Have you been browsing the Toronto MLS for listings and seen the initials “SCE”? Or maybe you found the perfect home only to call the REALTOR® and be informed it is “Sold Conditionally…with an escape clause”.
If you’re new to Ontario Real Estate, you’re likely unfamiliar with the term. However, an escape clause can be a powerful tool in both the Buyer’s and the Seller’s negotiation toolkit.
What is an Escape Clause?
An Escape clause is a contractual agreement between a Buyer and a Seller that allows the Seller to terminate the agreement if certain conditions are met.
To better understand how they work, its important to remember some fundamental principals of Real Estate agreements in Ontario. Typically, conditions are incumbent on the Buyer to fulfill or waive. Once a binding agreement is signed, there is little wiggle room for the Seller to back out of the contract. The Buyer however, if a condition is included, could decide to terminate the deal, and have their deposit returned “in full without interest or deduction”. The Escape Clause, however, converts these conditions into a two-way street. Just as the Buyer can choose to walk, the Seller, in certain situations, may be able to as well.
On first brush, it may seem like the Escape Clause is a tool used by unscrupulous sellers to renege on a deal if they feel a better opportunity approaches. Why would a Buyer agree to invest in an agreement (Appraisal, Inspection, etc.) just to have the rug pulled from them at the last minute? However, Escape Clauses, when drafted correctly, can be beneficial to the Buyer as well.
The Escape Clause – An Illustrative Example
Let’s suppose a buyer is desirous in purchasing a property on the market. The Buyer feels confident they will have the necessary financing to complete the transaction, but will not know for certain until completion of their prior project in 4 months. The Buyer could submit an offer with a 4 month financing condition. The Seller, however, would likely reject this offer. Why would the owner of a property wish to commit to the sale for 120 days, with the chance that they will be met with a mutual release and no recourse against the Buyer? This valuable time could have been spent marketing the property and finding the correct buyer who is more qualified and financed.
It is in this situation that an escape clause could prove useful for both parties. For example, a clause in the agreement may read similar to:
“The Buyer agrees to allow the Seller to continue to market the property as available. If the Seller is presented with a bona fide, unconditional offer to purchase this property at a price not less than X, the Seller may choose, at their sole and absolute discretion, to render this agreement null and void and the deposit shall be returned in full to the Buyer without interest or Deduction.”
In this case, the Buyer has right to purchase the property unless a very specific better offer materializes. The Seller may be more obliged to accept this agreement, where their property is not tied in a contract during a hot selling season. The Buyer benefits by not allowing the rug to be unceremoniously pulled from underneath them…the criteria for the competing offer is clear.
It’s important to note that Escape Clauses do not need to have a unilateral termination component by the Seller. For example, the above clause could be modified to read “Conditional Period shall be shortened to twenty-four (24) hours following receipt of the offer”. In This example, the original Buyer would have 24 hours following receipt of the second offer to waive conditions, or walk away from the deal.
Usage in Real Estate
Escape clauses are rare in Real Estate. Its no surprise as the escape clause can only exist in very specific scenarios, and requires a certain level of trust in “good faith” between the Buyer and Seller. However, when used correctly, they can be a powerful negotiation tactic.
Do you have questions about Escape Clauses? Contact ReaLawState for a free consultation.