The Best of the Legal Hotline: Price Escalation


 Tracy Rucka  |    July 16, 2020
Best of the Legal Hotline

Although the concept may be straightforward, implementation of escalation clauses may lead to confusion and buyer disappointment. Price escalation clauses are not uncommon in limited inventory markets. Sometimes called the ‚Äúescalation clause‚ÄĚ or ‚Äúacceleration clause,‚ÄĚ the following questions and answers will help navigate when such clauses are used.

Can a buyer draft an offer with a provision stating the buyer will pay an amount more than any other bona fide offer?

It is a legitimate negotiation strategy to negotiate price at an amount above another buyer’s offered price. The offer to purchase must state the price the buyer is willing to pay to purchase the property. The price may be determined by referencing the price of another offer to purchase. If the buyer wants to use such a strategy, the equation used to determine the offered price must be clear and unambiguous.

Is there a standard acceleration or escalation clause or form?

No, there are different clauses in use ‚ÄĒ some drafted by attorneys or brokerage firms. The basic elements include but are not limited to the buyer agreeing to increase his or her offered price up to a certain amount over a competing offer, up to a maximum dollar amount. There are different details that can be included, for example, when the price change could be triggered and whether the price change could happen more than once. The base element of a price escalation clause is providing for the buyer to pay more for the property if the seller receives another equal or higher offer. The broker drafts upon the instruction of the parties.

Why are there so many different clauses?

Escalation clauses have evolved based on transaction experiences. The basics of an escalation clause include: using only another bona fide offer to determine price, a maximum price that would be offered, requesting the seller provide copies of other offers directly to the buyer, the time limit on when a clause may be used, whether the price can increase multiple times, and the time allowed for other offers to be used to set the buyer’s price. There are sample escalation clauses in the Wisconsin Real Estate Clause Manual, available at www.wra.org/pub280.

Will a buyer with an escalation clause always get an accepted offer?

No. The buyer may also be reminded that price may not be the seller’s most important condition for the sale of property and the use of an escalation clause may not guarantee an accepted offer. Also, in markets with low inventory, more than one buyer may try to use an offer with an escalation clause. Some sellers may be offended when the buyer offers one price but says they are willing to go up to another price if there is competition. Given the issues that may arise from implementation or interpretation of escalation clauses, the seller may choose not to accept an offer with such a provision in it, preferring an offer not requiring mental gymnastics or shaping of other offers to determine the price.

All offers must be presented, and the listing agent will discuss the advantages and disadvantages of each. The seller might choose to respond to the offers using a multiple counter-proposal. The seller might use a counter-proposal that could potentially go to the buyer’s top price. For example, the seller may counter all buyers using a multiple counter-proposal, setting a fixed price and removing reference to the escalation or acceleration clause. Alternately the seller could negotiate with one buyer at a time, setting a price and removing references to the escalation or acceleration clause. Licensees should not allow the seller to issue two counter-offers as that could result in two accepted offers.

Aren’t the terms and conditions of an offer confidential?

Licensees are precluded from sharing the terms of one buyer‚Äôs offer with another buyer. Therefore, if the escalation clause requires proof of the price of an offer, the seller will have to provide a copy of that highest offer directly to the buyer with the escalation clause. The important point here is the seller provides the document ‚ÄĒ not the brokers ‚ÄĒ because the brokers must observe the duty of confidentiality to the other buyer. Under Wis. Admin. Code ¬ß REEB 24.12(1), a licensee may not disclose ‚Äúany of the terms of one prospective buyer‚Äôs offer to purchase ‚Ķ to any other prospective buyer or to any person with the intent that this information be disclosed to any other prospective buyer.‚ÄĚ

There are two offers, each with an escalation clause. Can they be used to increase price to the maximum amount?

Whether either buyer’s price may be set by escalating the price back and forth may depend on how the clause or clauses were drafted as some clauses strictly prohibit such back and forth escalation. 

If there is a dispute about the implementation of the clause, the parties may either amend the offer language to establish the price or consult private legal counsel.

