In Singapore, escrow accounts are used predominantly by solicitors in conveyancing transactions to control the flow of funds during various stages of the transaction. This article will look at the role of escrow accounts in conveyancing and the other purposes escrow accounts can serve. By understanding what the term means, you can better navigate and make informed decisions for your transactions or business dealings.
Escrow Accounts in Conveyancing
Conveyancing broadly refers to the legal transfer of an object’s title from one person to another. The term is most commonly used in property transactions, where a conveyancing transaction means the transfer or grant of any estate or land upon sale, surrender, or mortgage. Property development companies, or the Housing & Development Board in the case of HDBs, will hire or have solicitors to oversee the conveyancing process when you purchase a property.
Escrow accounts are a means for these solicitors to safe-keep the buyer’s funds during the sale of the property. Solicitors help to draft an escrow agreement, which states the terms by which money from the buyer will be released from the escrow account as payment to the developer. Such terms may include clauses regarding the timely completion of the property’s development, or any interest payable at various stages of the construction.
Are Escrow Accounts Necessary in Conveyancing?
As set out in the Conveyancing and Law of Property Rules 2011, the solicitor should not hold this “conveyancing money” unless in accordance with “an escrow agreement; or the applicable provisions of these Rules and the Legal Profession Rules”. Such a provision ensures buyers that their funds will not be abused by the developer or their solicitors, as escrow agreements involve another third party bank that will:
- safe-keep the buyer’s funds for the duration of the transaction
- only release the funds as per the escrow agreement
The escrow agreement is a legally binding document for all parties in the transaction, and reference may be made within the agreement to the Conveyancing and Law of Property Rules 2011. It is also not just the escrow agreement that does this, as the initial Option to Purchase, or the Sale and Purchase Agreements may do so as well. However, while the Rules seek to protect the proper handling of conveyancing monies, they do not restrict solicitors from relying on third party escrow agents and accounts to hold payments. Two other means are available for solicitors do so:
- Conveyancing Accounts
Solicitors may have their own Conveyancing Account with a bank. This account is opened and maintained by the solicitor’s firm, and is solely dedicated to holding the buyer’s funds.Only banks approved by the Minister of Law are allowed to open these dedicated Conveyancing Accounts. Money received from any buyer’s CPF Accounts must also be separately deposited into a Conveyancing (CPF) Account.The movement of funds from these accounts cannot take place through ATM withdrawals, cheques, or telegraphic transfers. Only set Payment Forms may be used to authorise and document all payments.
- Singapore Academy of Law (SAL) Conveyancing Money Service
Solicitors may also opt to have the money deposited with the SAL’s Conveyancing Money Service. Here, the SAL serves as an “independent depository to both buyer and seller”.The SAL does not require any account opening, and payments can be made by cheque, cashier’s orders, cash, NETs, or credit cards. However, transaction fees at varying rates may apply.
So then how are escrow accounts different from these means? Escrow accounts are not subjected to some of the provisions in the Conveyancing and Law of Property Rules 2011, nor does the Law Society have any explicit rules governing the operation of an escrow account. Notably, payments to Category B and C payees need not follow the prescribed instructions in the Rules. Buyers may want to clarify with the developer and their solicitor’s, or their own lawyer if the escrow agreement ensures the same level of security as Conveyancing Accounts are subjected to under the Rules.
Given the independent nature of and fewer restrictions placed upon the escrow agreement, this allows solicitors to adjust agreements for more complex conveyancing transactions. Some buyers will also feel more reassured that an independent party is holding their funds as it introduces another gatekeeper to the transaction.
Other Uses of Escrow Accounts
Escrow accounts are also used in non-business transactions. For certain transactions or businesses, it may be legally necessary to employ services similar to that of escrow services. Alternatively, your business may want to use an escrow service to better ensure your clients’ security for their monies. You may view the list of appointed banks that provide escrow accounts by the Ministry of Law here.
When setting up an escrow account, you may want to consider the following:
- Industry standards or laws that mandate how transactions should take placeIt is also important to note that industry standards may change. For instance, as of Dec 2017 the Committee for Private Education has phased out escrow schemes in their Fee Protection Scheme requirement for Private Education Institutions to apply for the necessary EduTrust certification.
- Client’s preference for an escrow account or its alternativesThough escrow accounts allow for more complex payment schemes between your business and client, some clients may prefer setting up non legally binding methods, such as a joint bank account, for the transaction.
- Consulting services that the bank offersSome banks do offer consulting services to help businesses better understand the options available to them when constructing the escrow agreement. For example, they may provide the provision of multi-party escrow agreements, or have expertise on cross-border transactions.
Do consult your lawyer to better understand if setting up an escrow account is the correct solution for your business or transaction.
When discussing the use of escrow accounts, conveyancing transactions usually come to mind. We have seen that escrow accounts are just one of three options available to solicitors when securing the funds of buyers as required by the law. It may be useful to consult your lawyer or the developers on how your funds are and should be managed.
If you intend to create an escrow account for your own business, you should also ensure the escrow agreement meets the industry’s and client’s expectations. If your transaction is a complex one, employing a bank’s escrow’s services may be beneficial for you in the long run.
Need legal advice?
If you have any questions about escrow accounts, you can request for a quote with Parvathi Annanth or other lawyers. With Quick Consult, from a transparent, flat fee from $49, a lawyer will call you on the phone within 1-2 days to give you legal advice.
This article does not constitute legal advice or a legal opinion on any matter discussed and, accordingly, it should not be relied upon. It should not be regarded as a comprehensive statement of the law and practice in this area. If you require any advice or information, please speak to practicing lawyer in your jurisdiction. No individual who is a member, partner, shareholder or consultant of, in or to any constituent part of Interstellar Group Pte. Ltd. accepts or assumes responsibility, or has any liability, to any person in respect of this article.