On buying property in earnest

(Conclusion)

In Racelis v. Spouses Javier, the Supreme Court held that unless otherwise agreed, earnest money, whether in a contract to sell or a sale contract, is intended to be forfeited if the sale did not happen without the seller’s fault. The forfeiture of the earnest money does not unjustly enrich the seller. To be sure, he could have found a better deal from another potential buyer.

The potential buyer then shoulders the burden of proving a contrary agreement on the earnest money, which respondents-spouses Germil and Rebecca Javier have failed to do in this case.

Earnest money is different from option money, as held by the Supreme Court in a long line of cases, including Oesmer v. Paraiso Development Corp. In this case, petitioners Rizalino, Ernesto, Leonora, Bibiano Jr., Librado and Enrequita, along with Adolfo and Jesus, all surnamed Oesmer, are siblings who co-own undivided shares of two parcels of agricultural and tenanted land.

Ernesto sought to broker the sale of petitioners’ properties to respondent Paraiso Development Corp. (PDC). Consequently, PDC prepared the contract to sell, which petitioners thereafter signed. Petitioners notified PDC that they intended to rescind the contract and to return the P100,000 given by the latter as “option money.”

PDC did not respond to petitioners, constraining them to file before the trial court a Complaint for Declaration of Nullity or for Annulment of Option Agreement or Contract to Sell.

The trial court and upon appeal, the Court of Appeals ruled in favor of PDC, declaring that the contract to sell was binding with respect to petitioners’ undivided proportionate shares in the assailed properties.

The Supreme Court affirmed these findings, declaring that contrary to petitioners’ claims, they validly consented to the transaction with PDC by affixing their signatures on the contract. Moreover, petitioners fully understood the contract to sell, which was couched in terms that are easy to read and understand.

Meanwhile, the failure of PDC’s representatives to sign the contract does not invalidate it. To be sure, PDC’s consent to be bound by the terms of the contract was established when it partially performed its obligations thereunder, particularly when it tendered the P100,000 to form part of the purchase price, which petitioners accepted and expressly acknowledged.

While the parties denominated the P100,000 as option money, it actually partakes the nature of earnest money when considered with the other terms relating to the transaction. This further bolsters the nature of the transaction as a contract to sell, and not as a unilateral promise to sell.

Thus, according to the Supreme Court, earnest money and option money are distinct, such that the former is part of the purchase price, while the latter is given as a distinct consideration for an option contract.

Earnest money is given only when there is already a sale, while option money applies to a sale that has not yet been perfected. Furthermore, the buyer is bound to pay the balance after paying the earnest money, while the potential buyer is not required to buy the property, despite paying the option money, and may even forfeit it in accordance with the option contract.

Considering the nature of earnest money, its payment before the owner can agree to sell his property is irregular, and thus cannot be used to bind him to the obligations of a seller under an otherwise perfected sale contract, as held in First Optima Realty Corp. v. Securitron Security Services, Inc.

As in this case, the property owner may not be legally obliged to execute a sale with the prospective buyer when the latter employed questionable practices which prevented the former from freely giving his consent thereto, such as forcing the owner’s acceptance of a check supposedly as payment of earnest money, absent a prior board resolution or other circumstances reflecting the approval of the sale transaction.