The Escape Clause
Homebuyers should be aware of how this clause in a real estate contract could affect their offer.
By Emily Southey | 10 minute read
The escape clause, also known as the escape clause, release clause, kick-out clause, hedge clause, or right-of-first-refusal clause, is a clause frequently inserted into real estate contracts in Canada.
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If you’re a Canadian buyer who already owns a home but is looking to purchase a new one, you may have to deal with the escape clause. The clause comes into play for offers made that are contingent on the buyer selling their existing home.
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While not mandatory, sellers have the right to request this clause be added to real estate contracts and many do owing to the advantages it offers. Equally, buyers don’t have to agree to include the provision, however, it could lead to them losing the property. Keep reading to learn all there is to know about the escape clause, including why it matters and how it can benefit both sellers and buyers.
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What is a Time Clause in Real Estate?
Real estate contracts can be extremely complex, especially when they’re filled with legal jargon and what can feel like an endless number of provisions, including the escape clause. Buyers and sellers often misunderstand this clause, which can lead to all sorts of problems, even causing a buyer to lose their dream home.
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A common assumption is that the escape clause or “72-hour clause” allows the buyer to back out of an agreement to buy the home within 72 hours. But this couldn’t be further from the truth. Rather, when a real estate contract contains a time clause, such as an escape clause, a seller is able to keep their home on the market and accept another (better) offer should one be made. If a seller receives a better offer during the specified window of time, they can then activate the escape clause by notifying the original buyer about the new offer. From there, the original buyer is given one chance to agree to lift all contingencies that haven’t been met and complete their purchase. They have 72 hours, or another mutually agreed-upon length of time, to do this. If they fail to do so, the contract is forfeited and the deal is cancelled.
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The Home Sale Contingency and Escape Clauses
Historically, making an offer on a home was contingent on the buyer selling their existing home. So after an offer was made and the seller accepted it, they would take the home off the market for a set period of time to allow the buyer to sell their existing property. This time period varied but could be as long as three months (typically between 60 and 90 days).
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Home sale contingencies are ideal for the buyer. If they already own a home, they usually want to make sure it’s sold before purchasing a new property. There are many reasons why a buyer might wish to do this. The number one reason is to avoid paying two mortgages at once — a mortgage for your existing home and one for your new home. Including such a condition in an offer allows the buyer to walk away from a deal if they can’t find a buyer for their current home. The offer is only firm once the buyer’s existing home has been sold. While advantageous for the buyer, sellers often prefer to avoid this contingency as there is no guarantee that the buyer will sell their home quickly, if at all, leaving them vulnerable.
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From the seller’s point of view, having to take their property off the market for any period of time is not ideal. The escape clause was designed to prevent the seller from losing out on other potential offers while the buyer sells their current property. This means that the seller can keep the property on the market after a conditional offer has been accepted. If in the meantime, the seller receives an unconditional or firm offer, one that is not contingent on the buyer selling their existing home, the seller must send written notice to the original buyer. The original buyer then has 72 hours, or another pre-agreed time frame, to either forfeit the home sale contingency (and all other contingencies that haven’t yet been met) or pull out of the contract altogether. If the buyer fails to make a decision during the notice period, the original offer is void.
“Real estate contracts can be extremely complex, especially when they’re filled with legal jargon and what can feel like an endless number of provisions, including the escape clause. “
How Long is the Escape Clause?
It’s important to note that while the term “72-hour clause” implies that the length of time is 72 hours, it is a bit of a misnomer. In reality, the notice period can be negotiated. Depending on what each party decides, the notice period could be less than or greater than 72 hours. The name of the clause is also misleading as even if the notice period is 72 hours, it may actually be longer than that if these hours fall outside of a business day, such as on a weekend and statutory holiday.
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When Are Escape Clauses Used?
The clauses are most often found in real estate contracts where the buyer has included a home sale contingency. If you are a first-time buyer who does not currently own a home and therefore has no reason to include a home sale contingency in your offer, you are unlikely to find an escape clause in your contract. Further, escape clauses are less common in seller’s markets as buyers are unlikely to include conditions that make their offer less attractive, like a home sale contingency. However, in a buyer’s market, a buyer can afford to include a home sale contingency, which could lead to an escape clause in their real estate contract.
