Documents delivered in escrow

Construction contracts and consultants appointments often provide for the contractor or consultant to execute collateral warranties and for the employer to hold them “in escrow”. This is on the condition that if the contractor or consultant fails to execute and deliver the warranties itself within a specified period, the employer will be entitled to complete and date the warranties and deliver them to the beneficiaries. This means that the document delivered in escrow is of no effect until the conditions stipulated are fulfilled.

A recent case demonstrates that if a deed is being delivered in escrow then this will need to be made clear; all conditions required to be satisfied before the deed takes effect should be listed; and finally, the overall conduct of the parties should be consistent with their position that the deed is being delivered in escrow.

Facts

A property was being sold for £1.5 million. A bank gave the purchaser an advance of £1.2 million to finance the purchase, to be secured by a mortgage on the purchased property. Shortly before completion, the advance monies were transferred to the sellers’ solicitors to be held to the order of the purchaser’s solicitors, with around £300,000 left outstanding to be paid to the sellers. The transfer deed for the property (a TR1) was executed by the sellers and forwarded to the purchaser’s solicitors. The covering letter sent by the sellers’ solicitors enclosing the transfer deed gave no indication that the transfer deed was being sent in escrow or that it was subject to any conditions. Significantly, the sellers then used the advance monies transferred to it by the purchaser to pay off mortgages on the property and for personal uses. Unfortunately for the sellers, however, the purchaser failed to come up with the balance of the purchase price.

A year later, the sellers wrote to the purchaser stating that the contract was revoked due to the balance of the purchase price not having been paid. The sellers argued that the transfer deed had been executed in escrow on condition that the purchaser paid the balance of the purchase price. The bank however disagreed, arguing that the transfer deed had already taken effect and that the property was therefore charged by way of legal mortgage in its favour as security for the advance it had made to the purchaser.

Outcome

The judge noted that, where only part payment of the purchase price has been made at the time of delivery of a deed, the courts would usually conclude that it is being delivered in escrow. However, this can be rebutted by other circumstances relating to the delivery, and, on the facts of this case, the transfer deed did in fact take effect and was not held in escrow, for the following main reasons:

• The covering letter had not specified that the transfer deed was being delivered in escrow or that it was subject to any conditions;
• The sellers were aware that the purchaser had taken a loan from the bank that was to be secured by a mortgage on the property, and that the bank’s charge would not be executed until the purchaser had an unconditional transfer of the property; and
• The advance monies forwarded to the sellers’ solicitors had been regarded as irrevocably released to the sellers, who had used them to discharge their own mortgages and for their own purposes.

Further, on the facts of the case, in using the money advance to discharge earlier mortgages the sellers waived any condition that the full purchase price be paid before the transfer deed took effect. The bank was therefore entitled to have its charge registered against the registered title of the property.

Comment

The case emphasises the importance, where a document such as a collateral warranty is being delivered in escrow, of this being made clear and of any conditions attached to the escrow being clearly specified. However, even if the collateral warranty is specified as being delivered in escrow, it is also important that the parties’ conduct is consistent with that position. Finally, it is possible in certain circumstances for a party who has delivered a collateral warranty in escrow to waive the conditions attaching to it, in which case it may take effect sooner than anticipated.

Reference: Bank of Scotland v King plc and Ors [2007] EWHC 2747 (Ch)