Learn how to Avoid Deceptive Bidding-War Practices!
Today many homes in Niagara and beyond sell with competing offers and are sold to the highest bidder, sometimes resulting in a deceptive bidding-war. In this regard the Code of Ethics of Ontario’s Real Estate and Business Brokers Act says the following: A brokerage “shall not disclose the substance of the competing offers,” and “Shall disclose the number of competing offers to every person who is making one of the competing offers.
What are Escalation Clauses and What’s Wrong with them?
Escalation clauses are also known as “Sharp Bids”. In our experience a buyer’s competing offer does not indicate a price. A clause in the contract states that the buyer agrees to pay say $2,000 more than the highest offer upon being shown or informed of the highest price. There is also a cap stating, provided the price does not exceed $_______________.
RECO Warns of Potential Legal Problems with Deceptive Bidding-War
The Real Estate Council of Ontario, the real estate licensing authority in Ontario, has stated to us that they cannot regulate the actions of buyers and sellers. They do not, however, support the practice of escalation clauses “due to the potential legal problems that could arise” not only for brokerages and salespeople but also for buyer and sellers. So RECO strongly recommends that each party “obtain independent legal advice before acting on or promoting this type of offer.” Further, the Real Estate and Business Brokers act prohibits registrants from disclosing the substance of any offer (ref. s.26 Code), “so a disclosure of the highest price…would be prohibited.”
Lawyer, Author and Speaker Mark Weisleder on Deceptive Bidding-War Practices
In a Toronto Star article of June 24, 2011, he said this: “However, a private seller could take one buyer offer and just show it to another bidder. This is one of the main reasons private sellers have trouble creating bidding wars.” Specifically on Sharp Bids he says this: “An agent cannot do this based on their code of ethics. However, you could give this to a private seller in a bidding war, where the rules are different.”
Additional Concerns and Questions about Deceptive Bidding-War
Is an offer enforceable and binding if there’s no price in the offer to purchase? According to one legal source, it might not be a legally binding contract as the price is an essential term of the agreement.
With a not to exceed $_________ price cap, why would a seller settle for only $1,000 or $2,000 more when the price cap is usually much higher? And who knows how much more the highest bidder might go. Countering the best offer might result in more than the suggested sharp bid clause.
It can be argued that the seller is bound by the terms of the listing agreement and should not fall prey to such Escalation Clauses or other deceptive practices that could become legally problematic.