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Escrow Agreements At The Closing Table
By Steven R. Greenberg
Often overlooked at the real estate closing is the importance of a well-drafted escrow agreement for repairs. If the Seller has not completed the repairs pursuant to the Buyer’s notice of property defects or if an issue arises as part of the final walk-thru, the Buyer and Seller may agree to escrow funds with the closing agent for repairs to be completed after closing. Usually, the closing agent will throw together a very simple escrow agreement, or ask the REALTOR® to write an escrow agreement, which fails to deal with all issues regarding the escrow funds, including the following minimum requirements:
1. The escrow agreement should clearly identify the closing agent, i.e. who will be holding the escrow funds;
2. The names of the parties for whose benefit the funds are being held, i.e. the Buyer and Seller;
3. The amount of the escrow funds. This is a trap for the unwary. The Buyer’s agent should have the Buyer involved in the decision as to the amount to be held in escrow. If possible, the escrow funds should be based on the amount of a firm proposal, plus an amount equal to 25% to 50% for miscellaneous overrun costs while the work is being done;
4. The exact purpose of the escrow funds must be stated in the escrow agreement to ensure that the escrow funds will not be claimed by the Buyer for any repairs other than those which were contemplated by the parties. If a proposal for work is available, it is best to attach it to the escrow agreement so it will be clear as to the purpose of the escrow funds.
5. The time period for the holding of the escrow funds by the escrow agent should be set forth in the escrow agreement. Of course, this is tied to the time period for the repairs to be made;
6. It is easy to overlook the requirement of stating in the escrow agreement who will be responsible for having the repairs made, i.e. the Buyer or the Seller. However, this can be a real problem if the Buyer expects that the Seller is going to make the repairs or vice-versa, and the other party has a different understanding;
7. The procedure for the release of the escrow funds should be clearly set out in the escrow agreement. If the Seller is responsible for having the repairs made, the escrow agreement should require that the Buyer acknowledge in writing to the escrow agent the Buyer’s approval of the repairs that were made before the escrow funds are released by the escrow agent. Also, it is necessary to address the situation where the repairs are not completed properly. Finally, the escrow agreement should provide for the disposition of any excess funds after the repairs have been completed and paid for; and
8. The escrow agreement should provide for a dispute resolution procedure if the parties have a disagreement over the disposition of the escrow funds.
The REALTORS® in the transaction may also want to make sure the escrow agreement addresses the potential liability of the Seller for additional amounts that may be necessary to complete the repairs. From the Seller’s perspective, the Seller would want the Seller’s liability to be limited to the amount of the escrow funds. On the other hand, the Buyer may want the Seller to pay any additional costs to complete the repairs. In circumstances of this type, I keep in mind my professor who use to say “where you stand depends on where you sit” and that certainly applies in the preparation of a well-drafted escrow agreement.
Steven R. Greenberg has practiced Real Estate law in Sarasota since 1986 and is a shareholder in the law firm of Icard, Merrill, Cullis, Timm, Furen & Ginsburg, P.A. He is board certified by the Florida Bar in real property law and frequently lectures on matters involving real estate transactions. Steven may be reached at (941) 365-6216 or by calling Linda Witt, Director of Marketing, directly at (941) 586-4412 or by email at REinfo@icardmerrill.com [2].
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