Escrow agreements in real estate transactions

In real estate transactions, especially those involving large sums, the figure of the escrow agreement has become a common and accepted practice in order to successfully carry out a business.

This type of contract, onerous by its nature, is not an ordinary deposit agreement, but shares similarities with it in terms of its objectives. At the end of the day, the purpose of the escrow agreement in real estate transactions is the custody by a third party (in Costa Rica, duly authorized to operate), with respect to foreign funds, to be disbursed to one of the parties of the real estate transaction, once previously agreed conditions are met. Thus, the funds from the buying party will be transferred to the selling party during the real estate transaction, under the custody and administration of that third party: the custody agent. In practice, it is usually the buyer’s down payment, deal signal or down payment, that is transferred to the custodial agent, without prejudice to other existing tracts or the same final payment, also being included within this dynamic.

The evolution of the real estate sector has placed the fund custody contract as a parallel requirement and contract an accessory to option contracts or promises of sale. This service clearly entails the payment of a sum of money to that third party who provides the custody service, which must also be analyzed between seller and buyer, before entering such a contract. The distribution of such expenditure shall be assumed by the person designated by the parties so by mutual agreement.

Beyond the cost of having an escrow, the advantages of this type of agreement are several. Among them we have:

· Business confidence: the custody agent’s participation ensures that parties have greater transparency in the business.

· Intervention of a neutral party: we are talking here about the custody agent, who will ensure impartiality in the business regarding the payments between parties.

· Transfer of liability to the agent: the funds are held by a third party, who will have a contractual obligation to turn them to the appropriate party.

· Liquidity security to the seller: the seller is assured that the buyer has the necessary resources to acquire the property.

· Efficiency and effectiveness of the transaction: intimately linked to the previous immediate point.

It is of the utmost importance that the rules of the game are determined in advance clearly and expressly in the contract of choice or promise of sale, mentioning that a escrow agreement between the parties will be signed, which will support that main contract. Subsequently, buyer and seller, together with the fund custody agent, will sign the escrow contract, which, among other elements, will determine payment and disbursement instructions; amounts to deposit and disburse; bank accounts; custody agent’s fees; and responsibility of the parties involved.

At Lexincorp we can advise you on the subject. You can contact us at the email address

Written by:

Carlos Cartín


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