Escrow is the process of depositing funds or other things of value, like legal documents and titles, with a neutral third party until an agreed-upon action occurs. The way escrow works in California is slightly different than how it works in other parts of the country.
Defining the steps of the process
In California, ‘escrow,’ as it relates to commercial real estate transactions, typically refers to the settlement process of a transaction. Money and necessary documents will be deposited with the neutral third party who holds onto those items until the obligations of the arrangement are met. In other states, escrow may refer to the accounts between a borrower and lender as it relates to sequestering taxes, mortgage payments and other items. For commercial real estate transactions, ‘sale escrow’ is a common form of escrow transaction. Here are some reasons why escrow can be an essential step in a real estate transaction:
- As a service, escrow minimizes some of the risks in a real estate transaction.
- The neutral third party safeguards legal documents and funds so that the buyer and seller can interact with the assurance that no funds will be released or legal documents recorded until the terms of the contract or agreement are met between the two parties.
- Escrow can be a useful tool if there is distrust between the two parties, but is also helpful in maintaining a transparent relationship where both parties agree to terms in a more formal way to prevent liability risks and adverse outcomes from agreement violations.
- In California, the party performing the escrow service must be a corporation licensed by the California Corporations Commissioner or an escrow agent who is exempt from licensing requirements like a qualified bank or, in some cases, a licensed California attorney.
Protecting your business interests during a transaction
You want to protect your interests during a commercial real estate transaction while upholding local regulations regarding real estate transactions. To explore the intricacies of this process, and to help maintain open working relationships in a deal, it would help to have an attorney experienced in commercial real estate transactions to guide you.