Using an Escalation Clause in a Multiple Offer Situation

by Kristian Tzenov, RECA Regulatory Compliance Advisor, Real Estate Brokers

Real estate sales activity in Alberta has continued to increase throughout 2022. As the market continues to thrive, so does the possibility of transactions that involve multiple offers.

The process for handling multiple offer situations is currently determined by the seller. This means, it’s the seller’s choice whether they disclose multiple offers to all potential buyers, to select potential buyers, or to none of the potential buyers.

When sellers don’t disclose multiple offers, buyers aren’t aware. When buyers aren’t aware of other offers, they aren’t always given the opportunity to make a counteroffer.

Multiple offer situations have become more the norm than the exception. I have been hearing from more and more licensees who are advising their buyer clients to use escalation clauses to ensure they end up the winning offer.

It is important for real estate licensees to help their buyer clients understand the purpose, advantages, and disadvantages of an escalation clause when they anticipate their offer to be among multiple offers.

Advantages

• buyers may get the home they want without the need to pay the highest price as when there are no competing bids, the escalating clause does not come into play
• no need for buyers and sellers to go back and forth with counteroffers

Disadvantages

• some sellers will not accept offers with an escalation clause. They may feel they are unfair or unethical and prefer potential buyers to submit exactly what they are willing to pay for the property upfront
• some brokerages are not well-versed in escalation clauses or how they work, which may cause them to misadvise their licensees on how to structure a client’s escalation clause. e.g., there is no maximum price specified or the seller is not required to disclose the next best offer
• some brokerages may simply instruct their clients to avoid an escalation clause, due to the fact they do not understand them well themselves

Remember, real estate licensees must act in their client’s best interests. If appropriate, this may include discussing the purpose and use of an escalation clause and to seek professional legal advice if they require additional information.

If you need further information or have questions on escalation clauses and their use in Alberta real estate transactions, please reach out to info@reca.ca.

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Escalation Clauses in Brief

An escalation clause in a real estate contract is a provision allowing for an increase to the buyer’s offer price, activated only if a competing offer is submitted that is higher than the buyer’s original offer.

For example, a contract could state that the buyer is willing to pay a specified amount over the highest offer to a maximum specified purchase price, but only if the seller receives another offer at the same time which is higher and provides proof of the higher offer. If there turns out to be no competing offers, the buyer’s original asking price remains.