GENERAL ESCROW PROCEDURES

GENERAL ESCROW PROCEDURES

(May vary according to local custom and practice)

1. Prepared Escrow Instructions on the Escrow Holder’s Pre-printed Forms:

The escrow instructions are expected to describe the understandings and intentions of the principals to the
sale escrow.

In Southern California, joint/bilateral escrow instructions are typically prepared and submitted following
the execution by the principals of the receipt for deposit (residential purchase agreement) or other form of
agreement of sale. These instructions are usually accompanied by an initial earnest money deposit made by
the buyer, which is conditionally delivered awaiting the happening of specified events and the performance
of the conditions imposed in the joint escrow instructions.

In Northern California, unilateral escrow instructions are typically prepared and submitted a few days
before the anticipated completion or close of the sale escrow. Following the execution by the principals of
the deposit receipt (residential purchase agreement) or other form of agreement of sale, the buyer’s earnest
money deposit is generally delivered to the escrow holder for which a receipt has been obtained (without
instructions and in the absence of conditional delivery). Typically, no escrow instructions are prepared at
this time describing the happening of specified events or the performance of prescribed conditions,
together with the conditional delivery of instruments, money, or other things of value. Therefore, the
escrow has not been opened and will not be opened until much later when the unilateral escrow
instructions are prepared and signed by the principals of the escrow and conditional delivery occurs.

The principals to the escrow should carefully review any general provisions of the escrow prepared and
submitted to them by the escrow holder. These general provisions often include, among others, duties and
obligations imposed upon the principals (which may or may not be acceptable) and exclusions or
exceptions from the intended title insurance coverage.

In recent years, some “standard” forms of deposit receipts (residential purchase agreements) used by the
real estate brokerage industry have included provisions executed by the principals to be transmitted to the
escrow holder for the expected purpose of opening or establishing an escrow. The issue is whether
conditional delivery to the escrow holder has occurred by one or more principals of instruments,
money/funds, or other things of value to be delivered to another principal(s) upon the happening of
specified events or the performance of described conditions.

For a home purchase, the mutual escrow instructions of the principals (whether in the form of
joint/bilateral or unilateral instructions) are to include, among others:

• the purchase price and terms;

• agreement as to mortgages;

• how buyer’s title is to vest;

• matters of record subject to which buyer is to acquire title;

• inspection reports to be delivered through escrow;

• proration adjustments;

• date of buyer’s possession of the subject property;

• instruments and related documents to be signed by the principals, delivered into escrow, and recorded;

• disbursements to be made, including fees, costs and charges, who pays for them, and who is to receive

each disbursement; and,

• the date of closing of the sale escrow.

2. Ordering a “Preliminary Report” on the Subject Property:

A “Preliminary Report” is ordered from the title company selected by the buyer. The escrow holder (which
may be the same person/entity as the title company) examines this report carefully for items not
contemplated in the escrow instructions. Typically, the seller must clear or remove any such item and it
must be brought to the attention of the buyer “for information”, “expression of desire in the matter”, and
for the appropriate instructions of the buyer. The real estate broker acting as the agent and the fiduciary of
the buyer should review the “Preliminary Report” to offer the broker’s advice and recommendations within
the course and scope of the broker’s agency relationship. The “Preliminary Report” provides the
information upon which the instructions of the principals and of the lender(s) are based, as applicable,
when making/funding “purchase money” loans. The “Preliminary Report” (together with the instructions
of the principals and such lender(s)) become the basis upon which the title insurance company provides the
requested insurance coverage.

3. Requesting Demands and/or Beneficiary Statements:

Such demands or beneficiary statements are generally obtained by the escrow holder from the lender(s) of
record. The necessary documents will include:

• a “Demand for Pay-off”, if an existing loan is to be paid in part or in full through escrow; or,

• a “Beneficiary Statement”, if the buyer is purchasing “subject to” or “assuming” an existing loan.

(Purchasing “subject to” should not occur without the buyer receiving independent professional advice
regarding the legal and practical consequences of such a transaction.)

4. Accepting Structural Pest Control and Other Reports:

Structural pest control and other reports such as plumbing or roofing inspections are typically delivered to
the escrow holder who is to obtain, as instructed, any necessary approvals from the principals in connection
with such reports/inspections. The escrow holder receives the reports/inspections (and holds any funds
associated therewith) for delivery to the proper principal or party at the completion and close of the escrow
(or, depending upon the fact situation, for delivery subsequent to the close of the sale escrow).

