The Escape Clause
How It Works for
Sellers and Buyers


If you happen to come across the real estate term, "escape clause", you're either ...

A buyer offering on a home, conditional on the sale of your present house, or a seller who has accepted an offer from a buyer with a house to sell.

First of all, let me say that there are certain circumstance under which a seller can escape an accepted offer from a buyer before the agreed condition expires. However, there's normally no way for a buyer to use the escape clause contained in the contract to run away from their commitment until their condition on sale expires, at least without seller cooperation.

Financing and home inspection conditions, two common examples of short term conditions, are normally just a few days, or a week at most, and would not normally include an escape clause for the seller.

A condition pertaining to the sale of the buyer's present home, on the other hand, is typically longer. Keeping in mind that once a seller accepts any type of condition in the offer, the property is effectively off the market while the buyer is busily fulfilling their conditions. And since it would be unreasonable for a buyer to expect a seller to accept a longer term sale condition in the offer, which would effectively take the subject property off the market while the buyer attempts to sell their present home, such sale conditions have what is referred to in the industry as an escape clause.

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How an Escape Clause Works

This type of condition usually extends for a period of 30 to 60 days, longer in slower markets and shorter in hot ones. During this time period, in an attempt to fulfill this condition, the buyer is supposed to be taking all reasonable action to market their present home. To permit the seller to continue marketing their property and entertain other offers from other buyers, it's standard procedure to include an escape clause in the conditional contract.

If another buyer wants to try to 'bump' the already accepted conditional offer, they would have to include a clause in their offer which states that the acceptance of their offer by the seller is conditional for a short period of time, typically 48-72 hours, upon the seller being released from a previously accepted agreement. The seller, through his realty agent, would then give the first buyer the required Notice to Conditional Buyer, instructing them to either waive (remove) their condition on sale (and possibly all conditions depending on how the clause was worded) or sign a mutual release.

In other words, the first buyer has the first option to remove the condition(s) and firm up their purchase. In such an example, buyer two would be out of the process. Bumping a conditional offer is often a risk which, in my experience, buyers rarely assume.

If the first buyer elects to waive the condition(s), whether or not they've sold their own home, they assume the risk of successfully selling their old home prior to having to close on their purchase.

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It can be a stressful time for the buyer, especially if they're depending on the sale proceeds from their old home to close on the new.

When a buyer, given notice under the escape clause of another buyer's offer, chooses to waive their condition(s), they must also coordinate the closing dates of both their sale and purchase. If they fail to do so, they must arrange for a temporary loan, or what is commonly referred to as 'bridge financing'. Banks will sometimes lend the buyer sufficient funds on a short term to close on their purchase, and use the future proceeds from their sale as security. The lender will ask the buyer to sign an irrevocable instruction to the buyer's lawyer to discharge this loan upon closing, including any accrued interest and fee, directly from the sale proceeds.

Provided the buyer unconditionally sells their old home (but not closed) prior to having to close on their purchase, their worst case scenario is that they'll have some extra interest to pay and maybe a small bank fee. If they fail to sell their home in time, they either own two homes (if they have the resources to close on their purchase), or they can't honour their purchase agreement on their new home. Of course, this is to be avoided since the seller could launch a lawsuit against the buyer who has defaulted on their agreement.

Conversely, if when bumped, the first buyer elects to sign a mutual release, the pressure is off, their full deposit is returned to them and the house is then sold to the second buyer under their agreed terms. But due to the escape clause in the contract, which worked well for the seller, the first buyer is back to the drawing board and their home search continues.

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I've never met a seller who liked the idea of accepting an offer conditional upon the sale of the buyer's property. When they do, they're either anxious because they've been on the market for awhile and will accept almost anything. Or the buyer's property appears extremely marketable, thus they expect it to sell quite easily. In either case, for a seller to grant the buyer what the seller perceives as a privilege, the seller may demand a higher price from the buyer.

'Okay - if I accept your condition, which allows you the luxury of time to sell your own home, I want this much more. Don't want to pay it? Then I'm not accepting your offer.'

And of course, if they come to terms, an escape clause is included in the contract.

In markets where homes traditionally take more time to sell, homeowners are often more amenable to offers of this kind. But in hot markets, like Vancouver or Toronto real estate, it's often the buyer who accepts the risk by buying without such a condition. Or else, the buyer sells their present home before offering on another. Either way, the buyer accepts the risk of finding their new home before having to vacate their old. Usually, though, in a hot market and if listed well by an experienced agent, their old home will sell quickly.

Another consideration in such a scenario is once a seller accepts a condition with an escape clause, and the conditional sale is reported to the real estate board (which it's compelled to do by board rules), buyers and their agents may be inclined to avoid that listing. Even if they were to negotiate a successful agreement with the seller, the existing buyer may simply firm up, in which case, all the time and effort expended by the second agent and their buyer would have been wasted. Having said all this, it's definitely a roll of the dice as to whether everything works out for the seller or either of the two buyers who want to buy the property.

For more information on the escape clause and when it is used, visit The Real Estate Council of Ontario or RECO.

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