Contract to sell or contract of sale

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Persida Acosta

Persida Acosta

Dear PAO,
My mother together with us, her children, own a parcel of land with a building improvement. Since it was impossible to divide the property among us, we all agreed to sell it to one of my sisters. Our agreement is contained in a notarized document which all of us signed. Unfortunately, my sister was not able to fully pay the price of the lot and building. Now, she demands that we sign another contract before she pays the balance. What case can we file against her?
DT

Dear DT,
You mentioned that you, your mother and your siblings have all agreed to sell the lot and building to one of your sisters, and the agreement is expressed in a notarized document. From this information, it may be safely assumed that you executed a contract. A contract is defined as a meeting of minds between two persons whereby one binds himself, with respect to the other, to give something or to render some service (Article 1305, Civil Code). It gives rise to obligations that have the force of law between the contracting parties and should be complied with in good faith (Article 1159, Civil Code). Thus, the parties to a contract are bound to comply with their respective obligations. The failure of a party to comply with his obligation would have legal consequences.

Your contract involves sale of land and building. Please note that there are two common types of contracts relating to sale of land: contract to sell and contract of sale. The main distinction between the two is that in a contract of sale, the ownership of the property is transferred to the buyer upon the delivery of the thing sold while in a contract to sell, the ownership is reserved by the seller and is not passed to the buyer until the purchase price is fully paid (Reyes vs. Tuparan, 650 SCRA 283). A stipulation in a contract which states that the seller shall execute a deed of sale only upon or after full payment of the purchase price also indicates that it is a contract to sell, and not a contract of sale (Diego vs. Diego, 691 SCRA 361).

It is important to distinguish between a contract to sell and a contract of sale because the remedies available to the seller should the buyer fail to pay would be different. In a contract to sell, the failure of the buyer to pay the purchase price would mean that the contract is deemed terminated or cancelled. As declared by our Supreme Court in one case, the non-fulfillment of the condition, which is full payment of the purchase price, prevents the obligation to sell from arising and ownership is retained by the seller without further remedies by the buyer (Diego vs. Diego, 691 SCRA 361). This means that the seller does not have any obligation to continue with the sale, which also means that the buyer cannot demand it.


On the other hand, in a contract of sale, the failure of the buyer to pay the purchase price will amount to a breach of contract. Breach of contract is defined as the failure without legal reason to comply with the terms of a contract. It is the failure, without legal excuse, to perform any promise which forms the whole or part of the contract http://sc.judiciary.gov.ph/jurisprudence/2012/march2012/173155.htm – _ftn64 (R.S. Tomas, Inc. vs. Rizal Cement Company, 668 SCRA 665). This will give the seller the right to demand rescission of contract or specific performance, with damages in either case.

Rescission refers to the right of a party to cancel or resolve the contract. To rescind a contract means not merely to terminate it and release the parties from further obligations to each other, but to abrogate it from the beginning and restore the parties to their relative positions as if no contract were made (Laperal vs. Solid Homes, Inc., 460 SCRA 375). Thus, it entails mutual restitution, which means that each party is obliged to return the thing which he received from the other party.

On the other hand, specific performance refers to the remedy of requiring exact performance of a contract in the specific form in which it was made, or according to the precise terms agreed upon. The actual accomplishment of a contract by a party bound to fulfill it (Ayala Life Assurance, Inc. vs. Ray Burton Dev’t. Corp., 479 SCRA 462) and the right of a party to demand specific performance in case the buyer failed to pay the balance of the purchase price has been expressly recognized by the Supreme Court in the case of Tan vs. Court of Appeals (175 SCRA 656).

We hope the foregoing discussion shed light on the matter. Bear in mind that our opinion is based solely on the facts you narrated and our appreciation of the same. Our opinion may vary if actual facts and circumstances change.

Editor’s note: Dear PAO is a daily column of the Public Attorney’s Office. Questions for Chief Acosta may be sent to dearpao@manilatimes.net

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