Escrow Agreement Practices in Turkey
12.01.2020
ABSTRACT
Escrow Agreements which allows to secure the payment of obligations by transferring to the Third Party (Escrow Agent) is a method which has been commonly used in United States of America (“USA”) since 1850s. Recently, Escrow Agreements have became one of the most preferred contract system in Turkey since it allows to secure the payments, especially on conditional contracts. In this Article, we will be focusing on legal characteristics and key elements of Escrow Agreements and will detailly explain the Turkish practices.
Introduction
Escrow Agreements have various of definitions in doctrine and academic studies, but commonly accepted definition in USA, includes the function of Escrow. California Financial Code (“CFD”) explains the Escrow as follows;
“Escrow” means any transaction in which one person, for the purpose of effecting the sale, transfer, encumbering, or leasing of real or personal property to another person, delivers any written instrument, money, evidence of title to real or personal property, or other thing of value to a third person to be held by that third person until the happening of a specified event or the performance of a prescribed condition, when it is then to be delivered by that third person to a grantee, grantor, promisee, promisor, obligee, obligor, bailee, bailor, or any agent or employee of any of the latter.[1]
In accordance with abovementioned definition, real estate sales and leasing’s can be subjected to Escrow, but this definition is not acceptable in Turkish practices. Because in accordance with the article 705 of Turkish Civil Code, “Property rights of real estates are only gained through registration.”[2] Also, in this definition, Escrow is generally limited with the real estate transactions, but Escrow has much more extensive area of usage nowadays.
California Civil Code provides different and modern definition of Escrow as; A grant may be deposited by the grantor with a third person, to be delivered on performance of a condition, and, on delivery by the depositary, it will take effect. While in the possession of the third person, and subject to condition, it is called an escrow. [3]
Latter definition has wider scope than the previous since delivery of grant is not subjected to written instrument or any other document. On the other hand, considering the current practices, Escrow can be explained as the transfer of assets/goods to third party for the purpose of delivering to the other party if set forth conditions in the agreement are fulfilled, or returning to transferrer if conditions stated in the agreement are not fulfilled.
II. Key Elements of Escrow
On the basis of above-mentioned explanations, key elements of Escrow Agreements can be categorized as follows; Parties of Escrow Agreement, Legal Relationship Behind the Escrow Agreement, Assets Subjected to Escrow, Conditions of Transfer.
1. Parties of Escrow Agreement; General Escrow Agreement includes three Parties; Transferor, Transferee and Escrow Agent. Each of the Parties has different rights and obligations arising from Escrow Agreement as it is explained below.
i. Transferor;
In accordance with the Turkish Code of Obligations, each contract should include a Party which agrees and undertakes to transfer or fulfill specified assets/services. In Escrow Agreements, Transferor is the Party which agrees and undertakes to make the payment in cash or with some other asset, in the return of fulfillment of conditions set forth in Escrow Agreement.
Both legal and real entities can be a Transferor of Escrow Agreements and more than one person can be a Transferor in accordance with the Escrow Agreement.
ii. Transferee;
Transferee is the real or legal entity which will have a right to receive the assets which are subjected to Escrow if all conditions in the Escrow Agreement are fulfilled. Usually, in accordance with the nature of Contract Relationship, Transferee is also the real or legal entity which undertakes to fulfill the conditions set forth in the Escrow Agreement.
However, in some circumstances, conditions of Escrow Agreement can be subjected to the requirements not related to actions or duties of Transferee.[4] Relation between conditions of transfer and obligations of Transferee will be detailly explained at article 4.
iii. Escrow Agent;
Escrow Agent is the real or legal entity which undertakes to receive the assets subjected to underlying legal relationship and transfer to the Transferee if conditions set forth in the Escrow Agreement is fulfilled. If mentioned conditions are not fulfilled, Escrow Agent is obliged to return the asset to the Transferor.
In practice, Escrow Agents are usually banks or other Financial Institutions since they are much more trusted and independent institutions. However, in principle, any legal or real entity can be assigned as Escrow Agent in Turkey.
In USA, in order to prevent any possible misuse or fraud, in some cases, Escrow Agents are obliged to obtain an “Escrow Certificate” in accordance with the regulations.[5] However, in Turkey, since Escrow Agreements are not regulated by code, such requirement is not introduced.
