An escrow agreement is constituted by the legal instructions that outline the terms and conditions of a given escrow arrangement. In an escrow, a legal document or property are delivered by a promisor to a third party to be held for a specified amount of time or until the satisfaction of a condition, at which time the third party is legally obliged to hand over the document or property to the promisee. The document or property may be referred to as ‘the escrow’, and the delivery is said to be ‘in escrow’.
An escrow agreement must fully detail the conditions of the escrow arrangement, and normally includes information like the identity of the third-party (escrow agent), relevant definitions, the escrow funds, detailed conditions and pre-requisites for the release of these funds, guidelines as to the acceptable use of the funds by the escrow agent, their duties and liabilities, fees, expenses, and the jurisdiction in the event of resulting litigation or legal action.
An escrow agreement is used for protection when transacting. It allows a party to commence a relationship or transaction with certainty that the other party can fulfil their obligations. Escrow agreements are most commonly used in the securities industry, for the sale or grant of stocks, and in real estate, where notaries or lawyers may act as escrow agents by holding the seller’s deed to the property to allow the buyer time to perform due diligence before purchase, while assuring the seller their capacity to close the deal.