Oftentimes, an escrow agreement will be necessary for the purpose of payment for repairs to be completed post-closing. If the escrow agreement does not contain the essential elements, the Buyer or Seller may end up with unexpected liabilities.
The Florida Association of Realtors (“FAR”) Contract provides in pertinent part that, “If Seller is unable to complete required repairs or treatments or meet the Maintenance Requirement prior to closing, Seller will give Buyer a credit at closing for the cost of the repairs and maintenance Seller was obligated to perform.” Buyers should be cautions about agreeing to accept a credit from the Seller since most institutional lenders will not allow credits for repairs. Moreover, it is usually the case that the parties will not know the exact cost of the repairs and the Seller will instead insist on an escrow of funds from which the repairs will be paid with all amounts remaining thereafter being paid over to the Seller.
A properly drafted escrow agreement will address, at a minimum, the following items:
- The name of the Escrow Agent. Someone (or some entity) needs to be named as the Escrow Agent and should sign the escrow agreement agreeing to hold and disburse the escrow funds in accordance with the terms of the escrow agreement.
- The names of the parties to the escrow agreement must be clearly set forth in the document and all parties should sign the escrow agreement.
- The amount of the escrow funds must be specified. The Buyer’s agent should always let the Buyer select the amount of the escrow funds to be held based on the written estimate from a contractor selected by the Buyer. Consideration should also be given as to whether the Seller would be obligated to pay the additional amount if the cost of repairs exceeds the escrow funds. From the Seller’s perspective, the Seller may want to limit the Seller’s liability to the amount of the escrow funds.
- The escrow agreement should clearly state the repairs to be made. If the repairs to be made are not clearly identified, the Buyer may try to utilize the escrow funds for other repairs which the Buyer may become aware of after the closing. This may result in litigation over the escrow agreement.
- It is imperative that the escrow agreement provide for the maximum period of time that the escrow funds will be held. Otherwise, there may be no provision for the eventual release of the escrow funds and the termination of the escrow agreement.
- The escrow agreement should be clear as to whether the Seller or the Buyer is responsible for getting the repairs completed and what are the rights and obligations of the parties in the event that the repairs are not timely completed.
- The procedure for the release of the escrow funds should be set forth in the escrow agreement, i.e. what approvals or documents must be given to the Escrow Agent prior to the release of the escrow funds.
- The method of dispute resolution should be clearly established in the escrow agreement. A dispute under the terms of the escrow agreement is not a matter to be resolved by FREC or a FREC disbursement order and instead, will probably be handled through the judicial system.
It is evident that an escrow agreement is not a document to be loosely drafted at the closing table. In fact, a real estate attorney is best suited to drafting the escrow agreement, usually at no additional charge to the Buyer when the attorney is handling the closing, in order the best protect the interests of the Buyer.