Best of the Hotline: Price Escalation Addendum

PAR first published the Price Escalation Addendum (Form PEA) way back in 2008. The Standard Forms Committee resisted drafting this sort of form for many years, but finally relented after seeing example after example of poorly drafted clauses that were wreaking havoc in local markets. But this form – and even the general concept behind it – is one of the most misunderstood in the PAR forms library. You should review PAR’s guidelines for the form before using it, but let’s review a couple of the most common questions/complaints/misconceptions that we hear on the PAR Legal Hotline.

“The seller didn’t honor our escalation clause!”

This comes up in two contexts:

• the escalation addendum goes up to $X, but the seller chooses to accept a different offer with a price lower than $X;
• the escalation addendum goes up to $X, but the seller returns a counteroffer at a set price (we’ll talk more about price below) without invoking the addendum.

Attaching Form PEA is not a magic bullet that somehow overrides all the regular negotiation rules.

There is never a guarantee that the offer with the highest purchase price will be accepted in any transaction. A seller has the right to accept whichever offer they want, and if they don’t want the offer with the escalation addendum, they are free to accept another one regardless of the price.

Nor is there any requirement that a seller unquestionably accept all the terms and conditions of an offer that is presented. The seller can choose to tear up this addendum and counter at a set price in the same way that a seller could counter with a different settlement date or refuse to accept an appraisal contingency.

“How dare the seller counter at my maximum price when I’m sure there’s no competing offer that high?”

Life – and real estate – is a series of trade-offs. In a typical negotiation the buyer puts out their preferred terms, but keeps their “if I have to” terms close to the vest. Not so with this form. A buyer using Form PEA gets the benefit of an automatic escalation without having to do a direct back and forth negotiation, but it comes at the cost of telegraphing part of their strategy. If a seller chooses to not negotiate using the PEA, they can counter at any price they choose.

The first thing buyer agents often say is “It’s not fair to counter at the top price without a competing offer.” But why not? With or without an escalation addendum, if a buyer says “I’m willing to go higher” there’s no reason why the seller can’t ask them to actually go higher. Now…it’s a problem if the seller/listing broker lie about the competition and say they have a competing offer when they don’t, but that’s probably (though not always) why they tore up Form PEA in the first place, so buyers should probably consider that as part of their negotiating position.

“If there are multiple offers using Form PEA, the price automatically escalates to the highest one, right?”

No, sorry. That is not a correct reading of the form. Paragraph 2 says: “If one or more competing offers include similar price escalation terms, this automatic increase will be applied to the maximum escalated sales price of the highest competing escalation term, not to exceed the maximum purchase price stated above.” The key wording there is “the highest competing escalation term….” This doesn’t mean it goes to the highest of all the offers, but that it goes to one increment above the maximum of the second-highest escalation addendum (which is the ‘competing’ offer).

For example, assume there are three offers that would escalate in $1,000 increments to $210,000 – $220,000 – $230,000. If the PEA is invoked here, the sales price would be $221,000 – one increment over the second-highest offer.

“This is hard!”

Yes, it is. This sort of clause is difficult to write, and even harder to implement across all possible transactional variations. Many brokers have told us that they teach their agents to advise clients they should view Form PEA as an indicator of interest, but that it’s often better to just negotiate a clean agreement with acceptable terms (which is why we hear so many versions of the first two questions). This ultimately becomes a practical business issue for brokers, agents and clients to work through, but our best advice – with this form and any other one for that matter – is to educate yourself on how it works and to keep a clear and open line of communication with the other side to ensure that everyone is on the same page throughout the negotiations.