Wednesday, June 21, 2017

What The Heck Is An “Escape Clause?”


A couple of weeks ago, I wrote about RECO's bulletin on "escalation clauses," and how they were, in my opinion, illegal and unethical.

I got some push back from some of my readers, but perhaps we can agree to disagree for now.

In any event, a lot of the old-timers were joking that escalation clauses were used in the 80's when the market was slow, painful, and at times – more creative.

So is it any coincidence that escape clauses are making a comeback?


Please tell me that you know what movie the above image is from?

The Great Escape!

Steve McQueen, Richard Attenborough, James Garner, Charles Bronson, James Coburn – what a cast!

You know how I roll with the feature images: sometimes I'm literal, sometimes I'm about the puns, and then you've got the sentimental photos, like the one above.

I figured the ESC key on your keyboard would be a boring photo anyways…

Plus, nobody won my $50 Home Depot gift card from last week's Pick5, which was the first time that's ever happened.  I guess nobody who watched played with GI Joe when they were growing up?  So I thought about doubling-down with the image from above, but that's just too easy.  Right?

Okay, back to the task at hand: escape clauses.

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.

The clause usually has to be triggered – and that can come with its own set of allowable circumstances, and must be done so within a certain time period, and/or allow a certain time period for the other party to make amendments to the agreement.

In real estate, an escape clause is usually used by the seller to get out of an accepted Agreement of Purchase & Sale.

And usually, the seller allows the buyer to firm up the deal – almost containing elements of a shotgun clause.

Here's a typical clause as seen in an offer, keeping in mind that this clause would be added by the seller, in an agreement that is conditional by the buyer:

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 in writing by delivery to 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 48 hours from the giving of such notice to waive this condition 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 Buyer's deposit shall be returned in full without deduction.

Do you see the escape?

So the buyer submits and offer with at least one condition, say they have a condition for five business days on financing.

And the seller says, "I'll accept your offer, and tie up my home for five business days, but I want to be open to other offers as well.  And if and when I get another offer that I want to accept, I'll let you know – and you have 48 hours to make up your mind."

So let's say there's an offer accepted today – Wednesday, June 21st, conditional on the buyer obtaining financing, or conducting a home inspection, or getting a lawyer's opinion, and that condition is for five business days – until next Wednesday, June 28th.

On Friday, a second buyer appears, and expresses interest in the property.

That buyer can make an offer, conditional on the seller being released from the Agreement of Purchase & Sale that already exists.

It's rare for a buyer to submit an offer with condition that the seller must satisfy, but that's how the escape clause works.

The listing agent would tell the buyer agent how many days or hours the escape clause is for (in this case, 48), and the buyer would submit the offer with that guidance.

So the buyer submits an offer on Friday night with this clause:

This Offer is conditional upon the Seller being released from a prior Agreement of Purchase and Sale. Unless the Seller gives notice in writing delivered to the Buyer not later than 11:59 p.m. on the 25th day of June, 2017, that this condition is fulfilled, this Offer shall be null and void and the deposit shall be returned to the Buyer in full without deduction.

The seller accepts this offer, which is conditional, and then notifies the first buyer that they have 48 hours to provide a waiver, or sign a mutual release.

The first buyer then has to decide, very simply, whether to go ahead with the transaction or not.

I suppose it all depends on what that condition is for.  If it's for financing, the buyer might not chance that he or she doesn't get a mortgage, and thus could walk away.  If it's for something else, with more discretion, then he or she might sign the waiver, and firm up the deal.

I had my first experience with an escape clause in quite some time, last week.

The process was frustrating, but not just because of the escape clause, but rather because it brought even more fun times into the equation – like out-of-town agents, conditions you haven't seen in 15 years, and the ever popular "double-ending."

My clients saw a house two weeks ago that they really liked, and as I always do before I have a showing, I called the brokerage to ask if, a) the property was still available for sale, and b) if there were any registered offers.

