The hotline article this month takes a look the use of price acceleration or price escalation clauses from buyer and seller perspectives.
In a market with low inventory, can a buyer negotiate an offer that states the buyer will pay more than another buyer’s price?
Yes, a buyer may offer to increase his or her offered price up to a certain amount over the highest offer, up to a maximum dollar amount. It is a legitimate negotiation strategy to negotiate price at an amount above another’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. 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.
Practically, how does the provision get drafted?
There are different clauses in use — some drafted by attorneys or brokerage firms. Drafting basics 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, and the time allowed for other offers to be used to set the buyer’s price. These are only the rudimentary elements to a well-crafted clause. Given many questions on the WRA Legal Hotline, one thing is sure: the details matter when it comes to implementing a price acceleration or escalation clause in an offer. The following questions have been asked, and some are answered, about price escalation or acceleration clauses and identify some of the potential pitfalls for both the buyer and seller to consider.
Can the buyer’s purchase price be adjusted after the offer is accepted?
Yes, this adjustment is possible, depending on how the price acceleration/escalation clause is drafted and when it is triggered. The timing of a price adjustment is subject to negotiation. In some cases, after the offer is accepted, so long as the seller receives another bona fide offer by a specific date, the other offer may be used to trigger the price acceleration or escalation clause.
Is the price changed by amendment or counter-offer?
If the price adjustment is prior to the acceptance of an offer, a counter-offer would be used. If the adjustment occurs after acceptance, the parties would document the new price in an amendment clarifying the adjusted price.
How do you determine price, with or without seller concessions?
It depends on how the clause is drafted. There are versions of acceleration or escalation clauses that define purchase price to include or exclude seller concessions.
Can the purchase price be bumped up once or multiple times if different offers come in at different times?
Maybe once or maybe multiple times — the implementation of the clause will depend on the drafting. One thing to take away from a conversation about price acceleration or escalation clauses is they differ. The drafting matters, and the drafting may result in very different outcomes. Be sure to read each clause carefully before answering a question such as this.
What happens if more than one offer includes a price adjustment clause? Does the price climb up and up and up to maximum?
Likewise, the answer depends on the drafting. This is one of the most interesting conversation starters with hotline calls. The interpretation and implementation may be subject to interpretation and disagreement if the clause is not drafted with specificity. As the old saying goes, the devil is in the details. Draft clearly and, when in doubt, counter to clarify or counter out such ambiguous provisions.
Will the property later appraise for the increased purchase price? What if it doesn’t?
Given the concern about the property appraisal and the availability of financing, sellers may negotiate for risk allocation. For example, if the property will be financed, buyers will be required to bring funds to the closing to cover the difference between purchase and appraised price.
Can a seller negotiate a contingency whereby the buyer’s offer is bumped or becomes null and void in the event the seller receives an offer with a higher purchase price?
The seller can try. The seller may include a provision allowing the seller the right to terminate the offer, within a certain amount of time, if the seller accepts a secondary offer with a higher purchase price. The provision would, for example, allow the seller to give written notice of termination with evidence of the secondary offer. The parties may negotiate about whether to use net or gross purchase price, and how and when the seller may terminate. Alternately the parties may determine whether the buyer, upon receipt of the notice, has an opportunity to adjust purchase price to match the other offer or if the seller’s notice makes the offer null and void.
The broker is presenting multiple offers to the seller. How can the seller respond?
In response to multiple offers, a seller has several options, each with potential advantages and disadvantages. The seller may accept any one of the offers. Alternately the seller may choose to negotiate price independent from the price adjustment clauses. If the seller elects not to use the price adjustment clause, the seller may counter one buyer with a counter-offer. It is the seller's prerogative to counter at the maximum price the buyer was willing to pay if the price clause had been triggered or any other price. The one buyer receiving the one counter offer may accept, reject or counter the counter-offer. Alternately a WB-46 Multiple Counter Proposal may be used, allowing the seller to negotiate simultaneously with more than one buyer. Likewise, in response to the seller’s multiple counter-proposal, the buyers may approve, counter or reject the multiple counter-proposal.
The seller received three offers. Two of the offers include a price adjustment clause. Offer Number 1 is at $145,000. Offer Number 2 is $147,000, or $1,000 over another maximum $149,000. Finally, offer Number 3 is $146,000, or $500 over another maximum of 152,000. How does the seller respond when there are multiple offers with acceleration clauses?
One of the frequently asked questions on the hotline is whether competing price clauses cause an increase to purchase price as price increase triggers price increase, which triggers price increase, which triggers price increase, until a maximum price is reached. Confused? So are we. The answer to the question will depend on how the price clauses were drafted. When drafting the clause, the buyer may clarify whether the initial price or an adjusted price can be used.
What limits are there on licensees when it comes to confidentiality?
Licensees must observe the duty of confidentiality to the other buyer. Under Wis. Admin. Code § REEB 24.12(1), a licensee may not disclose “any of the terms of one prospective buyer’s offer to purchase … to any other prospective buyer or to any person with the intent that this information be disclosed to any other prospective buyer.” Because agents are precluded from sharing the terms of an offer, the seller will have to provide a copy of that highest offer to the buyer directly.
What language may be used to educate buyers and sellers of their responsibility?
The seller may provide the buyer with the escalation clause and a copy of the other buyer’s offer. Both the buyer and seller should be aware that Wis. Admin. Code § REEB 24.12 prohibits a licensed real estate agent from disclosing any of the terms of one prospective buyer’s 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.
Tracy Rucka is Director of Professional Standards and Practices for the WRA.
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