By Bob Aaron

The Ontario Real Estate Association (OREA), which represents 70,000 real estate agents and brokers in Ontario, has become involved in a public spat with the real estate industry regulator over the use of a controversial provision in purchase agreements known as an escalation clause.

The dispute began after the regulator, the Real Estate Council of Ontario (RECO), sent a controversial newsletter about the use of escalation clauses to agents across the province. The communication said it was designed to provide “clarity” about the clauses.



An escalation clause is designed to defeat competing purchase offers by automatically increasing the buyer’s purchase price by a pre-set amount over the highest offer. The clause typically sets a cap or upper limit on how much the purchase price will increase so that the buyer will not exceed his or her budget.

Here’s how it works: Two buyers are bidding on a house. One buyer offers $600,000 and a second one offers $550,000 with a $2,000 escalation clause. The second buyer is then told she won the bidding at $602,000. She is not specifically told that the other bid was $600,000 but the escalation clause clearly enables a violation of the privacy rule.

The RECO newsletter notes that the use of an escalation clause could violate a provision in the industry Code of Ethics, which prohibits agents from disclosing the price and contents of competing offers. Despite this, RECO provides detailed advice on how agents should handle offers with escalation clauses without specifically telling the competing buyer the price of the top offer.

Last year, RECO told one real estate agent that this type of clause “not only can contravene (the governing legislation) but also expose the seller and perhaps (an agent) to possible litigation.” But now, RECO is advising agents on how to use the clause and technically comply with the rules.

In an open letter to RECO last month, Ettore Cardarelli, president of OREA, urged the regulator to immediately set the record straight that escalation clauses are not allowed in Ontario because they violate the industry code of ethics.

It asks, “How can registrants use escalation clauses if they are not permitted to disclose the content of another offer?”

Blogs, LinkedIn and Facebook discussions on the Internet lit up with similar criticisms of the RECO position.

On his website torontorealtyblog.com, Toronto broker David Fleming wrote, “This may be the dumbest bulletin ever released by RECO.”

Katie Steinfeld, president and broker of record at On The Block Realty in Toronto, wrote on her LinkedIn page, “This clause is dangerous for many reasons…. Let’s ban escalation clauses altogether.”

In his real estate blog movesmartly.com, well-known Toronto real estate broker John Pasalis wrote that RECO’s position “has just made the bidding process even less transparent and worse.”

In a worst-case scenario, Pasalis says, when the seller’s agent is less than honest, “escalation clauses act like a blank cheque that the seller and their agent can fill in as they please.” This can be “at the expense of all home buyers.”

Pasalis says, and I agree with him, that RECO’s direction to agents, which does not outlaw the use of these clauses but tries to regulate them, “continues to demonstrate that it is an organization run by Realtors designed to protect and promote the rights and interests of real estate agents – not consumers.”

RECO’s mission is to protect the public interest through a fair, safe and informed marketplace, but eight out of 10 RECO board members are real estate agents or brokers.

Pasalis calls on the Ontario government to end the real estate industry’s right to regulate itself because it comes at the expense of the rights of consumers.

When asked about this issue, RECO registrar Joe Richer responded, “RECO does not endorse escalation clauses, because they can create complex situations for buyers, sellers and their representatives. In fact, we recommend that consumers consult with a lawyer if they’re a buyer thinking about submitting an offer with an escalation clause, or a seller who is entertaining an offer with an escalation clause.

“The bottom line is, escalation clauses are not prohibited under the law, we know that they are occasionally used, and we do receive regular inquiries from registrants seeking information about them. For these reasons, as the registrar, I believed it was important that we issue a communication to registrants about how they work, and the challenges that come with them.

“Our consumer protection mandate demands that we ensure registrants know how to comply with the legislation. Our article contains a clear example on how to handle an escalation clause while remaining in compliance with the Code of Ethics.”

Unfortunately, unless RECO acts to prohibit the use of escalation clauses, no one submitting a purchase offer can be confident that the price in the offer will remain confidential and not be used against them. I fail to see how this protects the public interest.

12 COMMENTS

  1. Simple, hand over all the offers when it is said and done to the broker so they can confirm the referential offer amount. More than 1 referential offer? Whomever has the highest price will win. Why is this complicated?

    • How about this?

      The highest offer is for $50,000 above asking price with a deposit of $40,000 and a condition that says subject to zoning allowing for 2 residential units to be erected on the lot, condition expires in 28 days and a closing date is 5 months from now. Versus an offer for $20,000 less, a deposit of $60,000, no conditions closing in 2 months.

      Does highest price still win?

      Yes, it can get complicated!

      • Sellers sometimes do unusual things, with or without escalation clauses. In a particular situation there were two offers on a MLS listing. It was very long ago. I didn’t know the seller, or the listing agent, but apparently the sellers were very sensitive people, and as the metronome ticked through both presentations, in days when one of two offer-agents would wait in another room or out in the car, I found myself waiting to see which offer the sellers would accept. I learned both offers were not far apart. But mine had be chosen.