In this market, you never know if MLS is one, two, or six days behind reality.  Some of the crummy brokerages don't update MLS in an efficient manner, and while a property says "Available" on MLS, on Wednesday, June 21st, it might have been sold last Friday.

I was told "Yes" and "No" to my two questions, and so I proceeded with the showing.

My clients put together an offer the next morning, and we submitted it to the listing agent.

The agent called me and informed me that the property had actually sold the night before.

He then informed me that it was to his buyer-client.

But all was not lost here – he told me that it was sold conditionally, and they were still showing the property.

That's what everybody says.  "Sold conditionally, still showing" is what you get from the office administrator when you go to book a viewing on a condo, and you know there's a 99.9% chance it firms up because the condition is on Status Certificate.

But with this house, I soon learned, that it was sold conditionally on financing and home inspection.

And then I heard those words that I have, not once in my thirteen years, ever heard: "It's also sold conditional on the sale of the buyer's house."


No way.

I heard that wrong.

It's 2017, not 1988.

You're telling me that this property is sold conditionally on three things, one of which is the sale of the buyer's house?

Oh, wait – you're representing both buyer and seller.  So as long as you're willing to screw your seller, you can satisfy your buyer.  Gotcha.

The agent also added, "You know we had two offers, eh?  Mine was higher."

Well no kidding.  I don't exactly expect you put them both in sealed envelopes and had your broker of record present them to your seller…

In any event, he told me that the condition on the sale of the buyer's house came with an escape clause for 48 hours, and we were free to submit an offer after the financing and inspection clauses firmed up.

The clauses for financing and inspection were for five business days, whereas the clause for the sale of the buyer's property was for thirty days.

So if the deal fell apart on financing or inspection, we wouldn't have to deal with the escape clause.

So we looked at other properties for a week, and came back to this one after not finding any houses on which we wanted to bid.

We submitted our offer on Wednesday, with the condition on the seller being released from the existing Agreement of Purchase & Sale by the seller, but for some odd reason, the seller granted the buyer a two-day extension on their financing condition.  And by "odd reason," I'm insinuating more pressure from the listing agent, who was representing the buyer.

Our offer went live that Friday when the buyer waived their financing condition, but it was short-lived, as the buyer immediately waived their condition on the sale of their own property, and firmed up their deal.

I know, I know – this story had a lot of hype, and ended abruptly.

But that's the point, in the end, since the original buyer has all the power when it comes to the escape clause.

Sure, the seller can include the escape clause to ensure that if they see another offer they want to work with, they can try to do so.  But the original buyer can always firm up the deal when that escape clause is triggered, and the second buyer to the table can only hope, and wait.

That's what we did for a week – hoped and waited.

The situation was bizarre from the get-go.

The listing brokerage didn't have a record of the registered offers.

The listing agent provided both buyer and seller to the transaction.

The listing agent provided both buyer and seller to the transaction, while up against another competing offer.

The listing agent "advised" his seller to accept an offer that had three conditions, including one not regularly seen in Toronto since Brian Mulroney was Prime Minister.

The listing agent advised his seller to extend a two-day extension on financing.

Geez, the more I write, the less this becomes a story about escape clauses!

I guess that wasn't the point, but as I said, the real estate "fun times" just kept rolling in this experience.

I felt really bad for my clients in all this, since being the brutally honest guy that I am, I told them every single thing I was thinking, from the start.  I didn't sugarcoat it – I told them "this sucks," and that we found a house we liked, that was listed by somebody who did business………differently.

In the end, we put our best efforts forward, and didn't come out with the "win."

Most buyers would have walked away once they found out the property was conditionally sold, but we stuck it out, and kept fighting.

I don't think conditions on the sale of a buyer's property are going to make a comeback; at least not in Toronto.

But the good-old "escape clause" seems to be popping up now and again, and it can wreak havoc in a real estate market…

The post What The Heck Is An "Escape Clause?" appeared first on Toronto Real Estate Property Sales & Investments | Toronto Realty Blog by David Fleming.

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