Escalation Clauses: A legal way to guarantee a multiple offer win?

scales of justice

By Lorie Garland, Ohio REALTORS Assistant Vice President of Legal Services

The OAR Legal Assistance Hotline receives an array of real estate-related legal questions — including license law issues, disclosure, contract law, ethics and commission problems, among others. In an effort to help you work within the law we spotlight some of the timely questions that are being asked by REALTORS. This one centers on the legality of gaining an edge in multiple offer situations…

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

Help! Two of my buyers want the same house!!

lady justice

By Peg Ritenour, Ohio REALTORS Vice President of Legal Services/Administration

In today’s market it’s not unusual for an agent to represent more than one buyer looking at the same property. But what if two buyers you represent both want to make offers to purchase the same property at the same time? How do you handle this situation without violating your agency duties to each of those buyers?

HB 532, which became law on April 6, provides a protocol to be followed by licensees when handling “contemporaneous offers.” Contemporaneous offers is defined as offers to purchase or lease made by two or more clients represented by the same licensee for the same property that the licensee knows or has reason to know will be taken under consideration by the owner during the same period of time.

Below are FAQs that outline the new license law requirements for handling this situation.

Q. I wrote an offer for one buyer client that is still open for acceptance. Now a second buyer I represent has decided that she wants to make an offer on the same property. How do I handle this situation?

A. Because these offers will be considered at the same time, HB 532 requires you to provide written disclosure to the buyers of the fact that you represent another buyer who is also making an offer to purchase the same property.

Q. When do I have to make this disclosure?

A. HB 532 provides that the disclosure must be made before writing the second offer.

Q. Can the written notice be accomplished by text or email?

A. Yes. Be sure to document this by printing a copy of your email or taking a screen shot of your text.

Q. Can you suggest sample language that can be used to make this disclosure?

A. Yes, OAR has created sample language that can be used — Notice of Contemporaneous Offers.

Q. What if my buyer doesn’t text or email, making timely written notification difficult? Can verbal notice be made?

A. Yes. HB 532 provides that if written notice can’t be made in a timely manner, verbal notification can be made. Of course you should document that you provided this verbal notification.

Q. Do I need the consent of the first buyer before I can write the second offer?

A. No. HB 532 only requires that you disclose the contemporaneous offer situation.

Q. What happens if one of the buyers isn’t comfortable with me writing an offer for another buyer?

A. HB 532 requires that if requested, you must make a referral to another licensee. That referral could be to another agent in your brokerage, or if the buyer is not comfortable with that, to a licensee in another brokerage.

Q. What happens if I tell buyer #2 that I have already written an offer for buyer #1 and she immediately requests that I refer her to another agent, which I do. Since I no longer represent buyer #2, do I still have to notify buyer #1?

A. No. According to the Division, if buyer #2 immediately decides to work with another licensee and you will not be representing buyer #2 or writing the offer for her, a contemporaneous offer situation no longer exists and no disclosure to buyer #1 is required.

Q. If I make a referral to another licensee, can I be paid a referral fee from that licensee? If so, do I have to disclose that to the buyer?

A. There is nothing in HB 532 or the current law that would prohibit such a referral fee or mandate disclosure of that referral fee.

Q. I have shown two buyers the same house, but only one of those buyers has decided to make an offer at this point. Do I have to notify the other buyer of this fact?

A. No. If only one buyer makes an offer, a “contemporaneous offer” situation does not exist and no disclosure to the other buyer you represent can be made. Remember, the disclosure provisions only apply if two or more offers made by your clients will be considered at the same time.

Q. I wrote an offer to purchase for my buyer client that was accepted by the seller. A week later another buyer client contacted me to write a backup offer on the same property. Do I have to notify the buyers?

A. No. In this situation there aren’t two open offers pending at the same time; instead there is a pending contract and a backup offer. Because the disclosure is only required when there are two offers pending at the same time, no notice is required before you write the back-up offer.

Q. What about my duty of confidentiality to my clients? By disclosing that there are contemporaneous offers, aren’t I violating my duty of confidentiality to my clients?

A. Generally, you are correct that an agent’s duty of confidentiality could be breached by disclosing to others that a client has made an offer to purchase a property. HB 532 creates a narrow exception to this general duty by only permitting disclosure when there are two offers on the same property from two buyer clients that will be considered at the same time. HB 532 specifically states that disclosure of the existence of contemporaneous offers does not breach the licensee’s duty of confidentiality.

Q. What about the identity of the buyers and the terms of their offers? Can that be disclosed?

A. No. HB 532 specifically provides that the identities of the buyer and the terms of their offers is prohibited.

Q. What if I am the listing agent on the property that the buyers want to make an offer on? Don’t I need the consent of the seller to disclose the existence of multiple offers to the buyers?

