Should lawyers advise against using contracts to sell ?

The Philippine real estate market is a very active one. There are property developers
selling their projects, industries seeking to acquire property for use in their businesses, and
those purchasing for their personal use or for investment.

When one has found a property to buy, the sale process usually involves the payment of
a downpayment and an agreement for subsequent payments until the full purchase price is
paid.

The agreement covering this initial payment is usually the contract to sell. When the buyer
has completed the payment of the price, the seller and buyer execute a deed of absolute sale.

There is no contract to sell when the buyer will pay the entire sale price for the property
in one payment, in which case the seller and buyer execute a deed of absolute sale.

The execution of the contract to sell is aimed at giving the buyer time to gather the money for the purchase of the property and to check the property and ownership documents of the seller.

For those buyers intending to purchase a property and entering into a contract to sell or,
those who already have an existing contract, it would be useful for them to know more about
this type of contract. In particular, what happens when the seller, during the existence of the contract to sell, decides to sell the property to another buyer for a higher price or better terms.

In such a scenario, the title to the property will be transferred to the second buyer who may register
the property because there is no defect in the owner-seller’s title per se.

The remedy of the buyer in the contract to sell is to sue the seller for damages for the
breach of contract and promise to sell the property to it. The buyer under a contract to sell
does not have a better right of ownership over and will not be entitled to recover the property
which they intended to purchase under the contract to sell.

In a case decided by the Supreme Court, the sellers of a parcel of land, the Nabuses,
entered into what the Supreme Court considered as a contract to sell with the Pacsons, the
buyers. The Pacsons failed to pay on time but the Nabuses still accepted their late payments.
However, the Nabuses failed to appear on the designated date for the delivery of the final
payment to them.

Later, the Pacsons learned that the Nabuses sold the property to Betty Tolero, a third
party. Tolero was able  to obtain a new title over the property and the Pacsons filed a
case to annul the deeds of sale, cancel the titles issued in favor of Tolero, and for damages.
The Supreme Court denied the claim of the Pacsons and ruled in favor of Tolero.

A contract to sell may not be considered as a contract of sale because the first
essential element of a contract of sale, which is the consent or meeting of the minds to transfer
ownership in exchange for the price, is lacking.

In a contract to sell, the prospective seller explicitly reserves the transfer of title to the
prospective buyer, meaning, the prospective seller does not as yet agree or consent to transfer
ownership of the property subject of the contract to sell until the happening of an event, which
is the full payment of the purchase price. (Sps. Domingo vs. Sps. Manzano, G.R. No. 201883,
November 16, 2016 citing the case of Spouses Nabus and Tolero v. Spouses Pacson, G.R. No.
161318, November 25, 2009).

In another case, the Supreme Court declared that in a contract to sell, upon the
fulfillment of the suspensive condition which is the full payment of the purchase price,
ownership will not automatically transfer to the buyer although the property may have been
previously delivered to him. The prospective seller still has to convey title to the prospective
buyer by entering into a contract of absolute sale.

It is then essential to distinguish between a contract to sell and a conditional contract of
sale.

When the property is sold by the owner to someone who is not the party the seller first
contracted with (contract to sell), but to a third person, if the first agreement to sell the
property was in the nature of a contract to sell, there is under the law, no previous sale of the
property.

This means that a third person buying the same property from the same seller despite
the fulfillment of the suspensive condition such as the full payment of the purchase price, for
instance, cannot be deemed a buyer in bad faith and the prospective buyer cannot go to court
and seek a reconveyance or delivery to it of the property covered by the contract to sell.

The title to the property will be transferred to the buyer who purchased the same under
a contract of sale or deed of absolute sale after registration because there is no defect in the
owner-seller’s title.

The remedy of the buyer in the contract to sell is to go to court and seek damages
against the seller. (Coronel vs. Court of Appeals G.R. No. 103577 October 7, 1996)

To sum it up, the remedy of the buyer of a property in a contract to sell, where the
seller had mid-way sold the property to another via a contract of sale, conditional contact of
sale, deed of absolute sale, or other such sale agreement, is NOT to ask for the delivery of the
property purchased BUT only to file a case for damages for breach of contract or promise
against the seller.

Unfortunately, this remedy may not fully compensate the buyer for its loss considering
that the damage may be found in the intrinsic value of the property such as when the property
increases in value. It will be difficult for our courts to determine and award such damages as
these would not only be considered as speculative but may also happen at a future
undetermined time.

Aside from this, the buyer may have sought to purchase the property for some other
personal reason upon which a monetary value cannot be assigned.

Accordingly, when we discuss with clients about our reluctance to use contracts to sell, a
lot are surprised as they have been used to relying on contracts to sell for property sales
transactions.

Of course, there are instances where the buyer has no other option but to use
the documentation provided by the sellers such as when buying property from real estate
developers who have their own set of procedures. Nonetheless, it would be useful for buyers in
such transactions to know their rights and the meaning of the documents and contracts they
enter into.

For those who are not bound by such procedures however, there are other contracts to
cover initial and downpayments such as earnest money agreements and conditional contracts of
sale which they can consider that would provide them with better protection in their property
purchase transactions.

(The author, Atty. John Philip C. Siao, is a practicing lawyer and founding Partner of Tiongco
Siao Bello & Associates Law Offices, teaches law at the MLQU School of Law, and an Arbitrator
of the Construction Industry Arbitration Commission of the Philippines. He may be contacted
at [email protected]. The views expressed in this article belong to the author alone.)