Jamaica Gleaner

Sub­ject to es­ca­la­tion – A devel­oper’s guard against inf la­tion


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 timescale 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.

 ?? FILE ?? A view of a sec­tion of the Ebony Glades hous­ing de­vel­op­ment in Rus­sell Heights, St An­drew, where the units were sold sub­ject to es­ca­la­tion.
FILE A view of a sec­tion of the Ebony Glades hous­ing de­vel­op­ment in Rus­sell Heights, St An­drew, where the units were sold sub­ject to es­ca­la­tion.
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