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Legal Hot Line Q & A: Competing Escalation Clauses

QUESTION:  If a seller receives more than one purchase and sales agreement with an escalation clause, how does the escalation work? ANSWER:  The Rhode Island Association of REALTORS® Escalation Addendum now states that multiple offers with escalation clauses will be compared on the net escalated price and not the net base price. These offers will continue to escalate until they reach the buyers’ caps, if any.

EXAMPLE:

Offer #1  Price: $400,000   Escalation:  $2,000  Cap:  $420,000
Offer #2  Price: $402,000   Escalation:  $1,000  Cap:  $415,000
Offer #1 increases to $404,000 ($402,000 + $2,000)
Offer #2 increases to $405,000 ($404,000 + $1,000)
Offer #1 increases to $407,000 ($405,000 + $2,000)

Offer #2 increases to $408,000 ($407,000 + $1,000), etc.

Eventually, the buyers with offer #1 would have the highest price because they have the highest cap. Before the seller makes a decision, the listing broker should remind the seller to compare the terms of all purchase and sales agreement and keep in mind that the property must appraise if the buyers plan to finance their purchase of the property. Make sure that you are using the most current version of the RIAR Escalation Addendum. The revision date of 05/21 is in the lower right hand corner of the form. The previous version of the Addendum escalated differently.

Questions? Please contact the RIAR Legal Department at 401-432-5945 or email monica@rirealtors.org.