What is an open residential escrow account?

Banks are increasingly reaching out to clients with interesting offers. One example of an interesting banking mechanism is the open residential escrow account. Who is this offer aimed at? What conditions must be met to use it?

• Target group
• What is an escrow account?
• Open residential escrow account

Target group

The open residential escrow account should interest above all buyers of residential premises on the primary market. This offer is indirectly aimed at developers' clients. Indirectly, because it is the developer who has a statutory obligation to set up an escrow account. The choice of its type – open or closed – depends on many factors.

What is an escrow account?

Put simply: an escrow account is a kind of safety buffer placed between the buyer's funds and the developer's finances. If we decide to buy a flat on the primary market, we automatically use the escrow account service – this is where the instalments we pay will go.

Payments made by clients into the escrow account will not go straight to the developer, but the developer – in the case of an open residential escrow account – will be able to withdraw funds from it gradually. Crucially – the money obtained by the developer may be spent only on strictly defined purposes – for example construction or finishing work on the specific flat to which the agreement relates. All the developer's obligations are set out in the Act on the Protection of the Rights of Purchasers of Residential Premises or Single-Family Houses of 16 September 2011, the so-called "Developer Act" (ustawa deweloperska), so there is no room for discretion here.

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Open residential escrow account

The difference between an open and a closed escrow account lies in the options the developer has. An open account allows funds to be withdrawn while the project is under way, whereas a closed one blocks this option and pays the money to the developer only after ownership has been transferred to the buyer of the residential premises, confirmed by a notarial deed (akt notarialny).

This, however, only seems an ideal situation for the buyer. A closed escrow account means the developer has to commit more of its own capital, which translates into lower economic efficiency and weaker financial liquidity for the developer. An open account allows the seller to use the funds paid in by the client, as a result of which the project carries less risk.

There are three types of open residential escrow account:

• A stand-alone account without safeguards
• An account secured by a bank guarantee
• An account secured by an insurance guarantee

If the buyer withdraws from the developer agreement – when the seller has not fulfilled the agreement or it was not drafted in line with the act, the buyer will receive a full refund. If, however, the agreement was terminated by mutual consent, the bank divides the funds accumulated in the account in accordance with the parties' arrangements.

Is a residential escrow account a good idea? It certainly gives clients a somewhat greater sense of security, regardless of the form chosen: open or closed. In turn, setting one up increases the developer's credibility, which is of no small importance for further property sales.