        One offer succeeds over the other, yet it is two thousand dollars less, on a mid-priced property in an ordinary subdivision location, in a quiet market, with not a whole lot of activity. The offer was mine, and upon learning from the seller the content of the other offer price, after all the paperwork was finalized, I quietly, gently asked what the decision-making cause of action had been, since my offer was for less money. I was a little surprised.

        The answer might surprise some readers, perhaps a learning experience for newbies? The answer as to why my APS was accepted falls under the category of sensitivity: In general conversation I had referred to this very ordinary property that was clean and tidy but not much else could be said about it (fifteen years old, still had builder’s paint; you can see it; builder’s grade broadloom, in other words, no upgrades… ); I called it in each reference, their “home.” And had explained graciously why my buyers had chosen it.

        The other agent, allegedly referred to the subject property as “this place, this house, your house, this listing…”

        (See how the seemingly smallest, otherwise innocuous, things can affect decisions?) The sellers called us both back to the kitchen table to say which offer had been accepted (and why). The other offer-agent was outraged and let the seller know how “foolish” they were, losing a couple thousand dollars, and stormed out of the room, but not before trying to convince the sellers that his was the better “deal.”

        I felt bad for the other agent and his buyers because his insensitivity cost him about 9k that evening, and it meant his buyers would have to search out further listings, (back to the drawing board for him), and likely he would scratch his head when the actual sold price was revealed in the MLS system.

        The sellers had just said: “her offer was a little bit less than yours, but we decided to accept her offer because throughout the presentation she kept saying “your home;” I realize this is your “home” and you keep it nicely done, and it’s very clean, and that appealed to my buyer, because that’s how they keep their own ‘home,’ too.”

        Just a reminder how such seemingly little things make such a big difference. Right up there with something I noted in a prior comment: never ask a would-be buyer – “how many children do you have?”

        Imagine an agent, not knowing of the recent accident where three children’s lives were lost in a drunk-driving accident would ask those people, as would-be buyers.

        No, this business is not all about doing a hundred “deals” a year, or commissions, or being number one producer in the office or in the country. It’s often about employing that magic word: sensitivity. Escalation clauses, or not. Several offers on a given property means there’s going to be several disappointments. Everyone needs to be sensitive to the “inner workings.”

        And to the person who posted to get the manager involved: golly! I never worked for a manager who would have participated in any kind of offer presentation. Not under any circumstance. Didn’t see that as part of his job description, for sure not. Wonder how many of those managers are out there. What province are you in, please? I’ve never heard the term “referential offer.”

        Carolyne L 🍁

        • Carolyne:
          Bravo! This is an excellent eye-opening response to the bald-faced commission chasers’ mercenary attitudes, and, more important, for the newbies coming into this business whom value future dollars (in their own pockets) over being a well-rounded, empathetic, understanding-of-human-nature professional (a warm-hearted human being vs a cold-hearted, calculating, statistics-watching slave to monthly sales boards). Many have the learned influential lines and learned body language skills, the answers to technical questions, the education, the plaques on their walls, but many lack what you have so eloquently and pointedly described as the humane touch. Fortunately, not all Realtors are of the foregoing negatively described ilk, and therefore the positively described professionals (yes, I do believe that there are many of them) who continue to exist within this business are the true models of behavior and character to be looked up to. There is a clear divide between the two. The Terry Paranych’s of the real estate sales world (pre Hearing decision), (there are far too many of that mindset operating out there unaccounted for by the industry authorities, in my opinion) are not to be emulated…no matter how many “deals” they turn or how much money they “earn” or how many sales awards they “earn”. The only thing worth “earning” in my opinion is a stellar reputation (whether one is a high profile or low profile professional) worth defending by way of one’s honest, altruistic, transparent actions and behaviours when pitted against the harsh glare of negative public opinion…which is reality.
          Carolyne: Your story is one of the best examples I have seen regarding what it means to be a humane, professional Realtor.

          • Thank you, Brian. It’s always nice to be acknowledged. When I relate such situations it’s not to grow my head to a bigger hat size or to brag of my often outrageous success, but in particular for the newbies, to draw attention to the little things that matter so much, often more than the big things. Sometimes, price. Point counterpoint.

            Here is a real life example of what could have been a most difficult situation: opportunity lost, for the buyer and for me. I had a difficult time (very rarely happened) convincing the would-be buyer to sign a buyer agent contract.

            He just simply saw no need. I should trust him if he said he would work with me. He had worked with other agents, one in particular, including his agent when he bought his existing house several years prior, and not one had even suggested or discussed such. Much less topping up the co-op.

