Escalation Clauses: A legal way to guarantee a multiple offer win?
On July 17, 2017
By Lorie Garland, Ohio REALTORS Assistant Vice President of Legal Services
Q: My seller received multiple offers on her property. The seller directed me to disclose to all buyers that she had received multiple offers and to request they each make their highest and best offer. One of the buyers had his agent submit an offer which provides that the buyer will pay $250,000 or $1,000 more than any other offer. Is this legal?
A: Yes. This type of provision is commonly referred to as an escalation clause. This provision is most often used when a buyer knows he is in a multiple offer situation. The buyer’s intent is to ensure he is making the highest offer.
While legal, if not carefully drafted escalation clauses can have unintended consequences. When including such a provision in an offer to purchase there are several issues the buyer should consider. Let’s start with price. Is there a cap on the price the buyer will not go above? Let’s say a buyer would like to pay $250,000 for a property, but if necessary would be willing to pay $275,000. The offer could be written for $250,000 with an escalation clause that caps the offering price at $275,000. Without such a cap, a buyer could end up paying more than he intended.
A buyer may also want to specify that offers are competing on the basis of net proceeds. If a buyer submits an offer of $250,000 with an escalation clause he would not want the escalation provision to apply to a competing offer of $260,000 that includes a $20,000 credit towards the buyer’s closing costs. For this reason, net proceeds should trigger the escalation clause. And in this example, a net offer of $240,000 would not increase the buyer’s $250,000 offer.
The escalation clause should also only apply to bona fide offers. This means an offer from a buyer with the genuine intent to buy the property, not just to run up the purchase price. The buyer should require some evidence the offer is from bona fide buyer. This proof could be the seller providing a copy of that offer.
REALTORS should remind buyers that the highest priced offer may not always be the best offer received by the seller and that price is just one of several factors a seller may consider. However, if a buyer wants to give their offer an edge by including an escalation clause it is important that it be a properly drafted. Further, to avoid the unauthorized practice of law, this should be prepared by an attorney.
Legal articles provided in the OAR Daily Buzz are intended to provide broad, general information about the law and is not intended to be legal advice. Before applying this information to a specific legal problem, readers are urged to seek advice from an attorney.
Tags: legal, Legally Speaking