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Ontario realtors association condemns industry regulator’s escalation clause advice

A real estate sign that reads "For Sale" and "Sold Above Asking" stands in front of housing in Vaughan, a suburb in Toronto, Canada, May 24, 2017.

MARK BLINCH/REUTERS

The association representing Ontario realtors has issued a condemnation of recent advice from Ontario's real estate regulator on how to use escalation clauses in home bidding wars, saying it should be made clear that the clauses cannot be used because they breach ethical guidelines for realtors.

The Ontario Real Estate Association, which represents realtors in Ontario, sent a letter on Tuesday to the Real Estate Council of Ontario (RECO), criticizing the industry regulator's recently published advice on escalation clauses, which are provisions added to an offer to buy a new house that promise to automatically top any better offer.

Escalation clauses have been common in some U.S. markets, and are starting to move to Canada. They allow a would-be buyer to submit an offer for a house and promise to beat any other bid by a preset increment, up to a maximum that the buyer will not exceed. Some realtors have complained the clauses can add fuel to heated bidding wars and lead to ethical challenges and bidding complications.

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OREA president Ettore Cardarelli said a recent advisory from RECO that laid out how realtors should use escalation clauses should not have implied that such clauses are legal because Ontario rules clearly prohibit realtors from disclosing the details of competing offers for a house.

The real estate association argues that escalation clauses essentially require the selling agent to reveal another bidder's offer, triggering the extra amount above the highest bid.

"An escalation clause, by virtue of its operation, would disclose the content (a competing offer price) of another offer," Mr. Cardarelli said.

"How can registrants use escalation clauses if they are not permitted to disclose the content of another offer?"

In his letter, Mr. Cardarelli said a realtor whom he did not name asked RECO last year for advice about an escalation clause and received a written response saying the clauses could expose the home seller and the agent to litigation for violating confidentiality provisions.

"What has changed in the past 12 months to cause RECO to change your position on escalation clauses," Mr. Cardarelli asked in his letter. "OREA believes the RECO was right then and is wrong now."

RECO issued a statement on Tuesday saying it does not endorse the use of escalation clauses but has no authority to prohibit their use. RECO said nothing in Ontario's Real Estate and Business Brokers Act specifically prohibits such clauses.

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The regulator said a seller who accepts a bid with an escalation clause and gives the buyer an agreement-of-purchase-and-sale document that includes the final price would not breach disclosure rules under the industry's code of ethics as long as no specific information about other bids is provided.

RECO, meanwhile, also warned realtors representing buyers that they need to be sure clients understand how the clauses work and that their offers are irrevocable until their price cap is reached.

The regulator said buyers will not be able to see other offers to confirm their value, so there is no way to be certain that other bidders really made offers up to their price cap maximum level. RECO said buyers have to "trust that the seller and the seller's representative will act honestly in managing the escalation clause."

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About the Author
Real Estate Reporter

Janet McFarland is the real estate reporter for The Globe and Mail’s Report on Business, with a focus on residential real estate trends. She joined Report on Business in 1995, and has specialized in reporting on corporate governance, executive compensation, pension policy, business law, securities regulation and enforcement of white-collar crime. More

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