Ashvini Chopra is a man in a hurry. The 41-year-old MD of Universal Trustees is meeting top executives of a Mumbai-based real estate firm for the fourth time in a row. Chopra has already made countless presentations on the importance of escrow trusts for real estate transactions.
This is a service that Chopra’s firm – a trusteeship entity founded two years back to manage the family wealth of industrialists – recently started to offer given that the number of disputes in such deals is growing sharply.
In an industry where every year $2.5 billion, or about 13,000 crore, worth of institutional real estate transactions are completed, the value of disputed transactions alone since 2006 adds up to $3 billion, says real estate consultant Knight Frank.
Typically, the stakes in such realty deals, which also include foreign private equity money and large institutions, are so high that both parties – the buyer and the seller – cannot afford for transactions to stall due to last minute hitches. Hence, the need for escrow services.
Chopra cites examples where deals have fallen through due to oversight. The 300-crore land deal between the Rahejas and NRC LtdBSE -0.82 % of the Goenka Group. After more than a year of negotiations and the signing of a memorandum of understanding and payment of earnest deposit of 25 crore by the Rahejas, the deal was aborted just before the final agreement, as NRC, the seller, was declared sick by the BIFR and hence restrained from selling its property.
“This could have been avoided if the two parties had agreed to entrust the transaction in an escrow trust which would have managed the deal from the beginning,” said Chopra. “The neutrality of the escrow service ensures safety for all milestones in the negotiations.”
Similarly, another 300-crore deal to sell a land parcel belonging to Crown Mills of the Thackersey Group to the Godrejs also ended early when, after a prolonged negotiations, the Thackerseys sold the land to the Rahejas. The deal went into litigation which further delayed ultimate closure resulting in losses to all parties.
An escrow trust for real estate typically houses the entire transaction with the mutual consent of the buyer and seller, so that financial payments, documentation, due diligence, land titles and succession issues are all insulated. Even in the case of a breakdown, the two parties have recourse to legal action under the escrow arrangement, which is absent in current conventional pacts. The escrow company is a neutral third party that also holds the money associated with the transaction until the requirements of the contract are completed.
The escrow arrangement is still foreign in India where such deals have traditionally been done through unregulated structures based on mutual trust. “Such escrow trusts are critical as they not only act as custodians and arbitrators, but also as entities to which both parties agree to submit,” said Knight Frank director Amit Goenka.