February 22nd, 2021 at 11:10 am
What is an Escalation Clause? An escalation clause is a provision included in a buyer’s offer that proposes to pay a purchase price of a certain dollar amount over the highest competing offer that the seller receives. Although buyers in multiple offer situations may be tempted to use an escalation clause, our buyers’ agents should generally discourage clients from doing so for the reasons set forth below.
Parameters of an Escalation Clause: An offer with an escalation clause generally includes the following 3 parameters:
- Actual Purchase Price: An offer with an escalation clause should include an actual purchase price, just in case the seller receives no other offers. As an example, a buyer could offer: “Purchase price to be the greater of: (1) $1 million; or (2) $5,000 more than the highest competing offer that Seller receives from a bona fide buyer.”
- Maximum Purchase Price: An offer with an escalation clause should also include a maximum purchase price, so that the buyer will not be obligated to pay more than what the buyer is willing to pay. Hence, a buyer may want to add to an escalation clause as follows: “But in no event shall the Purchase Price exceed $1.15 million.”
- Obtaining Copy of Other Offer: A buyer may want to require that the seller provides the buyer with a copy of that competing offer for the buyer to confirm its price and terms.
Maximum Price Tips Buyer’s Hand: In a typical contract negotiation, the seller does not know how high of a price a buyer will pay, and the buyer does not know how low the seller will go. In stark contrast, an escalation clause with a maximum purchase price reveals precisely how high the buyer will go, whereas an escalation clause without a maximum purchase price is a very risky venture for the buyer.
Writing an offer with an escalation clause can easily backfire on a buyer. After all, a seller who receives an offer with an escalation clause is well-advised to simply issue a counter offer deleting the escalation clause in its entirety, and requiring the buyer to pay the maximum price that the buyer has already revealed.
Practice Tip for Buyers’ Agents: In the event that, contrary to your advice, your buyer nevertheless wants to write an offer with an escalation clause, be sure to give your buyer the C.A.R. legal article on Escalation Clauses (password-protected for C.A.R. members only). Also make sure to get your client’s written acknowledgment of receipt of the C.A.R. legal article (e.g., you may use a C.A.R. Receipt for Reports (RFR)).
-Thank you to Hamid Kharrat (Tustin Office) for suggesting this week’s legal tip!
Copyright© 2021 Berkshire Hathaway HomeServices California Properties (BHHSCP). All rights reserved. Any unauthorized reproduction or use of this material is strictly prohibited. This information is believed to be accurate as of February 22, 2021. It is not intended as a substitute for legal advice in individual situations, and is not intended to nor does it create a standard of care for real estate professionals.
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