Escrow Deposits Provide Security for All

July 27, 2007

When an investor wishes to enter into the Costa Rican real estate market, one of the first questions that arises is how the legal system here operates: how it protects investors, and how it could facilitate or hinder the execution of desired projects.

It is not uncommon for Costa Rican landowners to be completely unfamiliar with the concept of an escrow agent, which is more customary in North American countries.

This is a shame, because an escrow deposit provides a lot of security for all parties involved in a real estate transaction, when the escrow agent is a registered administrator of third-party funds.

An escrow deposit may be defined as a deposit of money that is entrusted to an escrow agent, usually by way of a bank-to bank wire transfer, to be kept in his custody and to be managed and disbursed according to a related real estate contract, such as a purchase and sale agreement. The escrow agent is a good-faith and objective participant, and the funds become his responsibility when they are received and accepted for administration.

Escrow deposits are also useful instruments for other participants in the real estate transaction, such as real estate brokers, architects, surveyors, builders and lawyers.

The principal parties, of course, are the depositor and the main beneficiary of the deposit, that is, the owner of the property to be sold. The buyer is also guaranteed that the conditions specified in the real estate contract will be satisfied prior to any funds being released by the escrow agent, which means that both parties are more protected when they use the services of an escrow agent. The seller, in turn, is ensured that the buyer has the financial ability to complete a specific transaction.

It is common for the escrow agent to be a lawyer or law firm. In all cases, escrow agents must be registered with the Superintendence of Financial Entities (SUGEF), the government body in charge of supervising financial entities such as banks and administrators of third-party funds. It is mandatory for administrators of third-party funds to be properly registered with this institution, under the law against money laundering and drug trafficking (Law 8204).

Investors should inquire as whether an escrow agent is duly registered with SUGEF to protect their funds and avoid undue risk.

Escrow deposits are preferred when there are contingencies on a purchase, so that the funds may be recovered promptly in the event of default.

In short, the use of a registered escrow agent provides security in real estate transactions.

Most developers and sellers are familiar with the concept; if the seller is not familiar with this instrument, it is worth it to try to make him understand that using a registered escrow agent will afford both parties security and peace of mind.

For inquiries regarding escrow services, contact attorney Arcelio Hernández of Bufete Hernández Mussio y Asociados at lawyer@crtitle.com.

 

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