Escrow

An escrow is an account where part of the purchase price is deposited with a neutral escrow agent. The money serves as security for possible later claims by the buyer. Once the agreed deadlines and conditions have been met, the amount is released.

Amount and term depend on the risks secured, with the term usually aligned to the limitation periods for warranties and longer for tax matters. The economic purpose is to protect the buyer against the risk that a seller is no longer available or solvent after receiving the price, which applies in particular to private individuals, foreign sellers and funds that distribute proceeds to their investors. In Germany the function is often performed through a notary's trust account or a bank acting as escrow agent, with release conditions requiring precise drafting: who may raise claims, in what form, what happens with disputed claims, who receives the interest and how partial releases are handled.

Alternatives are a simple holdback retained by the buyer, which is less secure for the seller, a bank guarantee, or warranty and indemnity insurance, which materially reduces the need for escrow amounts and is therefore increasingly replacing it in auction processes. For the seller every euro held back is a deferred and uncertain receipt. The release mechanism is essential in practice, because payment may, for example, require joint instructions from both parties or a specified decision. Without clear provisions an amount can remain blocked for years if one side objects. Partial release of the unclaimed portion at fixed intervals has therefore proven itself, together with express provisions on how a disputed claim is handled and who bears the escrow agent's costs.