Functioning in tandem to close a transaction
Most modern real estate sales transactions depend on both the purchase agreement and the escrow instructions working in tandem to close a transaction. [See RPI Form 401]
Both the purchase agreement and the escrow instructions are contracts regarding interests in real estate. Both documents are required to be in writing to be enforceable under the Statute of Frauds. [Calif. Civil Code §1624]
A purchase agreement sets forth the:
- sales price;
- terms of payment; and
- conditions to be met before closing. [See RPI Form 150]
Escrow instructions constitute an additional agreement entered into by the buyer and seller with an escrow company. Under the instructions, escrow facilitates the completion of the performance required of the buyer and seller in the underlying purchase agreement.
Escrow instructions do not replace the purchase agreement. Instead, the instructions function as directives an escrow officer undertakes to coordinate a closing intended by the terms of the purchase agreement. [Claussen v. First American Title Guaranty Co. (1986) 186 CA3d 429]
Escrow instructions occasionally add exactness and completeness, providing the enforceability sometimes lacking in purchase agreements prepared by brokers or their agents.
A written and signed purchase agreement typically is the primary underlying document in a real estate sales transaction. All further agreements, including the escrow instructions, need to comply with the primary document, unless the parties intend to modify the terms of that original agreement.
The agents negotiating a transaction are responsible for ensuring the escrow instructions conform to the purchase agreement. This is done by reviewing the instructions prepared by the escrow officer to ensure the intentions of the buyer and seller are clear. Thus, the escrow instructions are reviewed by both agents prior to submitting them to their clients for their review and signatures.
In some instances, the buyer and seller orally negotiate the sale and go directly to escrow, without first memorializing their understandings in a written purchase agreement. In this instance, there is no underlying written purchase agreement generated prior to opening escrow.
Here, the buyer and seller intend the escrow instructions to function as the binding contract documenting the sale. In this situation, in addition to providing closing instructions, the escrow instructions constitute a binding contract between the buyer and seller, satisfying the Statute of Frauds. [Amen v. Merced County Title Co. (1962) 58 C2d 528]
To provide for a timely closing, the agent dictating instructions collects and hands to the escrow officer all of the information necessary to prepare the instructions and documents.
