The Escalation Clause

Hispanic Couple Viewing Potential New Home

In this market, multiple offers seem to be the norm. To distinguish their offers from others, buyers are increasingly using “escalation clauses” in many areas.

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. Here at MAR, we are in the process of creating a standard form escalation clause 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

While the terms in an escalation clauses can vary, most escalation clauses contain the same basic features. These features include the original offer, the amount by which the buyer is willing to escalate his or her offer, the total amount that the buyer is willing to offer (the “cap”) and 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. The buyer should also be aware that escalation clauses reveal to the seller more information than is contained in a traditional offer. This is because the seller will know exactly how much the buyer is willing to pay. The seller could then decline the buyer’s offer and propose a counteroffer above the buyer’s cap.

Watch for the new form in the Massforms Library in the coming weeks. The form will be accompanied by a two page explanation sheet to give buyers and sellers more information to consider when using these clauses.