instructions to disburse the funds to the seller once the goods arrive. The escrow agent, likely an attorney, is bound by the terms of the agreement.

In the securities industry, stocks are often the subject of an escrow agreement, in the context of an initial public offering or when they are granted to employees under stock option plans. These stocks are usually in escrow because there is a minimum time limit that needs to pass before they can be freely traded by their owners.

Escrow Agreements and Real Estate

Escrow agreements are frequently used in real estate transactions. Title agents (in the United States), notaries (in civil law countries) and attorneys (elsewhere in the world) routinely act as escrow agents so the buyer can perform due diligence, such as an inspection, on his potential acquisition while assuring the seller of his capacity to close on the purchase.

RELATED TERMS
  1. Bulk Sales Escrow

    A type of escrow agreement placed on the sale of inventory, business ...
  2. In Escrow

    An item such as money or a piece of property that has been transferred ...
  3. Third Party

    An individual or entity that is involved in a transaction but ...
  4. Escrow Receipt

    A bank guarantee that an option writer has the underlying security ...
  5. Annual Mortgage Statement

    An annual report sent to a mortgagor by the mortgagee's servicer ...
  6. Good Faith Money

    The deposit of money into an account by a buyer to show that ...
Related Articles
  1. Personal Finance

    Understanding the Escrow Process

    Everything you need to know about this interim stage of buying or selling a home.
  2. Investing

    Understanding The Escrow Process

    Learn the 10 steps that lead up to closing the deal on your new home and taking possession.
  3. Investing

    12 Steps To Closing A Real Estate Deal

    Before that new house officially becomes yours, there’s a long list of things you’ll need to accomplish during the closing process.
  4. Investing

    12 Steps to Closing a Real Estate Deal

    A long list of things needs to happen before a home becomes yours. Find out what to expect.
  5. Investing

    7 Must-Have Real Estate Contract Conditions

    It's a good idea to educate yourself on the not-so-obvious parts of a real estate contract.
  6. Financial Advisor

    How to Find the Best Life Insurance Agent

    Choosing a life insurance agent is the first and most important step in obtaining coverage. Buyers should pay attention to five key factors.
  7. Investing

    What Real Estate Agents Don't Want You To Know

    While they can be instrumental in helping you buy or sell a home, real estate agents may ulterior motives.
  8. Investing

    How Do Real Estate Agents Get Paid?

    Here's how real estate commissions on home sales really work. And, yes, they're negotiable.
  9. Investing

    How To Find The Best Real Estate Agent

    Most people don't have the time, expertise or motivation to go it alone and finding a good real estate agent becomes essential to enjoying a smooth real estate transaction.
RELATED FAQS
  1. Who manages an escrow account?

    Managing an escrow account is a job for a trusted and experienced service provider. Discover the best personal finance solutions ... Read Answer >>
  2. Do mortgage escrow accounts earn interest?

    Paying down monthly mortgage escrow accounts? Will you receive any interest on this payment? If you are, should you put more ... Read Answer >>
  3. Do landlords set up escrow accounts for their tenants' security deposits?

    Learn when and why landlords place rental property security deposits in separate escrow accounts to make sure the money is ... Read Answer >>
  4. Do FHA loans require escrow accounts?

    Here's why FHA mortgages require escrow accounts for property taxes, homeowners insurance and mortgage insurance premiums ... Read Answer >>
Hot Definitions
  1. Agency Theory

    A supposition that explains the relationship between principals and agents in business. Agency theory is concerned with resolving ...
  2. Treasury Bill - T-Bill

    A short-term debt obligation backed by the U.S. government with a maturity of less than one year. T-bills are sold in denominations ...
  3. Index

    A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is a hypothetical ...
  4. Return on Market Value of Equity - ROME

    Return on market value of equity (ROME) is a comparative measure typically used by analysts to identify companies that generate ...
  5. Majority Shareholder

    A person or entity that owns more than 50% of a company's outstanding shares. The majority shareholder is often the founder ...
  6. Competitive Advantage

    An advantage that a firm has over its competitors, allowing it to generate greater sales or margins and/or retain more customers ...
Trading Center