A boat buyer in heat has little patience. My clients often tell me they were “ready to close yesterday.” However, surveys and inspections often reveal minor deficiencies, which the parties may agree to have repaired as a condition to closing. Sometimes, these repairs cannot be completed until well past the intended closing date. In certain circumstances, an escrow holdback arrangement is a tool that can be used to keep the closing date from being extended.
What Is an Escrow Holdback?
An escrow holdback typically occurs when a portion of the purchase price is held back pending completion of repairs. These arrangements are typically seen in cash transactions where the necessary repairs are a relatively minor amount compared to the overall purchase price, and a holdback is oftentimes put in place as part of the conditional acceptance. For example, the acceptance of the boat is conditioned upon holding back a portion of the agreed upon purchase price to secure the seller’s obligation to repair certain items by a specific date or time.
There are many different forms of escrow holdback arrangements, but a few things should always be considered. To begin with, the funds should be held by an independent third party. If possible, the parties should use an agreed upon attorney as the escrow agent, where the funds will be placed in the applicable trust account until disbursed. It may be hard for some to believe, but an independent maritime attorney’s trust account is probably the safest place for the funds to be held when dealing with such an arrangement during this process.
The terms of the escrow agreement can be in the conditional acceptance itself or in a separate document. Regardless, it’s important the rules of disbursement are clear and objective so there is little dispute as to when the funds should be released. It’s vital the terms of the agreement are not subjective, as the escrow agent may have the right to deposit the funds into the court if the parties are unable to agree on the amount, timing and place of disbursement. This legal procedure is known as interpleader, and this scenario can lead to the funds being tied up in court for lengthy periods of time.
If certain repairs are to be performed prior to disbursement, then the escrow agreement should specify how and who determines if such repairs were completed in a proper fashion. All of the parties should always agree in the document as to who makes the determination whether the repairs are properly completed. Ideally, the parties agree to have the applicable surveyor, or another independent expert, make the final determination. It should never be up to the party paying for the repairs to make that decision.
Lastly, the total amount of funds held back is important. Parties oftentimes agree to hold back an amount equal or close to the estimate provided to perform the repairs. While this initially may seem fair, it’s wise to hold back two to three times the amount of the estimate. Anyone who has been active in the marine industry knows how tough it is to predict the cost and timing of repairs. As a result, it’s always smart to hold back significantly more funds than estimated in the event the work is more costly than predicted. It can create a difficult situation when the escrow funds are too small to cover the repairs.
Applicable to Certain Situations
Escrow holdback arrangements do not apply to every boat deal, but they can be great tools in certain transactions. Brokers, and especially maritime attorneys, know when a holdback is a possibility. The parties should hire a lawyer to draft the escrow agreement, particularly when dealing with significant repairs. A poorly drafted agreement with subjective terms and rules of disbursement can cause a nasty dispute and possibly lead to the funds being deposited into the relevant court.
Raleigh P. Watson is a contributing author, and a Partner at Miller Watson Maritime Attorneys.