What Is an Escrow Account? How Escrow Works in Commercial Deals

If you’ve ever been in a deal where you’re thinking, “I don’t want to pay until I know I’m getting what I paid for,” you’re not alone.

Whether you’re buying a business asset, licensing software, hiring a developer, ordering high-value stock, or selling something where the buyer wants extra reassurance, trust can be the sticking point. That’s where escrow can help.

In this guide, we’ll break down what an escrow account is in practical terms, how escrow works in commercial deals in the UK, when it’s worth using, and what you’ll want to get right in the paperwork so you’re protected from day one.

What Is An Escrow Account?

So, what is an escrow account?

In UK commercial deals, “escrow” usually means a holding arrangement (rather than a standard off-the-shelf bank product) where money (or sometimes documents or other assets) is held by an independent third party (often a solicitor or specialist provider) until the parties meet agreed conditions. Once those conditions are met, the holder releases the funds or assets to the right party.

In plain English, escrow is a way to make a deal safer when:

• you don’t fully trust the other party yet (which is normal in business);
• the deal involves a lot of money or high stakes;
• delivery or completion will happen over time (not instantly); or
• there’s a risk one party could walk away after getting paid or after receiving the goods/services.

Why Escrow Exists (And Why It’s Useful)

Escrow reduces risk for both sides:

• For the buyer: you don’t hand money straight to the seller before you’re confident the seller has delivered what they promised.
• For the seller: you know the buyer has the money available and has committed it into escrow (so you’re not doing all the work for free).

Escrow can be used for a one-off payment, milestone-based payments, or even “holdbacks” after completion (for example, where there might be post-completion adjustments or warranty claims).

Is Escrow The Same As A Deposit?

Not quite.

A deposit is usually paid directly to the seller (or sometimes to an agent) and can be forfeited depending on the contract terms. Escrow is different because the money is typically held by a neutral third party and only released if the agreed conditions are met.

That said, escrow can be used to hold a deposit where both parties want tighter controls around when it can be retained or returned.

When Do UK Businesses Use Escrow?

Escrow is common in a range of UK commercial scenarios, especially where there’s a “time gap” between payment and completion.

Here are some situations where escrow is often used (and where it can save you a lot of stress later):

1) Buying Or Selling A Business (Or Shares)

In business sales, escrow is often used to hold:

• part of the purchase price (a “retention”) to cover warranty claims;
• money pending completion steps (like consents, assignments, or deliveries); or
• an adjustment amount until accounts are finalised post-completion.

In these types of deals, you’ll often see multiple documents working together, and escrow is just one part of the legal “risk management puzzle” alongside a well-drafted main sale agreement.

2) Software Development And IT Projects (Milestone Payments)

If you’re hiring a developer or agency to build software, escrow can hold funds and release them when agreed milestones are achieved (for example, alpha build delivered, testing passed, final deployment completed).

Escrow is especially useful where you’re paying meaningful sums upfront and want objective criteria for release. You’ll want the underlying Service Agreement to match the escrow conditions so you don’t end up with conflicting obligations.

3) IP Licensing Or Transfer Deals

Escrow can be used where IP rights are being transferred, or where critical IP assets (like source code) are being held until payment clears.

Sometimes, escrow isn’t just about money. It can also be about holding documents or assets until conditions are satisfied - for example, signed assignments, domain transfers, or access credentials. In IP-heavy deals, an IP Assignment may also be part of the package to ensure ownership actually moves the way you intend.

4) High-Value Goods, Manufacturing, Or Supply Deals

If you’re ordering bespoke goods, large quantities of inventory, or goods with long lead times, escrow can reduce the risk of:

• the supplier taking the money and delaying or not delivering; or
• the buyer refusing to pay after delivery.

In these scenarios, escrow conditions might be linked to shipping documents, proof of delivery, inspection outcomes, or sign-off processes.

5) Dispute Settlements

Escrow is sometimes used as part of a settlement where the parties want a clean, controlled payment mechanism tied to dismissal of claims, delivery of deeds, or staged obligations.

Depending on the structure, a deed may be required. If you’re documenting a settlement, a Deed Of Settlement might be relevant, and the escrow mechanics can sit alongside it.

How Does Escrow Work In A Commercial Deal?

