As land and property has become so valuable, the stakes have continued to grow for large land transactions. As with any high-stakes transaction, the use of escrow accounts can help to mitigate and reduce, at low cost, the changes of the other's default costing them significantly.

In addition to the full range of construction escrow services, there are also quite a few different types of property escrow arrangements that are common in the UK.

Types of Real Estate / Property Escrow in the UK

While, in the USA, it is common for escrow services to be used for mortgage purposes, with an escrow agent holding mortgage funds for completion and then transferring them to the seller, here conveyancing is traditionally done on an exchange of solicitors' or conveyancers' undertakings and the system has worked well this way for years.

That said, there are still specific real estate use cases in the UK where escrow can support significant property transactions.

Escrow for proof of funds / good faith escrow

Where a party is selling a particularly valuable piece of land, a building or a development opportunity, it may be interested in going to sealed bids or a pseudo-auction process.  Given that searches and transactions can take weeks or even months, they will not wish to have their resource wasted by bidders or parties who don't, in fact, have sufficient funds to complete.

This is where the seller may ask would-be bidders to deposit either a significant deposit, or the entire proposed purchase amount, in escrow before their bid will be considered.  If it is simply a large deposit held in escrow, the purchaser will forfeit it if they don't complete, compensating the seller a little for the hassle, resource and expense of then going back to the market.  If it is the full purchase price placed in escrow, then it will allow the transaction to complete smoothly.

Escrow for overage agreements (UK)

An overage agreement is a contract under which the purchaser of land agrees to pay the selling party an extra sum—above the initial purchase price—once a specific future event increases the land’s value.  Often, this will be on the securing of planning consent for development of the land. This arrangement enables the seller to benefit from any subsequent rise in value after the sale. In property transactions, such mechanisms are also often referred to as “clawback,” “uplift,” or “anti-embarrassment” provisions.

Because of these benefits, overage agreements are especially popular where there is significant development potential, allowing the seller to share in future gains if the land is improved or approved for more profitable use. Similarly, a buyer may secure a lower upfront purchase price by agreeing to pay the selling party additional funds in the event that the land appreciates in the future.

Part of the difficulty of such arrangements is ensuring that the purchaser has sufficient funds to pay the seller - the seller won't want to take a risk on the purchaser's impecuniosity or insolvency - and the use of escrow services to hold the overage funds is a neat, low-cost way of mitigating this potential downside.  In this way, the purchaser must place the overage funds in escrow, held against satisfaction of the conditions (or held in escrow for a specified period of time, or both), so that they can be paid directly from the escrow account to the seller if the conditions are satisfied.

Escrow as an alternative to restoration bonds (UK)

Restoration bonds arise in the context of landowners to lease their land to tenants for a specific (often destructive or controversial) purpose.  This could be for quarrying, the installation of a solar farm, or similar, but it will usually involve very specific and detailed planning conditions which, at the end of the use, need to be fulfilled.

The landowner is likely to fall foul of the planning authorities if these conditions aren't satisfied, but they wont want to carry the risk of fulfilling them, so will instead often require a 'restoration bond' which allows the landowner to call upon cash security deposited in escrow to satisfy and discharge those conditions itself if the tenant doesn't.

A key advantage of an escrow arrangement is that the funds are held as real cash in a specific escrow account, which the landowner can tap into if the tenant does not meet its obligations. This direct approach can be especially important if the tenant becomes insolvent, as the landowner is not reliant on chasing other sources of funding.

Another benefit is that dealing with escrow generally requires no external parties beyond the escrow provider, so the landowner and tenant can resolve issues between themselves. In addition, many consider that the tenant has a strong incentive to honour its restoration commitments, as this is the only way to reclaim its deposited money.

From the tenant’s point of view, escrow is often more economical than, say, a bond (more on these below), and escrows come with the benefit of avoiding involving additional third parties who may charge for providing guarantees or even require personal guarantees from the owners/directors. By limiting expenses and administrative burdens, an escrow arrangement can be a more straightforward way to meet planning conditions and assure all parties of the land’s proper restoration.

The Role of the Escrow Agent

Escrow agents help to bridge these trust gaps by offering a reliable, independent, objective third party to handle the exchange of money and documents in accordance with the parties' wishes and the terms of the escrow agreement, without having to rely solely on trust to ensure the security and success of the transaction.

We offer escrow solutions to address all of the above trust issues and would be delighted to provide you with a quote for your specific requirements. You can also check out our detailed service pages listed above.

