Laws & Jurisprudence
EARNEST MONEY VIS‐A‐VIS OPTION MONEY
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OPTION MONEY is the distinct consideration in case of an option contract. It does not form part of the purchase price hence, it cannot be recovered if the buyer did not continue with the sale.
Payment is considered option money when it is given as a separate and distinct consideration from the purchase price. Consideration in an option contract may be anything or undertaking of value.
EARNEST MONEY or “arras” is the money given to the seller by the prospective buyer to show that the latter is truly interested in buying the property, and its aim is to bind the bargain. (Pineda, p. 75)
It forms part of the purchase price which may be deducted from the total price. It also serves as a proof of the perfection of the contract of sale. The rule is no more than a disputable presumption and prevails only in the absence of contrary or rebuttable evidence. (PNB v CA, 262 SCRA 464, 1996)
When payment is considered an earnest money it constitutes as part of the purchase price. Hence, in case when the sale did not happen, it must be returned to the prospective buyer.
Option money may also become earnest money if the parties so agree.
To distinguish option money from earnest money:
1. Option money is given as distinct consideration for an option contract. Whereas, Earnest money forms part of the purchase price.
2. Option money applies to a sale not yet perfected. On the other hand, Earnest money is given only when there is already a sale.
3. In Option money, prospective buyer is not required to buy. While Earnest money, when given, the buyer is bound to pay the balance.
4. Option money, if sale did not materialize, cannot be recovered. In contrast, Earnest money, if buyer does not decide to buy, must be returned. (Villanueva, p. 87, Pineda, p.77)
Bar Problem (2002)
Bert offers to buy Simeon's property under the following terms and conditions: P1 million purchase price, 10% option money, the balance payable in cash upon the clearance of the property of all illegal occupants. The option money is promptly paid and Simeon clears the property of all illegal occupants in no time at all. However, when Bert tenders payment of the balance and asks for the deed of absolute sale, Simeon suddenly has a change of heart, claiming that the deal is disadvantageous to him as he has found out that the property can fetch three times the agreed purchase price. Bert seeks specific performance but Simeon contends that he has merely given Bert an option to buy and nothing more and offers to return the option money which Bert refuses to accept.
1. Will Bert's action for specific performance prosper? Explain.
Bert's action for specific performance will prosper because there was a binding agreement of sale, not just an option contract. The sale was perfected upon acceptance by Simeon of 10% of the agreed price. This amount is in reality an earnest money which, under Art. 1482, "shall be considered as part of the price and as proof of the perfection of the contract." (Topacio v. CA, G.R. No. 102606, July 3, 1992; Villongco Realty v. Bormaheco, G.R. No. L‐26872, July 25, 1975).
2. May Simeon justify his refusal to proceed with the sale by the fact that the deal is financially disadvantageous to him? Explain.
Simeon 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 (Vales v. Villa, G.R. No. 10028, Dec. 16, 1916), and no such wrong has been committed by Bert.
DISCLAIMER: The author is not lawyer nor an authority on this topic. It is a product of humble research and study of law. The information provided is not a legal advice and it should not be used as a substitute for a competent legal advice from a licensed lawyer.
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