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The Hidden Dangers of an Escalation Clause

 

In real estate contracts, an escalation clausesometimes called an escalator clauseallows a buyer to increase how much theyre 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 sellers 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 Nashvilles 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 buyers agent, youre 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 Brokers Act When working through a transaction involving an escalation clause, agents run the risk of having disclosed detailed information to their client of another buyers 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 Brokers 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 agents 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 theyre worth, and you may be better off advising against them. If youre 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, its the REALTORs 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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