Escalation or Escalator Clause in North Carolina

Excerpt from the North Carolina Real Estate Commission:

The Commission discourages the use of escalation clauses, but does not prohibit them. Commission Rule A .0115 reads as follows: “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.” Therefore, in the unlikely event that a buyer consents to allow a broker to share the price and terms specified in their offer with another prospective buyer, then and only then may the broker do so.

Pitfalls of escalation clauses:

• If a buyer submits an offer containing an escalation clause without knowing the price and terms of the other offers and without specifying a maximum price, the buyer may end up paying much more for the property than desired.

• If a buyer includes a maximum price in an escalation clause, the seller will immediately know the buyer’s top price thereby compromising the buyer’s bargaining position.

• An offer containing an escalation clause may not become enforceable until a specific price is entered into the contract and the buyer sees the price the seller has specified.

• The seller may fabricate a fictitious offer in order to drive up the sales price for a buyer who uses an escalation clause.

• Real estate brokers are prohibited from drafting escalation clauses, because doing so would constitute the unauthorized practice of law. Hiring an attorney is recommended, but will increase the buyer’s costs. The seller should also have an attorney review an offer containing an escalation clause to protect the seller’s interests.

• If multiple buyers were to include escalation clauses in their offers, a bidding war may follow. If no buyer is willing to commit to a specific price, then no contract is ever formed and no property is sold.

• Since the use of an escalation clause implies that a prospective buyer is willing to pay more than other buyers, it may motivate sellers to seek higher prices, a disadvantage to the buyer using the escalation clause.

• While the use of escalation clauses may lead to higher sales prices, a benefit to the sellers, they could also discourage buyers who do not want to use escalation clauses. The use of escalation clauses may also lengthen the negotiation process, a potential disadvantage to sellers and buyers.

• The buyer who is unsuccessful in a negotiation where a competing buyer used an escalation clause may feel that they were treated unfairly. The perception of unfair treatment may discourage the buyer from purchasing property in the future and may lead the buyer to file complaints against the brokers involved in the transaction.

• A broker who discloses the price/terms of an offer without the buyer’s consent or otherwise gives one party an unfair advantage over another risks disciplinary action by the Commission.