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Current Stats: Total Disciplinary Cases as of February 28, 2021
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The Pitfalls of Using Escalation Clauses
By Stephen L. Fussell, Chief CPO
In an effort to gain a competitive advantage, some prospective buyers may ask their agents to include escalation clauses in their offers. An escalation clause is one in which a prospective buyer expresses their willingness to pay a specific amount more than the highest competing buyer. The escalation clause may or may not indicate a maximum amount that the prospective buyer is willing to pay.
The Commission discourages the use of escalation clauses, but does not prohibit them. Commission Rule A .0115 reads as follows: “A broker shall not disclose the price or other material terms contained in a party’s offer to purchase, sell, lease, rent, or to option real property to a competing party without the express authority of the offering party.” Therefore, in the unlikely event that a buyer consents to allow a broker to share the price and terms specified in their offer with another prospective buyer, then and only then may the broker do so.
Pitfalls of escalation clauses:
- If a buyer submits an offer containing an escalation clause without knowing the price and terms of the other offers and without specifying a maximum price, the buyer may end up paying much more for the property than desired.
- If a buyer includes a maximum price in an escalation clause, the seller will immediately know the buyer’s top price thereby compromising the buyer’s bargaining position.
- An offer containing an escalation clause may not become enforceable until a specific price is entered into the contract and the buyer sees the price the seller has specified.
- The seller may fabricate a fictitious offer in order to drive up the sales price for a buyer who uses an escalation clause.
- Real estate brokers are prohibited from drafting escalation clauses, because doing so would constitute the unauthorized practice of law. Hiring an attorney is recommended, but will increase the buyer’s costs. The seller should also have an attorney review an offer containing an escalation clause to protect the seller’s interests.
- If multiple buyers were to include escalation clauses in their offers, a bidding war may follow. If no buyer is willing to commit to a specific price, then no contract is ever formed and no property is sold.
- Since the use of an escalation clause implies that a prospective buyer is willing to pay more than other buyers, it may motivate sellers to seek higher prices, a disadvantage to the buyer using the escalation clause.
- While the use of escalation clauses may lead to higher sales prices, a benefit to the sellers, they could also discourage buyers who do not want to use escalation clauses. The use of escalation clauses may also lengthen the negotiation process, a potential disadvantage to sellers and buyers.
- The buyer who is unsuccessful in a negotiation where a competing buyer used an escalation clause may feel that they were treated unfairly. The perception of unfair treatment may discourage the buyer from purchasing property in the future and may lead the buyer to file complaints against the brokers involved in the transaction.
- A broker who discloses the price/terms of an offer without the buyer’s consent or otherwise gives one party an unfair advantage over another risks disciplinary action by the Commission.
A seller’s best response in a multiple offer situation where one or more of the buyers is using an escalation clause will likely be to invite all buyers to make their highest and best offers. That way, each buyer is given an opportunity to buy the property at the price and terms he or she is willing to pay and the seller will receive the best offer from each buyer rather than an incremental offer from a buyer who wants to offer slightly more than a competing buyer.
Escalation clauses tend to focus on price. Listing agents should exercise care to advise seller-clients to consider more than the sales price in an offer. An offer from a well-qualified buyer who offers a lesser amount may be a wiser choice than a higher offer from a less-qualified buyer. Similarly, an offer from a buyer who has visited the property may be preferred over one who offers a high price sight unseen.
Brokers who choose to use escalation clauses should proceed with extreme caution. Real estate transactions are complex even without such clauses. Real estate transactions in busy markets with low inventory can be even more frantic. The use of such clauses may introduce confusion, anxiety, frustration and fraud. For these reasons, the Commission discourages their usage and the disclosure of the terms of competing offers even when authorized by buyers.
Current Stats: Open Cases as of January 31, 2021
*Beginning March 2020, these case numbers also reflect all applications subject to character review.
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Disciplinary Actions
MICHAEL ANTHONY BOWMAN (CHARLOTTE) – The Commission accepted the voluntary surrender of the broker license of Mr. Bowman effective February 1, 2021. The Commission dismissed without prejudice allegations that Mr. Bowman violated provisions of the Real Estate License Law and Commission rules. Mr. Bowman neither admitted nor denied misconduct.
BOWMAN REAL ESTATE LLC (CHARLOTTE) – The Commission accepted the voluntary surrender of the broker license of Bowman Real Estate LLC effective February 1, 2021. The Commission dismissed without prejudice allegations that Bowman Real Estate LLC violated provisions of the Real Estate License Law and Commission rules. Bowman Real Estate LLC neither admitted nor denied misconduct.
