Covering risks with sales through escrow: this is how it works

Two parties in a sales contract place part of the purchase price in an escrow account. There is then a discussion on which party is entitled to this amount. Were the conditions in the escrow agreement complied with or not? The court addresses this issue in a recent ruling. Contract lawyer Hidde Reitsma discusses this case.



Concession agreement: part of the purchase price in escrow

This case concerns the following. Transautex (the parent company of the Dutch Burger King) concluded a concession agreement with Schiphol, based on which they can operate a Burger King at Schiphol. This concession agreement runs until April 2008. In 2009 Transautex sells this branch to Burger King Nederland BV. The purchase price is partially determined by the existence of the concession agreement with Schiphol, because obviously this branch is worthless without this agreement. Because at that time it is still unclear under which conditions Schiphol is prepared to renew the concession and lease agreement after 2008, part of the purchase price in placed in escrow.

Escrow: covering possible decline in value

The purpose of an escrow is to cover the risk of a decline in value of the purchased object. This concerns circumstances that may or may not occur that could have an impact on the value. In concluding a purchase contract there is still uncertainty about these future circumstances, but the parties nevertheless want to proceed with the sale. Therefore part of the purchase price is held separately on a bank account. If the circumstances reducing the value do in fact occur, this amount is deducted from the purchase price and reimbursed to the buyer. In the other case the seller receives the amount (held back) as yet. The conditions of an escrow determine the claim. An escrow always sets a date where an event does (or does not) occur. So an escrow works as a sort of temporary guarantee for the buyer.

Renewal concession agreement condition of escrow

In the escrow in this case it was stipulated that if Burger King achieves a renewal of its concession and lease agreement with Schiphol no later than 1 May 2008, the escrow amount shall be paid to the seller Transautex. However, if this renewal does not take place or if the renewal has less favourable conditions, Burger King shall receive (part of) the escrow amount as compensation. If Schiphol offers a renewal under less favourable conditions, Burger King is obliged to make its best effort to achieve better conditions. If it fails to do so, Burger King has no right to the escrow. Eventually Burger King agree to a renewal with Schiphol, but under less favourable conditions. Burger King then claims the escrow. In the opinion of Transautex, Burger King did not comply with its obligations under the escrow agreement and Transautex claims the escrow amount itself.

Lawyer to assess the escrow agreement

The court finds that Burger King has a best efforts obligation to achieve a renewal under the best possible conditions. This means that Burger King should have made an effort to the best of its ability, carefully and in good faith. According to the court, the correspondence between the parties shows that Burger King consistently and extensively consulted Transautex at the crucial times, and regularly followed Tranautex’s advice. Burger King complied with its obligations and cannot be blamed for the fact that the renewal was achieved under less favourable conditions. The court therefore rules that Burger King is entitled to the escrow amount.