Escrow account in Latvia

[BalticLegal]

Escrow – is an arrangement made under contractual provisions between transaction parties whereby an independent trusted third party (usually a bank) receives and disburses money or documents on behalf of the transaction parties, with the timing of such disbursement by the third party being dependent on the performance of the contract agreed conditions of the contracting parties. It is commonly used in support of sale/purchase transactions such as the purchase of a property in order to minimize risk between the parties and to provide a mechanism that ensures trust and confidence.

The buyer, seller, and bank sign an agreement agreeing on the documents, terms, and other terms needed to close the deal, as well as all the key milestones along the way. An escrow agent – the bank – acts as an impartial custodian of the money or documents, keeping the risk of fraud to a minimum for both parties.

Although escrow is generally used in a real estate transaction, in practice it can be used in any transaction where the aim is to reduce risk for all parties, for example:

Buying a used car where the money can be released at the end of the warranty period.

How does an escrow account work?
The bank creates an escrow account, and the buyer/client transfers the agreed purchase price or payment amount;
Once the seller/contractor has the required documents or has completed relevent requirements – he submits documents or evidence to the bank;
The bank informs the buyer/client, that the seller has submitted the documents/evidence;
If the documents/evidence meet the requirements as provided for by the agreement, and the buyer/client accepts them – and the bank finalizes the transaction: transfering the money to the seller/contractor and handomg out the original documents to the purchaser/client. The transaction is then closed.
Security deposit for a property rental where the money is released after the tenant moves out according to the condition of the property.
Provision of construction services where all or part of the money can be released when the construction work is to a defined standard or when defined phases (milestones) of the work are completed.