Let’s talk about escalation and acceleration clauses because the WRA Legal Hotline continues to receive many calls about these price adjustment clauses. There are still many questions regarding implementation notwithstanding the many years these provisions
have appeared in offers.
Back to basics
Are price escalation clauses a valid way to negotiate price?
Yes, these clauses serve a legitimate negotiation strategy to negotiate the price at an amount above the price offered in another offer. A buyer may offer to increase their offered price up to a certain amount over the highest price offered, which may
include a maximum dollar amount. The offer to purchase must state the price the buyer is willing to pay to purchase the property, but 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 used a price escalation clause, and their offer was rejected. How can this be?
When working with a buyer, the broker may remind the buyer that price is not always the deciding factor. The seller’s most important condition for the sale of property may be other factors, like closing, contingencies or deadlines. Also, given reports
of multiple offers with escalation clauses, there may be another buyer who submitted an offer with a price escalation provision with a higher maximum amount. Therefore, using an escalation clause will not guarantee an accepted offer.
Why are there so many clauses?
The implementation of escalation clauses may be problematic, therefore in response to prior concerns or snags, different clauses are in use — some drafted by attorneys or brokerage firms. Many clauses include similar provisions, such as the following
- Using only another bona fide offer to determine price.
- Setting a maximum price that would be offered.
- Requesting the seller directly provide the buyer a copy of the other offer.
- Setting a deadline for submission for other offers to be used to set the buyer’s price.
These are only the rudimentary elements to a well-crafted provision. Additional details matter when it comes to implementing a price acceleration or escalation clause in an offer, resulting in different provisions, designed to avoid potential pitfalls.
Purchase price
How is the purchase price determined? Is it with or without seller concessions?
It depends on how the clause is drafted. There are versions of price acceleration or escalation clauses that define the purchase price to include or exclude seller concessions. These contractual differences may result in different purchase prices, so
be cautious when comparing offers.
Can the buyer include an appraisal contingency when there is an escalation clause?
Yes, the offer may be negotiated to include an appraisal contingency. Given the concern about the property appraisal, the appraisal contingency may be included and may be implemented if the appraised price is less than the purchase price.
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 when presenting the offers to the seller. It may be helpful to create a hypothetical situation and apply the clause from each offer to see what the potential purchase price will be.
Again, each clause may result in a different purchase price.
Can the seller counter one buyer with a fixed purchase price? If so, would the seller also remove the price escalation clause?
The answer depends on whether the seller wishes to retain the escalation clause for possible future use. If the underlying goal is to have an offer negotiated at a fixed price and not later use the clause, the counter-offer may state the parties agree
the clause is deleted. The price contained in the counter-offer may be any price, not dependent upon any other buyer’s offer. A seller countering the offer to a fixed price is not required to provide the buyer with a copy of any other offer because
the seller is not using the escalation clause to set the price.
The seller received four offers: two have price escalation clauses, and two don’t. Does the seller need to accept the offer with the highest purchase price?
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 any price escalation 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 listing broker may discuss options and allow the seller to decide which is most appropriate for the transaction.
Confidentiality
Many price escalation clauses provide that the seller has to provide proof to the buyer of the price in the other offer they are competing with. Some clauses state that all parties understand that licensees are prohibited from sharing information about one party’s offer with other parties, so it is understood by all parties that this information is being shared between the buyer and seller. Is this type of language required?
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.” To avoid a breach of confidentiality, the brokers are prohibited from sharing one buyer’s offer with another buyer. As stated in the contingency, the seller — not
the broker — must deliver the buyer a copy of the offer that sets the buyer’s price. The seller may use any delivery method authorized in the contract, for example, personal delivery, fax or mail.
Using other association addenda
When using Transactions (zipForm Edition), a broker found a local association addendum that includes an escalation clause. The broker is not a member of that association. Can the broker use that addendum?
Yes, there are multiple addenda produced by the WRA as well as various REALTOR® associations. These addenda are not forms approved by the Wisconsin Department of Safety and Professional Services, and the use of addenda contained in Transactions
(zipForm Edition) is allowed for WRA members. Note, if an addenda is from a different brokerage company or franchises, the use may be subject to copyright.
For more information