Escrow account (construction)

A construction escrow account is a mechanism for holding an off-plan buyer’s instalments outside the developer’s own accounts, under the control of a third party such as a bank or trustee. Funds are released to the developer only as agreed construction stages are certified complete, rather than being available to the developer on demand from the moment they are paid.

Also called: project account, trust account

The arrangement exists because off-plan buyers pay for something that does not exist yet. Without escrow, instalments go straight to the developer, who may spend them on this project, on another, or on servicing debt. If the company fails, buyers are unsecured creditors of a company that has already spent their money.

Where escrow is mandatory it is usually statutory. Dubai requires project accounts under the RERA regime, with releases tied to construction progress signed off by a consultant, and a portion held back until after handover. Several other jurisdictions adopted similar rules after a wave of failures.

What escrow protects against is misappropriation, and it does that well. What it does not do is establish quality or timing. Money is released when a stage is signed off as complete, and that sign-off is typically produced by a consultant the developer engaged. If the certificate is generous, the release is generous, and the account has done exactly what it was designed to do.

Nor does escrow protect against delay. A project can draw funds correctly, stage by stage, and still be two years late, because the account governs where the money goes rather than how fast the building rises. Buyers frequently read the existence of an escrow account as an assurance of delivery. It is not one.

Markets without a statutory regime rely on whatever the individual contract says. In Bali, Phuket and much of the Albanian coast, payment terms are a matter of negotiation, and ‘escrow’ in a draft may mean a genuine third-party account or an account in the developer’s own name with the word attached to it.

Establish whether your payments sit in a real third-party account, and who certifies the releases. Then treat the certification as the thing worth checking, because that is the point at which the protection either holds or does not.

A construction escrow account keeps buyer instalments in third-party hands and releases them only as agreed stages are certified, protecting against a developer spending buyers’ money elsewhere — but it does not certify quality or guarantee the building arrives on time.

See also

• Milestone payment
• Off-plan
• Practical completion