Deconstructing option and right of first refusal

To rent or to own? That is the question.

At first glance, buying a house or condominium unit and thereafter leasing it can earn you passive income and thus, it seems more logical than renting it from another person. Deciding on this universal concern depends on an assortment of factors, however, such as the person’s financial standing, as well as one’s commitment to permanently reside in the house or condominium unit and pay the housing loan and corresponding expenses and taxes.

As aptly said by American singer Kane Brown, “Our home should be a source of stability, not insecurity.”

A rent-to-own scheme maybe feasible for those who want to buy their house or unit but cannot afford the huge down payment. According to real estate company ZipMatch, under the rent-to-own scheme, the owner-lessor grants the lessee the option of purchasing the leased house or unit either during the rental period or until the expiry of the term of the housing loan.

Unlike traditional financing, the owner-lessor offers financing options to the lessee, who then pays rent that is slightly above the market rate. A portion of the increased rate will answer for the lessee’s down payment, should he decide to purchase the house or unit. Thereafter, the lessee must apply for a loan with a bank or other lending institution, which will pay for the remaining balance of the purchase price.

The option granted to the lessee may be stipulated in the lease agreement or the subject of another contract. But for it to be valid and enforceable, it should indicate the owner-lessor’s offer—that is, a definite price at which he is willing to sell the house or unit.

This option may or may not be supported by a consideration, which is often referred to as “option money.” If the option were not supported by this consideration, the owner-lessor may withdraw the offer before the lessee notifies him of his acceptance.

In Sanchez v. Rigos, however, the Supreme Court held declared that pursuant to Article 1479 of the Civil Code, which governs options not founded on consideration, in relation to contracts of sale, the owner-lessor may withdraw such offer even after he found out about the lessee’s acceptance thereof. In any case, the owner-lessor may not whimsically or arbitrarily withdraw his offer; otherwise, the lessee may file an action for damages against him.

Meanwhile, an option contract is deemed perfected when it is supported by a separate consideration. But it is different from a contract of sale, which shall be executed once the lessee agrees to purchase the house or unit in accordance with the owner-lessor’s offer.

Thus, while the owner-lessor would breach the contract for withdrawing his offer during the agreed period, the lessee may not sue for specific performance on the proposed contract of sale. Instead, he may sue the owner-lessor for damages for said breach.

Furthermore, option money should be distinguished from earnest money. Pursuant to the Supreme Court’s rulings, while option money is given as distinct consideration for an option contract, earnest money is part of the purchase price.

Option money applies to a sale which the owner-lessor and lessee have yet to perfect, while earnest money is given only where there is already a sale. When the lessee gives option money, he is not required to buy the house or unit, unlike when earnest money is given, in which case the lessee is bound to pay the balance of the purchase price.

Similar to the rent-to-own scheme is a lease agreement containing a right of first refusal. Under this agreement, the owner-lessor is under a legal duty to the lessee not to sell anybody at any price until after: (a) he has made an offer to sell to the latter at a certain price; and (b) the lessee has failed to accept it. In this regard, the Supreme Court ruled that the grant of the right of first refusal is a means to protect the lessee’s interest over the leased premises.

Moreover, unlike in an option contract, which requires, among others, a clear certainty on both the property and the purchase price of the envisioned contract of sale, the exercise of a right of first refusal depends on the purchase price and other terms that the owner-lessor have yet to agree upon.

Before such agreement, a right of first refusal can best be described as merely belonging to a class of preparatory juridical relations governed by other laws of general application and scattered provisions of the Civil Code.