Meaning
A financial arrangement where a portion of the purchase price is held by a third party to secure post-closing obligations and indemnities. Establishing a post closing escrow protects the buyer’s investment by ensuring that funds are available to cover any breach of warranty or undisclosed liabilities that emerge after the deal has closed. This arrangement is governed by an escrow agreement signed by the buyer, the seller, and the escrow agent.
Fund Release
The escrowed funds are held for a specific period, usually twelve to twenty-four months. If no claims are made during this time, the money is released to the seller. This release is often done in stages as the indemnity periods for different warranties expire.
Dispute Resolution
If the buyer discovers a breach, they must file a claim against the escrowed funds. The seller has the right to object to the claim. The escrow agreement defines the process for resolving these disputes, which may involve arbitration or court proceedings.
Buyer Protection
This mechanism ensures that the buyer does not have to chase a seller for cash if a problem arises. It is especially useful when the seller is a fund that will be liquidated after the transaction or is located in a foreign jurisdiction. The escrowed funds provide a secure, liquid source of recovery.
