a. Contract of Sale vs. Contract to Sell

A. Nature and Form (Civil Code, arts. 1458-1488)

• Contract of Sale vs. Contract to Sell
• Option Contract
• Right of First Refusal
• Earnest Money in Contract of Sale and Contract to Sell

Civil Code, arts. 1458-1488

TITLE VI

SALES

CHAPTER 1

Nature and Form of the Contract

Article 1458. By the contract of sale one of the contracting parties obligates himself to transfer the ownership and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent.

A contract of sale may be absolute or conditional. (1445a)

Article 1459. The thing must be licit and the vendor must have a right to transfer the ownership thereof at the time it is delivered. (n)

Article 1460. A thing is determinate when it is particularly designated or physically segregated from all others of the same class.

The requisite that a thing be determinate is satisfied if at the time the contract is entered into, the thing is capable of being made determinate without the necessity of a new or further agreement between the parties. (n)

Article 1461. Things having a potential existence may be the object of the contract of sale.

The efficacy of the sale of a mere hope or expectancy is deemed subject to the condition that the thing will come into existence.

The sale of a vain hope or expectancy is void. (n)

Article 1462. The goods which form the subject of a contract of sale may be either existing goods, owned or possessed by the seller, or goods to be manufactured, raised, or acquired by the seller after the perfection of the contract of sale, in this Title called "future goods."

There may be a contract of sale of goods, whose acquisition by the seller depends upon a contingency which may or may not happen. (n)

Article 1463. The sole owner of a thing may sell an undivided interest therein. (n)

Article 1464. In the case of fungible goods, there may be a sale of an undivided share of a specific mass, though the seller purports to sell and the buyer to buy a definite number, weight or measure of the goods in the mass, and though the number, weight or measure of the goods in the mass is undetermined. By such a sale the buyer becomes owner in common of such a share of the mass as the number, weight or measure bought bears to the number, weight or measure of the mass. If the mass contains less than the number, weight or measure bought, the buyer becomes the owner of the whole mass and the seller is bound to make good the deficiency from goods of the same kind and quality, unless a contrary intent appears. (n)

Article 1465. Things subject to a resolutory condition may be the object of the contract of sale. (n)

Article 1466. In construing a contract containing provisions characteristic of both the contract of sale and of the contract of agency to sell, the essential clauses of the whole instrument shall be considered. (n)

Article 1467. A contract for the delivery at a certain price of an article which the vendor in the ordinary course of his business manufactures or procures for the general market, whether the same is on hand at the time or not, is a contract of sale, but if the goods are to be manufactured specially for the customer and upon his special order, and not for the general market, it is a contract for a piece of work. (n)

Article 1468. If the consideration of the contract consists partly in money, and partly in another thing, the transaction shall be characterized by the manifest intention of the parties. If such intention does not clearly appear, it shall be considered a barter if the value of the thing given as a part of the consideration exceeds the amount of the money or its equivalent; otherwise, it is a sale. (1446a)

Article 1469. In order that the price may be considered certain, it shall be sufficient that it be so with reference to another thing certain, or that the determination thereof be left to the judgment of a special person or persons.

Should such person or persons be unable or unwilling to fix it, the contract shall be inefficacious, unless the parties subsequently agree upon the price.

If the third person or persons acted in bad faith or by mistake, the courts may fix the price.

Where such third person or persons are prevented from fixing the price or terms by fault of the seller or the buyer, the party not in fault may have such remedies against the party in fault as are allowed the seller or the buyer, as the case may be. (1447a)

Article 1470. Gross inadequacy of price does not affect a contract of sale, except as it may indicate a defect in the consent, or that the parties really intended a donation or some other act or contract. (n)

Article 1471. If the price is simulated, the sale is void, but the act may be shown to have been in reality a donation, or some other act or contract. (n)

Article 1472. The price of securities, grain, liquids, and other things shall also be considered certain, when the price fixed is that which the thing sold would have on a definite day, or in a particular exchange or market, or when an amount is fixed above or below the price on such day, or in such exchange or market, provided said amount be certain. (1448)

Article 1473. The fixing of the price can never be left to the discretion of one of the contracting parties. However, if the price fixed by one of the parties is accepted by the other, the sale is perfected. (1449a)

Article 1474. Where the price cannot be determined in accordance with the preceding articles, or in any other manner, the contract is inefficacious. However, if the thing or any part thereof has been delivered to and appropriated by the buyer he must pay a reasonable price therefor. What is a reasonable price is a question of fact dependent on the circumstances of each particular case. (n)

Article 1475. The contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price.

