By Miss Francisca Bwashi

Definition

In Tanzania, there is no law or statute that defines or explicitly governs an “Escrow Account.” Instead, the concept and practice of Escrow accounts operate within the framework of general contract, banking, and financial regulations. However, an Escrow Account is generally defined as a financial arrangement where a third party holds funds or assets on behalf of two parties involved in a transaction, releasing them only when specific conditions are met.

Purpose

The primary purpose of an escrow account is to ensure security and fairness in transactions by using a neutral intermediary to safeguard funds or assets until all parties meet their obligations.

Principles Governing Escrow Accounts

  • Neutral Third Party: The escrow agent must be a neutral entity without any vested interest in the transaction’s outcome, ensuring impartial management of funds.
  • Mutual Agreement: Both parties involved in the transaction must agree to theterms under which the escrow agent holds and releases the funds.
  • Defined Purpose and Conditions: The escrow account operates based on a specificpurpose with clear conditions that must be fulfilled by the transacting parties. Theseconditions are outlined in the escrow agreement.
  • Security of Funds/Assets: Escrow accounts must safeguard the deposited funds.The escrow agent is responsible for safeguarding the funds, ensuring they areprotected from fraud, misuse, or unauthorized access.
  • Transparency and Accountability: There must be clear and transparent record-keeping by the escrow agent, which includes maintaining accurate and up-to-date records of all transactions, deposits, and withdrawals in the account.

How An Escrow Account Works: The Basics

  • An Escrow Account is one of several methods to facilitate sale transactions especially where the parties to the transaction do not know each other, or do not completely trust each other.
  • An agreement is established between the buyer and seller, where they agree to the conditions of a transaction, and an escrow agent is appointed.
  • The buyer deposits the funds into an Escrow account to prove to the seller that he can pay.
  • The seller then meets the agreed-upon conditions; delivers of goods, completion of a service, etc. Once the conditions are satisfied the Escrow Agent releases the funds to the seller.

Benefits of Using an Escrow Account

  • Security and Protection: Safeguards funds or assets until conditions are met.
  • Neutrality: Reduces the risk of fraud or disputes involving an impartial third party.
  • Transparency: Clear terms are set, and both parties can monitor the progress.
  • Dispute Resolution: Funds remain in escrow if there is a dispute until it is resolved

Types of Escrow Accounts

  • Real Estate Escrow Account: Commonly used in property transactions, where funds are held by an escrow agent until all conditions of the property sale are completed. The funds are released to the seller and the property to the buyer.
  • Business Transaction Escrow: Used in mergers, acquisitions or other business deals. This type of escrow holds assets or funds until the transaction terms are met. This might include regulatory approvals, due diligence, or specific performance obligations by either party.
  • Online Escrow Services: Used in e-commerce transactions, particularly for high-value or cross-border purchases, where funds are held by an online escrow service. The service releases funds to the seller only after the buyer confirms receipts of goods or services as agreed.
  • Construction Escrow Accounts: Created for construction projects, where Construction Escrow Accounts: Created for construction projects, where phases of the project are completed, helping to ensure the contractor meets agreed-upon performance requirements.
  • Mortgage Escrow Account: Often set up by lenders for homeowners to ensure property taxes, insurance, and other property-related expenses are paid on time. A portion of each mortgage payment is allocated to the escrow account, which the lender uses to pay these costs on behalf of the homeowner.
  • Settlement Escrow: Used in legal settlements where the liable party deposits funds into an escrow account to ensure payment. Once the conditions of the legal settlement are fulfilled, funds are released to the beneficiary.

Escrow Agreements

  • An Escrow Agreement is a legal contract involving three parties; the buyer, the seller, and an independent third-party known as the Escrow Agent. This agreement sets out the terms and conditions for holding and releasing funds, documents, or assets in a transaction.

Escrow Agreements includes the following Key Elements:

  • Parties Involved:
    • Buyer: The party placing funds or assets in escrow
    • Seller: the party set to receive the funds or assets once the conditions are met.
    • Escrow Agent: a neutral third party who manages and oversees the escrow process, ensuring compliance with the agreement terms.
  • Description of Assets; what is being held in escrow.
  • Conditions for release
  • Escrow Agent duties and responsibilities
  • Escrow fees; Fees for escrow agent services
  • Dispute resolution mechanisms
  • Termination clause
  • Legal compliance

Disclaimer

This article is not intended to replace professional advice. No one should rely exclusively on the information provided as a substitute for seeking professional advice. The writers or the Firm are not liable for any use of the information contained herein and do not guarantee the accuracy of its contents from the date of publication to the date of usage. For contact: temu@africorp.co.tz or info@africorp.co.tz

AfriCorp Attorneys

Phone Number: +255 22 211 0660
Amverton Office Park, Plot No 64 Lugalo Street
Dar es Salaam, Tanzania