IS ESCROW IN UKRAINE REALLY NECESSARY?
In Ukraine, due to the recent Soviet past and, accordingly, the restructuring of the economic model of the state, the domestic business environment doesn’t comply with global standards. The Ukrainian agreement toolkit is still underdeveloped due to the lack of many institutions in the local legislation aimed at the efficient implementation of such agreements.
Internationally, there are several legal mechanisms that allow the parties to conduct transactions in a way that is convenient and secure for both sides. One such tool we would like to mention, is escrow.
Escrow is a commercial arrangement where a third party regulates and handles payment of the funds for two participants in a given transaction.
In countries with a developed economy, escrow is used by parties for real estate contracts involving mortgages, where the mortgage company establishes a separate escrow account from which to pay property taxes and insurance. Escrow accounts are also used for transactions of property sales where credit is not used, especially involving transactions where a counterparty is a foreign resident.
The escrow algorithm is as follows:
1.. The parties sign an agreement with the escrow agent, who acts as the intermediary between the seller and the buyer.
2. The buyer transfers the purchase price and closing costs to the escrow agent’s bank account (escrow account). As a rule, an escrow account is opened by an escrow agent in its name to hold the funds that will later be transferred to the seller (beneficiary). The escrow agent can’t use these funds in any way except to transfer them to the seller or return them to the buyer. The escrow agents can report periodically on the status of an account.
3. The seller transfers the documents to the escrow agent (the title documents for the property and other documents that may be required), which is an essential condition for the fulfillment of the obligation.
4. The escrow agent checks the form and contents of the documents submitted to him for compliance with the terms of the underlying obligation. If these conditions are met, he transfers them to the buyer and, at the same time, transfers the funds for purchase to the seller. If the documents do not meet these requirements, the escrow agent returns the documents to the seller, and the money is returned to the buyer. In this case, the agreement is terminated.
Alternatively, if this does not contravene the escrow agreement and the underlying obligation, the escrow agent may give the seller time to bring the documents into compliance with the requirements, and then proceed according to the original arrangement.
Depending on the specific situation and intentions of the parties, the described algorithm may be modified. For example, documents can be deposited in the escrow agent’s bank account; cash can be transferred in parts and accumulated in an escrow account, or immediately transferred to a seller.
The escrow agent may also perform an administrative function for the property subject of the agreement.
The hallmark of escrow is the responsibility of the agent to all parties of the transaction. Moreover, neither the account holder nor the beneficiary can dispose of the funds in the escrow account.
It guarantees the security of the agreement for the parties as the relevant conditions are reflected in the underlying obligation (for example, sales-purchase contracts) and are essential parts of this obligation. This way, the parties effectively protect their rights and interests from potential violations by the other party.
Escrow in Ukraine will open new opportunities for the Ukrainian market, simplifying the process of closing real estate deals, protecting the rights of the parties, and ensuring the safe transfer of the significant funds only after all the conditions are fulfilled.
However, there is still a lack of confidence given the Ukrainian reality, and companies, as well as banks, are not keen enough to make the needed improvements.
The main question is, “Who will be the first to break the ice and bring escrow to Ukraine on a regular basis?”