From that moment, the parties may reciprocally demand performance, subject to the provisions of the law governing the form of contracts. (1450a)

Article 1476. In the case of a sale by auction:

(1) Where goods are put up for sale by auction in lots, each lot is the subject of a separate contract of sale.

(2) A sale by auction is perfected when the auctioneer announces its perfection by the fall of the hammer, or in other customary manner. Until such announcement is made, any bidder may retract his bid; and the auctioneer may withdraw the goods from the sale unless the auction has been announced to be without reserve.

(3) A right to bid may be reserved expressly by or on behalf of the seller, unless otherwise provided by law or by stipulation.

(4) Where notice has not been given that a sale by auction is subject to a right to bid on behalf of the seller, it shall not be lawful for the seller to bid himself or to employ or induce any person to bid at such sale on his behalf or for the auctioneer, to employ or induce any person to bid at such sale on behalf of the seller or knowingly to take any bid from the seller or any person employed by him. Any sale contravening this rule may be treated as fraudulent by the buyer. (n)

Article 1477. The ownership of the thing sold shall be transferred to the vendee upon the actual or constructive delivery thereof. (n)

Article 1478. The parties may stipulate that ownership in the thing shall not pass to the purchaser until he has fully paid the price. (n)

Article 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable.

An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promisor if the promise is supported by a consideration distinct from the price. (1451a)

Article 1480. Any injury to or benefit from the thing sold, after the contract has been perfected, from the moment of the perfection of the contract to the time of delivery, shall be governed by articles 1163 to 1165, and 1262.

This rule shall apply to the sale of fungible things, made independently and for a single price, or without consideration of their weight, number, or measure.

Should fungible things be sold for a price fixed according to weight, number, or measure, the risk shall not be imputed to the vendee until they have been weighed, counted, or measured and delivered, unless the latter has incurred in delay. (1452a)

Article 1481. In the contract of sale of goods by description or by sample, the contract may be rescinded if the bulk of the goods delivered do not correspond with the description or the sample, and if the contract be by sample as well as description, it is not sufficient that the bulk of goods correspond with the sample if they do not also correspond with the description.

The buyer shall have a reasonable opportunity of comparing the bulk with the description or the sample. (n)

Article 1482. Whenever earnest money is given in a contract of sale, it shall be considered as part of the price and as proof of the perfection of the contract. (1454a)

Article 1483. Subject to the provisions of the Statute of Frauds and of any other applicable statute, a contract of sale may be made in writing, or by word of mouth, or partly in writing and partly by word of mouth, or may be inferred from the conduct of the parties. (n)

Article 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor may exercise any of the following remedies:

(1) Exact fulfillment of the obligation, should the vendee fail to pay;

(2) Cancel the sale, should the vendee's failure to pay cover two or more installments;

(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's failure to pay cover two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall be void. (1454-A-a)

Article 1485. The preceding article shall be applied to contracts purporting to be leases of personal property with option to buy, when the lessor has deprived the lessee of the possession or enjoyment of the thing. (1454-A-a)

Article 1486. In the case referred to in the two preceding articles, a stipulation that the installments or rents paid shall not be returned to the vendee or lessee shall be valid insofar as the same may not be unconscionable under the circumstances. (n)

Article 1487. The expenses for the execution and registration of the sale shall be borne by the vendor, unless there is a stipulation to the contrary. (1455a)

Article 1488. The expropriation of property for public use is governed by special laws. (1456)

CONTRACT OF SALE vs. CONTRACT TO SELL

Reservation of right to repurchase

The right to repurchase is reserved by a stipulation to that effect in the contract of sale. Because it is not a right granted to the vendor by the vendee, but is right reserved by the vendor.