On the other hand, even if license is not required, Escrow Agent will be liable for the misuse of assets which he/she obtained in accordance with the Escrow Agreement. Escrow Agent can be considered as “trustee” in Turkish practices. If transferred asset is destroyed or damaged by the flaw or negligence of Escrow Agent, in principle, Escrow Agent will be liable for such damages as Trustee.
In addition, if it is set forth in the Escrow Agreement, Escrow Agent might be entitled to charge the Parties for Escrow services.
If characteristics of assets are suitable, more than one real or legal entity can be assigned as Escrow Agent.
2. Legal Relationship Behind the Escrow Agreement
Escrow Agreements are used for ensuring the fair distribution of rights arising from some other legal relationship. Escrow Agreement plays an important role during the payment of liabilities arising from the basic legal relationship.
Escrow can be drafted as separate agreement or can be included in the contract drafted for the basic legal relationship. In latter option, Parties shall sign a separate contract with Escrow Agent in order to specify the terms of payment and duties of Escrow Agent. In all circumstances, Escrow Agreement always require a basic legal relationship. As in California and many other jurisdictions, an escrow presupposes the existence of a valid contract with sufficient parties, a proper subject matter, and a consideration.[6]
In the light of information provided above, it is safe to assume that validity of Escrow Agreement will be tied with the validity of the basic legal relationship. If underlying agreement is terminated for any reason, Escrow Agreement shall be automatically terminated and Escrow Agent shall return the assets which are subjected to Escrow Agreement, to the Transferor.
3. Assets Subjected to Escrow Agreement
In accordance with the nature of Escrow Agreement, subjected assets should be convenient for the transfer or assign. Thus, performance and service liabilities cannot be subjected to Escrow Agreement since they are not transferrable by nature. In practice, most commonly assets which are transferred to Escrow Agent are cash, check, securities or other legal instruments.
Even if usually Escrow is preferred for real estate sales in USA, real estate sales cannot be performed via Escrow in Turkey since Property rights of real estates are only gained through registration in Turkey. Because of this reason, even if the land title of the real estate is transferred to
Escrow Agent, and Escrow Agent has submitted the land title to Transferee upon the fulfillment of conditions stated in the Escrow Agreement, Transferee will not be the owner of real estate since registration is required by Turkish Legislation. In order to prevent possible disputes, rights and obligations of Escrow Agent should be clarified in the Escrow Agreement. Parties should clearly specify the liability of damages which may arise during the possession of Escrow Agent.
4. Conditions of Transfer;
In accordance with the Turkish Obligations Code, validity of contracts or liabilities can be bind to certain requirements or conditions. If contract will be valid when certain requirements are fulfilled, such requirements or conditions will be considered as “Retarding Condition” pursuant to Turkish legislation.[7]
Retarding condition should not be confused with maturity. If the term of payment is subjected to an uncertain event that may or may not occur in the future, it shall be considered as condition. However, if term of payment is postponed to a certain date, Parties only prevents debt to become due for specified term. Because of this reason, this shall be considered as maturity.[8]
In Escrow Agreements, condition does not necessarily need to be something that shall be fulfilled by Transferee.[9] In some circumstances, condition can be specified as unpredictable matters such as exchange rate, court decisions and act of god. On the other hand, illegal or unlawful acts or matters can not be determined as condition of transfer. Escrow Agreement will be null if determined condition is illegal.[10]
Att. Selman BALTACI
sbaltaci@dnblegal.com.tr
0216 519 20 00
[1] California Financial Code § 17003
[2] Turkish Civil Code : Article 705
[3] California Civil Code § 1057
[4] Contracts subjected to Casual Conditions in Turkish Practices.
[5] California Financial Code § 17006
[6] Foulkes v. Sengstacken, supra at 132; Moore Mill & Lbr. v. Curry Co. Bk, 200 Or 558, 566, 267 P2d 202.
[7] Turkish Code of Obligations, Article : 170/1
[8] Oğuzman / Öz, C.2, s. 504; Eren, Borçlar Genel, s. 1189.
[9] In reference to section 1/ii.
[10] Turkish Code of Obligations, Article : 176
