It is very important to know and understand the use of the term “escrow” in real estate transactions.
Here’s the basic definition:
a contract, deed, bond, or other written agreement, thing or property deposited with a third person, by whom it is to be delivered to the grantee or promisee on the fulfillment of some condition.
So, in every escrow situation, there are three parties:
The Grantor is the principal, vendor, the seller, the owner, the transferor, the promisor or the person who has the title, possession and ownership of the property to be transferred.
The Grantee is the purchaser, the buyer, the transferee, the promisee, recipient or the person to whom the property is ultimately to be transferred. This is the new owner.
The Middleman is the person entrusted with carrying out the delivery of the property. This person is the Agent, the escrow agent, transfer agent, trustee, the lawyer, solicitor, conveyancer, notary, fiduciary or other party who has received and is acting upon instructions.
Property or Subject
Naturally, there needs to be some property or subject matter of the escrow. In this regard, it can be any of the following:
- other written agreement,
- thing or
This is a fairly large group. In fact, the property doesn’t even have to be something physical. It can be intellectual property.
These are the actual set of conditions governing the release, transfer or conveyance of the property. So, in a simple escrow arrangement, this is the agency contract between the Principal and the Agent, empowering and authorizing the agent to act in the circumstances.
Solicitors’ Escrow in Ontario
Not everything can be done at once, and instantly. So, for any kind of a closing we need some time, whether that’s a few minutes or a few hours. There’s a standard escrow agreement between solicitors acting in real estate transactions.
The basic principle to be followed is that “nothing happens until everything happens”.
The vendor’s solicitor will deliver the following:
- Direction re funds
- Statement of adjustments
- Mortgage discharge statement for institutional mortgages
- Undertaking to register discharge of mortgage
- Discharge for individual mortgages
- Old title documents
- Undertaking to re-adjust
The purchaser’s solicitor will deliver the following:
- Direction re Title
- Mortgage to be given to vendor
- Undertaking to re-adjust
- Certified funds, as directed
Now, both sets of documents will be placed in envelopes, sealed and couriered to the offices of the other law firm.
Naturally, they don’t arrive at the same time. The deal, of course, is that no one can do anything with the documents until the other side has received its package.
Assuming, everything is in order, in both cases, they will jointly go on the website governing real estate transactions hosted by TERANET and complete the transfer of the property from the vendor to the purchaser. Once that has taken place, the escrow is lifted and the transaction is all deemed to have taken place at the same time. In other words, you don’t get the deed unless you paid the money, and you don’t get the money unless you’ve delivered the deed.
So, first the exchange takes place, and then later the deal is consummated.
Prior to the electronic registration system, both law offices would send representatives to the registry office. The draft documents have been reviewed and approved ahead of time. Once the deal was finished, the deed would be tendered for registration. Usually, this took just a few minutes, on busy days, this could take a couple of hours. So, during that particular waiting period, the transaction was in escrow. In effect, you could still undo the transaction. The documents exchanged would be returned to the original party and the transaction would not close.
The Nature of Escrow
In a strict legal sense, the two aspects of ownership are separated in escrow transactions:
- Possession, and
For complete and full ownership, you need both possession and ownership. By separating the two, “possession” can be transferred at one time, and “title” can follow later.
So, one party delivers “possession” and holds onto “title”. The deal isn’t finished until “title” follows. And, you can pass title to everything at one time and in one instant.
Escrow Real Estate Transactions in Other Jurisdictions
Conveyancing practice varies from one jurisdiction to the next. Escrow agents in the United States often act for both parties. Registration and receipt of proper confirmation can sometimes take over a month. So, in those cases, arrangements are made to permit the buyer to occupy the premises during the 4 to 6 week escrow period. As I mentioned, this all takes place in Ontario within an hour or two, so there’s never been a need for such occupancy.
Real Estate Agents and the Use of Escrow
This is interesting! In Ontario, real estate agents just don’t use it. The occasion arises, but they often associate escrow with the solicitors’ conveyancing role.
The Deposit Cheque and the Use of Escrow
This is the first simple and practical use for a real estate agent. The Offer is drawn, the deposit cheque is written and both documents are delivered to the listing agent.
So, what happens? The listing brokerage deposits the cheque in its trust account. Why? The brokerage has 5 days from the date of receipt to deposit the cheque. Fortunately, the Act was amended to extend the time period to 5 days. Previously, it had been 2 days.
Here, we have the deposit cheque “cashed” and the vendor has not even accepted the Offer. The negotiations continue, but the deposit is already gone. That’s fine, if that was the intention, but usually, the purchaser didn’t want the cheque cashed until there was a deal.
Buyers’ agents will now often produce the cheque but not hand it over. If the intention is to show evidence of a cheque, certified or not, why not consider an escrow arrangement:
- Buyer’s agent delivers “possession” only, of the deposit cheque
- The condition, or the escrow instructions are to hold onto it, until there is a deal
- Once, there is an accepted Offer, the “title” to the cheque also passes
- The Listing agent delivers the cheque, now that it has been released from escrow to the brokerage
- The brokerage deposits the cheque into its trust account
A simple cover letter does the “trick”. Just point out and explain the arrangement in the letter, and everyone will be happy. No one really wants the bother of dealing with the deposit and the return of the funds if the deal never materializes.
Other Escrow Opportunities for Real Estate Agents
Whenever you are in possession of some property that you have to deliver to the other side, remember the escrow arrangement. So, if you have:
- Title documents
- Bills of sale
- Replacement parts
- Operating instructions
- Building plans
- Building permits
- Combination to locks
- Manuals for equipment
- Alarm system codes
- Lock box codes
just remember that they are should be subject to an “escrow” arrangement. You might part with possession, but title should only pass when the transaction closes, otherwise, there may be no obligation to return them.
Keys fall into a special category as do alarm codes etc. We’ll deal with them separately.
In the meantime, be safe, use “escrow”!
Brian Madigan LL.B., Broker