February 16

What is an Escape Clause?

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I used a clause last month on a rural property and realized not a lot of people know about them.  

An escape clause in most cases goes hand in hand with a "Sale Of Property Condition": or SPC for short so we'll start there first.  

In plain language and SPC means this:  "Ok, so I'm going to buy your property but I need to sell my property first.  I need 'x number of days'  to sell my property.  If I can't sell at the end of that time, I can back out of the deal without penalty.  Deal?"

An SPC usually allows 30-90 days for the buyer to sell their property with 60 days being pretty standard.  

The seller will want the ability to accept a better offer if one comes along which is where the escape clause fits in.  

What is an escape clause?

An escape clause allows a seller to entertain other offers on a home sold conditionally to another buyer.  Should the seller find another acceptable offer, they can accept the new offer and invoke the escape clause to get them out of the original agreement.  

Once the escape clause is invoked, the buyer will either have to waive their condition and go forward with the purchase or grant a mutual release to the seller  Fish or cut bait so to speak.

Example of an escape clause

Here is an example of a pretty standard escape clause.

When do you use an escape clause?

Normally, you'll see it when an offer is made with one of the terms allowing the buyer specified amount of time to sell their home; usually 60 days.  Unless it's a unique property, the seller should insert an escape clause to allow them to continue to market the property to other buyers.  

Without this important clause, you are beholden to the buyer for the duration of the conditional period which could be as long as 90 days or more.  

If you're selling and faced with this decision, always ask for an escape clause.  

How common is it?

With many properties receiving multiple offers in the GTA, it's not very common on residential properties.  Not many sellers will consider an SPC so the need for an escape clause doesn't come up very often.  

It's far more common in rural communities and less robust markets.

As for me....  

I've used it a handful of times.  It's a great tool to have for when you have 'an okay' buyer and want to see if you can do a little bit better in the meantime.  

Some Tips

Before accepting a deal conditional on the sale of a buyer's property you need to do your homework.  

  • Get all the details about the subject property as you can.  Is it saleable? Pull comparable listings to determine fair market value.
  • Find out who their realtor is. Do they have a good track record?  If they are selling on their own, I would NOT recommend going forward with an SPC, you are asking for trouble.  
  • Demand to know the list price for the buyer's property and write it into your offer.   If the list price is absurd, you may want to reconsider the SPC clause altogether.

If you must accept an offer conditional on the sale of property then make sure you charge a premium for that privilege.  Before you finalize things, be sure to include an escape clause in case a better offer comes along.  


Tags

escape clause, Sale Of Property Clause, SPC


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