Subject to escalation – A developer’s guard against inflation

This week, a frequent contributor, commissioned land surveyor, Leslie B. Mae, returns to share his take on an issue facing many persons who are entering the housing market.

The expression 'subject to escalation', which appears in practically every advertisement relating to major new housing developments in Jamaica, is one which is the cause of much anxiety on the part of purchasers. Yet there is nothing new about this concept.

Anybody who has ever asked for an estimate from a tradesman will be familiar with the condition "This estimate is good for two (or three) months only".

Everyone will recognise this as the tradesman's protection against any significant increase in the cost of labour and material. He expects to be able to see two or three months ahead, but cannot expect his costs to remain stable indefinitely, and you, the customer, know that if you delay your decision, you will have to renegotiate the price. In that knowledge, you have understood the basic theory of escalation.

Essentially, the expression "subject to escalation" performs the same function as the tradesman's time limit on his offer. It enables the developer to protect himself from increases in costs which are outside his control, but which fall within the time-scale of the development.

While the tradesman will not commit his skills or his cash to a job until he has agreed a mutually acceptable price, a developer is obliged to commit substantial funds to his project before any sales take place. He cannot expect the public to have faith in his scheme if he cannot demonstrate the financial faith to make it marketable.

He must embark upon a building programme which may extend up to five years, in the expectation that his sales and costs will keep pace with his building schedule.

Economically, the developer cannot adjust his selling price after each house is completed and sold. He must set a price which purchasers will perceive as being reasonable, while he must protect himself from those cost increases which inflation is likely to impose on him, however efficiently he conducts his business.

The developer is forced, therefore, into the position of saying, in effect, "I will deliver this house to you at this price, provided that these costs remain constant", and at this point in his contract, he will list those current cost factors (labour, materials, etc.) at the relevant current levels.

If those costs increase, the developer reserves the right to increase the nominal selling prices in proportion to that increase.

The range of items that may properly be included in an "escalation clause" is carefully prescribed by legislation, and the codes of practice under which those items may be applied are very strict.

Contrary to the view of some of our readers, it is not practical for a developer to contract at a low-selling price with the hope of propping up the final price by inflating the escalation. The amount of escalation has to be certified by a quantity surveyor and is usually restricted to the actual increase in material and labour costs during the period of construction.

In effect, the purchaser will be paying the same price that he would have paid if the developer had first completed the house before declaring its price.

The problem for the purchaser is not that the "escalation clause" is unfair, but that the final price is uncertain (within limits, of course), and he may eventually pay more than he originally budgeted for.

Remember that with a real estate purchase, the Sale Agreement "subject to escalation" commits the purchaser legally to pay the additional amount due to escalation at the end of the construction.

It should be clear from the above that the "escalation" clause in a contract is not an excuse for unscrupulous developers to cash in at the expense of the unwary purchaser. "Subject to escalation" is an honourable defensive mechanism employed by any prudent developer in today's circumstances. So much so that one is inclined to urge caution in respect of any advertisement for an ongoing housing-development scheme that makes no mention of escalation.

Keep sending your questions and comments, and let's continue to explore A Matter of Land. Until next time, traverse well.

- Craig Francis is a commissioned land surveyor and managing director of Precision Surveying Services Ltd. He can be contacted at craig_r_francis@yahoo.com or his Facebook page Precision Surveying Services.