Notary escrow account

Notary Escrow Account - A notary escrow account is a trust account managed by a notary through which the purchase price of a property is processed, in order to provide both the buyer and the seller with maximum security during the payment process.

How It Works and Legal Basis

When purchasing real estate, the notary escrow account serves as a safeguard between the interests of both contracting parties. The buyer does not want to pay the purchase price until it is certain that they will actually become the owner. The seller does not want to transfer ownership until they have received the purchase price. The notary escrow account resolves this dilemma: The buyer transfers the purchase price to the notary’s escrow account, and the notary only pays the money to the seller once all contractually agreed conditions for the transfer of ownership have been met.

The establishment and use of a notary escrow account are governed by the Federal Notary Code (BNotO) and the guidelines of the Chamber of Notaries. The notary is personally liable for the proper safekeeping and transfer of the purchase price. The funds in the notary escrow account are protected as third-party funds and do not form part of the notary’s estate in the event of the notary’s insolvency.

In practice, direct payment has largely replaced the notary escrow account for straightforward real estate transactions. With direct payment, the buyer transfers the purchase price directly to the seller after the notary has verified the contractually stipulated conditions for payment and issued the notice of due date. The priority notice of conveyance in the land register protects the buyer against any dispositions by the seller. The notary may only establish a notary escrow account if there is a legitimate security interest that goes beyond the standard case.

The costs for a notary escrow account are governed by the Court and Notary Fees Act (GNotKG). The custody fee amounts to half the fee according to Fee Schedule B. For a purchase price of 400,000 euros, this amounts to approximately 750 to 1,000 euros in addition to the regular notary fees. These costs are generally borne by the buyer, but may also be contractually agreed upon differently.

When a Notary Escrow Account Is Advisable or Required

A legitimate security interest for setting up a notary escrow account exists in particular in the following cases:

In the case of a discharge of encumbrances, a land charge or mortgage on the property held by the seller must be redeemed from the purchase price. The notary allocates the purchase price to the escrow account, pays the redemption amount directly to the seller’s bank, and forwards the remaining amount to the seller. This ensures that the encumbrance is removed and the buyer receives a property free of encumbrances.

In the case of communities of heirs with multiple sellers, the notary escrow account ensures the correct distribution of the purchase price among the individual heirs. The same applies to the distribution of the purchase price among multiple beneficiaries or the withholding of amounts for outstanding development costs.

Practical Tip for Buyers and Sellers in Nuremberg and Franconia

In the Nuremberg metropolitan region, the notary escrow account is no longer used in most standard purchase agreements, as the combination of a priority notice of conveyance and a notarial notice of due date provides sufficient security. Nevertheless, in practice we regularly encounter situations where a notary escrow account is the safest solution-for example, with older properties in Nuremberg neighborhoods such as Gostenhof or St. Johannis, where encumbrances from previous financing are still registered in the land registry.

We recommend that buyers and sellers discuss the issue of purchase price settlement with the notary before the notarization. The additional costs of a notary escrow account are well worth the investment in complex cases, as they prevent disputes over payment processing from the outset. Our network of experienced notaries in Nuremberg, Fürth, and Erlangen provides personalized advice on which settlement method is appropriate for each specific case.

Frequently Asked Questions

Is a notary escrow account required for every real estate purchase?

No, a notary escrow account is not mandatory. The notary may only set one up if there is a legitimate security interest, such as when a release from encumbrances is necessary or when the purchase price is to be distributed among multiple recipients. For straightforward transactions, the purchase price is now predominantly settled via direct payment after the notary has confirmed that the conditions for payment have been met.

Who bears the costs for the notary escrow account?

The costs for setting up and administering the notary escrow account are generally borne by the buyer, as they derive the greatest benefit from the fiduciary settlement. However, a different arrangement can be made in the purchase agreement, such as splitting the costs equally. The fees are based on the purchase price and the GNotKG and range between 500 and 1,500 euros for typical purchase prices in the Nuremberg metropolitan area.

What happens to the money in the notary escrow account if the sale falls through?

If the purchase agreement falls through-for example, because the buyer cannot secure financing or the seller fails to fulfill their contractual obligations-the notary returns the deposited purchase price to the buyer. In doing so, the notary acts strictly in accordance with the contractual agreements. Any interest earned on the escrow account, if applicable, belongs to the depositor. In the event of a dispute, the notary deposits the amount with the escrow office of the competent local court until the matter is resolved in court.

How does the notary escrow account differ from direct payment of the purchase price?

In the case of direct payment of the purchase price, the buyer transfers the purchase price directly to the seller after the notary has verified and communicated the conditions for payment. This notification requires that the priority notice of conveyance be entered in the land register, that all documents necessary for the transfer of ownership be available, and that no obstacles exist. The notary escrow account, on the other hand, positions the notary as a trustee between the payment flows: The notary receives the funds and disburses them only once all conditions for payment have been met-including the release of the property from any third-party mortgages. The key difference from the buyer’s perspective is this: With direct payment, there is a brief window during which the purchase price has already been transferred but ownership has not yet been transferred. The notary escrow account completely closes this window. In straightforward standard cases in the Nuremberg metropolitan area, the risk associated with direct payment is low; for complex transactions involving multiple mortgages or uncertain ownership structures, the notary escrow account offers greater security.

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