An escrow is a financial instrument whereby two or more parties involved in a legal transaction deposit assets, documents, and/or money with an independent third party known as the escrow agent. The escrow agent holding the assets, documents, and/or money in escrow shall deliver them to a beneficiary on the occurrence of a contractual condition agreed by the parties in the escrow agreement. The escrow agreement also contemplates the escrow instructions that must be complied with by the escrow agent.
In general terms, an escrow is used for any legal transaction in which it might be helpful for the parties to have the escrow agent hold the assets, documents, and/or money in escrow while the contractual condition agreed by the parties is fulfilled. For example, an escrow is frequently used in:
- Real estate transactions between the buyer and the seller of a house. The money for the payment of the house is held in escrow by the escrow agent. Among others, using the escrow allows the seller to conduct the inspections required by the buyer, and also serves to assure that the buyer has sufficient funds to complete the purchase transaction. The escrow agent shall deliver to the seller the money held in escrow if the conditions for the purchase of the house are satisfied.
- Mergers and acquisitions transactions between the buyer and the seller of stock. After the closing of the transaction has taken place, the escrow agent holds a portion of the purchase price in escrow for a period of time set by the parties. Once such a period of time has elapsed, the escrow agent shall deliver to the seller the portion of the purchase price held in escrow, provided that the conditions established in the stock purchase agreement are met (i.e. assure the performance of the post-closing obligations of the parties, confirmation of representations and warranties, etc.).
[Last updated in July of 2021 by the Wex Definitions Team]