5. Accepting New Loan Instructions, Instruments, and Related Documents:

If the buyer is requiring new financing, the escrow holder is to obtain the buyer’s approval/execution of the
loan instructions, instruments, and related documents as requested by the lender(s). The escrow holder is to
satisfy the instructions of the lender(s) prior to using the funds of the lender(s) to complete and close the
sale escrow.

6. Accepting Fire Insurance Policies and Completing and Closing the Sale Escrow:

• Accepting and delivering any fire insurance policy and transferring or establishing the insurance
coverage, as instructed by the principals of the escrow, including the lender(s);

• Making all proration’s (e.g., property taxes and insurance premiums) as instructed by the principals of
the escrow; and,

• Completing the accounting details and informing the principals the sale escrow is ready to close.

7. Requesting Closing Funds:

Upon the instructions of the principals, the escrow holder orders loan funds from the lender(s). The law
prohibits disbursal of funds from an escrow account until all items such as checks, drafts, etc. have cleared
and become available for withdrawal as an automatic right.

8. Auditing the File in Preparation for Closing:

• Accounting for all funds (Cash Reconciliation Statement) instruments and related documents;

• Determining that the principals have complied with the escrow instructions.

9. Ordering the Recording:

The title company (as the agent of the title insurance company), or the title insurance company intending to
issue the insurance coverage, will proceed to “date down”, i.e., to run the seller’s title to date. Thereafter,
the escrow holder/agent will request recording of the necessary instruments, provided no change has
occurred in the seller’s title (since issuance of the “Preliminary Report”).

10. Closing Escrow:

After confirming recording of the instruments described in the escrow instructions, the escrow holder
prepares:

• Closing or settlement statements for buyer and seller (typically in the form of a HUD 1 statement in a
sale escrow);

• Disbursing all funds; and,

• Delivering instruments and related documents to the principals or parties entitled thereto.

Proration’s

The seller is the fee title holder/ owner of the subject property until the completion and close of the escrow. If
possession is delivered at some time other than at the close of escrow, the principals may agree to adjust
accordingly the proration date. Depending upon the operative agreement, possession may alter one or more
incidents of ownership. If possession is delivered sometime after the completion and the close of the escrow,
the principals may agree to the proration of taxes, rent and/or assessments, along with prepaid items for which
the buyer becomes responsible as of the date of possession, or alternatively upon recording of the instrument of
conveyance (grant deed). Prepaid items include, among others, interest on a new loan or prepaid fire insurance
premiums obtained by buyer.

Termination

Escrows are voluntarily completed by full performance/execution and closing, or the escrow may be terminated
by mutual consent. The termination of the sale escrow is accomplished by cancellation of the escrow, and by
rescission or cancellation of the residential purchase agreement, or other form of agreement of sale. It has been
held that compliance with the escrow instructions must be achieved within the time limit set forth (unless the
time of performance included within the escrow instructions are mutually extended by the principals). The
escrow holder has no authority to enforce or accept performance after the time limit provided in the
instructions. When the time limit provided in the escrow instructions has expired and either principal to the
escrow has not performed in accordance with the terms of the escrow instructions, the principals may elect to
mutually cancel the sale escrow and each are thereupon entitled to the return of their respective property,
including funds, instruments and related documents. The escrow holder does not have authority to determine
that a principal has not performed, or that evidence of continuation of performance by either principal exists.
Therefore, clear and precise instructions from the principals are necessary.

Cancellation of Escrow - Cancellation or Rescission of Purchase Agreement/ Contract

Cancellation of escrow may not also cancel or rescind a purchase agreement/contract. In Cohen v. Shearer
(1980) 108 C.A. 3d 939, a Court of Appeal decided that cancellation of an escrow by mutual agreement of the
principals did not rescind the purchase agreement/contract between them. The distinction between cancelling
or rescinding the purchase agreement/contract is whether the principals stop the transaction in place (subject to
whatever limited fees, costs, and expenses as may be imposed by third parties and/or to the payment of
liquidated damages pursuant to the agreement of the principals), or whether the principals are returned to their
respective status prior to commencing the contemplated transaction. The former is an example of cancellation
and the later an example of a rescission.

Therefore, a real estate broker seeking to carry out the decision of the principal(s) to cancel or rescind a
agreement/contract of purchase or sale should be sure the other principal(s) to the agreement/contract agree in
writing to do precisely that and not simply settle for written instructions to cancel the sale escrow. As happened

in the Cohen case, if a purchase agreement/contract is not canceled or rescinded along with the cancelling of the
sale escrow, either principal to the purchase agreement/contract may retain the right to specific performance of
the agreement/contract or for the recovery of damages.