That Escalated Quickly: Pros and Cons of Escalation Clauses in Purchase Agreements

Louisiana REALTORS • July 7, 2021

By: Patricia B. McMurray, JD, Melissa M. Grand, JD, and Derbigny Daroca, JD
Baker, Donelson, Bearman, Caldwell & Berkowitz, PC

450 Laurel Street, Chase Tower North, 21st Floor

Baton Rouge, Louisiana 70801


The real estate market has become increasingly competitive, especially in the aftermath of the COVID-19 pandemic. One tool to compete in this market that REALTORS® are discussing with their clients is using escalation clauses in a buyer’s offer to purchase real estate. 


This article discusses escalation clauses and the potential impact on buyers, sellers, and their agents in real estate negotiations. 


While escalation clauses seem attractive in a fast-paced market, the potential risks may be greater than the rewards. In fact, some states, like Texas, have legislatively prohibited escalation clauses. As of the writing of this article, escalation clauses are untried in Louisiana—there are not Louisiana cases, legislation, or regulations interpreting escalation clauses.


So, while there may be some benefits, as explained below, it is important that REALTORS®, buyers, and sellers understand all of the potential pitfalls of escalation clauses, and that the risks may sometimes outweigh the possible rewards. 


  • What Is An Escalation Clause?

    An escalation clause or “escalator” is a provision in or an addendum to a purchase agreement, that allows the buyer’s offer to increase (escalate) the purchase price they have offered up to a maximum amount in the event that the seller receives another offer. 


    For example, Zach makes on offer on Mia’s house for $250,000 and adds a clause to his purchase agreement escalating Zach’s offer to $100 more than any offer over $250,000, up to a maximum purchase price of $280,000. Charles then offers $260,000 for the house, which automatically escalates Zach’s offer to $260,100


  • What Should Be Considered When Drafting An Escalation Clause?

    The following terms are typically included and defined in an escalation clause:

    • the “escalating factor”: the amount in excess of a higher, competitive offer; 
    • the “cap” or “ceiling amount”: the maximum limit or amount the buyer is willing to offer for a purchase price;
    • “multiple escalations”: the buyers acknowledge that there may be multiple escalations, up to the cap or ceiling amount. 

    The escalation clause should contain detail regarding the escalation increase procedure(s).  Example options include:

    1. the loan amount provided for in the offer shall remain the same, and the buyer shall pay any increase in cash at the time of settlement; 
    2. the down payment amount provided for in the offer shall remain the same, and any increase shall be added to the loan amount;
    3. the loan amount provided for in the offer shall automatically increase to be ______% of the new sales price of the property; or
    4. the loan amount shall not exceed $________ and the buyer shall pay any amount of the increase in sales price which is not included in the loan amount in cash at the time of settlement. 

    Escalation clauses also include provisions for termination of the escalation clause, a disclaimer that the buyer holds their agents and their brokers harmless with regard to the negotiation of the sales price, and the procedure for accepting a counteroffer from the seller.  

  • What Are the Benefits of Escalation Clauses?

    Escalation clauses have gained popularity since the COVID-19 pandemic has made the real estate market even more competitive. 


    Buyers who want to ensure their offer is a winning one are making more use of escalation clauses because it can be a helpful tool when buyers know there will be multiple offers or when the buyer expects to pay an increased price. In the event of a bidding war, a buyer might be inclined to use an escalation clause to help secure the sale. Sellers who want to minimize back-and-forth negotiations appreciate the immediate increased off that escalation clauses inherently provide.  

  • What Are Potential Drawbacks of Escalation Clauses?

    Full disclosure of a buyer’s maximum offer can be a strategic drawback for a buyer in their negotiations with a seller. Buyers should also consider that an escalation clause on the initial offer in a multistage negotiation could be strategic drawback if that offer is disclosed to other potential buyers. Additionally, sellers may have little incentive to lower a potential counter demand after knowing the maximum the buyer is willing to pay. Buyers should be aware that each scenario is different, and there are incentives and drawbacks to limiting the ability to negotiate their offers. 


    Sellers also face risk in receiving offers with an escalation clause. Escalation clauses do not guarantee a better offer for sellers. Offers from other buyers may be more advantageous to a seller, even if the purchase price is lower (i.e., cash offers, no inspection, less seller contribution to closing costs). When discerning between different offers, some with escalation clauses, some without, sellers must carefully evaluate which offer is truly best. 


    Another potential disadvantage of escalation clauses for sellers is that a buyer may not make an offer if he knows a previous offer includes an escalation clause. In a recent article, the National Association of REALTORS® (“NAR”) analyzed how buyers are coping in a highly competitive housing market. NAR discussed that among reported buyers who declined to make an offer on a house, 35% of those reported buyers did not make an offer once they knew there were already multiple offers on the property. NAR explained that this could be because the buyers could no longer make an offer that was below the listing price or the buyers anticipated escalation clauses. 


