Escalator Clause Definition and Legal Meaning

On this page, you'll find the legal definition and meaning of Escalator Clause, written in plain English, along with examples of how it is used.

What is Escalator Clause?

n. a provision in a lease or other agreement in which rent, installment payments or alimony, for example, will increase from time to time when the cost of living index (or a similar gauge) goes up. Often there is a maximum amount of increase (“cap”) and seldom is there a provision for reduction if the cost of living goes down or for deflation instead of inflation.

History and Meaning of Escalator Clause

An escalator clause is a provision in a contract, such as a lease or collective bargaining agreement, that allows for an automatic upward adjustment of payments or wages to keep pace with inflation. This clause operates based on a pre-determined economic index, such as the Consumer Price Index (CPI). This clause is also called an escalation clause or cost of living adjustment clause.

Escalator clauses first gained widespread use during the inflationary period of the 1970s when market prices for goods and services rose significantly, and the purchasing power of money decreased. Today, these clauses are commonly included in employment contracts, rental agreements, and long-term supply contracts to protect the interests of both parties.

Examples of Escalator Clause

  1. An employer and a union negotiates a five-year employment contract that includes an escalator clause for automatic annual wage increases linked to the CPI.
  2. A lease agreement between a landlord and tenant that includes an escalation clause for rent increases that automatically adjust based on the CPI.
  3. A construction contract between a subcontractor and a general contractor has an escalation clause to account for changes in material costs due to inflation.
  4. A long-term supplier contract with an escalation clause adjusts the price of goods or services every three years according to the CPI.

Legal Terms Similar to Escalator Clause

  • Cost of Living Adjustment: An increase in benefits or wages to account for inflation.
  • Inflation Hedge: An investment designed to provide protection against inflation.
  • Consumer Price Index (CPI): A measure of the average change in prices over time for goods and services typically purchased by households.