Escrow

What it means

Escrow is safekeeping with an independent third party - a notary, a bank, a lawyer - who releases money or documents only once agreed conditions are met. It solves the standoff where neither side wants to perform first.

In a company or property sale it is standard: the buyer deposits the price, the seller transfers the share or title, and the escrow agent releases the funds once the register entry is made.

Escrow differs from a lien. A lien gives the creditor priority in being paid out of an asset, but the money or property stays with the debtor and the risk of insolvency remains. In escrow the money has already left the buyer while the seller does not yet have it, so the risk of non-payment is removed rather than merely reduced.

How it works in practice

In transactions part of the price is usually held back in escrow for the period in which risks found during due diligence could surface - tax assessments, disputes, employee claims. Release conditions and timing belong in the term sheet and then in the contract.

IT has source code escrow too: the code sits with a third party and is released to the customer if the supplier ceases to trade. For bespoke systems it is practical insurance against vendor lock-in.

In Slovakia notarial or attorney escrow is most common, with bank escrow in larger deals. Money placed in escrow is not yet shown by the buyer as the purchase price paid: we keep it apart from the bank account as a receivable from the escrow agent and book the settlement of the liability only on the date of release.

What to watch out for

Escrow is only worth something when the release conditions are written measurably. "On successful handover" invites a dispute; "on registration of the change and delivery of the confirmation" is something the agent can verify.

Escrow has its own cost and rules: the agent charges a fee and insists on precisely defined documents before release. If the contract does not say who pays the fee and what happens to the money if a condition is not met by a given date, the funds can stay frozen until the parties agree or a court or arbitrator decides under an arbitration clause.