Suggestions for the Adoption and Use of Escrows
| Publication year | 1976 |
| Pages | 1468 |
1976, October, Pg. 1468. Suggestions for the Adoption and Use of Escrows
Mark A. Senn is an Associate with the firm of Pettit, Evers & Martin, San Francisco, California, and formerly practiced law in Colorado.
The adoption of the escrow as an indispensable part of Colorado real estate transactions can no longer be avoided. The escrow device not only offers greater security to purchasers and sellers, but also diminishes the constraints of time and pressure which customary closings induce. The escrow can act as a custodian of funds and documents, a clearinghouse for the satisfaction of contractual requirements, and an agency for the performance of clerical actions. Moreover, proper escrow instructions may create a valid real estate contract, or rescue an unenforceable one.(fn1)
In present practice, United States income tax liens, judgment liens, suits against the title, and conveyances or encumbrances of the property may intervene between the closing and the recording of the purchaser's deed. Even if such matters are found prior to closing, they often cannot be settled at a closing conference without further agreements. The escrow device can assure the purchaser that his funds are not transferred until his title is insured; and the seller, that his property is not conveyed until his payment is received. Thus, an escrow supported by a proper agreement can assure the purchaser, seller, title company, lender, broker and their attorneys that their respective interests will be protected, and their involvement with details minimized.
The word "escrow" properly refers to a "written instrument which by its terms purports a legal obligation and which is deposited by the grantor or obligor with a third party, to be kept by the third party until the performance of a condition or the happening of a certain event, and then delivered to the grantee or obligee."(fn2) In this sense, an escrow differs from a deed only with respect to delivery. Nevertheless, the practice is to use the word to refer to the transaction or arrangement of which the deed is a part. The depository is also often called an escrow, but more frequently an escrowee, escrow holder, escrow agent or stake-holder. The instrument that defines the duties of the escrow holder is called an escrow agreement, or escrow instructions.
The essential elements of a valid real estate escrow agreement are (1) a valid and enforceable contract for the sale of land;(fn3) (2) a condition; (3) a good and valid deed; and (4) a stranger or an impartial depository.(fn4) The escrow agreement may be entered into after the underlying contract in a separate instrument, or it may supplement an existing
contract, or it may be the contract itself. By familiar rules of construction, the escrow instructions and a separate contract will be read together to ascertain the agreement, but if the two conflict on the same subject matter the subsequent agreement will prevail. The contract, of course, together with the escrow agreement if there is one, must satisfy the Statute of Frauds
In Colorado, written or oral escrow agreements are permissible but parol evidence will not be admitted to vary a prior or contemporaneous written instruction.(fn5) Written agreements are preferable because they protect the escrow holder, are evidence in the event of breach, advise the purchaser and seller of their duties, and may provide the writing necessary to rescue a contract from the Statute of Frauds. The most satisfactory method seems to be the use of a real estate contract in the form of joint escrow instructions. Once the escrow instructions have been executed, and the documents deposited, the agreement is unrevocable, absent agreement to the contrary.(fn6)
The escrow holder must be a stranger to the transaction. Legally, the escrow is a limited agent for both the seller and the purchaser. The escrow cannot be the grantee,(fn7) and although there have been suggestions to the contrary,(fn8) recent experience has shown that an attorney should avoid acting as an escrow, or appearing to do so, when his client may be a depository.(fn9) Prior to the satisfaction of the condition of the escrow instructions, the escrow is the agent or trustee for both depositors. When the condition of the escrow agreement has been satisfied, the escrow holder is no longer a dual agent but becomes the agent for each of the depositors (for example, for the purchaser's agent for the delivery of the deed and for the seller's agent for the delivery of money). For this reason, if the escrow embezzles the money prior to the satisfaction of the condition, the purchaser bears the loss, but if after, the seller does. The satisfaction of the condition in the...
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