When Sellers May Keep Partial Payments in a Failed Property Sale

When a property sale falls through, the buyer usually expects a full refund of any partial payments made. But Philippine law recognizes an important exception: if the buyer was given possession or use of the property before the sale was completed, the seller may retain those payments as reasonable compensation for the buyer's use of the property.

The Supreme Court clarified this rule in Spouses Godinez v. Spouses Norman (G.R. No. 225449, February 26, 2020), which addressed how partial payments should be treated when a contract to sell fails because the buyer could not pay the full price.

The Facts of the Case

In August 2006, the Godinez spouses agreed to sell their leasehold rights over a housing unit in Subic Bay Freeport Zone to the Norman spouses for US$175,000.00. The Normans paid US$10,000.00 as a partial payment, with the balance due within 30 working days.

After making this initial payment, the Normans moved their furniture and appliances into the unit and assigned a house helper to act as caretaker. They later asked for more time to pay, and the Godinez spouses agreed on condition that the Normans pay an additional US$30,000.00, which they did in December 2006.

Despite the extension, the Normans still could not pay the remaining balance by January 2007. The parties agreed that the Normans would remove their belongings so the Godinez spouses could use the unit again. About three months later, the Normans learned the property had been sold to another buyer. They demanded the return of their US$40,000.00 in partial payments, but the sellers refused.

The Legal Issue

The central question was whether the sellers could retain the partial payments made by the buyers when the contract to sell failed due to the buyers' inability to pay the full purchase price.

The Regional Trial Court ordered the full return of the US$40,000.00, ruling that the parties had a contract of sale and that the partial payments were earnest money that should be returned upon rescission. The Court of Appeals affirmed, but on different grounds: it found the agreement was a contract to sell, not a contract of sale, and that the partial payments should still be returned because the buyers were not given "full possession" of the property.

The Supreme Court's Ruling

The Supreme Court reversed the lower courts and allowed the sellers to retain a portion of the partial payments.

The Court distinguished between a contract of sale and a contract to sell. In a contract to sell, ownership does not pass until the full purchase price is paid. If the buyer fails to pay, the contract is not breached—rather, the suspensive condition (full payment) is not fulfilled, and the contract simply does not take effect.

The Court cited Olivarez Realty Corporation v. Castillo (738 Phil. 737 [2014]), which established that while partial payments on a failed contract to sell are generally returned, they may be retained if the buyer was given possession of the property before title transferred. The Court also relied on Gomez v. Court of Appeals (395 Phil. 115 [2000]), where partial payments were forfeited as "reasonable compensation" for the buyer's use of the property.

Applying these precedents, the Court found that the Normans had been given possession of the unit—they stored their furniture and groceries there and installed a caretaker. During the five months of this arrangement, the sellers could not use their own property.

However, the Court also recognized that the Normans' use was limited. They did not actually reside in the unit, and there was no evidence of significant financial benefit derived from their possession. The Court therefore set the reasonable rental at 13.1% of the purchase price, following the proportion used in Olivarez. This amounted to US$22,925.00, which the sellers could retain, with the remaining US$17,075.00 to be returned to the buyers.

The Court also cited Article 1378 of the Civil Code, which provides that doubts in the interpretation of onerous contracts should be settled in favor of the greatest reciprocity of interests. Since the buyers used the property without paying rent, it was only fair that the sellers receive compensation.

Practical Takeaways

• Possession matters. If a buyer is given possession or use of a property before a sale is completed, the seller may have a stronger claim to retain partial payments as reasonable compensation if the sale fails.
• Full occupation is not required. Storing belongings and installing a caretaker can constitute possession sufficient to justify retention of partial payments, even if the buyer never actually lived in the property.
• Retention is not automatic. The amount retained must be reasonable and proportionate to the buyer's actual use of the property. Courts may reduce the amount retained if the buyer's use was limited.
• Stipulations still control. If the parties agreed on forfeiture terms in their contract, those terms generally govern. The rule in Godinez applies where there is no such stipulation.
• Distinguish the contract type. Whether the agreement is a contract of sale or a contract to sell significantly affects the legal consequences of the buyer's failure to pay.

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