Escalator Clause

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DEFINITION of 'Escalator Clause'

A contract provision allowing for one to pass an increase in costs to another party. Escalator clauses are usually related to influences beyond both parties control, such as inflation.

Also known as an "escalation clause".

BREAKING DOWN 'Escalator Clause'

Escalation clauses allow people to enter large or long-term contracts, while accounting for changes in the market or economy. For example, let's examine a possible arrangement for someone to rent an apartment. If housing prices are increasing rapidly, a landlord may be hesitant to sign a longer term rental agreement or lease, since he or she could lose out on the property's appreciation. By including an escalator clause, where rent can increase by a specified amount each period, the landlord can still benefit from current market conditions, while the renter can secure a long-term living arrangement.

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RELATED FAQS
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    Escalation clauses are often used to facilitate the creation of long-term contracts, and the consumer price index (CPI) is ... Read Full Answer >>
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