The California Law That Allows You to Cancel an Escrow Account

When buying or selling a home, the California escrow process is the most common procedure used to transfer the ownership of the property. This process is often confusing, especially to new home buyers, but basically it is an instrument used to protect both buyer and seller until all the instructions in the buyer-seller contract are followed. Under California law, an escrow may be canceled if certain provisions are met.

The laws that govern an escrow process or its cancellation are contained in the California Financial Code in Division 6 of Section 17000 and in the California Code of Regulations, under Subchapter 9, Title 10. In condensed terms, an escrow is a the process where parties who wish to transfer or finance a real estate property, deposit funds, documents and any other instrument pertaining to the transaction with a neutral third party. These are held in trust until a condition or event occurs according to the conditions set forth in the escrow instructions made by both transacting parties. When the conditions are met, the escrow is released and distribution of the property title, documents and monies is made.

California escrow law states that the third party holding an escrow must be a corporation that specializes in escrows. However, other types of businesses such as banks, trust companies, savings and loan, real etate brokers, licensed attorneys, title companies and insurance companies may also perform escrow services, provided they meet certain state regulations. The choice of escrow holder must be agreed on by both of the real estate participants. If one disagrees with another’s choice, the participants must use another escrow company they agree on.

According to California escrow law, escrows are voluntary, but cancellation can occur only with the written consent of both parties. This is established when the escrow instructions are made. If there is a default in any of the instructions, this causes the escrow to fail to close, both parties need to execute and sign a mutual cancellation agreement called a cancellation of contract. This cancellation is completed by a real estate broker. But besides the cancellation of contract, most escrow companies also require their own mutual cancelation process. An escrow officer may not release any funds until both parties agree to its disposition and to the payment of the escrow holder charges.

A cancellation of escrow may not mean the purchase contract is also canceled. A 1980 California court appeal determined that a mutually agreed escrow cancellation did not rescind the purchase contract. Therefore, a real estate broker representing the interested party should obtain a written agreement to cancel the purchase contract as well as the escrow.