Are escalation clauses legal?

QUESTION: I’ve heard people talk about escalation clauses but now I’ve received an Offer to Purchase and Contract on a hot listing of mine that has an escalation clause addendum attached to it and I don’t know what to do.  What is an escalation clause exactly?  Are they even legal?  What should I tell my seller?

ANSWER: In answer to your first question, according to one source, an escalation clause is “a provision in a purchase contract allowing for incremental increases in the offer price, up to a predetermined amount, based on and evidenced by competing offers.” In other words, an escalation clause might provide among other things that the purchase price will be increased by a specified amount over the purchase price in any bona fide competing offer, up to a specified maximum amount.

To answer your second question, our view is it’s likely that a contract containing a properly-drafted escalation clause would be found to be legally enforceable in North Carolina.  We are not aware of any North Carolina law specifically addressing the legality of escalation clauses. However, there is case law supporting the proposition that so long as the price can be readily determined by reference to some ascertainable standard (which in this case would be the price in the other offer), the contract is not unenforceable simply because the final price isn’t in the offer itself.

There are a number of other issues that should be taken into consideration by a buyer who wants to consider making an offer containing an escalation clause or by a seller who wants to consider accepting one.  Some of those issues are discussed in a 2013 Forms Guy article on the subject that may be viewed by clicking here.  As to your third question, you should present the offer with the escalation clause to your seller and strongly recommend that he or she seek legal advice before accepting it.  You should also advise the seller that you may not be in a position to share an offer from another buyer with the buyer who included the escalation clause in their offer because that might be considered “shopping” the other offer in violation of NC Real Estate Commission Rule 58A.0115, which provides that “[a] broker shall not disclose the price or other material terms contained in a party’s offer to purchase, sell, lease, rent, or to option real property to a competing party without the express authority of the offering party.”