Escape Clause Example: Everything You Need to Know
An escape clause example is a set of provisions that are included in certain contracts that allow the contract to be terminated without repercussions.3 min read
An escape clause example is a set of provisions that are included in certain contracts that allow the contract to be terminated without repercussions when certain conditions exist.
What Is an Escape Clause?
In terms of labor laws, escape clauses are provisions included in member union contracts that allow members to exploit an "escape period," which is a period of time in which they may choose to leave the union without repercussions. Once this period has elapsed, if a member has not exercised their rights under the escape clause, they are contractually obligated to maintain their membership until the contract expires according to its terms.
In real estate scenarios, the escape clause is typically utilized by sellers to get out of an agreement of purchase and sale. Normally, the seller will allow a buyer to firm up the agreement, closely resembling the makeup of a shotgun clause.
How Escape Clauses Work for Buyers and Sellers
If you've ever participated in a real estate transaction, you've probably encountered an escape clause. These are common in the following scenarios:
- A buyer is making an offer on a home, on the condition that their current home sells
- A seller accepts a buyer's offer when that buyer needs to sell another property
To begin with, a seller has multiple opportunities to escape from an offer once they have accepted it as long as the agreed upon condition has not expired. However, the buyer does not have the option to back out of their commitment unless their condition on the sale has expired under normal circumstances and only if they have the cooperation of the seller.
Two common examples of potential short-term conditions include:
- Home inspections
These normally expire after just a few days and can last up to a week. These conditions do not typically include an escape clause that the seller can take advantage of. Conditions related to the buyer selling their current home, however, normally last for a longer period of time. It is important to keep in mind that once a seller accepts any conditions associated with an offer, the property is considered to be off the market while the buyer works to fulfill their conditions.
For this reason, it is not reasonable for the buyer to expect the seller to accept long-term sale conditions. This is why conditions of this nature included what is commonly referred to as an "escape clause." These conditions normally last between 30 and 60 days. In slower moving markets, the condition may last for longer periods of time. During this time, the buyer is expected to take any actions that can be considered necessary to sell their current home in an attempt to fulfill their end of the bargain.
To allow the seller to continue to market their property and consider other offers, it is common procedure to include escape clauses in this type of conditional contract. If another buyer, for example, comes to the table and wants to "bump" the current conditional offer, they will need to include a clause in their own offer stating that the seller's acceptance of the new offer is conditional on them being released from the originally accepted offer, normally within 48 to 72 hours.
The seller would then need to provide the original buyer with a notice to conditional buyer, which will instruct them either to remove their condition or sign a mutual release. In simple terms, the buyer has the option to remove their conditions and firm up the purchase. In scenarios such as this, the second buyer would not be involved in the process. Bumping an existing conditional offer is often risky and not something that most buyers are willing to do.
If the original buyer does choose to waive their conditions, regardless of whether they have sold their home, they will be taking on the risk of potentially selling their original home before closing on the purchase of their new home. This time can be stressful for buyers, especially if they are counting on the money that they would gain from selling their original home in order to close on the new one.
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