The virtues of a sole order escrow prior to the expiration of due diligence

Blog Post

Many commercial real estate purchase and sale agreements provide that the buyer’s earnest money deposit be held in a strict joint order escrow with the title company. In such a “joint order” arrangement, the buyer has unwittingly subjected the return of its earnest money deposit to the prior written consent of the seller.

Buyers routinely “terminate and walk” during their due diligence period if they are not satisfied with the physical condition or economic prospects of the applicable property. In a “joint order” arrangement, the seller may delay or withhold its consent to the release of the buyer’s earnest money as a tactic to try to keep the buyer in the deal or renegotiate the deal. In the event the seller does not consent to the release of the earnest money deposit, the title company will continue to hold the funds until a judge resolves the issue.

Such seller stratagem can be avoided at the outset by adding a simple provision to the purchase and sale agreement stating that prior to the expiration of the buyer’s due diligence period (and/or other buyer contingencies), the earnest money deposit is to be held at the sole order of buyer, notwithstanding any contrary instruction from the seller or any other party.

Title companies will usually allow such a provision to be added to their form of escrow instructions only if the due diligence period expires on a date certain (which requires no interpretation on the part of the title company). Although, it is worth noting, a zealous title company may make the sole order provisions subject to a contrary court order. Similarly, sellers will typically allow such a provision out of fairness on the logic that the buyer can “terminate and walk” during the due diligence period regardless of the reason for the termination.

Given the obvious protection and relative ease of including a “sole order” provision in a purchase and sale agreement, it has always surprised me why so few buyers insist on them.