What Is an Escalator Clause?

An escalator clause is also called an escalation clause and a contract provision that allows for an increase in the agreed-upon wages or prices෴ if certain conditions change while the contract is in effect.

A labor contract may be adjusted based on an increase in the inflation ra💜te. Additional expenses may trigger an adjustment to a business-to-business contract. A landlord may demand an escalation clause in a🌳 long-term rental agreement to cover tax increases.

Benefits

An escalator clause allows individuals to commit to long-term contracts without worrying that changes in external circumstances could hurt them. It ensures that contracts remain fair to all parties involved. Escalator clauses are often championed by labor unions, whic𒀰h demand that wage increases in emplo🍸yment contracts be tied to inflation.

Escalator clauses are found in business contracts of companies that supply goods or services with costs that are prone to fluctuations. For example, shipping charges can swing dramatically depending on volatile oil prices.

If rents are increasing rapidly, a landlord may hesitate to sign a long-term rental agreement or lease, since they could lose out on higher rents. An escalator clause allows rent to increase by a specified amount each period, allowing the landlord to benefit from current 🎃market conditions and the renter to secure a long-term arrangement.

Example

In real estate, an escalator clause may be attached to an offer on a home, indicating that the potential buyer is willing to increase the bid should higher offers be receive𒈔d.

If a buyer makes an offer of $400,000, an escalator clause could specify that if a higher offer comes in, the buyer will beat it by $3,000, but only up to $427,000. If a⭕n offer of $405,000 is tabled, the escalator clause would trigger a new offer of $408,000. Alternately, if a competing offer comes in at $429,000, the escalator clause would not allow for a new offer adding $3,000 since the clause specifies a cap of $427,000.

The Bottom Line

An escalator clause is commonly called an escalation clause. It is a provision that allows for increases in wages or prices if economic conditions change throughout the contract. This clause is found in labor and real estate contracts.