– by Morgan Jones

Real estate transaction post-closing escrows: when the closing isn’t really the end!

It happens to the best intentioned parties to a real estate transfer: the Seller agreed to fix something after the building inspection, but it didn’t get done before the closing. Maybe the parts were back-ordered or broken. Maybe weather didn’t permit the repair. By the time the parties get to the closing table, they want everything to be done and settled… but what if it’s not?

If some condition has to survive the closing, holding some funds in escrow and a written agreement of what is to be done, by when and by whom, and the consequences for failing to perform may be the necessary thing to do. Some writing explicitly stating that it survives the closing is absolutely necessary in this circumstance because the “doctrine of merger” means anything that was in the Purchase and Sale Agreement and related Addendums is deemed to “merge” into the closing and cannot be enforced later. Money held in escrow that would cover the complete failure of performance can also ensure that one way or another, the repair gets done.

However, as they say, “an ounce of preparation is worth a pound of cure.” I have seen post-closing issues drag out long after everyone wanted to be done and moving on with their lives: More broken parts, more misunderstandings, and/or parties that are fighting out of spite because they were unsatisfied with something that happened before the closing and see the post-closing escrow as an opportunity for revenge.

With the new CFPB lending regulations coming into effect next month, last minute credits and escrows may not be allowed or may significantly delay the closing. Early identification of inspection issues and a practical assessment of the most efficient solution will be crucial. A Seller may be able to repair an item for less out of pocket cost than would be required as a credit for the Buyer to have the repair done him or herself, but is that more efficient in the long run with the timing risks? It will be a case-by-case basis assessment, but the nearer to closing the process moves, the greater the risk of leftover issues that could either delay a closing or cause post-closing battles, or both.