Escrow in California: instructions, the escrow holder, closing, and prorations

Escrow holds until conditions are satisfied

California escrow involves delivery of money, written instruments, evidence of title, or another thing of value to a third person to hold until a specified event or condition, followed by directed delivery. A deposit is not itself closing. Written instructions specify deposits, conditions, payments, and closing requirements; the holder follows them rather than changing the bargain.

Holder qualifications and exemptions

California's Escrow Law exemptions include persons doing business under state or federal laws relating to banks, trust companies, building and loan or savings and loan associations, credit unions, or insurance companies. They also include persons whose principal business is preparing abstracts or searching title used as a basis for a title insurance policy issued by a company operating under California insurance law.

A California attorney must have a bona fide client relationship with a principal and must not be actively engaged in the escrow agent business. A broker licensed by the Real Estate Commissioner must act in the course of or incidental to a transaction in which the broker is an agent or party and performs an act requiring a real estate license. These two exemptions are personal: delegated duties require direct supervision, and arrangements to perform escrows for more than one business do not qualify. Exemption does not remove applicable professional duties.

Instructions and closing

For an exempt California broker handling escrow:

• Do not accept instructions with blanks to fill after signing.
• Obtain signatures or initials from all prior signers for changes.
• Give each executing person a copy at execution.
• Deposit escrow money by the close of the next full working day after receipt.
• Disburse under written instructions of the depositing party or parties.
• Give each principal a closing statement of receipts and disbursements identifying payees.

Signing, funding, recording, and possession are distinct events. Determine closing and possession from the agreement and instructions.

Prorations

Identify the expense or income period, day-count convention, closing-day ownership, and whether payment is prepaid or unpaid. For unpaid annual taxes of $3,600, use a 360-day year with 30-day months; closing is January 11 and the buyer owns closing day. Daily amount: $3,600 divided by 360 = $10. Seller's period: January 1 through 10 = 10 days. Seller's share: 10 times $10 = $100. Because the buyer pays the bill later, debit seller $100 and credit buyer $100. A seller-prepaid expense generally gives the seller a credit and buyer a debit for the buyer's share.

A lender's continuing tax-and-insurance impound account is different from the transaction escrow that closes the sale.