Escrowed funds: can the buyer block their release?

Key points

• The escrow agent does not settle disagreements: they apply the agreement, and nothing but the agreement.
• A party cannot obtain the release of the funds alone; nor can it block them indefinitely without a serious reason.
• Anyone who withholds escrowed funds without proof is exposed to damages: the Rouen Court of Appeal ruled so on 5 January 2022.
• Everything depends on the drafting: objective release conditions, expected evidence, a long-stop date, what happens to the funds in case of disagreement.

The case: a clean-up, an escrow, a blockage

In 2016, a property holding company buys a former car garage. The soil pollution is known: the sellers, the last operators, agree to a fixed contribution to the clean-up, and part of the price is held in escrow by the notary, partly to finance the works and partly until the document certifying that the site can be reused is obtained. After the sale, the buyer considers the pollution more extensive than expected, refuses to release the funds and sues the sellers for hidden defect and fraud.

It loses at first instance and then on appeal (Rouen Court of Appeal, 1st civil chamber, 5 January 2022, no. 20/02031). The judges note that no additional pollution is shown, and that the buyer, a real estate professional, knew about the pollution and had accepted a fixed contribution, and therefore the risk that the cost of the works would be exceeded. They order the release of the escrowed sums and order the buyer to compensate the sellers for the unjustified blocking of their price.

The escrow agent is not an arbiter

The conventional escrow agent receives a sum which they undertake to hand over to the party entitled to it (article 1956 of the French Civil Code). As long as the dispute lasts, they can only be discharged of the funds with the consent of all interested parties or for a cause judged legitimate (article 1960 of the French Civil Code).

Whether a notary or a lawyer, the escrow agent therefore applies the agreement to the letter. If the release conditions are met and proven, they release. If they are not, or if a party objects, they keep the funds until joint instructions or a court decision. They do not themselves judge who is right: that is precisely what makes the mechanism secure. The notary could therefore not, on the buyer's request alone, refuse to release funds whose conditions were met; nor could they release them alone to the seller in the face of an objection: it was the judge who decided.

Blocking without proof has a price

The main lesson of the case lies here. Escrow protects the buyer against a defined risk, not against all their regrets. Keeping funds blocked on the strength of an unproven complaint amounts to depriving the seller of their money without anything in return. The judges penalised this: the party behind an unjustified blocking must make good the harm it causes the seller, notably the tying up of the sum.

The message applies both ways. A buyer with genuine grounds to object must document them, through an expert report, quotes or analyses, and act quickly. A seller whose funds are withheld without reason can ask the judge for their release, and for compensation for the harm suffered.

Drafting the clause to avoid blocking

• A precise amount and purpose: what exactly the sum secures, and what it does not.
• Objective release conditions: a document, a date, a verifiable event, rather than an assessment.
• The list of supporting documents to be given to the escrow agent, and who provides them.
• A long-stop date, and what happens to the funds on that date if nothing has occurred.
• How the escrow agent behaves in case of disagreement: holding the funds, a time limit to go to court, possible consignment.
• Where relevant, a cap on the risk borne by the seller, such as a fixed contribution, so that the buyer cannot claim more than agreed.

These rules apply to any price retention: site clean-up, works to be completed, warranty and indemnity, earn-out. For the details of the clauses, see our article on the escrow agreement, and for the duration, how long escrow lasts.

The choice of escrow agent matters too

The notary holds in escrow the funds of the deeds they receive; the lawyer can act as escrow agent for any transaction, including a property sale signed at the notary's office, on a dedicated CARPA account. In both cases, the quality of the arrangement depends less on the profession than on the precision of the agreement and the neutrality of the escrow agent. The comparison is detailed in our article on escrow with a lawyer or a notary.