Escalation Clauses

Escalation Clauses

As escalation clauses become more popular during this hot seller’s market, buyers should consider the pros and cons of using them – as well as the broader legal context of their offer.

During this hot seller’s market, many conversations on Florida Realtors® Legal Hotline involve multiple offer scenarios. Buyers are desperately seeking ways to try and make their offer stand out. One method that has rocketed in popularity is using an escalation clause.

There are many variations of these clauses, but the one thing they have in common is that a buyer is willing to increase the purchase price above the amount in the initial offer. A simple version of an escalation clause may read something like this:

“Buyer agrees to pay $____________ more than the next highest offer, not to exceed a final purchase price of $___________.”

This is the core concept, at least. Most clauses will also include some combination of the following components, although this is by no means an exhaustive list. The clause can get increasingly more complex the more a buyer adds to the clause.

  • The amount of money to add to the next highest offer (the escalation amount)
  • The maximum purchase price
  • Seller’s obligation to show the buyer a copy of the next highest offer used to calculate the final purchase price
  • Whether the financing amount will increase, or whether the buyer will pay cash to cover the escalation amount
  • How to handle a situation involving two or more competing escalation clauses
  • Whether the buyer or seller will be obligated to sign or initial further documents if the escalation clause is triggered
  • Whether the escalation is based on the purchase price or net proceeds to the seller (to account for costs and credits in a competing offer)

The positive side of escalation clauses is that they may make a buyer’s offer stand out. It also invites a seller to take an easy path to finalize negotiation.

Most of the confusion we hear about these clauses on Florida Realtors Legal Hotline centers around the fact that the buyer’s offer is just that – an offer. A seller who receives an offer can accept, reject, counter, or even ignore an offer.

For example:

Can the seller send a brief message that instructs the buyer to submit a new, “highest and best” offer, with a fixed purchase price by a deadline?
Yes – the seller is welcome to reject the buyer’s offer.

What if the seller removes the escalation clause and counters the buyer’s offer right at buyer’s maximum price cap with no information about any other offers? Can the seller do that?
Yes – the seller is welcome to counter buyer’s offer.

Can the seller go with a different buyer’s offer (even a lower-priced one) and never inform the buyer with the escalation clause?
Yes – the seller is welcome to ignore the buyer’s offer.

As you can see, the crux of most buyer frustrations centers on the concept that the seller isn’t bound to follow the rules in the escalation clause unless the seller accepts the offer.

Please note that there are additional angles to this issue – this brief article is simply designed to give an overview of the escalation clause itself. For example, although this article mentions a seller’s right to ignore an offer, a listing Realtor must comply with this Standard of Practice from NAR’s Code of Ethics:

REALTORS®, in response to inquiries from buyers or cooperating brokers shall, with the sellers’ approval, disclose the existence of offers on the property. Where disclosure is authorized, REALTORS® shall also disclose, if asked, whether offers were obtained by the listing licensee, another licensee in the listing firm, or by a cooperating broker.

Escalation Clause Example

In their website blog, Sarasota Real Estate attorneys Berlin Patten Ebling explain:

A well-written escalation clause will allow the Buyer to make an offer at an initial purchase price, while also confirming in writing that the Buyer is willing to increase said purchase price by a certain amount — up to a maximum amount — should another Buyer make an offer which is higher than theirs.

While this is certainly a useful tool to add to a Realtor’s arsenal during a Seller’s market, Realtors and Buyers should use caution when including an escalation clause in an offer. For instance, if the maximum purchase price the Buyer is willing to offer is not properly defined, the Buyer could find themselves under contract for a home that is well above what they intended due to a bidding war. In order to avoid unintended pitfalls when using an escalation clause addendum, we recommend the following language or something similar:

“If, prior to Seller’s acceptance of Buyer’s offer to purchase, Seller receives from another prospective purchaser a bona fide offer to purchase the property (“Competing Offer”), with terms acceptable to Seller and a Net Purchase Price (the Purchase Price less any identified Seller financial concessions) higher than the Net Purchase Price offered by Buyer, Buyer agrees that the Purchase Price of Buyer’s offer is increased so that the Net Purchase Price is $_____ higher than the Net Purchase Price in the Competing Offer(s), up to a maximum Purchase Price of $______. Seller shall provide a copy of the Competing Offer to the Buyer no later than the time Seller returns a copy of the executed Agreement to Buyer.”

By including the escalation clause language discussed above, Buyers can be certain that (1) their offer will be increased by a certain amount if the Seller receives an offer that will net them a higher amount, (2) their escalating offer will “max out” at a defined amount, and (3) Seller will be required to prove that they actually received a higher offer.

Joel Maxson is Associate General Counsel for Florida Realtors
© 2021 Florida Realtors®

Berlin Patten Ebling Blog

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