An escrow agreement is a type of legal agreement that involves three different parties and works to ensure that a transaction goes as planned. For some types of transactions, there are just buyers and sellers. The buyer and seller must depend on each other, in such a case, to see the transaction through smoothly. Unfortunately, there’s always a chance that either party will fail to live up to his part of the bargain. Escrow agreements help make transactions more risk free by putting a third party in charge of releasing payment once the terms of the contract are met.
Each escrow agreement has a seller, a buyer, and a third party. In legal terms, the buyer is often referred to as the depositor while the seller is called the beneficiary. The third party to an escrow agreement is called an escrow agent.
Often, escrow agreements are used when a buyer must make a deposit for something he plans to buy. For example, if a person wants to buy a home, the terms of the sale may require the buyer to pay a deposit, which is held in escrow. In such a case, the escrow agent may be the seller’s lawyer. The lawyer doesn’t then go on to give the money to the seller, however. Instead, he safeguards the deposit until the sale of the residence is complete.
Usually, parties to an escrow agreement agree that the money held in escrow will be kept in a special account, which is typically referred to as an escrow account. Both parties have a right to know where the money is being held on deposit. With the exception of the escrow agent, however, neither party has access to the account or the ability to go to a financial institution and withdraw it. When the transaction is complete, the escrow agent transfers the money to the seller. If the buyer and seller decide to cancel the agreement, the escrow agent returns the money to the buyer, unless the agreement states otherwise.
While escrow agreements are frequently used in sales involving real estate, they can be useful in many other types of situations as well. For example, an escrow agreement may be drafted as part of the sale of a group of Web sites. In such a case, the parties may sign an escrow agreement, stating that the seller will begin to transfer the site's files to the buyer once the buyer has provided an escrow deposit. After the buyer has examined the files and determined them to be complete, the escrow agent then transfers the funds to the seller.