Reservation CANNOT be made in an instrument different from that of the contract of sale. Once the instrument of absolute sale is executed, any right thereafter granted the vendor in a separate instrument cannot be a right of repurchase but some other right like the option to buy.

Parole evidence in proving right of repurchase

The right of repurchase may be proved by parol evidence when the contract of sale has not been reduced in writing. If it has been reduced to writing, the parol-evidence rule applies, subject to its exceptions under Rule 130, Section 10 of the Revised Rules on Evidence, as amended in 2019; evidence admitted without objection may also be considered. (Mactan Cebu International Airport Authority v. CA, G.R. No. 121506, October 30, 1996)

CONTRACT TO SELL

A bilateral contract whereby the prospective seller, while expressly reserving the ownership of the subject property despite delivery thereof to the prospective buyer, binds himself to sell the said property exclusively to the prospective buyer upon fulfillment of the condition agreed upon, that is, full payment of the purchase price. (Solid Homes, Inc. v. Spouses Jurado, citing Coronel v. Court of Appeals, G.R. No. 103577, October 7, 1996)

NOTE: In a contract to sell, the payment of the purchase price is a positive suspensive condition that gives rise to the prospective seller's obligation to convey the title. However, nonpayment is not a breach of contract but “an event that prevents the obligation of the vendor to convey title from becoming effective.” The contract would be deemed terminated or canceled, and the parties stand “as if the conditional obligation had never existed.” (Racelis v. Spouses Javier, G.R. No. 189609, January 29, 2018)

Q: Dolores Ventura entered into a Contract to Sell with Spouses Eustacio and Trinidad Endaya for the purchase of two parcels of land located in Marian Road II, Marian Park, Parañaque City. The contract to sell provides that the purchase price of P347,760.00 shall be paid by Dolores through: (a) down payment of P103,284.00 upon execution of the contract; and (b) the balance of P244,476.00 within a 15-year period, plus 12% interest per annum on the outstanding balance and 12% interest per annum on arrearages.

Dolores’ children, Frederick Ventura, Marites Ventura-Roxas, and Philip Ventura filed a Complaint and, thereafter, an Amended Complaint for specific performance, seeking to compel Sps. Endaya to execute a deed of sale over the subject properties. They argued that their parents’ close friendship with Sps. Endaya, allowed widowed Dolores to pay the down payment stated in the contract to sell and, instead, allowed her to pay amounts as her means would permit.

The total payments made by Dolores and petitioners amounted to P952,152.00, more than the agreed purchase price of P347,760.00, including the 12% interest p.a. thereon computed on the outstanding balance.

When Dolores’ children demanded the execution of the corresponding deed of sale, Sps. Endaya refused. Should Sps. Endaya execute a deed of sale over the subject properties in favor of Dolores’ children?

A: NO. Spouses Endaya had no obligation to petitioners to execute a deed of sale over the subject properties. A contract to sell is defined as a bilateral contract whereby the prospective seller, while expressly reserving the ownership of the subject property despite delivery thereof to the prospective buyer, binds himself to sell the said property exclusively to the latter upon his fulfillment of the conditions agreed upon, i.e., the full payment of the purchase price and/or compliance with the other obligations stated in the contract to sell.

Given its contingent nature, the failure of the prospective buyer to make full payment and/or abide by his commitments stated in the contract to sell prevents the obligation of the prospective seller to execute the corresponding deed of sale to effect the transfer of ownership to the buyer from arising. (Ventura v. Heirs of Sps. Endaya, G.R. No. 190016, October 2, 2013)

Instances when a contract to sell may be resorted to:

• The object of a sale must be determinate or capable of being made determinate without a new or further agreement between the parties; it need not be physically segregated when the contract is made (NCC, Arts. 1458 & 1460);
• Future goods may be the object of a contract of sale; their future character does not, by itself, make the agreement a contract to sell (NCC, Art. 1462);
• Stipulation that deed of sale and corresponding certificate of sale would be issued only after full payment. (Sps. David v. Sps. Tiongson, G.R. No. 108169, August 25, 1999)

