Understanding Contract to Sell vs. Contract of Sale

Your journey to condo ownership involves a lot of paperwork, including contracts that you need to read in their entirety. Remember that you’re making a major purchase so it’s a must that you understand all the details of the transaction. Reading the “fine print”, no matter how laborious, is a way to protect yourself against arrangements that may be unfavorable to you.

As a soon-to-be condo owner, you are welcome to enroll your unit with DMCI Homes Leasing Services (DHLS), a team that provides solutions for unit owners who want their units to be rented out. They assist in all stages of the leasing process, from marketing units to potential renters to drafting lease contracts. DHLS aims to enhance property values and the marketability of DMCI Homes residential developments – primarily for its local as well as overseas buyers who eventually want their homes to be strong working investments, without the hassle.

At the start of your purchase transaction, you will encounter two types of contracts: a contract of sale and a contract to sell. While these sound similar, they shouldn’t be interchanged. These contracts are of different nature, elements, and effect.

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Contracts, in general

By definition, a contract is an agreement of two or more contracting parties whereby one person binds himself, with respect to the other, to render services or give something. The essential elements of a contract are:

(1) Contracting parties' consent - One person has an offer that the other person accepts.

(2) Subject matter of the contract - The subject matter or object may be to transfer the ownership of a property, render services, and others.

(3) The cause of the obligation - The cause of the contract will be based on the type of contract. The cause may be a promise of service or something by the other person. It may also be a benefit or service in exchange for money.

Contract of Sale vs. Contract to Sell

The New Civil Code of the Philippines defines a contract of sale as follows:

Article 1458. By the contract of sale, one of the contracting parties obligates himself to transfer the ownership and to deliver a determinate thing, and the other to pay therefore a price certain in money or its equivalent.

From the provision above, the essential elements of a contract of sale are:

1. Consent to transfer ownership in exchange of a price;
2. Determinate subject matter; and
3. Price certain in money or its equivalent.

In a contract of sale, the transaction is deemed perfected or fulfilled “at the moment there is a meeting of minds” or upon agreement by the buyer and the seller on the thing (for instance, a condo unit), and upon the price. Once the parties reach such an agreement, the buyer may demand ownership of the thing while the seller may also ask for payment of the price.

Difference between a contract of sale and a contract to sell

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The Supreme Court explained the element that distinguishes a contract of sale from a contract to sell in its Decision in the case of Tan vs. Benolirao (2009):

The defining characteristic of a contract of sale is the seller's obligation to transfer ownership of and deliver the subject matter of the contract. Without this essential feature, a contract cannot be regarded as a sale although it may have been denominated as such.

In a contract to sell, however, the consent to transfer ownership is lacking. The seller does not yet agree to transfer ownership on the thing until the happening of an event - which is the full payment of the purchase price.

The Supreme Court expounded on the nature of a contract to sell in Tan vs. Benolirao:

In contrast, a contract to sell is defined as a bilateral contract whereby the prospective seller, while expressly reserving the ownership of the property despite delivery thereof to the prospective buyer, binds himself to sell the property exclusively to the prospective buyer upon fulfillment of the condition agreed, i.e., full payment of the purchase price.

A contract to sell "commonly entered into so as to protect the seller against a buyer who intends to buy the property in installments by withholding ownership over the property until the buyer effects full payment therefore,” the Supreme Court explained in Coronel v. Court of Appeals (1996).

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A concrete example of contract to sell is the contract you will be receiving from the real estate company or DMCI Homes upon payment of the required reservation fee. By signing the contract, the company reserves ownership of the condo unit although it may “deliver” the unit to you upon payment of the required percentage of equity.

The title to the property remains with the company until you have paid the full purchase price. Upon full payment of the price, whether through in-house financing or bank loan, the company will then draft a Contract of Sale (or Deed of Absolute Sale) for your review and acceptance. This contract includes the company’s consent to transfer ownership of the condo unit to you.

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Here is a summary of the difference between a contract of sale and a contract to sell:

A resolutory condition (condition subsequent) extinguishes the obligation upon its fulfillment. This type of condition extinguishes the effectiveness of a contract already consented to based on the occurrence of an event that is also future and uncertain at the time of contracting. A contract of sale is effective or valid once the essential elements are present, but may be rescinded or annulled upon the occurrence of an event, which is non-payment of the agreed purchase price.

A suspensive condition is one that suspends the rights and obligations under a contract until the condition is fulfilled. The effectiveness or validity of a contract depends on the fulfillment of an obligation. In a contract to sell, the transfer of ownership on a thing is suspended until the buyer pays the full purchase price.

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What if a party fails to comply with the agreement?

If one of the parties misses to perform his/her obligation, you may consult the Civil Code. A contract of sale and a contract to sell are of a reciprocal nature. Article 1191 of the Civil Code provides:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

In a contract of sale, either party may choose to demand fulfillment of the obligation or to rescind or annul the contract upon failure of the other party to perform his/her obligation. Remember that the sale is already valid and that the seller has consented to transfer ownership of the thing to the seller. However, in case the buyer fails to deliver the full purchase price, the seller can annul the contract and demand payment of damages.

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It’s quite different in a contract to sell. It should be noted that non-payment is not a breach of contract by "an event that prevents the obligation of the vendor to convey title from becoming effective." Since non-payment of the purchase price is a suspensive condition in a contract to sell, it will not obligate the seller to transfer ownership of the thing. The contract would be deemed terminated or canceled, and the parties stand "as if the conditional obligation had never existed." In this case, the seller may rescind the contract to sell.

The importance of knowing the difference between the contracts

You should be able to distinguish between a contract of sale and a contract to sell so you would know your rights under each contract. Under a contract of sale, the ownership of a thing is transferred to you so you have the power to exercise acts of ownership such as the right to use the thing, to dispose or sell it, or to use it as collateral for a loan. However, in a contract to sell, since the seller reserves ownership of the thing, you may not exercise these acts yet. The seller, in fact, may sell the thing to a third party without committing a double sale.

Key takeaways

Buying a condo unit is an important transaction that needs careful consideration. Take the time to understand all documentary requirements and the terms and conditions of every relevant contract. Through your condo ownership process, you will encounter paperwork including legal documents. Here are a few reminders for you:

• Know the difference between a contract of sale and a contract to sell. The former transfers ownership by consent while the latter requires the fulfillment of a positive suspensive condition, which is the payment of the full purchase price, to give rise to the seller’s obligation to transfer ownership to the buyer;
• Remember that unless you’re paying your DMCI Homes condo unit in full, you will be entering into a contract to sell with the real estate developer; and
• Contact your DMCI Homes sales representative or the customer service hotline if you need assistance in any aspect of the purchase transaction.

Once you’ve become a DMCI Homes condo owner, don’t forget to check out DMCI Homes Leasing Services to know how you could maximize your property through leasing.

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