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Balanced Protections. Form 244 & the Escalation Clause

May 8th 2019

Two tools are becoming increasingly familiar in the real estate landscape in London - the Form 244 & the Escalation Clause. 

A Form 244 is more commonly known as a Seller’s Direction and is often used to "hold off offers".  A Seller can us use this document to give written legal direction to their real estate representative about when & how they will receive/review offers on their property. One of the conditions of true market value is reasonable exposure to the market. Holding off offers may help to protect a Seller from underpricing their property and taking an offer before a other buyers have had a chance to view their home. There are several risks and many variations to the use of this form but the gist of it is to protect sellers from under-selling their homes while increasing the potential of a multiple offer scenario. 

 

A carefully constructed Escalation Clause serves to protect the Buyer when competing with multiple offers.
Escalations clauses are comprised of several components:
  1. the offer price
  2. the criteria that will trigger the escalation clause
  3. the escalation factor
  4. the cap
  5. the terms that create a fully accepted offer
  6. the delivery of documents confirming the final purchase price met the criteria required to trigger the escalation clause 

 

How about an example?
Let’s say a property is listed for $100 & the Seller has directed their agent not to notify them of any offers for 7 days. 
If multiple offers are being reviewed 1 of them might contain an Escalation Clause stating that the buyer is:

 

  1. offering $110 
  2. if a higher priced bona fide offer is received by the seller
  3. the buyer agrees to raise their offer (escalate) by a factor of $4 above the highest offer
  4. to a maximum of $120 (super important to have a cap to your price)
  5. and that if all criteria are met the new escalated price will be deemed accepted by the buyer (this is acceptable because both the buyer and seller are agreeing to this framework in the offer)
  6. the offer may require the Seller to delivery the second place offer, or a portion of it, to the Buyer's lawyer after the fact so that their lawyer can confirm the new price met the criteria outlined in the offer. This step is done directly through the lawyers because members of organized real estate are not permitted to convey the terms of offers due to the confidentiality rules of our industry unless there is written consent. The Sellers have no such obligation as they haven’t signed any non-disclosure agreements with parties submitting offers on their property. 

 

If a brokerage will support protecting a Seller's interests with the use of Form 244’s they should be equally comfortable providing, navigating & negotiating Escalation Clauses which protect their Buyer's interests. 

 

If a Seller is being counselled not to consider an offer with an escalation clause they should ask why as there are some inherent benefits for the Sellers as well:

 

  1. They will get more money by adding the escalation factor to their top offer if the escalation cap hasn’t been surpassed. 
  2. Buyers are often anxious about bidding wars/multiple offers. Knowing that other offers will be within a certain proximity to their own increases consumer confidence which leads to higher maximum price. In the previous example a buyer might bring a standard offer of $115 but with the escalation factor might increase their final price to $130 knowing there there are other buyers who see similar valuations for the property. 
  3. Being able to provide a pattern of value to an appraiser may help with financing. This is important for Sellers because Buyers may not be able to get a full financing if the purchase price doesn't appraise. If a property under-appraises the Buyer must have access to the cash differential between the appraised value & the purchase price. If that cash doesn't exist there may be no financing on closing day. 

  

In short:
A Form 244 details when a Seller can be presented with or even notified of an offer.  It’s a legal direction to their agent about the format that must be followed for offer presentations. It creates a firm "earliest opportunity" for notification & conveyance of offers. 
It has risks and benefits that must be discussed thoroughly before deciding if it will be beneficial to protecting your interests as a Seller. 

 

An Escalation Clause is an option for Buyers to consider in multiple offers stating that, under certain circumstances, the Buyer is willing to continue to increase their purchase price if a defined level of consumer confidence accompanies it as evidenced in a similar offer. This offer format may offer additional protections if a Buyer's offer is competing with a listing agent's own offer. 

 

Both of these tools are permissible under the Real Estate Council of Ontario (RECO).
It is critical that the written directions for a Form 244 & Escalation Clauses are clearly articulated or they can impede negotiations. 

If you are looking for representation as a Buyer or Seller make sure your Real Estate Agent is comfortable navigating all of the tools available to you.

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