Commercial Real Estate: Is an Escrow Necessary?

When it comes to commercial real estate, many people wonder if an escrow is mandatory part of the purchasing process.  Commercial real estate is any property that deals with a business context, including leased office space, selling property that was owned by a business, and owning an apartment complex. 

Determining Whether Property Is Commercial Real Estate

The trick to understanding if property is commercial is to realize that unless the person who owns the property is living in it and making it their home, it is commercial real estate.  Property might be agricultural, residential, government-owned, or industrial.  Residential property is commercial if it produces income, such as rental properties or business-owned residential properties. 

Is An Escrow Always Necessary?

Most people will agree that having an escrow is a good idea when setting up a deal in commercial real estate.  However, unless one of the parties involved in a contract both agree to have an escrow as a part of their contractual deal, there is no legal requirement to have an escrow.

Benefits of Having an Escrow

There are several benefits to having an escrow for your commercial real estate deal, even if it is not legally required:

• An escrow company facilitates the entire real estate deal, acting as an intermediary in the transaction and handling most of the details of the deal. 
• They help to distribute funds and record all deeds and instrument. 
• They can handle the details involving escrow instructions, title insurance, and title reports. 

Overall, having an escrow makes the legal process simpler and run smoother, and acts as a good moderating third party.

Escrow Instructions:  Are They Enough?

Escrow instructions might seem to be enough, but it is sometimes necessary to have a separate real estate purchase contract as well.  Some parties close commercial deals without establishing and completing a formal real estate purchase contract. 

This can be dangerous because the parties might agree, shake hands, but never sign anything officially.  Then, when the escrow officer sets up a deal at the escrow company, they draft instructions for parties to sign and proceed to close the deal, without considering whether the escrow officer’s instructions are enough.

Not many people realize that the escrow instructions are prepared for the benefit for the escrow holder, not for the benefit of the parties involved in the transaction.  This way, the escrow officer and escrow company cannot be liable or legally responsible of anything goes wrong.  You will not get any legal or tax advice that is part of a normal real estate purchase contract.

Getting Help

Consult with an experienced real estate attorney to assist you in drafting any contracts or documents when entering into a commercial real estate deal, and to assist you in making a determination about whether escrow is necessary or not.