Escrow Account: How Secure Is It?

A warranty account or escrow is a special account designed to enhance the security of a monetary transaction between a seller and a buyer. Only lawyers, notaries, and banks can open such accounts. The uniqueness of this account lies in its automatic transfer from one owner to another upon the fulfillment of specified contractual agreements.

The primary purpose of escrow is to protect the interests of the contracting parties from potential financial risks associated with non-compliance or improper fulfillment of obligations.

The bank holding the warranty account acts as a neutral intermediary obligated to follow instructions and monitor the conditions of the account.

Advantages and Disadvantages of Opening a Warranty Account:

Warranty accounts are typically opened during real estate transactions, securities purchases, acquisitions of valuables, movable property, and more. Both individuals and legal entities can be buyers and sellers in these cases.

As an alternative to the traditional bank vault, escrow has several advantages:

• Guarantee of Obligation Fulfillment: If the seller fails to meet documented agreements, the funds are returned to the buyer.
• No Cash Transactions: The buyer doesn’t need to withdraw, verify, or store cash; all transactions are digital.
• Legality: Opening a warranty account involves AML checks, ensuring the legitimacy of large-sum transfers and protecting both parties from banking and tax-related concerns.
• Time and Cost Savings: It’s a more cost-effective way to secure obligations than alternatives like surety or deposits. Servicing an escrow account is also cheaper than renting a vault.

Regarding drawbacks, two important nuances should be noted. Firstly, funds in such an account can only be used for fulfilling obligations under the specific contract for which it was opened. Additionally, not all Czech banks offer escrow services.

How to Use an Escrow Account:

Opening a warranty account involves the following steps:

1. Signing a tripartite agreement between the buyer, seller, and bank (notary or lawyer). The agreement clearly outlines the conditions for the seller to receive the funds. It also specifies the duration.

Note: The contract duration can usually be extended, but the bank may charge an additional fee for the service.

2. The buyer deposits the amount specified in the agreement into the account.
3. The seller fulfills legal obligations and informs the bank through certificates and official documents.
4. The bank grants the seller access to the funds in the account.

To ensure the security of an escrow account, carefully select the bank where you plan to open the account. It should be reliable with a good reputation. When entering into an agreement, make sure it contains clear terms for using the warranty account.