Whenever real estate markets shift, what was normal becomes uncommon and vice versa.
For example, in a buyer’s market, it is quite rare to see seller’s listing below market value and holding back on reviewing offers to a set date, whereas in a seller’s market, it is pretty common.
In recent months we have seen the reemergence of a particular clause that was exceedingly rare in the past decade. It’s called an escape clause and given we’re now seeing it on a more regular basis, it’s worth reviewing.
What’s an escape clause?
As the name states, this is a clause that allows one party to a conditional transaction to “escape” the conditional status under certain circumstances.
The above is technically accurate but doesn’t really explain well what it means or how it works, so let’s go over it in more plain language. In order to do so, let’s clarify a few other terms.
First off, what’s it mean when a deal is conditional?
A real estate sale can be either firm or conditional. A firm sale is a legally binding sale with no conditions or outs for either side. Once it’s sold firm, it better close as planned, otherwise there will be significant repercussions.
If a home is sold conditionally though, there are still ways in which the deal can be terminated, often without any adverse repercussions to one side. The most common conditions in our markets in the GTA are financing, home inspection, or in the case of condos, review of the status certificate package.
There are lots of other ways in which a property can be sold conditionally and they can be for either the benefit of the buyer (and this is the most common conditions we see) or for the benefit of the seller. A condition that a seller might include is that the sale is conditional upon the completion of probate (for an estate sale).
A conditional purchase always specifies the condition (“Yes, I’ll buy it as long as X…”) and in almost all cases, the timeframe (“…and I’ll get that sorted by this date and time.”) of the condition as well.
The most common conditions as listed above often have quite short time-frames, typically three to five business days for the financing or home inspection conditions, and up to 10 business days for the status certificate package to be provided and then reviewed within three to five days after that happens.
With such short time frames, most conditional deals are reported on the MLS system as “Sold Conditional”, or SC. While such homes may technically still be available, the vast majority of buyers and sellers treat the home as being off the market. For sellers, many don’t want to continue to show the home to other potential buyers due to the inconvenience of being ready for such showings. More practically, many buyers have no interest in seeing a home that is sold conditionally for fear they will love the home and not be able to buy it when the conditions are fulfilled and the original buyer makes the deal firm.
There is a modification that can be made to a deal where instead of being sold conditionally, it is sold conditionally with an escape clause. This shows up on the MLS as SCE.
What’s an escape clause actually look like?
While there can be some variation, below is the most typical wording for an escape clause that is inserted into the Agreement of Purchase and Sale.
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 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 __________ hours from the giving of such notice to waive or remove any and all conditions 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 deposit shall be returned to the Buyer in full without deduction.
The plain language version of the above is pretty simple. It’s sold conditionally but during the conditional period where the buyer is getting whatever they need to do done, the seller can keep showing the home to other potential buyers and, more crucially, if they negotiate another offer they are willing to accept, they can trigger this clause and the buyer has X number of hours to either waive the conditions (buy the home) or refuse to waive their conditions and the first deal dies and the seller can sell to this new buyer.
Can the seller just trigger it to make the buyer firm up the deal?
If you’re a bit cynical, you might be wondering if a seller can’t force a buyer to waive their conditions by just saying they’ve got another offer. The answer to that is no, this isn’t something that can be triggered by someone who “wants” to buy the home. The seller has to accept this other deal, which will have wording about it being conditional upon the sale to the first buyer being terminated. Yes, that means the second deal is conditional upon the first deal, which was conditional with an escape clause. There are lots of conditions flying around and it can get confusing for parties to these multiple potential sales. At the end of the day, there is just the one home, so the contracts need to be wording carefully to prevent the seller from having two legally binding agreements of purchase and sale for one home.
It’s worth noting that the new offer the seller accepts doesn’t have to be “better” than the first one. As per the wording of the escape clause, it just has to be “satisfactory” to the seller. That could mean any number of reasons such as closing date, the seller’s perception as to whether it is more likely to occur, price or literally any aspect that makes the seller happy with the offer.
How long does it take?
The most common timeframe for an escape clause is 72 hours, or three days. It can be shorter but generally there is an acknowledgment that if the clause is triggered, the original buyer needs some amount of time to gather information and make a decision.
Given the 72 hour timeframe is most common, you can see why it doesn’t make a lot of sense to have many conditional deals to have an escape clause inserted. If a buyer has three days to get their financing in order and waive their financing condition, an escape clause that allows the seller to find another buyer, negotiate and accept a conditional sale to that buyer and then trigger the escape clause giving the first buyer three days to waive their condition doesn’t make much sense.
So why are we seeing more deals with escape clauses now?
The most common reason for an escape clause being inserted into an Agreement of Purchase and sale has to do with the buyer inserting a conditional clause related to the sale of their own home. This is offer referred to as Sale of Purchaser’s Property (SPP or SOPP) and it is there when the buyer is worried they won’t be able to sell at the price they need or in the timeframe required to close on the purchase of this new home.
In such cases, it is not unusual to see this SOPP conditional period lasting for one to two months. That is a long time for the seller to wait to see if the deal will actually move forward and the escape clause allows them to continue to not only market and show the home, it allows them to actually sell it to someone else – or at least force the original buyer with the SOPP condition to waive the condition (and firm up the deal) or the deal dies.
The return of escape clauses to the market is a clear indicator that buyers are worried about their ability to sell their own homes and that sellers are desperate enough to be willing to accept a lengthy conditional period.
If you’re considering a move but are worried about how your sale will go, then we’d be happy to talk to you about escape clauses and the ways in which we can help you move forward.