Earnest Money in a Contract to Sell: When Buyers Lose Their Deposit

In a contract to sell, earnest money is not merely a down payment—it is the price a buyer pays to hold a property off the market. When the sale falls through without the seller's fault, that deposit may be forfeited. The Supreme Court clarified this rule in Racelis v. Spouses Javier (G.R. No. 189609, January 29, 2018), a case that also examined when a lessee may legally suspend rent payments.

The case arose from a failed sale of a Marikina residential property. The seller's administrator agreed to lease the property to the buyers while they raised funds to purchase it. The buyers paid monthly rent and later tendered P78,000.00 as "initial payment or goodwill money" toward the promised P100,000.00 earnest money. When the buyers failed to complete the purchase, the seller terminated the lease and demanded that they vacate. The buyers refused, withheld rent, and insisted the P78,000.00 should be applied to their unpaid rent.

When Can a Lessee Suspend Rent?

Article 1658 of the Civil Code allows a lessee to suspend rent if the lessor fails to make necessary repairs or fails to maintain the lessee in peaceful and adequate enjoyment of the property. The Supreme Court clarified that this right applies only when the lessee's legal possession is disturbed—not merely physical acts that disrupt comfort or convenience.

The Court cited Goldstein v. Roces and Chua Tee Dee v. Court of Appeals to explain that the lessor's duty under Article 1654(3) is a warranty against disturbance of legal possession. Acts like noise, spilled water, or broken crockery may disturb peace, but they do not entitle a lessee to withhold rent.

In this case, the disconnection of electrical service could ordinarily qualify as a disturbance of legal possession because it was meant to force the lessees out. However, the lease had already expired when the disconnection occurred. The lessees were unlawfully withholding possession after being told to vacate. Once the lease ended, the lessor's obligation to maintain peaceful enjoyment ceased. The lessees could not use the disconnection as a reason to stop paying rent.

Even if the right to suspend rent applied, the Court noted that it does not extinguish the obligation to pay rent under Article 1657. Lessees who exercise this right remain bound by their contractual duties.

Earnest Money in a Contract to Sell

The Court distinguished between a contract of sale and a contract to sell. In a contract of sale, title passes upon delivery, and non-payment is a resolutory condition allowing rescission. In a contract to sell, ownership remains with the seller until full payment—non-payment simply prevents the seller's obligation to convey title from becoming effective.

Here, the parties entered into a contract to sell. The seller reserved ownership and deferred the deed of sale until full payment. When the buyers failed to pay by the agreed deadline, the contract was deemed cancelled.

Under Article 1482 of the Civil Code, earnest money in a contract of sale is proof of perfection and part of the price. While that article technically applies to contracts of sale, the Court held that earnest money may also be given in a contract to sell. In that context, it compensates the seller for the opportunity cost of holding the property off the market and excluding other prospective buyers.

The Court ruled that absent proof of a clear agreement to the contrary, earnest money is forfeited if the sale does not happen without the seller's fault. The buyer bears the burden of proving a different intention. In this case, the buyers could not show that the P78,000.00 was meant as advanced rent—they had continued paying monthly rent even after delivering the money, and the receipts described it as "initial payment or goodwill money."

The seller's offer to return the money only after the property was sold to another buyer was not a waiver. The buyers rejected that offer anyway. The Court ordered them to pay P54,000.00 in accrued rent, reduced by their advanced deposit, with interest at six percent per annum from finality of judgment.

Practical takeaways

• Earnest money in a contract to sell is generally forfeited if the buyer fails to complete the purchase without the seller's fault.
• Buyers who want their deposit returned must prove a clear agreement that it would be refundable.
• Lessees may suspend rent under Article 1658 only when their legal possession is disturbed—not for mere physical inconvenience.
• The right to suspend rent does not extinguish the obligation to pay rent; it merely postpones it.
• After a lease expires, a lessor's duty to maintain peaceful enjoyment ends, and a holdover lessee must pay reasonable rent for continued occupation.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.