Earnest Money and Forfeiture Clause

 
Robert G. Sarmiento Properties
Professional Affiliation :
Philippine Association of Real Estate Boards
Member, City of Taguig Real Estate Board 2016 - 2019
Real Estate Broker’s Association of the Philippines 2000 - 2015
President, San Juan 2008, 2009
Philippine Association of Real Estate Boards
San Juan Mandaluyong Chapter 1998, 1999
PRC # 6569
PRC Lecturer’s License # 0294
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Earnest Money and Forfeiture Clause :

This is an actual case wherein an Earnest Money was received by a Seller from a Buyer, however, the Contract both parties signed didn't specify any Forfeiture should the Buyer not be able to pay the balance within a specified time.  This Supreme Court ruling was in the late 90s and as a Real Estate Broker, I am not aware if this particular ruling has been changed or modified so please take the time to ask a Real Estate Lawyer of any update.  Given the Real Estate market we have today, it's always best to have a Forfeiture Clause in a contract so as to avoid any grey areas.    

Under Art. 1482 of the Civil Code, whenever earnest money is given in a contract of sale, it shall be considered as part of the purchase price and as proof of the perfection of the contract. Petitioner clearly stated without any objection from private respondents that the earnest money was intended to form part of the purchase price. It was an advance payment which must be deducted from the total price. Hence, the parties could not have intended that the earnest money or advance payment would be forfeited when the buyer should fail to pay the balance of the price, especially in the absence of a clear and express agreement thereon. By reason of its failure to make payment petitioner, through its agent, informed private respondents that it would no longer push through with the sale. In other words, petitioner resorted to extrajudicial rescission of its agreement with private Respondents.

In ****** v. *******, the right to rescind contracts is not absolute and is subject to scrutiny and review by the proper court. We held further, in the more recent case of *******. v. Court of Appeals, that rescission of reciprocal contracts may be extrajudicially rescinded unless successfully impugned in court. If the party does not oppose the declaration of rescission of the other party, specifying the grounds therefor, and it fails to reply or protest against it, its silence thereon suggests an admission of the veracity and validity of the rescinding party's claim.

Private respondents did not interpose any objection to the rescission by petitioner of the agreement. As found by the Court of Appeals, private respondent ******* REALTY even sold Lot ** of the subject consolidated lots to another buyer, *******, one day after its President ***** received the broker's letter rescinding the sale. Subsequently, on ***** 19** respondent ****** REALTY also conveyed ownership over Lot ** to ***** which, in turn, sold the same to *****.

Article 1385 of the Civil Code provides that rescission creates the obligation to return the things which were the object of the contract together with their fruits and interest. The vendor is therefore obliged to return the purchase price paid to him by the buyer if the latter rescinds the sale, or when the transaction was called off and the subject property had already been sold to a third person, as what obtained in this case. Therefore, by virtue of the extrajudicial rescission of the contract to sell by petitioner without opposition from private respondents who, in turn, sold the property to other persons, private respondent ***** REALTY, as the vendor, had the obligation to return the earnest money of Php ********* plus legal interest from the date it received notice of rescission from petitioner, i.e., ****** 19**, up to the date of the return or payment. It would be most inequitable if respondent ****** REALTY would be allowed to retain petitioners payment of Php ***** and at the same time appropriate the proceeds of the second sale made to another. 

WHEREFORE, the Petition is GRANTED. The decision of the Court of Appeals is REVERSED and SET ASIDE. Private respondent ( ***** REALTY), its successors and assigns are ordered to return to petitioner ******, the amount of Php ***** with legal interest thereon from *****19**, the date of notice of extrajudicial rescission, until the amount is fully paid, with costs against private Respondents.

As always, it is best to seek the proper law office specializing on that specific case you have.

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robert
Robert G. Sarmiento Properties
Professional Affiliation :
Philippine Association of Real Estate Boards
Member, City of Taguig Real Estate Board 2016 - 2019
Real Estate Broker’s Association of the Philippines 2000 - 2015
President, San Juan 2008, 2009
Philippine Association of Real Estate Boards
San Juan Mandaluyong Chapter 1998, 1999
PRC # 6569
PRC Lecturer’s License # 0294

 

 

 

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