An escalation clause is a clause in a lease or contract that allows for a change in the agreed-upon price in response to a specific factor that is outside of the control of either party. Escalation clauses are used to protect against potential changes in the value of the goods or services being exchanged, such as in cases of inflation or other market fluctuations. Escalation clauses are common in construction contracts, where the clause may specify that the agreed-upon price for the project will be adjusted to reflect changes in the cost of raw materials, fuel, and labor during the course of the construction. Escalation clauses may also be used in other types of contracts, such as leases for commercial or residential properties, where the clause may specify that the rent will be adjusted based on changes in the market value of the property, or on changes in the cost of utilities or other expenses.

In real estate, an escalation clause is a clause or addendum to a real estate contract that notes the buyer is willing to raise their offer on a home should the seller receive a higher competing offer. Essentially, an escalation clause offers buyers protection if other potential buyers outbid them. The clause will state how much more the buyer is willing to pay than the highest offer and their spending limit. An escalation clause shows the seller how serious a buyer is about a property and how far they are willing to go to win the home. Escalation clauses have long been a part of real estate contracts in sellers markets, but they gained particular popularity during the onset of the COVID-19 pandemic, when pent-up demand made the housing market even more competitive. When drafting a contract or lease that includes an escalation clause, it is important to carefully specify the factors that will trigger the adjustment, as well as the method for determining the new price, to ensure that the clause is fair and reasonable for both parties and that it is enforceable in the event of a dispute.