            As you have heard me say many times on REM: no pre-approval, written, signed by your bank or other provider, as to how much you quality to spend (not that this dictates what you do spend or even choose to look at) then I will not work for you, or even with you. Period. There are plenty of others who will accept my carved in stone requirements.

            Sometimes to prove a point, I will agree to show three properties. Which is what happened in this case. The BBA contract got signed on the trunk of the car; if not, no advice and no further property visits.

            And my acceptable top up was agreed to, although reluctantly. No one had EVER talked about such a thing with him. He had tested it out with other reps after initially meeting with me. They told him to run away. I told him to go work with “them.” He came back. And here is his story in his own words, posted at my “Carolyne’s Clients Speak” link. I have removed his and his wife’s name here, but it is on the site. He writes (followed by my comment):
            ====
            • It was with great determination that Carolyne was able to find our dream home. We had several requirements and she was able to guide us through the different neighbourhoods showing us the best places to live.

            Carolyne seemed to know when there was a valuable place nearly ready to be shown. The timing was crucial for us to visit and make an offer on a house that had another offer at the same time. Her advice made our offer stand out and we were able to buy our wonderful place.

            It is beautiful to sit in the backyard and hear all the birds. This place is very special, you were correct in this aspect. We know that we have a wonderful location, acquired at the right price.

            We are thrilled with our purchase . . . and are certainly in your debt. We basically made a windfall of 10’S of thousands of $ in one night due to your efforts. You told me that you earn your fees and you were not kidding . . . I sensed that you were for real

            Our house is perfect and we would not be there if not for you. You seemed to know it was the one for us and made sure we considered it. Homes like ours are rare and becoming more so as you know. I love it so much I often go home for lunch just to enjoy my property! Best buy I ever made. (He added)

            Thank you

            DP and MW – Brampton, Ontario

            ====

            (Carolyne says:The [buyer] team were a challenge to say the least. They had wonderful ideas about where they wanted to live and a long list of prerequisites, and the price point they preferred. The challenge was that the two motivations were not compatible. I knew exactly what would appeal to them and where it was located – there just weren’t any for sale, and the chances of one coming along within their price point was slim to none.

            Finally we came to a meeting of the minds; a property popped up on a street where houses rarely come for sale that met ALL their criteria. It was vital to get them there pronto, since these types of homes at the listing price were a rarity for sure.

            Our offer won out against another offer the same night, in place by another real estate agent who wanted the house for his own residence. [The buyers] were open to my suggestions, and my system worked. Thus they were able to acquire a wonderful investment, as well as their personal residence.

            The listing agent, who knew me only in a business sense, told his sellers that although the offers were both similar in price, that he knew my reputation as a no-nonsense REALTOR® and that they could trust the information in our offer to be absolutely relied upon, thus he recommended they accept it. (That was also a huge compliment from a local colleague, and genuinely appreciated.)

            ====

            My often called “unconventional” way of working got all my buyers the opportunity of a lifetime. I had found myself actually checking out the street as the agent was installing his for sale sign. In between appointments I always scouted any specific location to see what’s new. It worked many times. New for sale sign but not yet in the MLS system.

            Once again, clients who will likely never move again. On a street that many agents don’t even know exists, it’s so tucked away. I had the buyer’s trust, now I had to deliver.

            He had spent a year receiving daily lists of emails showing him new listing addresses in his chosen price range, frustrated finding no match made in Heaven.

            Part of the magic was in getting both husband and wife to visit simultaneously. I insisted. This was indeed a rare opportunity not to be found at the price again any time soon.

            Another situation confirming I knew what, where, how, and when. The satisfaction wasn’t just theirs; it was mine.

            I have clients where I communicated regularly, over as much as three years, before a seller decided to sell, and a buyer decided to buy. Largely because what the buyers wanted just didn’t exist at their price point; and the market wasn’t yet ready to support the price range the buyer wanted. But I never ever used the “send me all new listings in my price range” technique. I treated each case individually, personally. But only after I established their sincerity.

            Patience is indeed a virtue, Brian. Being organized is nulli secondus! And “semper fi” doesn’t just apply to the military.

            If first opinions mattered, it could have been when at first office I interviewed at as I completed my licensing, I was told I likely didn’t have the typical salesman personality to succeed in the industry. Far too serious. And that it isn’t likely to be a success moving from the world of academe into the world of sales (from a manager who had been a school teacher). Nice person with whom I later developed a strong business respect while working elsewhere. He sent me referrals in my area.

            Your genuine kindness is appreciated.

            Carolyne L 🍁

  2. When you regulate registrants in regards to escalation clauses or double ending etc.. you are really limiting options to the buyers and sellers. Personally I don’t recommend escalation clauses. New regulations pushes things underground. What I am personally tired of is blanket regulations on the ethical agents, in other words punishing the good agents because of few bad apples. You can’t regulate ethics. Focus on nailing the bad apples and leave the ethical agents to look after their clients. One day the market will change and all this will come back to haunt.

