Legal Hotline: Key Considerations When Using an Escalation Clause

In this real estate market, multiple offers seem to be becoming the norm and buyers agents are trying to do what they can to ensure they have the best offer. This also means listing agents need to know how to evaluate all offers to ensure they are getting the best offer for their seller.

Buyers are increasingly using ‘escalation clauses’ to distinguish their offers from others. An escalation clause can let a buyer more easily compete in a multiple-offer situation. These clauses have been common in the Boston area for the last several years, but with low inventories and heavy buyer competition, CCIAOR is starting to see more of these in our market.

What’s an Escalation Clause?

An escalation clause is a term that is included in a buyer’s offer that allows the buyer to automatically increase his or her offer to a certain amount. Your REALTOR® association is in the process of creating a standard escalation clause form which will be included in the MassForms Library in the near future. Because every transaction is different, we recommend that your buyer clients carefully consider the advantages and disadvantages of using an escalation clause, and to always consult with an attorney before including one in an offer.

Key Considerations for Using Escalation Clauses

While the terms in an escalation clauses can vary, most escalation clauses contain the same basic features. These features include:

1.) The original offer
2.) The amount by which the buyer is willing to escalate his or her offer
3.) The total amount that the buyer is willing to offer (the “cap”)
4.) Details about how the buyer will fund the escalated offer.

In order for the escalation clause to kick-in, the seller must have received a higher bona fide offer from a competing buyer. A bona fide offer is an offer that is made in good faith and is legitimate and enforceable. At the buyer’s request, the seller must provide documentation to the buyer that the other offer was bona fide.

An Escalation Clause May Not be Right For All Parties

Your buyer should consider a few things before using an escalation clause in their offer.

For example, buyers should be aware that not all sellers accept offers that contain escalation clauses. Some sellers prefer to know the exact amount that a buyer is willing and able to pay for a home. In addition, escalation clauses can lead to increased paperwork and can complicate the final decision about which offer the seller accepts.

Buyers should also be aware that escalation clauses reveal to the seller more information than is contained in a traditional offer, potentially jeopardizing the original offer. This is because the seller will know exactly how much the buyer is willing to pay and thus the seller could decline the buyer’s offer and propose a counteroffer at or above the buyer’s cap.

What’s Next?

Look at the Escalation form, which is accompanied by a two page explanation sheet to give buyers and sellers more information to consider when using these clauses.

Read more about escalation clauses:

To Escalate or Not to Escalate that is the Question