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Phillip C. Querin, Partner
Partner - Portland, Oregon Office
philquerin@dwt.com
(503) 241-2300
Competing Offers and Escalator Clauses
[January 2004]
In almost every economic period, whether prices are
rising or falling, buyers of real estate may occasionally find themselves
competing for the same property. This is frequently so when the
reasons for the competition are not economic, but emotional, e.g.
the competing buyers want to acquire the property because it holds
a special significance, such as location, appearance, prestige,
etc.
For sellers, such competitive activity may be rewarding, but for
buyers, especially those who lose out – and sometimes even
the winners - the experience can be unpleasant and frustrating.
Oftentimes, the frustration is directed against the real estate
agent or agents handling the process. Here are some risk management
tips:
Office Policies. Principal brokers should
consider developing a written office policy for agents to follow
when handling competing offers – how to explain them to clients,
how to write them up and how to present them. Such policies serve
at least three purposes: (a) They reduce the risk of civil
liability arising from disgruntled sellers or buyers who believe
the agent breached his or her fiduciary duty; (b) They similarly
reduce the risk of licensing liability for the same reasons;
(c) Lastly, in the event of licensing action being filed against
an agent for mishandling a competing offer situation, the principal
broker’s licensing exposure for lack of supervision1
could be reduced if the company has a specific office policy outlining
the proper protocol.2
The Disclosed Limited Agency Conundrum.
Although Oregon law expressly allows disclosed limited agency -
if consented to in writing - including the representation of competing
buyers - implementing this in actual practice imposes an almost
impossible task upon the disclosed limited agent.
For example, say the agent represents both buyers vying for the
same property and the offers are to be submitted simultaneously.
Obviously, this means that after writing up the first offer, the
agent will be privy to what price and terms will be necessary for
the second offer to be accepted over the first. Although the agent
cannot disclose to the second buyer the price or terms of the first
offer, how is he or she to advise the second buyer in the preparation
of their offer, knowing, in advance that it can mean the difference
in acceptance or rejection? It is much easier to ethically advise
the second buyer if the agent has no knowledge about the contents
of the first offer. In circumstances like these, principal brokers
may wish to consider assigning another agent to the second buyer
and making sure that there is an effective firewall between the
two agents and restricting access to the files.
What if the agent represents only one buyer, but also represents
the seller in a multi-offer situation? This form of disclosed limited
agency can be equally problematic, especially if the other side
submits their offer first. Once a disclosed limited agent representing
the seller and a buyer learns the price and terms of the other side’s
offer, he or she is in a much better position to advise the seller
about accepting or rejecting it. However, without the client’s
express consent, it would be a breach of fiduciary duty for the
disclosed limited agent to inform the seller in advance of
a submitted written offer, of his/her buyer’s price and terms.3
How can a disclosed limited agent suggest to their seller-client
that it is in their best interest to reject another agent’s
offer, if doing so would require the agent to disclose the contents
of an offer that has not yet been submitted? And how can a disclosed
limited agent recommend their seller’s acceptance of a competing
offer, when doing so is not really in the best interest of the disclosed
limited agent’s own buyer-client? In such circumstances, assuming
that time and circumstances permit, the simultaneous submission
of all competing offers is one solution that helps avoid the appearance
of impropriety or claims of a breach of fiduciary duty. A buyer
who loses out of a competitive bidding situation believing their
offer was “shopped” by the other agent (acting in a
dual capacity as the disclosed limited agent for another buyer and
for the seller) would be a likely candidate to complain.4
An alternative approach, where the listing agent also represents
a competing buyer, is to have the listing firm’s principal
broker become the listing agent, and then permit each buyers’
agent to submit their offer separately. This approach has the advantage
of creating a firewall insulating both buyers (and their agents)
to the terms of the other’s offer – and therefore reducing
the chance of any claims of impropriety. The playing field becomes
level and each offer is then considered solely on its own merits.
Escalator Clauses. Occasionally, in an effort
to assure success in multi-offer situations, buyers have been encouraged
by their agents to insert an “escalator clause” into
the sale agreement or addendum, providing, for example, that the
purchase price will be $X higher than the highest competing offer,
not to exceed $Y.
Escalator clauses are a more recent phenomenon to the Northwest
than other regions of the country, especially the East Coast. For
that reason, agents are encouraged to consult with their principal
broker if they do not feel comfortable with the effect or meaning
of such a clause.
However, escalator clauses can be fraught with danger to those
agents who use them without a complete understanding of their meaning
or an inability to fully explain them to their clients. Here are
some tips in drafting and explaining escalator clauses:
- Always discuss with the buyer the importance of placing a cap
on the clause, in order to reduce the risk of obligating the buyer
to a price that is unrealistically high. For example, saying that
the buyer will pay $1,000 above the highest competing offer, places
the buyer at risk that another buyer’s outrageously high
offer (plus $1,000) would become binding on the agent’s
buyer. Putting a “not to exceed” provision in the
escalator clause is necessary to avoid this risk.
- Make sure that the buyer understands the impact of using an
escalator clause. If the buyer later tries to avoid their obligation
under the Sale Agreement, or is otherwise dissatisfied with the
outcome, licensees are at risk that a complaint will be lodged
against them. Oregon case law requires that agents make an adequate
explanation of the transaction, commensurate with the level of
understanding of the client.5
- Agents representing sellers should make sure they understand
the escalator clause being submitted to their clients. If there
is any doubt, or the offer is ambiguous or poorly drafted, agents
should consult their principal broker with regards to how to proceed.
In all cases, agents should discourage their sellers from accepting
offers that are ambiguous or capable of more than one interpretation.
Conclusion. Is the use of an escalator
clause in a competitive offer situation wise? Like any other contractual
provision, they may have a limited use if properly drafted and understood
by all parties, including the agents. However, they are fraught
with risk if not fully understood. For example, the use of an escalator
clause can backfire if it results only in encouraging the seller
to “fish” for other buyers, in order to up the bidding.
And since there is no firm purchase price identified in the Sale
Agreement containing an escalator clause (i.e. the price is $X dollars
plus another buyer’s highest competing offer), the risk of
buyer or seller confusion about the actual sale price could lead
to claims against the agent.
For the same reason that office policies should be developed for
presenting multiple offers, escalator clauses should similarly be
addressed in written policy at the company level. And principal
brokers must be especially vigilant when reviewing documents including
such clauses.
FOOTNOTES
1
ORS 696.301(29).
2
This is not to say that principal brokers are “immune”
simply by having written office policies. Not only must such policies
exist, they must be implemented and followed. In other words, office
policies do not eliminate the principal broker’s duty to review
the written transactional documents and step in when they see poorly
drafted or ambiguous agreements.
3
ORS 696.815(2)(c)(A),(B) & (C) Moreover, seller expectations
can be unrealistically raised if the disclosed limited agent discusses
with the seller what the buyer “intends” to offer –
only to have the buyer change his or her mind. If the seller rejects
or fails to accept another offer in reliance upon an agent’s
representations of a better offer to be submitted that never materializes,
the disclosed limited agent may find themselves on the receiving
end of a civil or regulatory claim.
4
Conversely, even buyers who tie up the property with the highest
bid can complain that their disclosed limited agent encouraged them
to bid more than was actually necessary.
5
Prall v. Gooden, 226 Or 554 (1961).
© Copyright 2004. Phillip C. Querin,
Davis Wright Tremaine. No part may be reproduced without the author’s
express written consent.
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