Law Firms: Escrow Agents Or Not?

The role of an escrow agent is to hold legal documents and/or pecuniary consideration in anticipation of closing a transaction, according to clearly specified instructions. While it is common for trust banks to serve as escrow agents, it is also possible for lawyers and law firms to fulfill this function under certain conditions. Law firms are prohibited from providing pure escrow services through client accounts as these are considered banking facilities and a serious compliance risk. However, in certain situations, such as high-value transactions, there may be a need for reliable lawyers or law firms to function as escrow agents.

Law firms are prohibited from providing pure escrow services

> "You must not use a client account to provide banking facilities to clients or third parties. Payments into, and transfers or withdrawals from a client account must be in respect of the delivery by you of regulated services."

However, law firms can act like escrow agents in legal transactions by holding funds in the client account until completion. The key difference is that the solicitor holding those funds will be acting for one of the parties on the transaction itself. As long as the money relates to the legal service being delivered, the prohibition in 3.3 of the Accounts Rules does not apply. This is similar to conveyancing solicitors holding deposits pending completion.

Lawyers and law firms can only provide escrow services under certain conditions. For example, in Japan, there is no law specifically regulating escrow services, but existing legal systems are used to facilitate the functions and reliability of escrow agents. In this case, law firms and lawyers can legally perform "escrow agent (or similar) services" as part of their legal services.

Escrow agents hold legal documents and/or pecuniary consideration before closing a transaction

An escrow agent is a limited agent of the parties to the transaction, acting on behalf of both the buyer and the seller. They hold legal documents and/or pecuniary consideration before closing a transaction, according to clearly specified instructions. The role of the escrow holder invariably involves a contractual set of instructions and a fiduciary duty. The agent acts on behalf of the buyer and seller, ensuring that closing documents are prepared according to the instructions and agreements of both parties.

Law firms are prohibited from providing pure escrow services through client accounts. This is because pure escrow accounts are primarily banking facilities and, according to the Solicitors Regulation Authority, pose a serious compliance risk. However, in certain circumstances, a law firm may act as an escrow agent. For example, a law firm may propose to send a letter to both buyer and seller declaring that it does not "represent" either party and that its role will be limited to drafting the necessary legal documents to complete the sale.

It is important to note that an existing agent or attorney of the grantor or grantee cannot act as an escrow agent due to a conflict of interest. The selection of the escrow holder is typically done by an agreement between the principals. State law usually determines the required escrow documentation and law, but Federal law can apply if Federally regulated financial institutions are involved or in transactions involving interstate commerce.

Escrow agents have a fiduciary duty and are liable for any loss occasioned by a breach of duty. However, they are not liable for a loss incurred while following escrow instructions or for failing to do something not required by the terms of the escrow.

Escrow agents are limited agents of the parties to the transaction

The role of an escrow agent is to act as a trustee, following the contractual instructions of the involved parties. An escrow agent is a limited agent in that they are only acting for a specified purpose as directed in the escrow instructions. This means that they do not exercise "independent professional judgement" on behalf of either party.

Escrow agents are typically used to hold legal documents and/or pecuniary considerations in anticipation of closing a transaction, according to clearly specified instructions. They are not allowed to deliver the deed prior to the performance of the condition or the happening of a contingency, as this would be a violation of the depositor's rights.

Law firms can act as escrow agents under certain conditions. While law firms are prohibited from providing pure escrow services, they can perform fund transfers as part of their legal duties. For example, in Japan, there is no law regulating escrow services, so lawyers and law firms can fulfill this function. In the US, escrow agents are commonly trust banks, but lawyers and law firms can also act as escrow agents, particularly in high-value transactions.

However, an existing agent or attorney of the grantor or grantee cannot act as an escrow agent due to a conflict of interest. The same applies in the UK, where law firms are prohibited from providing pure escrow services through client accounts, as this is considered a serious compliance risk.

Escrow agents can be held liable in tort and for breach of contract

A law firm can act as an escrow agent, but it is not a typical arrangement. Escrow agents are usually title companies or independent practitioners who are familiar with the legalities of transferring ownership. An escrow agent is a neutral third party that holds money or other assets until certain conditions of a contract are met.

An escrow agent has a fiduciary duty to both the buyer and the seller, which means they must handle the transaction in an honest and impartial manner. If an agent breaches this duty, they may be liable for damages. They are also legally obligated to safeguard and account for the funds and assets held in escrow. If they fail to do so, it can lead to liability. Additionally, escrow agents may be held liable for errors and omissions, such as failing to discover and correct title defects or failing to comply with state escrow regulations.

It is important to note that an existing agent or attorney of the grantor or grantee cannot act as an escrow agent due to a conflict of interest. The selection of the escrow holder is usually done by an agreement between the principals.

Lawyers can legally perform escrow services in Japan

Lawyers have a unique type of bank account called a "trust account", where they can hold client funds and transfer them as per the client's instructions. They can be commissioned by the buyer to perform "duties" such as contract negotiation for real estate transactions. While they cannot accept requests solely for fund transfers like a pure escrow agent, they can accept requests for their duties as a lawyer and perform fund transfers as part of these duties.

There are situations, such as high-value transactions that cannot wait for the opening of accounts with trust companies or banks, where there is a need for reliable lawyers or law firms to function as escrow agents. In these cases, law firms can assist both parties in the purchase and sale of a business by preparing closing documents. However, an attorney or law firm cannot act as an escrow agent if they are already acting as an agent or attorney for either the grantor or grantee due to a conflict of interest.

In Japan, there is also a public system very similar to escrow called the Deposit system (kyotaku 供託). Under this system, a party may deposit money or other negotiable securities with the government deposit office before executing a contract. Upon completion of the contract, the government office will release the money to the relevant party. This system is useful if the two parties to a contract do not trust each other to keep their promises.

Frequently asked questions