August 23, 2018
During a Seller’s market, a Seller typically has multiple offers for their property. As a result, more and more Buyers are turning to escalation clauses to make their offers stronger.
An escalation clause is simply language that indicates that a Buyer is willing to pay a certain price for the property, but if the Seller receives a higher offer than that price, then the Buyer’s offer will “escalate” in price to exceed the competing offer’s price (think Ebay’s automatic bid system). Escalation clauses are not illegal, but I want to address some potential problem areas.
Escalation clauses MUST be carefully drafted. There is no set required language, which gives you flexibility, but also increases the risk of contractual ambiguities. Contractual ambiguities create confusion and potential legal liabilities for both the agent and brokerage. Remember, you owe all your clients a fiduciary duty of reasonable care and diligence. Additionally, Article 9 of the Code of Ethics states that REALTORS® shall assure that contractual language is written in “clear and understandable language.”
If you do choose to use escalation clause language as part of your Buyer’s offer, you should consider how high you want that price to “escalate”, how much you want to exceed a competing offer, how you define a “higher” offer (purchase price?, purchase price minus Seller concessions?, etc.), and how you will verify that another offer has triggered your offer to escalate in price. The safest option would be for the brokerage to have an attorney draft language for the brokerage to use.
As a listing agent, if your Seller receives an offer with escalation clause language, it may at times be easiest to simply counter the offer with a set purchase price, rather than deal with the fluidity of the escalation clause price.
If you have questions about escalation clauses or contract questions, feel free to call the UAR’s Legal Hotline at 801-676-5211 on Monday, Wednesday, or Friday from 8:30 a.m. to 4:00 p.m.