October 26, 2018
I received a number of calls dealing with escalation clauses this past spring and summer. 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 automatic bid system). Escalation clauses are not illegal, but be very careful in the language that you use.
Let me give an example: Say a Buyer submits an offer that includes the following PROBLEMATIC language:
Escalation Clause: “Buyer shall beat the next highest competing offer by $1,000. Seller shall provide Buyer with a copy of the next highest competing offer as proof that the escalation clause language has been triggered.”
What concerns are there with this language? Let me address two.
1) If a Seller accepts the Buyer’s offer, it is clear that the Seller has agreed to provide the Buyer with a copy of the next highest competing offer. However, the escalation language above does not state WHEN the Seller needs to do this. I have had calls where the Seller provides a copy of the next highest competing offer the day before the Settlement Deadline. Obviously this creates significant issues. Additional language clarifying when the Seller needs to provide a copy is necessary (i.e. 3 days after Acceptance, etc.).
2) The escalation language above describes how the Buyer will beat the “next highest competing offer by $1,000.” So how is the “next highest competing offer” defined? My example language doesn’t define it and is therefore problematic. Additional language like “Buyer agrees to exceed the next net highest competing offer (Purchase Price minus any Seller concessions) by $_____.)” would be prudent.
If you have any questions about escalation clauses or any other contracts issues, 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.