Escrow account in Latvia

Author : Rick Rodriguez | Published On : 03 Jun 2021

Escrow Account - is an agreement made under contractual provisions between the parties to the transaction, whereby an independent, trustworthy third party (usually a bank) receives and pays out money or documents for the parties to the transaction, the timing of such disbursement by the third party being dependent on the fulfillment contractually agreed conditions of the contractual partners. It is widely used to aid sale / purchase transactions like buying a property, to minimize risk between the parties, and to provide a mechanism that ensures trust and confidence.

The buyer, seller and bank sign an agreement in which they agree on the necessary documents, terms and conditions and other terms required to close the deal, as well as any critical milestones along the way. A trustee - the bank, acts as an impartial holder of the money or documents, thus keeping the risk of fraud for both parties to a minimum.

Although escrow accounts are generally used during a real estate transaction, in practice they can be used in any transaction that seeks to reduce risks for all parties, for example:

Buying a used car where the money can be released after a warranty period has expired.
Security deposits for a property rental, in which the money is released after the tenant moves out according to the condition of the property.
Provision of construction work in which the money can be released in whole or in part, if the construction work has been completed according to a defined standard or if defined stages (milestones) of the work have been completed.

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.

Escrow account scheme

An escrow account scheme looks like this: