What is an Escalation Clause?

It is not uncommon for a seller to have many people interested in buying/renting his/her property. Here the term escalation clause comes into being. An escalation clause is also known as the 'escalator' where a seller raises the price of their property and the buyer is willing to make an offer and come to an agreement.

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The clause states the price of the buyer, who is willing to pay more than the actual offer. The escalation clause is essential because it safeguards the interest of the buyer in case another potential buyer is willing to outbid them.

Now that I have said the escalation clause I would like to explain the importance of the rent escalation clause. One of the most important tools while leasing out or renting out commercial/ residential property in the real estate industry is the rent escalation clause.

This clause helps the landlord to increase the price of the rent after a specific timing or as a result of certain terms and conditions which are stated in the clauses. Due to this the rent you pay to the landlord will not remain fixed over time. Therefore, when you rent property from your landlord you should look at the escalation clauses carefully as it can impact your occupancy cost after a while.

Let's say a tenant decided to rent a property with an escalation rate of 5% and he has signed a contract to rent a property for 3 years. If the initial rate is Rs.10,000 he will have to pay Rs. 10,000 in the first 12 months, then Rs. 10,500 for the next 13 to 24 months and Rs 11,205 for 25 to 36 months. This is how the escalation clause in rent agreement works.

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An escalation clause is a clause usually included in the purchase offer at the time of buying a property. This clause is usually in place when a property has multiple interested parties. Having an escalation clause in place allows you to increase your purchase price to an extent to stay in the bid. 

To understand it better, I will give you an escalation clause example.

Mr. Sharma, buyer 1 offers Rs. 75 lakhs for a property. The realtor adds an escalation clause stating that in case a higher offer is made, Mr. Sharma’s offer will increase by Rs. 35,000 above the competitor’s price. It is also mentioned that the escalation clause goes up to a maximum of 

Rs. 7850000. If no one offers above this price, Mr. Sharma’s offer will remain at Rs. 75 lakhs. But if another buyer offers anything above Rs. 7850000, Mr. Sharma will end up losing the bid.

An escalation clause helps you to ascertain in front of the seller that you are serious about the property and it also saves time and efforts that goes in buying a property.

However, having an escalation clause in place will let the seller know all of your cards and might want to push your budget beyond your initial offer.