A. You are absolutely correct. Your duty of confidentiality to your seller normally requires that you obtain the consent of the seller to disclose that a multiple offer situation exists. However, HB 532 again provides a safe harbor by providing that disclosure of the contemporaneous offers does not breach the licensee’s duty of confidentiality to any party. This would include the seller. Therefore, the consent of the seller is not required in this limited situation.

Q. As a broker, I am not comfortable with one of my agents writing offers for more than one buyer on the same property at the same time. Can I adopt a policy that if that situation arises one of the buyers must be referred to a manager or another agent in our brokerage?

A. Yes. A broker can adopt a policy of this nature.

Q. I am a member of a team. If I write an offer for one buyer and another member of my team writes an offer for a buyer she represents, do we have to follow the disclosure requirements?

A. No. The contemporaneous offer disclosure is only required when one agent writes both offers.

Q. Does HB 532 require that information on contemporaneous offers be included in the Consumer Guide to Agency Relationships?

A. No, this is not required by HB 532. However it is advisable to provide an explanation of how contemporaneous offers will be handled early in a relationship with a buyer to avoid confusion and reduce the likelihood that a buyer will react negatively to this situation. This could be accomplished in the Consumer Guide or in a separate document. A sample explanation has been developed by OAR — Contemporaneous Offer Disclosure Policy

Q. Do the contemporaneous offer provisions apply to leases?

A. Yes.

Q. Do these license law provisions regarding contemporaneous offers also apply to commercial real estate?

A. Yes.

 

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

NAR’s Window to the Law: Protecting yourself from a copyright claim

Learn about the new requirement that all copyright agents must be digitally registered with the U.S. Copyright Office by the end of 2017. Click here for more information on the DMCA Safe Harbor. (Source: National Association of REALTORS)

Tags: legal, OAR Legal Matters

Make our marks remarkable

The term REALTOR® is not only a trademark owned by NAR and protected by federal law, it is also a valuable membership benefit that distinguishes members from all others in the real estate business. Watch this entertaining, three-minute video to learn how members can protect the value of the mark by using it properly. Remember, a REALTOR® isn’t “just another real estate agent.” Being a REALTOR® means more.

Watch this video to learn why NAR protects the the value of the REALTOR® trademark.

Tags: Association news, legal

Legally speaking: Can a buyer get a ‘do-over’ after rejecting a counter?

lady justice

By Peg Ritenour, Ohio REALTORS Vice President of Legal Services/Administration

The OAR Legal Assistance Hotline receives an array of real estate-related legal questions — including license law issues, disclosure, contract law, ethics and commission problems, among others. In an effort to help you work within the law, “Legally Speaking” spotlights some of the timely questions that are being asked by REALTORS. This question involves contracts…

Q: A buyer made an offer which the sellers countered. The buyer told his agent he was rejecting this counteroffer and the buyer’s agent communicated this fact to the listing agent. The next day the buyer called his agent and told her he had reconsidered and really wanted the house after all. The agent immediately called the listing agent, only to find out that the sellers were accepting another offer. When the first buyers learned this they hurriedly signed the sellers’ counteroffer and their agent hand delivered it to the listing agent’s office. Do the sellers have a legally enforceable contract with the first buyer?

A: No. The buyer doesn’t get a “do over” or second shot at the apple!

Under Ohio contract law when an offer or counteroffer is rejected it is no longer open for acceptance. The only exception to this is if the person who made the offer (the offeror) is willing to honor the subsequent acceptance. In this situation, once the first buyer rejected the sellers’ counteroffer and that fact was communicated to the listing agent, the counteroffer was terminated. As such, it was no longer open for acceptance by the first buyer. Signing the counter and racing it over to the listing office was a futile act because the seller wasn’t willing to still go forward with the first buyer and chose instead to accept the second offer he received.

This outcome is true regardless of whether the rejection was done verbally or in writing and regardless of whether the expiration date on the seller’s counteroffer hadn’t expired yet (i.e., the counter is rejected on August 26th, but was open for acceptance until August 28th). As most REALTORS remember from their real estate law class, under Ohio’s statute of frauds, a purchase contract must be in writing and must be signed to be enforceable. However there is no similar legal requirement that a rejection must be done in writing or be signed to be effective. Therefore a verbal rejection is sufficient. Of course it is always a good business practice to get a rejection in writing because it documents that the offer was presented and the party’s rejection. However if the offer or counter is rejected and that fact is communicated — even verbally — that offer/counteroffer is terminated. That means it is no longer open for acceptance, regardless of whether the original expiration date hasn’t passed yet. The rejection terminates the offer/counter and it is off the table unless the other party (in this scenario the seller) is willing to put it back in play.

The “take away” for REALTORS should be to counsel their clients to be sure about their decision to reject an offer. Once they direct their agent to communicate to the other party that they are rejecting an offer or counteroffer and that notification is made, there is no “do over!” Because communicating a rejection isn’t something that must be done immediately, sleeping on a decision is sometimes the best advice you can give your client.

 

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

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