Escrow was widely used in 2020.

If there is a split signing and closing, a seller will usually require some form of security from the purchaser to ensure the deal will be closed and the purchase price will be paid once the seller satisfies all conditions to closing. On the Hungarian market mainly two instruments are used for this purpose: earnest money and escrow.

Purchase price payment protection

Under an escrow structure the purchaser is required to put the purchase price to be paid at closing into an escrow account opened in the name of the escrow agent, who will make payments out of the escrow account to the seller or other parties in accordance with the terms of the SPA and the escrow agreement. An escrow account offers the seller security against the risk of the purchaser’s inability to pay the purchase price as and when due. However, it may be unattractive from the purchaser’s perspective, as the purchaser is not able to use the escrow amount which is locked in the escrow account and bears almost zero interest. Nevertheless, escrow was the most widely used form of security in 2020 as it featured in 48% of our transactions.

Earnest money was used in 28% of the transactions we advised on. Earnest money is a portion of the purchase price, usually 10%, which is paid by the purchaser to the seller at signing to demonstrate the seller’s commitment to closing the deal. With the earnest money paid the seller is incentivised to proceed with the satisfaction of the conditions to closing, a process that sometime requires the seller to restructure certain aspects of the asset or business being sold. Under Hungarian law, if the purchaser does not close the deal after the seller satisfied all conditions to closing, the purchaser forfeits the earnest money. While if the seller backs out of the deal after the earnest money has been paid, the seller must return double the amount of the earnest money to the purchaser. In this way the earnest money also protects the purchaser from the seller weaselling out of a deal up to the point where the seller can secure a purchase price difference from a second purchaser that is higher than the earnest money received from the first purchaser.

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