In today's competitive real estate market, particularly in urban areas like Saskatoon and Regina, escalation clauses are appearing more frequently in residential offers to purchase. These clauses are often marketed to help buyers remain competitive in multiple-offer scenarios. However, while escalation clauses may seem straightforward, they carry significant legal and practical risks, especially under Saskatchewan's regulatory framework.
Understanding Escalation Clauses
An escalation clause allows a buyer to automatically increase their offer if a competing bid comes in higher. Typically, the clause sets a starting price, an increment (e.g., $2,000 above any higher bid), and a ceiling or cap on how high the offer can go.
While this structure may seem logical from a negotiation perspective, the legal enforceability of such a clause depends heavily on how it is drafted, and whether it complies with provincial legislation.
Implications Under Saskatchewan Legislation
A crucial piece of the puzzle lies in Section 58(1)(b)(iv) of The Real Estate Act, which applies to licensed registrants and governs how offers to purchase must be handled:
"An offer to purchase shall clearly show, prior to execution by the buyer, the price offered by the buyer."
This means that a purchase offer must state a definitive purchase price. A price that fluctuates depending on external factors, like the existence or amount of another buyer's offer, may fall short of that standard.
While buyers and sellers might be unaware of this requirement, realtors and brokerages have a professional obligation to ensure that offers comply with the Act. Escalation clauses, particularly when misused or poorly drafted, create a risk that the offer may not meet these legal requirements.
Potential Implications for Buyers, Sellers, and Realtors
While escalation clauses may make an offer more competitive, they also introduce complexities.
Buyers & Sellers
For buyers and sellers, escalation clauses can create confusion about pricing certainty, contract formation, and how competing offers are verified or disclosed.
- False sense of security: Buyers may believe their offer is competitive without understanding how or when the clause is triggered.
- Disputes over proof: Sellers may be asked to prove the existence of a valid competing offer; raising privacy, confidentiality, and timing concerns.
- Binding contracts: Once an offer is accepted, the escalation clause becomes irrelevant. The contract price is locked in, and the clause is without legal effect thereafter.
Real Estate Professionals
For realtors and brokerages, escalation clauses raise compliance concerns and professional risks if offers do not clearly state a fixed purchase price, as required by legislation.
- Regulatory compliance: Realtors must ensure offers clearly state a purchase price, as required by the Act.
- Professional guidance: The Saskatchewan Realtors Association (SRA) is expected to issue further guidance or a news release clarifying how escalation clauses should function within the standard form residential contract while ensuring consistency with regulatory obligations.
- Potential liability: If an offer containing an escalation clause is later challenged or deemed unenforceable, agents and brokerages may face reputational or legal risk, especially where regulatory non-compliance is involved.
Key Risks to Be Aware Of
- Unenforceable offers due to vague or conditional pricing.
- Potential liability for agents and brokerages who facilitate non-compliant contracts.
- Breakdowns in negotiation or post-acceptance disputes over whether an escalation clause was triggered.
Best Practices
Escalation clauses are not inherently problematic, but they are not plug-and-play tools. They must be:
- Carefully drafted;
- Clearly understood by all parties; and
- Legally compliant.
Given the regulatory obligations imposed on realtors and the potential financial implications for buyers and sellers, it is advisable to seek legal guidance before incorporating these clauses into any real estate transaction.
Final Thought
If you are considering using an escalation clause or you have received an offer that includes one, take the time to understand the implications. A well-meaning strategy can quickly become a source of confusion or, worse, a legal dispute.
For legal professionals, realtors, buyers, or sellers looking to better understand escalation clauses in Saskatchewan real estate, independent legal advice is strongly recommended.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