    If the escalation clause is drafted poorly and does not require that the competing offer be verified, the buyer risks the seller or others on the seller’s behalf manipulating the purchase price with sham offers to drive the price up. Further, the buyer risks an expensive surprise if the escalation clause fails to include a maximum purchase price amount. The careful drafting of the clause for a thorough analysis of probable outcomes and strategies in the current market is critical to preventing unintended outcomes.

REALTORS® should discuss the pros and cons of escalation clauses with their clients. If an escalation clause is used, including a disclaimer is prudent for risk management. Buyers and sellers should consult their real estate agents and attorneys when contemplating offering and/or accepting escalation clauses to minimize risk and maximize their opportunities. 

Update from 2025 REALTORS® Legislative Meetings

By Louisiana REALTORS® • June 6, 2025
The National Association of REALTORS® Board of Directors approved a 2026 budget with no dues increase and passed a Professional Standards Recommendation to clarify language in NAR Code of Ethics Standard of Practice 10-5, which prohibits harassment of any person or persons protected under Article 10 of the Code. A day earlier, the Executive Committee approved another Professional Standards change, revising language for Policy Statement 29 designed to ensure state and local associations can fairly and consistently enforce the Code of Ethics. Learn more about the changes. Read the revised Code of Ethics and Standards of Practice. Board members also approved a consent agenda to elect the 2026 officers and regional vice presidents . Christine Hansen of Ft. Lauderdale, Fla., was elected 2026 President-Elect, and Colin Mullane of Ashland, Ore. was elected 2026 First Vice President. The meeting opened with a video message from President Donald Trump, who welcomed REALTORS® to Washington and thanked them for support of the House-passed tax reform. NAR routinely invites the U.S. president to address REALTORS® at the Washington meetings. Over NAR's history, nine sitting presidents have addressed the association. Board Actions Approved a series of Finance Committee recommendations, accepting the association’s financial statement, approving the 2026 operating and advocacy budgets, and keeping dues at $156. The board actions also redirect $35 of the $45 Consumer Advertising Campaign assessment to operating funds. This change positions NAR to make its next settlement payment in February 2026 and maintain a balanced budget without raising total dues. The remaining $10 for the Consumer Advertising Campaign will fund optimized, metrics-driven activities that reach and engage consumers in critical markets. NAR CEO Nykia Wright and President Kevin Sears explained the shift at the opening session of the conference . Amended Standard of Practice 10-5 to give state and local associations greater clarity in how to fairly and consistently enforce Article 10 of the Code of Ethics. The amended Standard of Practice says that REALTORS®, in their capacity as real estate professionals, in association with their real estate businesses, or in their real estate-related activities, shall not harass any person or persons based on race, color, religion, sex, disability, familial status, national origin, sexual orientation, or gender identity. Made a series of recommendations to the Standards of Practice to bring the language in line with the terms of NAR’s 2024 settlement. Approved a motion to make one member of the Executive Committee a commercial practitioner who has served as chair, vice chair or liaison of an NAR commercial-related committee or forum to serve a two-year term and be independent of the 10% commercial representation requirement outlined in the NAR Constitution. Approved a recommendation from the Credentials and Campaign Rules Committee to amend qualifications for president-elect, first vice president and treasurer effective Jan. 1, 2026. Qualifications for top-line officers are now aligned with those already in place for regional vice presidents. Approved recommendations from the Member Accountability Committee related to applications for volunteer leadership and the Statement of Appropriate Event Conduct. The goal of the recommendations is to ensure members found in violation of the NAR Member Code of Conduct are properly disclosed. Award Winners NAR President Kevin Sears announced the 2025 Distinguished Service Award winners James P. Cormier , AHWD, C2EX, of Minneapolis-St. Paul, and Brooke S. Hunt , AHWD, E-PRO, SFR, SRS, C2EX , of Flower Mound, Texas. In addition, the group recognized the winner of the 2024 William R. Magel Award, Anne Marie DeCatsye , CEO of the Canopy REALTOR® Association and Canopy MLS in the Charlotte, N.C., metro area. REALTORS® Relief Foundation  During the meeting, REALTORS® Relief Foundation President Greg Hrabcak appealed to board members to make a tax-deductible donation. The fund provides housing assistance to victims in the immediate aftermath of a disaster; 100% of funds donated go to disaster relief. “We’ve had devastating wildfires in California, tornadoes in Missouri and Kentucky and flooding in West Virginia, and we’re still in the first half of this year,” Hrabcak said. Before the meeting ended, directors had donated more than $41,000.
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