Contract to Sell; Partial Payments; Reasonable Compensation

  TOPICS:

1. Contract to sell; effects of its cancellation
2. Treatment of partial payments received by the seller in a contract to sell
3. The concept of "full possession"
4. Computation of the reasonable compensation available to the seller for the use of the property by the buyer; prevailing standard in computing reasonable rentals 

 Spouses Rene Luis Godinez and Shemayne Godinez vs. Spouses Andrew Norman and Janet Norman 

FACTS:

In August 2006, Spouses Godinez agreed to sell (in an oral contract) their house in Subic Bay Freeport Zone to Spouses Norman for US $175,000.00.

On August 3, 2006, Spouses Norman paid $10,000 to Spouses Godinez as partial payment. The remaining balance would be paid within 30 days thereafter. After this initial payment, the Spouses Norman moved their furniture and appliances into the house. They also assigned a caretaker to act as a housekeeper. 

Thirty days from the initial payment, Spouses Norman requested an extension of time to pay the remaining balance. However, they only paid $30,000.00 on December 1, 2006.  

Sometime in 2007, Spouses Norman learned that the property had been sold to another buyer. So, Spouses Norman requested the return of their payments from the Spouses Godinez, amounting to $40,000.00. Spouses Norman only possessed the property for about four (4) months.

The RTC ordered the return of the partial payments made by Spouses Norman. The RTC ruled that there was a contract of sale and the $40,000.00 were in the form of an earnest money, which formed part of the purchase price. Absent of any stipulations that the money should be forfeited in favor of the seller in case of any substantial breach, then the partial payments should have been returned to the buyers in a rescission of the contract of sale.

The CA affirmed the decision of the RTC ordering the return of the partial payments made by Spouses Norman. However, the CA found that the contract was not a contract of sale, but a contract to sell. The nonpayment of the obligation to pay the full amount of the purchase price was not a breach of contract, but rather an unfulfilled suspensive condition, which prevented the seller from conveying the title to the buyer. Thus, failure to pay would render the contract to sell ineffective. 

ISSUE:

Whether or not the buyers, Spouses Norman, are entitled to the return of their payments of $40,000.00 made to the seller, Spouses Godinez, in the event of the buyers’ failure to pay the purchase price in a contract to sell.

RULING: 

No, the Spouses Norman are not entitled to the return of the total amount of $40,000.00 used as partial payment to Spouses Godinez in a contract to sell. 

Jurisprudence dictates that partial payments on a failed contract to sell may be retained by the seller as reasonable compensation for use of the property, provided that possession thereof was turned over to the buyers.

In this case, Spouses Godinez turned over the possession to Spouses Norman after the latter made an initial payment of $10,000.00. Spouses Norman even moved their furniture into the house and hired a caretaker to watch over the house. 

Therefore, Spouses Norman are not entitled to the return of the total amount of $40,000.00 partial payment made to Spouses Godinez in a failed contract to sell.

However, in a similar case decided by the Supreme Court, reasonable compensation is the payment of reasonable rentals, which is not meant to punish the illegality of the buyers’ actions, but to compensate the sellers’ inability to enjoy or use their own property. Although there is no definitive legal standard for computing reasonable rentals, the latest jurisprudence provides it to be 13.1% of the property’s total purchase price. 

In this case, the Court noted that the US$40,000.00 amounts to 22.9%, or over a fifth, of the total purchase price of the housing unit of Spouses Godinez, which is not commensurate to the value that Spouses Norman may have derived from their four (4)-month possession of the property. Thus, reasonable compensation may be set at 13.1% of the US$175,000.00 total purchase price, or US$22,925.00. 

Therefore, Spouses Godinez may retain US$22,925.00 of the US$40,000.00 partially paid to them, but must return the remaining US$17,075.00 to Spouses Norman.

*Note: The SC in the Olivarez case (2014) and Gomez case (2000) ruled that the total amount of the partial payments be totally forfeited in favor of the seller, considering that the buyers in these cases took possession of the property for 14 years and 8 years, respectively. 

Full text here.