The Repair Escrow Agreement: Having Your Cake and Eating It Too

In Florida, more likely than not a buyer will identify his or her requests for repairs early in a real property transaction and prior to closing pursuant to the standard FAR/BAR contractual provisions with little fanfare. Nonetheless, as in life and in realty, there are unforeseen circumstances where a closing extension would be difficult and too inconvenient for the parties.  For example, the delay in a purchase of buyer’s intended property might cause the immediate need to secure short-term housing, storage of personal property or additional mover costs.  On the other hand, a seller sometimes cannot secure the services of a reputable general contractor in a timely fashion because the scheduling for immediate repairs would be cost prohibitive, or the seller just doesn’t have the capital to make the repairs.

When the abovementioned occurs, the parties might agree to the seller providing a credit to the buyer.  And while this appears reasonable, the repairs might be substantially more than anticipated costs once the buyer has secured his or her own estimate.  If the repair costs exceed the credit then the buyer will have no future recourse against the seller!  Alternatively, the seller might disagree on the actual cost of the repairs and refuse to provide a credit when the repairs might be less.  In these situations, the more reasonable solution would be a post-closing escrow agreement.  A repair escrow agreement is a written contract withholding a certain amount of the seller’s sale proceeds to be designated and potentially applied for any agreed upon buyer repairs.  The escrowed funds would be held by a neutral escrow agent mutually agreed to by the parties until the repairs have been made within a set period of time.  After the buyer’s repairs have been made and properly documented to the escrow agent’s and seller’s satisfaction, then the remainder of the escrowed funds, if any, would be returned to the seller.  Additionally, the repair escrow agreement should expire after a set date and time – if the buyer fails to timely make repairs then the monies would be returned to the seller.  Thus, the buyer will be motivated to timely move forward with the desired repairs.

Escrow repair agreements generally benefit both parties.  The first readily identifiable benefit is the avoidance of any pre-closing delays related to repairs.  Specifically, a buyer refusing to close because the repairs were allegedly in poor workmanlike manner or reservations on if the repair warranty would transfer to the new buyer.  Secondly, the buyer is in control of the repairs.  Many buyers distrust that the seller will properly remediate and repair the property.  The repair escrow agreement provides a peace of mind to the buyer that repairs will be completed to the buyer’s expectations and the seller will have an opportunity to verify buyer’s repairs were reasonably appraised and performed.  Finally, the seller is protected in the event the buyer fails to close on the transaction.  If the property doesn’t close the seller is not out-of-pocket.

Note the forgoing is a simplistic explanation of the benefits and procedures of a repair escrow agreement. The agreement is a contractual legal document that will survive closing and create additional rights and the obligations between the parties and an escrow agent.  Because of this, the repair escrow agreement should be carefully considered and drafted by the legal representatives of the seller and buyer.  A loosely drafted repair escrow agreement could expose the parties to astonishing financial liability because the parties did not properly memorialize and document their obligations and duties.   And as always, should you have any questions regarding the foregoing, please consult with your real estate attorney.

 

Sincerely,

Berlin Patten Ebling, PLLC

Article Authored by Michael E. Schuchat, Esq., mschuchat@berlinpatten.com

 

This communication is not intended to establish an attorney client relationship, and to the extent anything contained herein could be construed as legal advice or guidance, you are strongly encouraged to consult with your own attorney before relying upon any information contained herein.

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