In real estate contracts, an escalation clause—sometimes called an escalator clause—allows a buyer to increase how much they’re willing to pay if a seller receives a better offer. On the surface, this can seem like a good option when you have a client who is determined to have their offer chosen in a seller’s market. Though legal, escalation clauses can result in some serious issues that may end up in a disciplinary case or worse, a lawsuit.
Your Offer May Not Be a Binding Contract
For offers that include an escalation clause, the sales price in the offer itself tends to be vague, and according to attorneys representing the Tennessee Association of REALTORS®, some courts may consider it a deficient contract. Even with a price cap, it would be up to the court to decide if the contract constitutes a firm and statuary offer.
Your Final Price Could Be Higher Than Your Appraisal
In Nashville’s booming real estate market, prices are known to increase significantly when multiple offers are on the table, oftentimes going beyond the appraisal limit. As a buyer’s agent, you’re responsible for making sure your client knows they will have to make up the difference (with cash), renegotiate the purchase price or have a window to terminate the agreement if their final price goes over the appraisal.
A Violation of the Broker’s Act
When working through a transaction involving an escalation clause, agents run the risk of having disclosed detailed information to their client of another buyer’s offer. This could be considered a confidentiality breach, which is something specifically addressed by the Tennessee Real Estate Broker License Act of 1973 (often called the Broker’s Act).
If someone were to file a complaint against an agent regarding an escalation offer, the Tennessee Real Estate Commission (TREC) could interpret it as a violation of TCA 62-13-403, where the act speaks to an agent’s duties to all parties in maintaining confidentiality and reasonable skill and care. This sort of violation is subject to TREC disciplinary action and could include civil fines as well as license downgrading, suspension and even revocation.
Is It Worth the Risk?
When representing a buyer, escalation clauses may present more risks than they’re worth, and you may be better off advising against them. If you’re the listing agent and you receive an escalation offer, you can always suggest your client counter multiple offers with a request to omit escalation clauses in their highest and best offers. At the end of the day, it’s the REALTOR’s responsibility to be a trusted resource for their clients, and knowing the possible outcomes of a contract with an escalation clause can help both you and your client avoid an undesirable situation.
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