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 ?
Yet, based on the wording of many escalation clauses, the owner could pass through both types of increases in operating expenses--increases related to higher building occupancy and increases related to inflation.
Accessibility of parking and escalation clauses in the leases were classified as very important.
But, if Kremer's lease is any indication of a trend, escalation clauses have been kicked out of current tower leases.
Leominster was looking for a three-year contract with the option for two additional years and a fuel escalation clause.
The contract includes a cost escalation clause and provides an option to add one additional year at a dayrate of US$178,000.
There has been more than one lease agreement which has had its escalation clause, or pro rata billing formula modified so as to conform to the inflexibility of a packaged program.
This contract includes a cost escalation clause and provides for two (2) separate options to extend the term to three (3) years.
This evolution of the CPI escalation clause resulted in the following 2 examples which were widely used: (Illustration of standard CPI clause with two choices of limiting clauses.
The industry is looking for an escalation clause," Higbee said.
To the market-related risk calculation by the group for the period between tender and the award into perspective comes a price escalation clause applies.
In addition, the ability for a tenant to negotiate a more favorable escalation clause is also much more likely.
There is also a royalty payment escalation clause in the agreement should the price of gold exceed US $300 per ounce.