What is an Escrow Holdback?
An escrow holdback is a mechanism by which a predetermined sum of money is held from the seller’s sales proceeds by the escrow agent (typically the closing agent) to ensure that funds are available post-closing for a specific purpose, with the intention being that sufficient funds are held to motivate the seller to cooperate post-closing. Typically, they are used for repairs; however, sometimes, they can be used for other purposes.
When can an Escrow Holdback be used?
- An often overlooked, but critical clause of both the Standard and AS IS FR/BAR Contracts is the Maintenace Requirement outlined in Section 11. This section places an obligation on the seller to maintain the Property in the condition existing as the Effective Date and allows for an Escrow Holdback should that condition not be met.
- The same provisions also extend to any repairs required under Section 12 of the Standard Contract, as well as to the extent that the seller is unable to complete any general repair, WDO repair, or permit-related repair items.
- It can also be used if the parties agree to have work completed after closing as part of the negotiation process – this is common for a roof replacement or window replacement that may be scheduled to take place after closing.
- Buyers and sellers may also opt to use an escrow holdback to address concerns related to special assessments that may not be finalized before closing or to cover an expected but uncertain increase in costs after the closing date.
Other Considerations:
While an escrow holdback can be a good option to keep a closing on track and avoid delays, there are several other considerations buyers and sellers should account for before making a final decision. The most common being, whether there is a lender involved. If there is a lender involved in the transaction, they will need to approve the use of an escrow holdback and may have specific requirements for how the holdback is handled. Another important consideration, if the holdback is for a repair, is whether the repair not being completed will impact the ability to obtain property insurance or if any open permits or notices of commencement may impact a buyer’s title insurance coverage.
Finally, an important consideration in determining if an escrow holdback is the best solution is cost. Does it make sense for one or both parties to incur the expense of an escrow holdback and go through the hassle of the holdback process when an alternate solution would be more practical? Often, a credit at closing or a short extension to the closing date can alleviate some of the stress and simplify the closing process for everyone involved.
If you or your clients have questions or concerns about an escrow holdback or any other real estate matter, we encourage you to speak with a local real estate attorney who can help you navigate your options.
