What is an Escrow Contract?

An escrow contract is a contract between two parties involved in a transaction that involves a third party who holds materials on behalf of the people involved in the transaction. In the contract, the parties agree to turn over documents, money, and other materials to the escrow agent. The escrow agent holds these materials until the terms set out in the contract are fulfilled, and then releases them as directed. This type of legal contract tends to be used for complex transactions where there are concerns about protecting the interests of both parties.

A common situation where an escrow contract is used is the process of buying a home. Most real estate transactions do not involve the buyer handing cash to the seller and the seller handing over the deed and the keys. Instead, a contract is created with certain terms and conditions that must be met, allowing the seller time to inspect the home. Part of the agreement can include an escrow contract. The escrow agent holds the buyer's deposit and paperwork related to the sale. If the home is sold, the deposit is applied to the sale price. If the deal is called off, part of the deposit may be forfeit to compensate the seller. The escrow agent is responsible for releasing the funds appropriately at the proper time.

Escrow contracts can also be used when people want to set up a transaction or transfer, but are not ready for it to go through, or want to control the transfer. For example, grandparents offering to pay for a child's college education might request an escrow contract. Under the terms of the contract, as long as the child is in school, funds will periodically be disbursed by the escrow agent to cover tuition, room, and board. The contract might also have other caveats, such as a requirement to take certain classes, or maintain a grade point average above a certain level.

There are standard escrow contracts available for many types of transactions that cover the fundamentals of the transaction. It is also possible to draw up a custom escrow contract for a specific situation. Both parties will typically retain attorneys who work together to craft a contract that is satisfactory for everyone.

In most regions, people who act as escrow agents must be licensed and they agree to adhere to ethical standards. Because they have control over and access to sensitive financial and other personal information, they are in positions of trust. If an escrow agent behaves fraudulently, assists with a scam, or otherwise violates professional ethics, there can be legal, as well as professional, penalties.