escalation clause


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Escalation Clause

A clause in a contract stating that the price of a good or service will increase if a cost increases correspondingly. For example, a supermarket may enter a contract with an apple distributor to buy apples at a certain price. However, an escalation clause may cause that price to increase if the cost of transporting the apples to the store goes up by a certain amount.

escalation clause

A clause in any of a wide variety of contractual or real property arrangements that allows one party to increase the price upon the happening of certain specified events. Longterm leases often have rent increases at 3- to 5-year intervals, with the adjustment being a certain stated amount,a percentage of then-current market rents,or an increase based on some index with the first year of the lease representing the benchmark and against which the index is measured.

Example: The parties agree that rent will increase in 5 years in the same proportion as the consumer price index (CPI) in 5 years bears to the current consumer price index. If the rent today is $4,000 per month and the CPI is 179, and in 5 years the CPI is 192, then the new rent is calculated at follows:

192 179 1.0726%

$4,000 1.0726% $4,290.40 per month

Other escalation clauses are used to increase the interest rate in a loan when there has been a default and to increase rent when a tenant remains in possession after expiration of its term.

References in periodicals archive ?
As recently as a few years ago, landlords were in the practice of tying escalation clauses to the Consumer Price Index, a popular figure that reflects inflation.
In this regard, the Supreme Court held that there is nothing inherently wrong with escalation clauses, which maintain fiscal stability and retain the value of money in long-term contracts.
Escalation clauses, which were intended to keep a rental rate current with inflation and market increases, were a significant cause of the most current trend of having no CPI escalation.
"The industry is looking for an escalation clause," Higbee said.
Offer conditions for entire duration of the framework agreement (first year fixed, then repricing according to Bidder escalation clause and interest rate hedging surcharge) -
Hall - the Court allowed a landlord to recover attorneys' fees incurred in defending (and prevailing) in an action by a tenant for a declaration of its rights under an escalation clause. In ruling for the landlord and distinguishing Frank B.
The lease contained a tax escalation clause which stated that the tenant (Bryant Imports Inc.) shall pay as additional rent, 3 percent of any increase in real estate taxes over those assessed for the building for tax year 1974/1975.
Shapiro explained the parties are battling over a "market rent" escalation clause that set the rent for the two-year period beginning February of 1994.
In addition, there was an increase in rental fees due to escalation clauses in existing lease agreements.
Also, compare current prevailing prices, escalation clauses, pass-throughs, inflation adjustments, up-front fees, cancellation fees and penalties.
and in their contracts with oil companies the price escalation clauses are benchmarked to indexes that we [ucg] generate."
About 18 percent of all builders now use such contracts, and escalation clauses are most common for small builders (23 percent).