Escrow can sound complicated, but the process is usually straightforward once the terms are agreed.

Here’s a typical flow in UK commercial escrow arrangements:

Step 1: The Parties Agree The Escrow Conditions

The buyer and seller agree:

• what is being held (money, documents, assets, source code, keys, etc);
• who holds it (often a solicitor, bank, regulated escrow provider, or another trusted third party);
• release conditions (what must happen before it’s released);
• timings (deadlines, longstop dates, milestone dates); and
• what happens if there’s a dispute (and how the holder should respond).

This is usually documented in an escrow agreement (or an escrow clause within a wider contract).

Step 2: The Escrow Agreement Is Signed

The escrow holder typically won’t accept funds until the escrow agreement is properly executed and they’ve completed onboarding checks.

This is also where you want to ensure the underlying contract terms are clear and workable, because escrow only works well when the underlying obligations are clear.

Step 3: Funds Or Assets Are Paid Into Escrow

The buyer transfers funds into the escrow account (or deposits the relevant assets/documents with the escrow holder).

At this point:

• the buyer has “committed” the money; and
• the seller can be more confident that payment is secured once they deliver.

Step 4: The Trigger Event Happens

The trigger event is whatever you agreed would unlock release - for example:

• completion of a share sale;
• delivery of goods and sign-off;
• achievement of a milestone;
• expiry of a claims period without a claim; or
• receipt of a specified document or confirmation.

Step 5: The Escrow Holder Releases The Funds (Or Not)

If the release conditions are met, the escrow holder releases the funds/assets to the correct party.

If there’s a dispute, the holder will follow the dispute process in the escrow agreement - which might mean:

• holding everything until both parties agree;
• requiring a court order;
• relying on an independent expert determination; or
• releasing part and holding part (depending on how the agreement is drafted).

This is why the “dispute clause” and mechanics of notice are not just boilerplate - they are often the difference between escrow being helpful and escrow becoming a headache.

What Should Be In An Escrow Agreement?

Escrow is only as good as the agreement behind it. If the terms are vague, you can end up stuck in limbo - with money frozen and both sides frustrated.

While escrow agreements vary depending on the deal, most UK commercial escrow arrangements should cover the following points clearly.

1) Parties And Roles (Including The Escrow Holder’s Position)

Spell out who is who:

• buyer (or payer);
• seller (or payee); and
• escrow agent/holder.

It should also be clear what capacity the holder is acting in (for example, as stakeholder, agent, or trustee) - because this can affect duties, standard of care, and liability, and it can vary depending on the provider and the wording used.

2) The Escrow Property (What’s Being Held)

Be specific about:

• the amount of money (and currency);
• the account details and permitted forms of payment;
• whether interest is earned and who it belongs to; and
• any documents/assets held (and how they are stored/returned).

3) Release Conditions That Are Objective (Not Emotional)

The best escrow conditions are measurable and evidence-based, not subjective.

For example, “when the buyer is satisfied” is a recipe for dispute. Better examples include:

• “on receipt of signed delivery note”;
• “on completion of penetration testing with no critical issues recorded”; or
• “10 business days after completion unless the buyer serves a written notice of claim with supporting documents”.

4) What Happens If Something Goes Wrong

Your escrow agreement should cover foreseeable issues like:

• late delivery or missed milestones;
• partial delivery;
• termination of the underlying contract;
• refund processes (full or partial);
• holdback amounts; and
• how notices must be served (and within what timeframe).

If the escrow is linked to a wider commercial relationship, make sure your termination wording and post-termination obligations align across documents. In many deals, parties also include limits on exposure using Limitation Of Liability clauses, but you’ll want to be careful that they don’t undermine the escrow’s purpose.

5) Fees, Costs, And Tax Treatment

Escrow holders usually charge fees, and your agreement should clearly state:

• who pays (buyer, seller, or shared);
• when fees are deducted; and
• whether fees come out of the escrow amount or are paid separately.

It’s also smart to clarify that each party is responsible for its own tax advice. Escrow doesn’t automatically change the tax character of a transaction, but timing can matter depending on the deal.

6) Data Protection And Confidentiality

Escrow involves information - names, bank details, contracts, IDs (for onboarding checks), and sometimes commercially sensitive documents.

