Do You Really Want To Use That Escalation Clause?
Much like the power of love, a price escalation clause is a curious thing. When considered against the background of contract mechanics, it’s hard to establish who is committed to do what when. Confusion can lead to issues.
The common language is: Buyer A agrees to pay $350,000.00 for said premises. In the event, seller receives additional offers, Buyer A agrees to increase price in increments of $5,000.00, but not more than, $375,000.00.
For one point, the Buyer has now let the Seller know how much they’re willing to pay for the house. The Buyer might be okay with this, but it’s certainly something they should consider before putting this kind of language in an offer.
More importantly, this clause calls into question both parties’ obligations, which is at the heart of a contract. A contract is a promise, at the breach of which, the law provides a remedy. That promise is supported by consideration. Consideration isn’t always money; consideration can be something the party isn’t already obligated to do.
In the above example, if a Seller receives a cash offer from Buyer B for $350,000.00 that can close two weeks sooner, can the buyer match? What if the offer from Buyer A indicates some repairs Buyer B’s offer doesn’t? Is the Seller obligated to stick with Buyer A? Can the Seller demand an increase, and is the Seller then obligated to accept that increase? Or, is the Seller obligated only to accept the Buyer A’s original new offer if they reach the $375,000.00 ceiling? Is the Seller obligated to show documentation of the new offer? When does this clause expire? Can the Seller ask for more money on the day of closing?
Legal Tip: Don’t write your contracts so they can be understood; write them so they can’t be misunderstood.
Something like this might be more productive: Buyer agrees to pay $350,000.00 for said premises. In the event, seller receives additional offers, Buyer agrees to increase price in increments of $5,000.00, but not more than, $375,000.00. Said additional offers shall be similar in other material terms, including but not limited to, timing of financing, delivery of deed, and condition of premises to be delivered. Seller shall present said additional offer within 24 hours of receipt and Buyer shall have 3 Business days to respond. The provisions of this clause shall expire upon Buyer’s procurement of financing. Also consider having the provision expire upon the execution of a purchase and sale agreement, or some step along the way.
If your buyer or seller is mulling over a price escalation clause, it’s okay, call me.