Effect of default on the disbursement of escrow funds

Recent decision - Austrian Supreme Court

It is common practice for transactions relating to the purchase of real estate to be conducted by an escrow agent. In the case of multilateral trusts, one escrow agent administers the trust established by several trustors who may have opposing interests. However, the escrow agent of a multilateral escrow is required to protect diverging interests that may lead off in a number of different directions.

In practice, the duties of the escrow agent are in most cases not comprehensively regulated by escrow agreements, and in particular, there are usually no provisions governing the effect of a default by the trustee on the disbursement of funds held in escrow. Rather, the wording of the escrow agreement in practice makes the obligation of the escrow agent to disburse funds solely dependent on the existence of a certain deed (e.g. a decision recorded in the land register). However, this does not mean the escrow agent has assumed a "performance guarantee" for payment of the purchase price.

In this regard, the Austrian Supreme Court has again confirmed in a recent decision that, according to the business purpose, the escrow agent is under an obligation to include freedom from defects or a certain property of the object of purchase (e.g. freedom from contamination of the object of purchase precisely defined and promised in the purchase agreement) as a condition for the payment of the purchase price deposited with the escrow agent.

In the case of alleged or established defects, this therefore regularly gives rise to conflict, which creates an unclear situation for the escrow agent. In the event of such a conflict, the escrow agent can wait until the trustors have reached an amicable settlement, if the escrow agent is of the opinion that this is in the interests of the trustors. However, the escrow agent can also deposit the disputed amount with the court if it is unclear or cannot reasonably be ascertained whether the conditions for disbursement of the funds are fulfilled. However, the escrow agent is not obliged (unless otherwise agreed) to deposit the amount with the court.

In light of this, the effect of a default on the disbursement of escrow funds should be expressly regulated in escrow agreements for real estate purchase contracts.