Distinguishing a Contract of Sale from a Contract to Sell: Why It Matters

G.R. No. 137552, June 16, 2000

Imagine you’re buying a property. You sign an agreement, pay a down payment, but later the seller backs out. Can you force them to sell? It depends on the nature of your agreement. Philippine law distinguishes between a ‘contract of sale’ and a ‘contract to sell,’ each with different legal consequences. This case clarifies those distinctions, highlighting when a buyer can demand the sale be completed and when the seller can rescind the agreement.

Introduction

Many Filipinos dream of owning their own home. However, the legal intricacies of property transactions can be daunting. One crucial aspect is understanding the difference between a contract of sale and a contract to sell. This distinction determines when ownership transfers and what remedies are available if either party defaults. In Roberto Z. Laforteza, et al. vs. Alonzo Machuca, the Supreme Court elucidated these differences, emphasizing the importance of clear contractual terms and the implications of earnest money payments.

This case revolves around a dispute over a house and lot in Parañaque. The heirs of Francisco Laforteza entered into an agreement with Alonzo Machuca, who sought to purchase the property. A key issue was whether the agreement constituted a perfected contract of sale, allowing Machuca to demand the transfer of ownership, or merely a contract to sell, giving the Laforteza heirs the right to rescind the agreement due to Machuca’s alleged failure to pay on time.

Legal Context: Sale vs. Contract to Sell

Philippine law clearly distinguishes between a contract of sale and a contract to sell. Understanding this difference is crucial in property transactions.

Contract of Sale: This is a consensual contract perfected upon the meeting of minds regarding the object and the price. Article 1458 of the Civil Code defines it as follows: “By the contract of sale one of the contracting parties obligates himself to transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money or its equivalent.” Once perfected, both parties can demand performance. Ownership transfers upon delivery of the property.

Contract to Sell: In contrast, a contract to sell is an agreement where the seller reserves ownership until the buyer fully pays the purchase price. The full payment is a positive suspensive condition. If the buyer fails to pay, the seller can rescind the agreement. The Supreme Court has emphasized that non-payment in a contract to sell is not a breach, but an event preventing the obligation to convey title from arising.

For example, imagine a scenario where Maria agrees to buy a condo unit from a developer under a contract stipulating that ownership remains with the developer until the full purchase price is paid. If Maria fails to complete the payments, the developer can legally rescind the contract without the need for judicial action, as the transfer of ownership was conditional upon full payment.

Case Breakdown: Laforteza vs. Machuca

The case unfolded as follows:

• 1988-1989: The Laforteza heirs, through special powers of attorney, authorized Roberto and Gonzalo Laforteza to sell the property. They entered into a “Memorandum of Agreement (Contract to Sell)” with Machuca for P630,000, with P30,000 as earnest money and P600,000 due upon the issuance of a new title and execution of an extrajudicial settlement.
• September 18, 1989: The Laforteza heirs notified Machuca of the reconstituted title, demanding payment within 30 days.
• October 18, 1989: Machuca requested an extension, which Roberto Laforteza (but not Gonzalo) approved.
• November 15, 1989: Machuca offered payment, but the Laforteza heirs refused, stating the property was no longer for sale.
• November 20, 1989: The Laforteza heirs formally canceled the agreement due to Machuca’s alleged non-compliance.
• Lower Court: Ruled in favor of Machuca, ordering the Laforteza heirs to accept payment and execute a deed of sale.
• Court of Appeals: Affirmed the lower court’s decision, finding a perfected contract of sale.

The Supreme Court upheld the Court of Appeals’ decision. The Court emphasized that the agreement was a perfected contract of sale, not merely a contract to sell or an option. The Court stated:

“In the case at bench, there was a perfected agreement between the petitioners and the respondent whereby the petitioners obligated themselves to transfer the ownership of and deliver the house and lot located at 7757 Sherwood St., Marcelo Green Village, Parañaque and the respondent to pay the price amounting to six hundred thousand pesos (P600,000.00).”

The Court further explained the significance of the earnest money:

“Whenever earnest money is given in a contract of sale, it is considered as part of the purchase price and proof of the perfection of the contract.”

Practical Implications: Key Lessons

This case offers several crucial lessons for anyone involved in property transactions:

• Understand the Agreement: Clearly define the terms of the agreement, specifying whether it’s a contract of sale or a contract to sell. Use precise language to avoid ambiguity.
• Earnest Money Matters: Recognize that earnest money typically signifies a perfected contract of sale and binds the seller to the agreement.
• Comply with Conditions: Ensure all conditions precedent to the transfer of ownership are met promptly.
• Reciprocal Obligations: In reciprocal obligations, neither party is in delay if the other party is not ready to comply with their obligations.

Key Lessons:

• A “Memorandum of Agreement (Contract to Sell)” can still be a contract of sale if the elements of one are present.
• Earnest money is proof of a perfected contract of sale.
• Sellers cannot unilaterally rescind a contract of sale without judicial or notarial demand, especially without an express clause.

Frequently Asked Questions

Q: What is the main difference between a contract of sale and a contract to sell?

A: In a contract of sale, ownership transfers upon delivery, while in a contract to sell, ownership is retained by the seller until full payment of the purchase price.

Q: What is the significance of earnest money?

A: Earnest money is considered part of the purchase price and serves as proof of a perfected contract of sale.

Q: Can a seller unilaterally rescind a contract of sale?

A: Generally, no. The seller must make a judicial or notarial demand for rescission, especially if there’s no express clause allowing extrajudicial rescission.

Q: What happens if the buyer fails to pay on time in a contract of sale?

A: The seller can seek rescission of the contract, but the court may allow the buyer to pay even after the deadline if no demand for rescission has been made.

Q: What is consignation and why is it important?

A: Consignation is the act of depositing the payment with the court when the creditor refuses to accept it. While not determinative of specific performance, it shows the buyer’s willingness and ability to pay.

Q: What are the elements of a valid contract of sale?

A: The elements are consent, a determinate subject matter, and a price certain in money or its equivalent.

Q: Can a document titled “Contract to Sell” actually be a Contract of Sale?

A: Yes. The Supreme Court looks at the elements present and the intent of the parties, not just the title of the document.

ASG Law specializes in Real Estate Law and Contract Disputes. Contact us or email hello@asglawpartners.com to schedule a consultation.