The Escalation Clause

Hispanic Couple Viewing Potential New Home

In this market, multiple offers seem to be the norm. To distinguish their offers from others, buyers are increasingly using “escalation clauses” in many areas.

What’s an escalation clause?

An escalation clause is a term that is included in a buyer’s offer that allows the buyer to automatically increase his or her offer to a certain amount. Here at MAR, we are in the process of creating a standard form escalation clause which will be included in the MassForms Library in the near future. Because every transaction is different, we recommend that your buyer clients carefully consider the advantages and disadvantages of using an escalation clause, and to always consult with an attorney before including one in an offer.

Key considerations

While the terms in an escalation clauses can vary, most escalation clauses contain the same basic features. These features include the original offer, the amount by which the buyer is willing to escalate his or her offer, the total amount that the buyer is willing to offer (the “cap”) and details about how the buyer will fund the escalated offer. In order for the escalation clause to kick-in, the seller must have received a higher bona fide offer from a competing buyer. A bona fide offer is an offer that is made in good faith and is legitimate and enforceable. At the buyer’s request, the seller must provide documentation to the buyer that the other offer was bona fide.

An escalation clause may not be right for all parties

Your buyer should consider a few things before using an escalation clause in their offer. For example, buyers should be aware that not all sellers accept offers that contain escalation clauses. Some sellers prefer to know the exact amount that a buyer is willing and able to pay for a home. In addition, escalation clauses can lead to increased paperwork and can complicate the final decision about which offer the seller accepts. The buyer should also be aware that escalation clauses reveal to the seller more information than is contained in a traditional offer. This is because the seller will know exactly how much the buyer is willing to pay. The seller could then decline the buyer’s offer and propose a counteroffer above the buyer’s cap.

Watch for the new form in the Massforms Library in the coming weeks. The form will be accompanied by a two page explanation sheet to give buyers and sellers more information to consider when using these clauses.

Can a text be legally binding in a real estate deal?

Can a real estate agent bind their client to a contract through a text message or email? The Massachusetts case, Saint John’s Holdings, LLC. v. Two Electronics, LLC., examines this very issue. The plaintiff, Saint John’s Holdings, LLC., sued Two Electronics, LLC. alleging that a text message from the defendant’s real estate broker constituted acceptance of a binding offer from the plaintiff to buy the defendant’s property.

Young woman using cell phone to send text message on social network at night. Closeup of hands with computer laptop in background

The case first examines whether the exchange of emails and text messages can create a binding and enforceable agreement. The Statute of Frauds requires that an agreement for the sale of real property be supported by a writing that contains the essential terms of the agreement. With the advance of technology what constitutes a ‘writing’ has become a gray area. The court examined multiple email exchanges between the plaintiff and the defendant and found that the emails contained the necessary essential terms of a contract including the purchase price, seller financing, the due diligence period, the closing date, and the deposit amount.

The defendant then argued that, even if a contract existed between the parties, the plaintiff’s acceptance of the contract terms by text message does not satisfy the signature requirement of the Statute of Frauds. In order to be enforceable, an agreement for the sale of real property must be signed by the party against whom enforcement is sought. Several courts have found that the requirements for a signature to satisfy the Statute of Frauds can be relatively minimal, including a typewritten, printed or stamped signature. The real estate brokers for both parties had typed their names at the end of messages that contained essential terms but did not type their names on more informal discussions. By signing their names in these exchanges, the court inferred that the parties chose to be bound by their signed communications. The court found that, by signing his name at the end of a text message acknowledging acceptance of the terms of the agreement, the defendant’s real estate broker intended to have the writing be legally binding.

Having found that a writing and a signature existed through the exchange of emails and text messages, the court then had to determine whether a real estate broker has the authority to bind a client to a legally enforceable contract. The plaintiff argued that the defendant’s real estate broker had the authority to bind the defendant to the contract. The court disagreed. The defendant’s real estate broker had never received permission from the defendant to do anything other than pass information back and forth between the parties. In addition, the plaintiff could not recall that the defendant ever informed him that the defendant’s real estate broker was authorized to accept offers to purchase the property or otherwise bind the defendant to a sale of the property.

Even though the real estate broker did not have authority to bind the defendant to the sale of the property, it’s important to note that exchanges in emails and text messages can satisfy the Statute of Frauds writing and signature requirements. Always be careful when sending communications through emails and text messages because you may run the risk of creating a legally enforceable contract.

2017 First Quarter Government Affairs Update

Massachusetts State House - Freedom Trail Site - Boston, Massachusetts, USA

MAR government affairs has been hard at work this year, introducing new legislation, pushing for housing development, and considering the impact of news laws on the real estate industry. Suffice it to say, 2017 will be an interesting one. Learn more below.

