What are Escalation Clauses?

BY Reid boles, REALTOR

Often misunderstood, an escalation clause can come in many forms:

New Home Construction: This clause usually comes into play with new home construction because it is an intricate process with many moving parts from contract time until possession. The most common ones involve either time spent, cost increases, or sometimes both depending on the current climate in the market.

An example of an escalation clause seen regularly on contracts is one where the builder has completed the offer and conditions have been closed, but for an extended period of time they cannot get in touch with the client to begin the design process and the selections for finishing work.

This is rarely activated because it the most exciting part of the process for the buyer, but sometimes things happen that draw out the process. The past few years have seen unheard of rate hikes from the Bank of Canada which puts everyone in a bind, even the builders who already pay a larger interest rate than the consumers. In this case, it is in their best interests to move forward quickly with the build to mitigate the extra costs applied due to the higher rates as well as volatile material pricing.  

After Closing: The second escalation clause reared its ugly head a few years ago in the direct aftermath of the pandemic. This one ended up costing everyone a frightening amount after the contract was closed and the house was built, culminating in surprise bills up to 50,000 dollars or more in some cases, out of pocket, before the keys can change hands.

This happened as the rising costs of fuel and transport bled into the supply chain which was already weaking due to rising costs and the sudden closing of many businesses, before the much-maligned decision to raise the interest rates to make things even worse. Since then, the costs have stabilized and many builders have stopped using this extra escalation to help balance out the volatile costs, but some still do.

This clause was an extra form applied to the new home contracts which was easy to spot, however there are usually a few buried in the standard offer to purchase used in the new home industry. This is where the lawyer approval condition holds its weight, have your lawyer comb through every line to see what other costs may come your way after the conditions have been satisfied, and if possible, have them cross out the ones that you deem unworthy to the process. A little research ahead of time for things like this will for sure save some stress headaches down the line if you are hit with a big bill that you were not prepared for.  

As always, feel free to reach out to us for any clarification and guidance through this process! I can be reached at 204-799-3951.