Escrow Account on Property Transactions 

January 25, 2017

One of the most important questions to answer when purchasing a real estate is how to ensure that the buyer will actually receive the title on the property in return for the paid purchase price. This occurs because the standard practice in Bulgaria is that the buyer pays the purchase price directly to the seller prior to registration of the title deed in the local Property Register.

Usually, there is no escrow agent or company involved in the process of payment of the purchase price on these property transactions. And therefore, there is a theoretical risk that another title deed with a third party (i.e. sale of the same property by the seller to another buyer) may be registered first.

It is possible in practice that in the same day when the buyer has signed the title deed and paid the purchase price, another property transaction with another buyer can be filed to the Land Register earlier that day (even one minute earlier is of importance, because it reflects on the registry number).

In this case it will occur that the buyer has paid the purchase price, but he won’t receive ownership rights on the property, because another acquirer has legally obtained them first. And if the seller (i.e. transferor of title) does no voluntarily t refund the received money, the only option for the buyer is to seek remedy in court. The above risk appears because of the specifics of the Bulgarian property law: The registration of deeds in the Land Register is absolutely important, because it enables the legal protection of these ownership rights acquired with the purchase, against any third parties who would make claims.

Therefore, if there are several registrations of title transfers to different buyers in one day with the file of a given property in the Property Register, the one which has been registered first shall be valid. The acquirers of the next sales have the option to pursue in court the legal liability of the transferor of title (but not to claim ownership rights, because they belong to the first buyer who has first registered the purchase in the local Property Register).

The opposite situation is also possible – although one property has been already sold, further sales, performed by the same seller with this property later in the same day, to be filed to registration in the Property Register. It may seem as the least harmful situation for the first buyer, but it appears that he/she will acquire real estate with disputes thereon, where lawsuits could be initiated by third parties involving this real estate.

Accordingly, in order to protect themselves from such “surprises”, the buyers could benefit from using trust account (escrow account) in conveyance procedures. This is a temporary account which could be opened on the base of escrow agreement signed between two parties with opposite interests (real estate seller and buyer), and a third party, the so called “escrow agent” which holds the money and act as an escrow agent or trustee who supervises the proper fulfillment of the agreed conditions of the related contract, before making payment of the purchase price on behalf of the buyer. Escrow accounts are very often used when entering into property transactions all over the world.

The secure escrow account is very convenient method for payment when closing on off-plan property purchases. By using escrow account, the buyer receives guarantees that the funds will be spent exactly for what he/she has agreed for, and the developer receives a security that the money is available and it won’t be withdrawn by the buyer, so the seller could receive it once he fulfills his obligations as listed in the escrow agreement.

One of the options for securing the transaction is by means of an escrow account, via escrow agreement signed between the seller, the buyer and the bank.

Another option for creating such legal securities that we use in our legal practice is when the seller, the buyer and the notary public who should later witness the property transaction, sign escrow agreement and use the escrow account of the notary. The latter is namely the party acting as an escrow agent and shall be obliged to keep the funds during the escrow period, and respectively to provide them to the seller, once the agreed conditions are met.

Under the provisions of the trilateral escrow agreement, the buyer deposits the money, being the purchase price, to the escrow account of the notary public, who keeps the sum during the escrow period and transfers the money towards the seller only once the agreed condition has been met – for example presenting to the notary the new title deed or non-encumbrance certificate evidencing clear legal status of the property.

There is a difference between the escrow agent and the other participants involved in a conveyance procedure in Bulgaria:

1) A lawyer, representing one of the parties – he/she is not a neutral third party. Lawyers do not keep escrow accounts, but customer (client’s) account – usually used for transfers of expenses; The deposited money could be withdrawn/transferred back to the payer, so there is no guarantee that the seller will receive the money, even if this money are kept in the client’s account, held by the buyer’s lawyer.

2) A real estate agent – in Bulgaria the estate agent is not directly involved in the payment of the purchase price. Estate agents are not neutral third party, because their goal is to complete the property transaction, whereunder they can collect their agency commission. In practice, real estate brokers collect from the buyer only earnest deposit (because it usually includes their commission fee), and sometimes – they are authorized by the buyer to operate with their personal accounts opened for the needs of the particular transaction (in situations where the buyer resides abroad), and to make payment of the purchase price to the seller.

3) An authorized person (a proxy) – representatives authorized by the buyer or the seller, who usually operate with current bank account in the name of the authorizer by virtue of a a power of attorney. When opening such accounts, it is not possible to set forth conditions like those mentioned above in order to allow payment. Furthermore, the deposited funds could always be withdrawn. Therefore, authorizing a proxy and opening regular payment account cannot serve for the same purposes as the escrow account.

The above confirms that the escrow account provides securities for both parties on the property transaction. Therefore, they should precisely stipulate the conditions that will apply to grant release of the blocked sums in the escrow contract, as well the results in case of eventual non-performance by the seller.

Although the use of trust account increases the applicable expenses in the process of purchasing real estate, our experience shows that this is a method which provides guarantees and securities to the participating parties and creates a bridge of trust between them in relation to the real estate transaction. We provide preparation of escrow agreements and legal assistance on escrow procedures and property transactions.

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