190TH General Court

January marked the start of the 190th General Court of the Commonwealth of Massachusetts. The start of a new session provides us with an opportunity to once again propose legislation that we have supported in the past, as well as introduce new issues. To start, we filed our H.O.M.E. Bill and its components in both the House and the Senate. The H.O.M.E. Bill is our effort to increase housing production through targeted zoning changes and improve specific items to help the economy. The bill’s 12 components have been filed as one omnibus bill and additional bills containing provisions related to each other. Additionally, we refiled our Mortgage Forgiveness Debt Relief legislation this year.

For the first time, we are introducing a new First Time Home Buyers Savings Account bill. This bill provides a tax advantaged way for future home buyers to begin saving for the purchase of their home. Specifically, it allows for future first time homebuyers to deduct contributions to a first-time home buyer savings account from their income for tax purposes. Senator Julian Cyr (D-Truro) has introduced the bill in the Senate.

View MAR’s 2017-2018 Legislative Priorities.

Sales Tax on Services

On April 5th, at a Greater Boston Chamber of Commerce event, Senate President Stanley Rosenberg commented that the state should begin to discuss the possibility of imposing a new tax on services. Rosenberg noted that the economy has shifted from goods to services and that the state’s tax structure needs to adjust for such a shift. Realtors® worked to defeat a similar tax proposal in 2009.  If a formal proposal of this tax is put forth, Realtors will once again be prepared to oppose it.

Commonwealth Conversations

The Massachusetts Senate is currently holding nine listening sessions as part of the 2017 “Commonwealth Conversations.” Senators from around the Commonwealth are conducting a series of regional public forums to hear the concerns and priorities of the people of the Commonwealth, from western Massachusetts to Cape Cod. The “Commonwealth Conversations” are based on a simple premise–engage the people in the process and the process will ignite. Over the course of the past month, Senators have have heard from Realtors® attending these forums, and have the opportunity to carry our important messages back to Beacon Hill. The main topics included the First-Time Homebuyers Savings Account, the H.O.M.E Bill, Mortgage Forgiveness Debt Relief, and access to high-speed broadband.

Building Code

On March 7th, MAR government affairs staff attended the Board of Building Regulations & Standards’ (BBRS) first public hearing on the 9th edition of the Massachusetts building code. MAR submitted testimony opposing a proposal that would add a requirement to the code that all new homes be built ready to accommodate an electric vehicle charger station. This would include all necessary conduits as well as blocking off circuits in the home’s electric panel. The provision is being offered as an additional amendment to the code and was not included in the version originally put forth for public comment. The decision of whether to include the necessary equipment to install an electric vehicle charging station should be left to the builder and homeowner and should not be required by the code.

Marijuana

The Joint Committee on Marijuana Policy held its first public hearing on March 20th. The committee is tasked with recommending any necessary changes to the recently enacted marijuana law. MAR government affairs staff attended the hearing with a specific interest in landlord/tenant issues and general private property rights concerns. The law currently allows for adults to cultivate up to six marijuana plants. However, landlords are permitted to prohibit the smoking and cultivation of marijuana in their units.

Agency Disclosure

The Board of Registration for Real Estate Brokers and Salespersons released an updated version of the Agency Disclosure Form. The form attempts to provide information to buyers and sellers more clearly and more succinctly than the previous form. However, nothing in the agency law itself has changed. The form is currently active in all of the MAR electronic forms platforms.

Title 5 Workgroup

The Massachusetts Department of Environmental Protection (MassDEP) has invited MAR to participate in a series of stakeholder meetings to consider various aspects of Title 5 and Groundwater Discharge regulations. The purpose of the meetings is to have outside experts and interested parties that represent a variety of interests provide advice to MassDEP on what modifications should be considered. Some of the topics include: appropriate design flows for various property types, use of innovative and alternative technologies, approaches to managing peak flows, coordination between state and local requirements and requirements for nitrogen sensitive areas. MAR is happy to have President Paul Yorkis participating on our behalf.

Realtor® Political Action Committee

As an Association, we are on track to reach our NAR goal with a grand fundraising total of over $215,000 invested in RPAC. This is a $100,000 increase from this time last year. This early progress is indicative of the increased awareness of the importance of investing in RPAC among members. As for participation, NAR has set our participation goal at 36%. Currently, we are at 31% total membership participation with a total of 6,667 RPAC investors.

Property Owner Prevails in Suite against Falmouth: Town to pay nearly $1 million for blocking building on “no disturbance” zone

The inlet waterway in Centerville Massachusetts on Cape Cod.What happens when a town institutes wetland “no disturbance” zones that prevent a landowner from building on her lot? In a recent case in Falmouth, MA, it resulted in the town owing the landowner nearly $1 million for denying her the economic value of the land. The use of zoning bylaws by towns to regulate and restrict growth is not a new phenomenon in Massachusetts but, as Falmouth recently learned, it can sometimes be a costly decision.

