SELLERS PROTECT YOURSELF with an Escape Clause.
Savvy home sellers are reluctant to take their home off the market when they have entered a conditional offer with a Buyer.
One of the most potent clauses in conditional offers in real estate is the “Escape Clause.” Its value is tremendous and multi-fold! Unfortunately, it is not used to the extent that it could or should be applied. It’s usage also depends on the real estate market. There are also many reasons some sale representatives consciously avoid discussing or adding an escape clause in conditional offers, and that would be a good topic for another blog.
Before a Seller accepts that conditional offer, they will want to talk to their real estate representative about including an “escape clause” in the Agreement of Purchase and Sale with the Buyer. An excellent real estate representative would ALWAYS have an HONEST discussion with their Seller about this topic for every conditional offer. A sound real estate representative would have the escape clause prepared in writing in advance by way of a separate Schedule and presented to their Seller client for their consideration at the same time the written offer is being presented to the Seller. The ultimate decision remains with the Seller and NOT their realtor.
WHAT THE HECK IS AN ESCAPE CLAUSE?
An escape clause, in the most basic term, is a set of circumstances in a contract that allows one party to back out of the deal. In real estate, it is a provision that is included in the Agreement of Purchase and Sale, that allows the Seller to continue to market their property and the agreement be terminated by the Seller without repercussions or penalties when certain conditions exist.
An escape clause is designed to prevent the Seller from feeling like they are forced into complying with a contract when circumstances change, adds fairness and gives the Seller some flexibility to consider other offers. It is a CRUCIAL part of the sale of a property. It allows the Seller to CONTINUE to MARKET their property and to CONTINUE to OFFER THE PROPERTY FOR SALE during the conditional period and gives them the right to accept the second offer or a backup offer with the original Buyer retaining the right of first refusal.
Let’s take a look at the wording of an escape clause:
“Provided further that the Seller may continue to offer the property for sale and, in the event the Seller receives another Offer satisfactory to the Seller, the Seller may so notify the Buyer personally or in accordance with any other provisions for the delivery of notice in this Agreement of Purchase and Sale or any Schedule thereto. The Buyer shall have (24; 48; 72) hours from the giving of such notice to waive any and all conditions by notice in writing delivered to the Seller personally or in accordance with any other provisions for the delivery of notice in this Agreement of Purchase and Sale or any Schedule thereto, failing which this Offer shall be null and void and the deposit shall be returned to the Buyer in full without deduction”.
The so important primary purpose of the escape clause is to permit the Seller and the Seller’s real estate representative to MARKET THE PROPERTY and “CONTINUE TO OFFER THE PROPERTY FOR SALE.”
Let’s be clear and transparent there are NO clauses in the standard Agreement of Purchase and Sale, that permits the Seller to continue to market the property or to continue to offer the property for sale after a conditional offer has been accepted. The written contract, which is the “meeting of the minds” between the Seller and the Buyer and both their representatives does not provide the flexibility and authority to the Seller and their representative to continue to market and offer the property for sale after a conditional offer has been accepted. Therefore, it can reasonably be expected from the Buyer’s perspective, and their real estate representative that the property will not be marketed or offered for sale, once their conditional offer has been accepted UNLESS an escape clause is ADDED to the offer.
When an escape clause is included in the Agreement of Purchase and Sale, the Seller can continue to market their home and continue to offer their property for sale. If they receive another acceptable offer, they can accept it in a backup position subject to terminating and being released from the first offer.
The second purpose clearly outlines the WHAT IF, WHAT HAPPENS, HOW IT IS GOING TO HAPPEN AND THE TIME PERIOD; “IN THE EVENT the Seller receives another Offer…” followed by the legal stipulation that needs to be followed. It is one last opportunity for the Buyer to complete the transaction by fulfilling or removing the conditions of the offer (making the offer unconditional) OR to terminate the offer by being released from the conditional offer. Effectively squeezing out the Buyer if they are unable to fulfill or waive their conditions.
I could get some push back from some of my readers, but perhaps we can agree to disagree for NOW.
I can visualize realtors in Ontario challenging the validity of my opinion when I state that once a conditional offer is accepted, we CAN’T market the property or offer the property for sale, UNLESS
- we have an escape clause OR
- a clause that states the Buyer and Seller acknowledges and understands and agree that the Seller will continue to market and offer the property for sale during the conditional offer period until all conditions have been waived or fulfilled.
Two points corroborate my opinion.
Firstly, I will point out that the standard Agreement of Purchase and Sale, spells out all responsibilities and obligations the Seller and Buyer have towards one another as well as their real estate representatives. The Agreement does not grant authority to the Seller or their representative to continue to market the property OR to offer the property for sale during a conditional offer without an escape clause.
The second point carries the most weight and is in line with the expectations of the Real Estate Council Of Ontario (RECO). Mr. Joe Ritcher is registrar of the Real Estate Council of Ontario (RECO), and he oversees and enforces all rules governing real estate professionals in Ontario.
The title of his article in the Star dated Saturday, May 6, 2017, CLEARLY STATES
“You can still market your home after a conditional offer – AS LONG AS you have an escape clause.”
That is a powerful heading. Those are insightful and specifically chosen words. That is a clear and transparent path.
An added Schedule to the Standard Agreement of Purchase and Sale provides the opportunity for both Seller and Buyer to add conditions, representations/warranties, acknowledgments, understandings, and clauses to the offer. To AVOID any CONFUSION, a GOOD PRACTICE is to ensure that the Seller makes the Buyer and their registrant aware in writing, of their intent to continue market and offer the property for sale during the conditional offer period. There is no better and more precise and transparent way than to add the grand “escape clause” in the offer.
Sellers should shy away from signing most conditional offers without an escape clause if they intend to continue to market and offer their property for sale.
As for Buyers, the message is clear, get pre-approved before placing a conditional offer and have an organized time plan to quickly fulfill your conditions to avoid disappointments in the event that the Seller plans on continuing to market and offer the property for sale by way of an escape clause.
As for Realtors representing their Seller client, do not trap your Seller clients in a conditional offer. Do not remove their prerogative and right to market and offer their property for sale during the period of a conditional offer. As for Realtors representing their Buyer client, ensure that when an escape clause is not used, protect your Buyer clients by making certain that the property is not being marketed and offered for sale during the conditional offer period. This can be crucial if your client requires an extension.
Specifics and clarity lead to happy endings!