EMSLEY A. LANEY, III (WILMINGTON) – Following a hearing, the Commission permanently revoked the broker license of Mr. Laney effective December 31, 2020. The Commission found that Mr. Laney failed to maintain and retain trust account records. Mr. Laney also failed to safeguard and account for trust monies resulting in trust account shortages.
LANEY REAL ESTATE CO. (WILMINGTON) – Following a hearing, the Commission permanently revoked the firm license of Laney Real Estate CO. effective December 31, 2020. The Commission found that Laney Real Estate CO failed to maintain and retain trust account records. Laney Real Estate CO also failed to safeguard and account for trust monies resulting in trust account shortages.
DAVID MOSELEY PROCTOR (KINSTON) – By Consent, the Commission permanently revoked the broker license of Mr. Proctor effective January 15, 2021. The Commission found that Mr. Proctor failed to enter into an agency agreement with a buyer-client prior to submitting an offer to the seller. Mr. Proctor also failed to enter into an agency agreement before representing a seller-client. Mr. Proctor misrepresented to his seller-clients that his buyer-client did not want to purchase a second lot from the sellers. Mr. Proctor’s misrepresentation induced his seller-clients to sell the lot to him for $1.
CARMEN WHITLEY SHAW (NORTH MYRTLE BEACH) – By Consent, the Commission reprimanded Ms. Shaw effective January 1, 2021. The Commission found that Ms. Shaw, whose license has been on inactive status since July 1, 2016, was employed as an administrative assistant at a firm. In July, 2020, Ms. Shaw’s broker-in-charge made an appointment to show a property in Carolina Shores, NC, which included in the MLS that “Sellers require everyone entering home to wear mask and gloves” due to COVID-19. Instead of the broker-in-charge, Ms. Shaw showed the property to potential buyers, who were members of her family, and, while at the subject property, did not follow the directive of the seller that that masks and gloves needed to be worn at all times.
TEAM ANDERSON REALTY (HOLLY SPRINGS) – By Consent, the Commission reprimanded Team Anderson Realty effective February 1, 2021. The Commission found that the firm falsely advertised the square footage of a home in the MLS when the affiliated listing agent included a basement area with no heat source in the living area, contrary to the professional measurer’s description.
Appearances
Sheryl Graham, Consumer Protection Officer, spoke at HomeTown Realty’s Brokers Office Meeting on February 25.
Homeowner Protection Extensions
On February 16, 2021, the White House announced the following extensions of COVID-19 protections for homeowners:
- the foreclosure moratorium for homeowners is extended through June 30, 2021
- the enrollment window for borrowers who wish to request mortgage forbearance is extended through June 30, 2021; and
- borrowers who entered forbearance on or before June 30, 2020 may have up to six months of additional mortgage payment forbearance in three-month increments.
Homeowners and renters can visit consumerfinance.gov/housing for more information on relief options.
The announcement is available at:
HUD Announcement on Fair Housing Act Enforcement
On February 11, 2021, The Department of Housing and Urban Development (HUD) announced that it will begin enforcement of the Fair Housing Act to prohibit housing discrimination based on sexual orientation and gender identity in addition to enforcement of discrimination based on previously identified protected classes including familial status, race, ethnicity, sex, handicap, color, religion, and national origin.
The memo notes that State and local jurisdictions which enforce the Federal Fair Housing Act also will be required to administer those laws to prohibit discrimination because of sexual orientation and gender identity. Additionally, regional offices and jurisdictions have been advised to review allegations of discrimination because of gender identity or sexual orientation that had been received since January 20, 2020, and notify persons who alleged such discrimination that their claims may be timely for filing.
In addition, the recent sunset of “House Bill 2” effectively means that local governments may now choose to adopt non-discrimination ordinances. Licensees should be aware of any local ordinances in their market areas that address housing discrimination.
The HUD memo is available at: https://www.hud.gov/press/press_releases_media_advisories/hud_no_21_021
Broker Misconduct
The Commission was dismayed by the violence that erupted at the United States Capitol building on January 6, 2021 and has received inquiries about the consequences of broker involvement.
While the Real Estate License Law and Commission rules are primarily focused on broker conduct connected to a real estate transaction, there are provisions in the law that address other conduct. The License Law provides that the Commission can discipline a broker who is found to be unworthy or incompetent to act as a real estate broker in a manner as to endanger the public interest. Likewise, disciplinary action can be taken against a broker who is convicted of certain crimes, including offenses showing professional unfitness. The Commission also considers character and criminal history when determining whether to license an applicant as a broker.
If you believe there has been a possible violation of the Real Estate License Law or Commission rules, please file a complaint with the Commission. If you are a broker and have been convicted of a criminal offense, you are required by law to report it on the Criminal Conviction Reporting form.
The Commission assesses each complaint and reported conviction on a case by case basis.