Contract to Sell vs. Conditional Contract of Sale

(Villamil v. Spouses Erguiza, G.R. No. 195999, June 20, 2018; Reyes v. Tuparan, G.R. No. 188064, June 1, 2011; Coronel v. CA, G.R. No. 103577, October 7, 1996)

Contract of sale vs. Contract to sell

Q: Project Movers Realty and Development Corporation (PMRDC) was indebted to Keppel Bank for P200M. To pay the debt, PMRDC conveyed to the bank 25 properties. Adao occupies one of the properties conveyed. The bank demanded Adao to vacate the property but he refused. Hence, an ejectment case was filed against Adao. In his defense, Adao assailed that he had a Contract to Sell entered between PMRDC and Adao. To prove full payment of the property, he presented an affidavit. Is Keppel bank bound by the contract to sell between PMRDC and Adao?

A: NO. The contract to sell does not by itself give Adao the right to possess the property. Unlike in a contract of sale, here in a contract to sell, there is yet no actual sale nor any transfer of title, until and unless, full payment is made. The payment of the purchase price is a positive suspensive condition. Adao’s lone affidavit is self-serving, and cannot be considered as substantial evidence to prove that there was full payment made. (Keppel Bank Phils. Inc., v. Adao, G.R. No. 158227, October 19, 2005)

Q: Spouses Roque and the original owners of an unregistered lot executed a 1997 Deed of Conditional Sale over a portion of a lot for P30,775.00. After the deed’s execution, Spouses Roque took possession and introduced improvements on the subject portion which they utilized as a balut factory. Sabug, Jr, applied for a free patent over the entire lot and was eventually issued an OCT in his name. Sabug, Jr., through the 1999 Deed of Absolute Sale, sold the lot to Aguado for P2,500,000.00, who, in turn, caused the cancellation of the OCT and the issuance of a TCT. Aguado obtained an P8,000,000.00 loan from the Land Bank secured by a mortgage over the lot. When she failed to pay her loan obligation, Land Bank commenced extra-judicial foreclosure proceedings and eventually tendered the highest bid in the auction sale. Upon Aguado’s failure to redeem the subject property, Land Bank consolidated its ownership and a TCT was issued in its name. Spouses Roque then filed an action for reconveyance before the RTC. Will the action for reconveyance prosper?

A: NO. This case involves a contract to sell. The Court held that where the seller promises to execute a deed of absolute sale upon the completion by the buyer of the payment of the purchase price, the contract is only a contract to sell even if their agreement is denominated as a Deed of Conditional Sale, as in this case. In a contract to sell, there being no previous sale of the property, a third person buying such property 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 seek the relief of reconveyance of the property. The action for reconveyance shall fail. (Roque v. Aguado, G.R. No. 193787, April 7, 2014)

OPTION CONTRACT

An option contract is a continuing offer or contract by which the owner stipulates with another that the latter shall have the right to buy the property at a fixed price within a certain time, or under, or in compliance with, certain terms and conditions, or which gives to the owner of the property the right to sell or demand a sale.

Remedy when seller refuses to complete the sale transaction despite down payment of the buyer

The action for specific performance will lie. There is a perfected contract of sale because there was a binding agreement of sale, not just an option contract. The sale was perfected when the parties agreed on the determinate thing and the price certain. The seller’s acceptance of the down payment may evidence that agreement.

Seller’s refusal to proceed with the sale despite down payment of buyer on the ground that the transaction is disadvantageous to him (seller)

Seller cannot justify his refusal to proceed with the sale by the fact that the deal is financially disadvantageous to him. Having made a bad bargain is not a legal ground for pulling out of a binding contract of sale, in the absence of some actionable wrong by the other party. (Legaspi y Navera v. People citing Vales v. Villa, G.R. Nos. 225753 & 225799, October 15, 2018)