If personal data is processed, your business still needs to think about UK GDPR and the Data Protection Act 2018. Depending on your setup, it may be appropriate to have a Privacy Policy that explains how personal data is used and shared with service providers (including escrow providers).

7) Transfer Mechanics (Assignment Or Novation Issues)

In more complex deals, you might need to transfer rights or obligations from one entity to another (for example, as part of a restructure, group reorganisation, or sale process).

Escrow documentation should be consistent with how the underlying contract can be transferred - whether by assignment, novation, or not at all. Depending on what you’re doing, a Deed Of Novation may be required to properly transfer obligations (not just rights).

Escrow Risks And Practical Tips For Small Businesses

Escrow is a great tool - but it’s not magic. If you don’t set it up carefully, you can still get stuck with delays, disputes, or unnecessary cost.

Here are key risks and practical tips to keep your deal moving.

Choose The Right Escrow Provider (Independence And Regulation Matter)

Escrow only works if the holder is genuinely independent and trusted. In UK commercial deals, escrow arrangements are often handled by:

• solicitors (especially in business sale contexts, typically holding funds as a stakeholder);
• regulated firms offering escrow services; or
• banks or specialist third-party escrow providers.

Ask early about onboarding requirements, timescales, and fees. It’s very common for delays to happen because compliance checks weren’t factored into the deal timeline.

Be Realistic About Anti-Money Laundering Checks

Many escrow holders must carry out anti-money laundering checks before receiving funds. For small businesses, this can involve providing:

• company registration details and shareholder information;
• director ID and proof of address;
• source of funds/source of wealth information; and
• transaction background documents (contracts, invoices, deal summaries).

This isn’t the agent being difficult - it’s standard compliance. Build this into your deal schedule, as it can be a material cause of delays.

Make The Release Conditions Easy To Prove

A surprisingly common escrow problem is “we can’t agree whether the condition happened.”

To avoid that, define:

• what evidence is required (signed document, email confirmation, third-party report);
• who provides it; and
• when it must be provided.

If you’re using email confirmations, consider adding clarity in the main contract about notices and communications (and whether email is acceptable). Getting this right early can prevent months of argument later.

Align The Escrow With The Underlying Contract

Escrow doesn’t replace your main contract - it supports it.

Your underlying contract (whether it’s a supply contract, a consultancy agreement, or broader Terms And Conditions) should match the escrow mechanics. If your contract says payment is due on delivery, but the escrow says payment releases 30 days later, you’ve built a dispute into the paperwork.

Don’t Forget Insolvency Risk

One reason escrow is used in bigger deals is insolvency risk.

For example:

• If the seller becomes insolvent after you pay them directly, you may be an unsecured creditor trying to recover funds.
• If the buyer becomes insolvent, the seller may never get paid even after delivering.

Escrow can reduce (not eliminate) these risks by keeping funds ring-fenced pending completion and by clearly defining who is entitled to the escrowed funds at each stage.

Get Legal Advice Before You Lock In The Structure

Escrow is a legal mechanism, not just an admin step. The details matter - especially around release triggers, dispute handling, liability of the escrow holder, and what happens if the underlying deal is terminated.

Templates can be risky here because escrow is highly deal-specific. A clause that works for a simple goods purchase may be a terrible fit for a milestone-based software build or a post-completion retention in a business acquisition.

This guide is general information only and isn’t legal, financial, or tax advice. If you’re considering escrow for a specific deal, it’s worth getting advice on the structure and documentation.

Key Takeaways

• An escrow account is a third-party holding arrangement where funds (or assets) are only released when agreed conditions are met, helping both sides reduce risk.
• UK businesses commonly use escrow in business sales, software and IT projects, IP deals, high-value supply arrangements, and settlement situations.
• The escrow agreement needs clear, objective release conditions, a workable dispute process, and alignment with the underlying contract to prevent money being “stuck” in limbo.
• Choosing the right escrow provider and allowing time for AML/KYC checks can prevent avoidable delays in completion.
• Escrow supports your commercial deal, but it doesn’t replace the need for a properly drafted contract and well-managed legal foundations.

If you’d like help setting up an escrow arrangement or reviewing the contracts around a commercial deal, you can reach us at 08081347754 or team@sprintlaw.co.uk for a free, no-obligations chat.