Escrow agreements

How BC law treats it

An escrow agreement is a three party contract between the depositor, the beneficiary and the escrow agent. It is governed by contract law and the law of trusts: the agent holds the property in trust and must release it strictly according to the agreed conditions. A good agreement defines the property held, the release triggers, the evidence the agent needs (such as a joint direction or a court order), how disputes are handled, investment of funds, fees and the agent's limited liability. In M&A, escrow is used to hold part of the purchase price as security for the seller's indemnities, or to hold signed documents until all closing conditions are met. In technology deals, a source code escrow protects a licensee if the vendor fails. In public offerings, securities regulators can require founders' shares to be escrowed under National Policy 46-201 Escrow for Initial Public Offerings. BC real estate practice is different. There is no standard BC escrow agreement for property sales. Deposits are usually held in trust by the brokerage under the Real Estate Services Act, SBC 2004, c 42, and closing funds and documents move through lawyers' or notaries' trust accounts on trust conditions and professional undertakings. Lawyers in BC commonly close commercial deals the same way, with documents and funds held in trust pending release, which can serve the same purpose as a formal escrow agreement.

What it means for your business

Escrow gives both sides comfort: a seller knows the money exists, and a buyer knows it can recover from the escrow if indemnity claims arise. A badly drafted agreement can leave funds frozen for months because the agent will not release without both parties' consent. Business owners should agree on clear release triggers, deadlines, dispute mechanisms and who pays the agent before signing. Example: On the sale of a Richmond logistics company, $400,000 of the price is held in escrow by the buyer's lawyer for 18 months to cover indemnity claims. The agreement releases the balance automatically at the end of the period unless the buyer has given written notice of a claim.

Risks and common mistakes

Leaving release conditions vague, so the escrow agent will not act without a joint direction or court order. Failing to set a deadline for indemnity claims against escrowed funds. Using a party's employee or affiliate as escrow agent instead of a neutral one. Confusing an escrow agreement with lawyers' trust conditions and undertakings in a BC closing. Forgetting to address interest on escrowed funds and who bears the tax.