What is an 'Escalator Clause'

An escalator clause is a contract provision allowing for an increase in wages or prices. In a labor contract, this clause may tie wage increases to the inflation rate. Also known as an "escalation clause."

BREAKING DOWN 'Escalator Clause'

Escalator clauses take a variety of forms and allow people to enter large or long-term contracts by accommodating changes in the market. For example, if rents are increasing rapidly, a landlord may be hesitant to sign a long-term rental agreement or lease, since he or she could lose out on higher rents and property appreciation. By including an escalator clause, whereby rent can increase by a specified amount each period, the landlord can benefit from current market conditions, while the renter can secure a long-term living arrangement. Sometimes escalator clauses include a cap on the allowed increases. Escalator clauses may also include de-escalation provisions.

Escalator Clause in Real Estate

In real estate, an escalator clause may be attached to an offer on a home, indicating that the potential buyer is willing to increase the offer should other higher offers be received. The escalator clause typically includes a cap indicating how high the potential buyer is willing to go. For example, if a buyer makes an offer of $400,000, an escalator clause could specify that if a higher offer comes in, the buyer will beat it by $3,000 but only up to a $430,000. If an offer of $405,000 is received, the escalator clause would allow a new offer of $408,000. On the other hand, if the competing offer comes in at $429,000, the escalator clause would not allow for a new offer adding $3,000 since the clause specifies a cap of $430,000.

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