Escrow - A Brief History (pt. 1)

Escrow - A Brief History (pt. 1)

Real estate transactions can be stressful.

If you're a buyer, you have hundreds of thousands, if not millions of dollars on the line.

If you're a seller, you're making plans hoping all the pieces fall in line and that you've picked a trustworthy buyer.

The current way we transact, using an escrow company, making large deposits, and hoping a lender approves a large loan amount, seems like a good way to go about things. It gives all parties a sense of security and assurance that things are less likely to go awry.

But, when you look back over the entire history back to the beginning of "private property", the way we buy and sell using escrow is actually in its' infancy.

The concept of private property as it relates to land or real estate came about in the 12th century, when the King of England made a law so that a feudal lord couldn't cheat the serfs working the land, and ended up with the serf being the owner of the land, in the modern sense, with the lord’s rights limited to receipt of money payments.

This caused a bit of a kerfuffle...

Prior to this, the kings and churches had complete control of the ledger that recorded any and all property rights, and they were the ones to approve or deny use, transfers and the like. If you could convince (bribe) the king or church to give you property rights, then you got them! There really was no need for a third-party to ensure a transaction went smoothly.

But after rights to land and property were distributed to all, some big laws got written in England to account for this monumental shift.

In 1285, De donis conditionalibus came about. This English law gave a property owner the ability to limit inheritance to their "heirs" with some reversionary rights in the event all the kids died. If you've ever watched Downton Abbey, all the squabble about the entail had to do with this law.

Through to the 16th century, descendants were given more property rights, and more laws were written to protect people "in possession" of land, making the lords more like the IRS than landowners. In all of this, "the crown" was still the final arbiter of what was written in the ledger so, still, no real third-party needed.

When the Roman empire crumbled, things got real interesting. Canon law (church law) was replaced by common law which applied to everyone, regardless of what the local bishop or priest wanted. It's around this time when disputes over land ownership started getting out of hand too. The King waving his hand was no longer the most practical way to resolve things. The fact that, up to this point in history, typically there was very little to no money changing hands when property rights were bought/sold/transferred, made resolving disputes a difficult task.

What followed was some really smart people crafting concepts like eminent domain and putting forth the idea that if a person possessed the land and provided "labor" (value) then the state not only couldn't deny private property rights, but now had a better means to enforce them. The job of the state became dispute resolution. Is this third-party escrow like we know today? Eh. not really, but it's getting closer.

In Escrow, A Brief History (pt. 2) we will look at the cultural enlightenment of the 18th and 19th centuries, how that further influenced property rights, and how local banks gave us true third-party escrow.