Sunday, August 5, 2007

Sher Value: Escrow Law: adeeper look.

Last week I have established in my mind, unequivocally, that the new law on escrow accounts is indeed in the best interests of the buyer and the market conditions for sure. There are a few refinements to the law, which can be handled through procedures that need to be considered and this is a practical way to see a good law being implemented.

Under the proposed law payments will be certified by the consultants and then the accountants and finally approved by the Land Department. The edict is that the Land Department will approve the payment within 7 days, however, there is no provision in the law to cover the delays. Under current FIDIC procedures, which govern contracts, the employer has 56 days from the day the contractor submits the bill to pay the contractor. In the event that there are delays in this the contractor has the right to claim. These 56 days were determined based upon the time it takes to verify the works, and the documentation of the billing, and hence there never was a chance that a third party (i.e. the Land Department) will check and approve the payment. This means that any delays by the Land Department could most certainly result in a payment delay claim from the contractor. How is this resolved?

Another more crucial element is when there is a dispute between the contractor and the client, then the position of the escrow account and the procedure actually complicate the matter even more. How does then the payment situation resolve itself as under the law as passed there is no provision for the payments to be suspended in such an event.

Interestingly, the banks who are to be the recipients of the escrow funds have suddenly jumped on the issue and some have said that they will have to charge to maintain the escrow account. From what I see in the law the banks have nothing to do in terms of verifying the payments or making any undertaking for the payments. I heard a few developers tell me that banks have suggested a 2% fee for maintaining escrow funds! I think this is totally shameless as banks are not required to do anything extraordinary under the law and I do not see why they should suddenly becomes scalpers in this situation. Indeed I would argue that banks are already holding sale funds that they receive so I do not see any difference on their lives.

One aspect of the law needs to be tightened up is the fiduciary responsibilities of the escrow agents as this is where comfort will be driven into the system. I also feel if escrow agents are specialized accounting and legal firms, as is the case in say the US, then indeed the need for the Land Department to confirm payments does not arise. I am sure these aspects are being looked at and the law will be further refined in its operation.

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