“Do you want to kill my deal?” Yehuda roared at me, a real estate developer about to buy a building in a European capital city. This conversation took place after it became clear to Yehuda that I was insisting, with the sellers' lawyers, that the down payment Yehuda would pay be deposited in a trust account and not be paid directly to the sellers.
I believe that depositing the advance payment in an Escrow-type trust account (this is the most common type in real estate transactions. In this account, the trustee holds the down payment funds until all the terms of the contract have been fulfilled, and then releases the funds to the seller) is a critical component in ensuring a smooth and safe transaction. In a complex world of cross-border transactions, in which various parties and diverse legal regulations are involved, a trust account provides an essential safety net for both sides, especially in a deal like Yehuda's, where there are several heirs each selling his share in the building.
I do not want my client, in the event that the deal does not go through because legal or engineering matters have been discovered that do not allow it to be completed, to find himself left empty-handed or required to take legal proceedings and perhaps also enforcement proceedings in a foreign country to recover the down payment he paid. After all, we do not always know the financial condition of the other side (all the more so when there are several heirs), and not in every country can a note be registered in the land registry regarding the preliminary agreement that was signed and for which the down payment was paid. When the advance payment is deposited in a trust account with clear instructions to the trustee, there is no risk that, in the event the deal does not proceed to completion, the buyer will be required to “chase” the seller to get back the advance payment he paid.
A study published in the journal “International Real Estate Review” found that the use of a trust account in international real estate transactions significantly reduces the risk of fraud and failure to meet contractual obligations. The researchers analyzed data from 1,200 international real estate transactions and found that in transactions in which a trust account was used, the rate of fraud was 70% lower compared with transactions in which this mechanism was not used.
A trust account, beyond the advantages already mentioned, provides an additional layer of protection against the insolvency of one of the parties. In such a case, the down payment funds are protected in a separate account and are not included in the debtor's assets, which ensures that the buyer will not lose his money if the seller goes bankrupt. Moreover, a trust account allows maximum flexibility. The account's terms can be tailored to the needs of the specific transaction, including setting conditions for the release of funds, dispute resolution mechanisms, and more. This flexibility allows personal tailoring of the trust account to each and every transaction, and ensures maximum protection for all the parties involved.
It is important to note that alongside the many advantages, there are also certain disadvantages to using a trust account. First, setting up and maintaining a trust account involves costs, including the trustee's fee and account management charges (and I would suggest checking whether there are tax aspects to the trust). Second, managing a trust account requires legal and bureaucratic knowledge, and can be complex for someone who is not versed in the field. Third, in certain cases, the release of funds from a trust account may be delayed due to bureaucratic procedures or disputes between the parties (we can avoid these events if we draft clearly the cases in which the trustee must return the trust funds to the buyer, both in the preliminary agreement and in the instruction letter to the trustee).
Stories are based on real situations, with identifying details changed. Not legal advice.
Translated from the Hebrew original. עברית