Escrow in the UAE: what it is and what you need to know

An escrow, in its most basic form, is where money is held by a third party and released in accordance with the terms the parties have agreed. Although many people are unfamiliar with the concept, it is growing more common across a range of industries, because it gives both sides of a transaction a way to commit without either having to go first.

A brief history

Escrow transactions in the UAE previously involved a bank or a law firm setting up a designated account and acting as the third party. That process is costly, slow and paper intensive. Unregulated entities have also marketed themselves as escrow agents here.

In 2007, H.H. Sheikh Mohammed bin Rashid Al Maktoum, ruler of Dubai and Prime Minister of the UAE, issued Law No. 8 of 2007 concerning Escrow Accounts for Real Estate Development in the Emirate of Dubai. It was the first of its kind, mandating the use of escrow accounts for off-plan real estate purchases.

That origin explains a persistent confusion in the local market. Because the escrow law was written for developers taking investor money on off-plan property, “escrow” is often heard here as meaning only that. It has a considerably wider application.

Why use an escrow service

Escrow has uses well outside real estate, including on the sale and acquisition of a company. A seller wants to know payment is secured before shares transfer. A purchaser only wants to release funds against an updated certificate of incumbency registered with the relevant authority. That is a loop, and escrow is what breaks it.

Escrow addresses the interests of both seller and purchaser through an arrangement under which:

• the parties transacting have been cleared from a KYC and AML perspective;
• funds are available and earmarked for the transaction, and neither party can unilaterally release them ahead of the agreed release conditions.

Electronic execution has also removed the need for the parties to be physically present to enter into an escrow arrangement.

When to use an escrow service

• On a complex transaction that requires a trusted third party to hold and release funds.
• Where certain obligations must be performed before funds are released.
• Where the seller must fulfil obligations against which payment is being held.

Staged transactions are a common case. A service provider may need funds to complete the work, but paying the whole sum in advance is imprudent. Funds can instead be released in stages, against the milestones the parties have set out in the agreement.