The broker is a co-broke/selling agent for a condominium unit. Multiple offers were submitted. The buyer drafted a ‚Äúcash‚ÄĚ offer for $250,000, with an Addendum AC (acceleration clause). The buyer is willing to pay $1,000 over any bona fide offer received up to $269,000.

The buyer received a WB-46 Multiple Counter-Proposal from the listing agent/seller. The seller countered at $269,000. Does this indicate that the seller received another offer for $268,000, or not necessarily? Can the seller counter $19,000 over asking without a bona fide offer of $268,000, in essence ignoring the Addendum AC and how it functions?

In response to a buyer’s offer, a seller can counter at any price, even over the list price. The only information known to the buyer, when a WB-46 Multiple Counter-Proposal is used, is that the seller is negotiating simultaneously with more than one buyer. It is the seller’s choice to negotiate price independent from the acceleration clause. If the seller elects not to use the acceleration clause, the buyer would have no right or expectation to know the purchase price in any other pending offer. It is the seller’s prerogative to counter at the maximum price the buyer was willing to pay if the acceleration clause had been triggered. In response to the seller’s multiple counter-proposal, the buyer may approve, counter or reject it. 

See pages 4-5 of Legal Update 99.07, ‚ÄúForm Revisions,‚ÄĚ at www.wra.org/LU9907 regarding multiple counter-proposals.

Price Escalation Samples

‚ÄúIf Seller accepts this offer and receives one or more additional bona fide offers to purchase the Property with terms acceptable to Seller (Other Offers), prior to __________ (date) which result in Net Proceeds of Sale (purchase price minus any monetary contributions by Seller) payable to Seller equal to or greater than the Net Proceeds of Sale payable to Seller under this Offer, then the purchase price of this Offer shall automatically increase to an amount which generates Net Proceeds of Sale to Seller $ __________ in excess of the highest Net Proceeds of Sale generated in such Other Offers.‚Ä̬†

‚ÄúThe Purchase Price of this offer may be increased¬† [ ] once [ ] more than once [CHECK ONE] (‚Äúonce‚ÄĚ if neither is checked) based on one
or more Other Offers.‚Ä̬†

‚ÄúThe purchase price of this Offer shall not exceed $ __________.‚Ä̬†

‚ÄúIf the purchase price of this Offer is increased based on one or more Other offers, Seller shall, no later than __________, submit to Buyer a signed amendment to the Offer reflecting the adjusted Purchase Price and a copy of any Other Offers that resulted in, and were the basis for the increase to the purchase price of this Offer.‚Ä̬†

“Buyer agrees to accept the amendment and deliver it back to Seller according to the delivery terms in this Offer and by the deadline for acceptance in the amendment. “

‚ÄúWis. Admin. Code ¬ß REEB 24.12 prohibits a licensed real estate agent from disclosing any of the terms of one prospective buyer‚Äôs offer to purchase, exchange agreement or option contract proposal to any other prospective buyer or to any person with the intent that this information be disclosed to any other prospective buyer. Accordingly, delivery of Other Offers must be conducted solely between Buyer and Seller or their attorneys and cannot involve their respective real estate agents.‚ÄĚ

“[ ] Appraisal. If the appraised value of the Property is less than the amended purchase price but is at least $ __________, the amount financed shall remain as stated in any financing contingency in this Offer and Buyer will pay the difference between (i) the appraised value plus $ __________, and (ii) the amount financed in the financing contingency in this Offer. If the appraised value is less than
$ __________, this Offer shall be null and void.‚Ä̬†

More Price Escalation Information

For more information about price escalations, see the WRA LegalTalks video, ‚ÄúEscalation Clauses and Multiple Counter Proposals with Tracy Rucka‚ÄĚ at www.wra.org/LegalTalks/EscalationClause and the January 2017 Legal Update, ‚ÄúPrice Escalation Clauses and Multiple Counter-Proposals,‚ÄĚ at¬†www.wra.org/LU1701.

Also watch for a price escalation video in a future episode of the WRA’s Thursday Takeaway video series at www.wra.org/ThursdayTakeaways.

Tracy Rucka is Director of Professional Standards and Practices for the WRA. 

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