Benefits of Escrow over Insurance/Bonds

Some of the trust shortfalls outlined above can be addressed through the purchase of a contract of insurance or a bond. These typically involve the payment of a fee (a "premium"), and in the event of default, the beneficiary under the policy must make a claim from the insurer or bondsman for their loss.

This approach comes with four primary drawbacks:

1. The premium is spent—regardless of whether or not a claim is made, the insurer or bondsman charges the premium as consideration for assuming the risk in the transaction;
2. There is a credit risk on the insurer/bondsman/guarantor—even the largest underwriters carry a credit risk; a policy of insurance is only as useful as the financial capacity of the underwriter to satisfy all of the claims they are underwriting at any one time. In circumstances where an insurer faces many simultaneous (or a few ultra-high-value) claims, they may not be able to fulfil their obligations;
3. It takes time to process a claim—even a successful claim can entail months of paperwork and administration before it is paid out;
4. Every policy or bond is written with very specific wording—it might be that, for unexpected reasons, an anticipated claim is not actually covered by a policy or bond (either because it is specifically excluded or because the wording allows it to be excluded for some other reason).

Cash-backed escrow, by contrast, addresses all of these issues. It is generally cheaper to administer than the cost of a premium; in most cases, there is no credit risk because the funds are segregated and safeguarded by the escrow agent; payouts generally happen within a few days; and there will not be any circumstances in which a payout is excluded—the terms of the escrow agreement will make it very clear what circumstances need to exist to trigger a payment, rather than necessarily the reasons behind those circumstances.

Why choose dospay over a another financial institution or trustee for your escrow?

We are an established, independent escrow agent not affiliated to any other financial institution or corporate trustee.  We're based in London, in a time zone conveniently located for transactions taking place anywhere in the world. As a small team, we're easy to get hold of, responsive and dependable.  

While our processes are systems are rigorous, they are also flexible. We make the effort to understand each transaction and its nuances, meaning that we can provide the perfect solution for the parties.

Escrow funds secured at the Bank of England

Through our technology partners, we are able to open custodial/escrow accounts at the Bank of England with the click of a button. Unlike a bank (who accepts your escrow funds as a "deposit", whereupon it becomes part of their balance sheet and can be loaned to others), our escrow accounts are all segregated (kept separately from our own) and safeguarded (not used for any other purpose). This means we are probably the most secure escrow agent in the United Kingdom.

We simply hold the funds liquid and unencumbered at the Bank of England, ready for use in the transaction. Exactly as escrow should be.

No existing escrow or future banking/trustee relationship required

Most banks and corporate trustees see escrow as a slightly painful service they need to offer in order to justify their moniker of being 'full-service' - it's a service that most clients will wish for, but compared to their lending, advisory and trustee fee revenues, few banks consider the provision of escrow accounts to be a profitable exercise.

As a consequence, most will ask for at least one of the parties to be (or to become) a client of the bank or trust company going forward in order to be interested in the escrow arrangements at all - very few will offer escrow accounts to entirely unrelated parties with whom they have no opportunity to make money in future.

We're different.  We only exist to provide escrow services, and those are frequently once-in-a-lifetime deals - while we are delighted to enjoy repeat custom, we haven't built our business model on it.

Lower fees

We don't carry the overheads of a large bank or trust corporation, or anything like them. As a small team, we've invested heavily in technology to do the heavy lifting and we have no legacy systems that make life difficult for us - it's all cutting-edge, encrypted, bank-level technology, but without the legacy costs.

We are therefore almost always cheaper, often by a considerable margin  (and, if for any reason we're not, we're always happy to have a commercial conversation).

Fast escrow account opening

Our streamlined systems and processes lend themselves to fast escrow account opening.  Often, the detail of escrow accounts is left until quite late in the transaction - this isn't a problem for us; indeed, we're used to it - it's what we do.

Our escrow accounts can be opened same-day if we have all of the information, and the vast majority are opened within 3-5 business days (most of which time is taken up with us carrying out our mandatory compliance activities).

Flexible terms

Unlike a bank or trust company that is required to operate on standard terms, with 3-5 day turnaround times for their internal legal teams to sign off any deviations, we can work either on our standard escrow conditions or on the basis of a document agreed between the parties, and we're flexible about what that looks like.

Each transaction is different, so we don't try to shoe-horn them into chapters of legalese - the terms of our participation in your escrow  are clear, concise and flexible.