On Friday, December 9, 2016, a Barnstable Superior Court jury found that the wetlands protection regulations setting “no disturbance” zones within 100 feet of salt marshes and 50 feet of coastal banks deprived a land owner from building a single-family house on her lot. When the owner’s family purchased the 16,000 square foot lot in 1975, it was considered by the town to be a buildable lot. However, in 2008 Falmouth amended its zoning bylaws to include the “no disturbance zones,” prohibiting building within 100 feet of salt marshes and within 50 feet of coastal banks. The “no disturbance zones” restricted the buildable area to a small portion of the lot. These bylaws reduced the buildable area of the lot to just 115 square feet, and when the owner sought variances to build a single-family home in 2012, the town denied the request. The town unsuccessfully argued that it should not be liable for the taking because the owner had not built or attempted to build on the land in 30 years.

John Wall, the attorney for the land owner explained it well in an email to the Cape Code Times, “As an agency that has the power to regulate land, the Conservation Commission wields significant power. Mrs. Smyth’s [owner] case demonstrates that the Commission must exercise that power responsibly and with sensitivity to the rights of property owners. If the Commission deprives a person of all ability to develop their land, the Commission is constitutionally required to pay for the value of the land.”

This case serves as an important example to both landowners and towns of what can happen when a town chooses to use zoning to prevent development instead of compensating a landowner and placing the land in conservation. It will be interesting to watch how municipalities and potentially aggrieved land owners respond to this case.

Read more about the case here: http://www.capecodtimes.com/news/20161212/falmouth-ordered-to-pay-landowner-nearly-1m

California Dual Agency Case – Horiike v. Coldwell Banker

Midsection of judge reading document at desk in courtroom

On Tuesday, November 22nd, 2016, the California Supreme Court issued its opinion on Horiike v. Coldwell Banker, which focused on the interpretation of the California dual agency statute, Civ. Code sec 2079.13(b). The court affirmed the appellate court’s opinion by holding that, pursuant to that statute, each of the salespeople involved in a dual agency transaction owe fiduciary duties to both the buyer and the seller. It is important to note that this decision is entirely based on the literal interpretation of the California agency statute and will have no effect on agency issues here in Massachusetts.

For more information on the case, please visit:  http://realtormag.realtor.org/daily-news/2016/11/22/dual-agency-role-expanded-in-calif-high-court-ruling

The Impact of Recreational Marijuana on Real Estate

Large Indoor Marijuana Commercial Growing Operation With Fans, Greenhouse, Equipment For Growing High Quality Herb. Cannabis Field Growing For Legal Recreational Use in Washington State
Large Indoor Marijuana Commercial Growing Operation

On November 8th 2016 Ballot Question #4, which will allow for the recreational use of marijuana, was passed by Massachusetts voters in a fairly wide margin of 54% to 46%. Under the new law, the use of marijuana for recreational purposes will be legal starting on December 15, 2016. However, the sale of the drug from regulated retail stores will not be permitted until the beginning of 2018. So how will this new law impact real estate? Here are a few considerations to keep in mind, but watch for more information from MAR on this issue in the coming weeks and months.

The first thing to consider is that although legal under state law, marijuana remains a Schedule 1 illegal substance under federal law. Up until this point the federal government has taken the position that it will not enforce federal law in those states that permit recreational marijuana usage. However, there is no guarantee that they will keep this position in the future as more and more states change their laws to allow for the use of marijuana.

How will the legalization of recreational marijuana affect landlord-tenant relationships and the rights of each party? As written, the law will allow for landlords to prohibit the smoking of marijuana on their property, but owners should be sure to check the language of their lease agreements to make sure the issue is covered. Just as a landlord may prohibit smoking of cigarettes in an apartment, they may also prohibit smoking of marijuana.

How will the new law affect residential transactions? Similar to the laws in Colorado and other states, the law will permit residents to cultivate a certain amount of the drug in their homes for personal use. This could potentially impact the homeowners insurance policy if there is a loss due to issues related to water damage, electrical fires and mold issues.

When listing a home where cultivation is occurring, it is prudent to have a conversation with the seller prior to any showings or open house. A seller should consider removing or relocating equipment during the listing period.

Finally, the new law provides cities and towns with some ability to regulate or prohibit the sale of marijuana at retail locations within their community.

It is likely that additional regulations will be enacted and changes to the law itself may be made by the legislature before 2018. This will hopefully provide some additional time to clarify some of the issues that relate directly to the real estate industry.