  3. We are educated, trained, experienced and competent professionals. We understand, or at least should not misunderstand, the laws that apply to our work and the contractual transactions we facilitate. We are registrants under REBBA 2002. There is no reason, therefore, for us to demand or ask for some clause like the escalation clause formats to be ‘banned’. Surely we have enough respect for the profession and enough guts to enforce professional and ethical behaviour, and we can leave the regulator and the government out of the process of negotiating a contract. If you do not know how to respond to an offer inclusive of the escalation clause, however many offers there are, however complicated the circumstances may be in regards to such offers…return your license to the government.

    • The problem is Cameron that not all registrants/agents “…are educated, experienced and competent professionals…”. You very well may be (I suspect that you are) but the “We” that you speak of are not in the majority, in my opinion. I think that you speak well for yourself, but that you really cannot factually speak for all other registrants/agents, and that is why ethics rules/regulations exist…for the “others’ out there who are not “educated, experienced and competent professionals”. You are right; consumers likely do not need to be protected from your kind–professionals–but they do need to be protected from the rest of the licensees, the amateurs that abound out there. Their licenses should be returned to the government before they cause psychological and financial harm to consumers. But the system dictates that they must be officially found out first and taken to task thereafter. The system operates like the Mental Health Act; nothing can be done to help/rein in someone with mental health problems until the subject actually hurts themselves or someone else or can be positively shown to be in imminent danger of doing either/or of the foregoing acts.
      In the meantime, RECO must look out for the collective consumer interest first and foremost. You may have enough respect for the profession, but I don’t due to the population of amateurs that pervades it.

    • Well apparently there is reason for us to ask that it be banned…

      It’s being used. which means some of us have no respect for the profession.

      A lot of Realtors won’t report a peer who skirts the law and ethics so no, there is not enough respect for the profession or the guts to enforce anything.

      It may be a tough pill to swallow that the regulator is involving itself in what an APS might state, but the regulator is there for the consumer not the registrant.

      …………”If you do not know how to respond to an offer inclusive of the escalation clause,
      however many offers there are, however complicated the circumstances may be
      in regards to such offers…return your license to the government….”

      Do you know of anyone who would voluntarily return their registration to the government even if they knew they were incompetent?

  4. What happens when there are more than two offers on a property, all with these Casino Royale escalation clauses contained therein? Where does it all end? Must there be a supra-escalation clause that trumps all other escalation clauses?
    This scenario opens the door for unethical Realtors to virtually guarantee themselves commissions via influencing their buyer clients to insert this clause within the APS in order for them to get their “dream homes” before prices rise even further (and the Realtors have to go searching for another property to bid on. Time is money after all).
    John Pasalis may be on to something. RECO: take note. Make this practice go away. It reflects poorly on the industry, and it does not impute what I would categorize as being a professional way of doing business, not even to mention the privacy issue.
    I did not realize that eight out of ten RECO board members are real estate agents (registrants) or brokers. That ratio is a mismatch for consumer protection advocacy in my opinion. Democratic representation demands that a fifty-fifty ratio be established; five real estate people and five consumer advocates, with an eleventh person (a blind dart champion) breaking tie votes. I’m practicing up blindfolded at the dart board.

    • When I make a bid on a house in a closed bidding system, I have certain expectations. The main expectation i have is that my offer is not revealed and furthermore that my offer does not act against me. For a buyer to win a bidding war with an escalation clause this is not possible and should definitely be prohibited. Reco’s position on this is quite foolish and needs to change.

      • John

        In your comment on another post 16 days ago that appears when readers click on your red name, you speak of a house you tried to buy in Ontario.

        For some reason, I didn’t see your earlier post, but respond now:
        You note that this has become a legal matter. And that is why no one addressed your issue as spelled out on REM.

        Most Ontario real estate registrants are not lawyers. And are therefore not licenced to practice law.

        But having said that, noting your words: “With this in mind wouldn’t it be in the best interest of . . . Counter offer both . . . ”

        That wouldn’t be smart from any point of view, as the seller could end up selling the house to BOTH buyers, simultaneously.

        As to your conversation with RECO, present the whole package to you litigating lawyer. Be sure you hire one who has a good history representing real estate transactions, not just any lawyer.

        And as to your reference to paying a cash deal: that has no bearing on anything. As far as any seller is concerned, any and all transactions are cash deals. The seller doesn’t care particularly where the money comes from; the buyer’s mortgage puts cash in the sellers hands, too.

        Sounds like you are perhaps an older person who maybe hasn’t bought or sold property recently, and or did not get good advice from the get go.

        Talk to your lawyer about all facets of the transaction, right from the get go.

        Best regards
        Carolyne L 🍁

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