3. Contract of Sale or Lease

Contract of Sale or Lease

Concept

In drafting a contract of sale or lease, identify whether the parties intend a present sale, a sale that will proceed only after full payment, a lease, or a lease with an option to purchase. The agreed terms matter: a promise to execute a deed only upon full payment characterizes the agreement as a contract to sell, rather than an immediate contract of sale. (View v. Mejia, G.R. No. 230832, 12 November 2018)¹

Governing provisions

A sale may be made in writing, orally, partly in each form, or inferred from the parties’ conduct, subject to the Statute of Frauds and other applicable statutes. Earnest money given in a contract of sale is part of the price and proof that the contract has been perfected. (Art. 1483, Civil Code)² (Art. 1482, Civil Code)³

Rule 70, Section 1 addresses recovery of possession of land or a building when possession is unlawfully withheld after the expiration or termination of a contractual right to possess. It includes a lessor, vendor, or vendee among those who may bring the action in the proper Municipal Trial Court within one year after the unlawful withholding. (Rule 70, Sec. 1, Rules of Court)⁴

Requisites / Rules

• For a sale, state the parties’ agreed terms clearly and distinguish any earnest money from other payments: when given as earnest money in a contract of sale, it counts toward the price and evidences perfection. (Art. 1482, Civil Code)³
• If execution of the deed is promised only upon full payment, describe that condition accurately; the arrangement is a contract to sell, not an immediate sale. (View v. Mejia)¹
• For a lease, specify the period and any termination terms. An automatic termination clause may be valid, while the lease’s continuance cannot depend solely on the lessee’s free and uncontrolled choice. (D.m. Ragasa Enterprises, Inc. v. Oro, G.R. No. 190512, 20 June 2018)⁵ (Hilltop Market Fish Vendors' Association, Inc. v. Yaranon, G.R. No. 188057, 12 July 2017)⁶
• If the lease includes an option to purchase, specify its period, conditions, and relevant price terms. An option is preparatory and distinct from the principal contract; it gives the optionee time to decide and restricts the grantor during that period. (Capalla v. The Honorable Commission on Elections, G.R. No. 201112, 13 June 2012)⁷

Distinctions

An option to purchase does not itself serve as the principal sale: it gives one party the power to decide, within a fixed period and under specified conditions, whether to enter into that contract. A lease may also credit rentals toward a purchase price; those agreed credits can affect the financial consequences of exercising the option. (Capalla v. The Honorable Commission on Elections)⁷

Key doctrines

Notarization gives a contract the status of a public document with a prima facie presumption of authenticity and due execution. A forgery claim requires clear, convincing evidence—more than merely preponderant evidence—to overcome that presumption. (Spouses Valenzuela v. Joselito, G.R. No. 246382, 14 July 2021)⁸

In a reciprocal lease, its period is deemed for both parties’ benefit unless the language shows that it was fixed for one party alone. Contractual liquidated damages may be reduced if iniquitous or unconscionable, and an injured party must mitigate its damages. (Hilltop Market Fish Vendors' Association, Inc. v. Yaranon)⁶ (D.m. Ragasa Enterprises, Inc. v. Oro)⁵

Exceptions

Although an oral sale remains subject to the Statute of Frauds and other applicable statutes, a party cannot invoke the Statute of Frauds to avoid obligations under a verbal sale that the parties have partially executed. (Art. 1483, Civil Code)² (Serna v. Cruz, G.R. No. 237291, 1 February 2021)⁹

Bar tip

Read the operative clauses, not merely the document’s title: check when the deed must be executed, how payments are credited, who controls the lease period, and whether an option has its own period and conditions. (View v. Mejia)¹ (Capalla v. The Honorable Commission on Elections)⁷ (Hilltop Market Fish Vendors' Association, Inc. v. Yaranon)⁶