Legal Line Question: What is an Escalation Clause?
In the context of a purchaser’s offer on a property, can you explain what an “escalation clause” is?
An escalation clause is a strategy whereby a purchaser, as part of his/her offer to purchase a property, instructs the seller’s real estate broker to automatically increase the purchaser’s offer incrementally, up to a capped amount, each time a competing purchaser makes a higher offer on the property.
For example, assume that a seller has listed an apartment for $750,000 and the prospective purchaser has made an offer of $715,000. As part of their offer, the prospective purchaser can instruct the seller’s real estate broker to “escalate” the purchaser’s offer in increments of $5,000 over any other bids above $715,000 (with, for example, a maximum offer of $750,000). Therefore, if a competing purchaser was to offer $730,000, the escalation clause would automatically raise the purchaser’s bid to $735,000. Assuming there are no other higher offers, the prospective purchaser would win the bidding for the property at $735,000.
Important Tip: There are a number of nuances and potential issues that are raised when using an escalation clause. Accordingly, the prospective purchaser should speak to his/her attorney and the real estate broker should speak to his/her manager to ensure that the escalation clause is used correctly and in a compliant manner.
|Neil B. Garfinkel,
REBNY Broker Counsel
Partner-in-charge of real estate and banking practices at Abrams Garfinkel Margolis Bergson, LLP