The term escrow is most commonly applied to situations where an independent third party holds money or property on behalf of transacting parties.
Escrow arrangements are generally used for the transfer of high value property such as businesses and intellectual property. Escrow is also available for software, websites and databases. In short it is a process whereby parties in a contract have a form of insurance or guarantee when entering into a particular business transaction.
It can be as simple as the situation where Business A and B enter into an agreement, the agreement states that C will hold Â£10,000 of business A’s money and only pay that money over to business B, once business B has carried out an act or fulfilled an obligation defined in the agreement between the parties (A and B).
Other examples of escrow include:
– A deposit being paid to the deposit protection scheme (DPI) before a tenant moves into a property, this deposit is held independently from the landlord by the DPI and is payable to the tenant at the end of the tenancy subject to the terms of the tenancy agreement.
– Purchase of a second hand vehicle, where the money being held is released at the end of a warranty period.