What is an escalation clause?
- An escalation clause is a term in a real estate contract, sometimes called an escalator, that lets a home buyer say: “I will pay x price for this home, but if the seller receives another offer that’s higher than mine, I’m willing to increase my offer to y“
Why are escalation clauses used?
- Escalation clauses are a tactic used by some buyers to make their offer more appealing and ensure the seller will choose their offer. It might sound like a good idea for a buyer trying to win in a bidding war and an even better idea for the seller looking for the highest sales price.
What terms does an escalation clause typically include?
While escalation clauses vary significantly, the general escalation addendum has a few essential components:
- The Original Offer
- The Escalation Amount
- The Maximum Limit of Escalation
The Original Offer
- The initial purchase price of the offer before the escalation clause is triggered. Sometimes referred to as the “Base Price.”
The Escalation Amount
- The incremental amount that the Base Price will be increased above any other competitive bid
The Maximum Limit of Escalation
- The maximum amount that the purchase price can reach before the escalation clause terminates.
When are escalation clauses typically used?
- Escalation clauses should only be used when the buyer is reasonably confident that there will be multiple offers, or when the buyer expects to pay an increased price.
What is the buyer clearly saying?
- I WILL PAY MORE
Do seller’s ever refuse to accept escalation clauses?
- Some home sellers state that they will not accept an offer with an escalation clause. They would prefer that every buyer submits what they are willing to pay for the home or real estate.
- Sellers sometimes prefer this method because it motivates buyers to outbid one another on the first try. It also streamlines the contract paperwork and the decision-making process.
What should also be included in a good escalation clause?
- Language indicating that only “Bona Fide offers” and/or “Arms-Length Transactions” can trigger the escalation clause.
- Language indicating that the net proceeds of any offer must exceed the net proceeds of the escalation offer in order to trigger the escalation clause.
- Language indicating that the escalation clause cannot be triggered by a subsequent offer that contains an escalation clause unless that subsequent offeror’s base price results in greater proceeds to the seller than the original offeror’s base price.
- Language that requires the seller to show proof of the existence of any offer that purports to trigger the escalation clause. A reference to what proof is satisfactory should also be included.
When is a good time to use an escalation clause?
- Escalation offers work well on one-day review situations.
After the seller has accepted an offer that includes an escalation clause, can the seller change his, her or their minds, and accept another offer?
- No, that would be a breach of contract.
If the seller has accepted an offer that includes an escalation clause, can the seller accept another offer as a backup offer?
- Yes, but only if the subsequently accepted offer indicates, in writing, that it is a backup offer.
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