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How the Seller Benefits From the Escape Clause
Sellers may derive several benefits from the escape clause. First, this provision allows the seller to make a sale more quickly. Without this provision, a seller could be forced to take their house off the market for several months while the buyer sells their home. This can mean a significantly delayed closing. Second, the escape clause may give sellers access to multiple offers, allowing them to secure a better offer on their home. This better offer might be free from conditions or even be of a higher monetary value.
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How the Buyer Benefits From the Escape Clause
Though the escape clause was originally established to benefit the seller, it also offers several benefits to the buyer. For example, it protects the buyer from a situation where they finally sell their existing home, only to discover that the home they thought they were buying has been sold to another buyer.
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It’s also worth noting that while it’s typically the seller who requests an escape clause be added to a contract, the buyer has the right to refuse this request or to draft an escape clause with stipulations. If the buyer agrees to an escape clause, they can work with a lawyer to redraft the clause so it features stipulations that are beneficial to them. Such stipulations may include that the seller is only allowed to accept firm (unconditional) offers, that only offers over a specific amount can trigger the escape clause, or that the buyer can use the clause to recover their deposit if their financing falls through. As a buyer, it’s critical to have a lawyer draft and review all aspects of your contract, including the escape clause, to ensure it satisfies your needs.
The Importance of the Escape Clause for First-Time Homebuyers
The escape clause may be less relevant to first-time homebuyers because they do not own an existing property. Therefore, they will not make an offer that includes a home sale contingency.
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That said, it’s still important for first-time buyers to be aware of the escape clause in case they are on the receiving end of it. For example, it could be a first-time buyer who puts in a second offer on a property that triggers the escape clause for the original buyer. In this instance, the first-time buyer will have to sit tight while the original buyer decides whether to forfeit all conditions and purchase the home or renege on their offer. In such a situation, the first-time buyer should ensure that their agreement with the seller is clear and contains a provision that states the offer should only be accepted if the first agreement falls through. Remember to pay close attention to the wording of this clause to ensure it is to your advantage. In the end, if the original buyer chooses to cancel the deal, the first-time buyer who put in the second offer will get the home. Of course, first-time buyers may also wish to learn about the escape clause in case they encounter it when they are looking to buy their second or third house in the future.
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Escape Clause Insurance
Ultimately, buyers and sellers may wish to think of the escape clause as a form of insurance. As you now know, the escape clause offers all kinds of benefits to both the buyer and the seller. Real estate transactions can be complicated, so the more protection you have the better — and escape clauses offer greater protection for both parties. From the seller’s perspective, they are protected against losing out on other, potentially more lucrative offers. Meanwhile, the buyer is protected against the unfortunate situation of selling their existing home only to find out the new home they wanted is now sold.
Frequently Asked Questions
What is an escape clause?
An escape clause is a provision that can be found in real estate contracts. The clause enables the seller to keep their property on the market for a set period of time after an offer is made. Typically, the clause is added to contracts at the behest of the seller when the buyer has made an offer that includes a home sale contingency. This way, the seller does not have to take their property off the market while they wait for the buyer to sell their existing property, which can take months.
What should homebuyers know about the escape clause?
Buyers should be aware of what the escape clause is and how it can affect their offer. There are several misconceptions about escape clauses, one of the main ones being that an escape clause gives the buyer an “out” should they change their mind about a property. In reality, an escape clause has nothing to do with this. The escape clause only gives the buyer an out if the seller receives a second offer. This provision typically favours the seller, allowing them to keep their house on the market and potentially entertain other offers while you are in the process of selling your existing home.
Further, it’s important for buyers to know that the escape clause can be beneficial to both them and the seller. As a buyer, an escape clause prevents them from selling their existing home only to then find out the home they made an offer on is no longer available.
Finally, buyers should also know that an escape clause is not compulsory. Like any clause, one party (in this case, usually the seller) is free to request that the clause be included in the contract, but the other party (the buyer) does not have to agree. Buyers should only agree to an escape clause if it is within their interests to do so. If you aren’t sure whether you should agree to include an escape clause in your real estate contract, get in touch with a real estate agent or lawyer for advice.
Is the escape clause rule real?
The escape clause, sometimes referred to as the 72-hour clause or right-of-first-refusal clause, is real. However, the term “72-hour clause” is a bit of a misnomer as the period of time can be any length that both parties have agreed to. In most cases, the clause is between 24 hours and 72 hours in length. Involved parties should make sure to specify an exact time frame, including whether that time frame is valid during business days only or on weekends and holidays.
Emily Southey
Wahi Writer
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