THE LAW ON SALES

I. THE NATURE OF SALE

A. DEFINITION OF SALE (Art. 1458)
Sale is a contract by which one of the contracting parties obligates himself to transfer the
ownership1 and to deliver possession, of a determinate thing, and the other to pay therefor a
price certain in money or its equivalent.

1. Elements of Sale
Elements of sale: (a) consent or meeting of the minds; (b) determinate subject matter;
and (c) price certain in money or its equivalent.
Absence of any essential elements negates a sale, even when earnest money has been
paid.
Sale being a consensual contract, its essential elements must be proven; but once
proven, a sale’s validity is not affected by a previously executed fictitious deed of sale; and
the burden is on the other party to prove otherwise.

2. Stages of Contract of Sale

Policitacion covers period from the time the prospective contracting parties indicate
interest in the contract to the time the contract is perfected. Perfection takes place upon the
concurrence of the essential elements, which are the meeting of the minds of the parties as
to the object of the contract and upon the price. Consummation begins when the parties
perform their respective undertakings, culminating in the extinguishment thereof.

3. Sale Creates Real Obligations “To Give” (Art. 1165)

4. Essential Characteristics of Sale:

a. Nominate and Principal

A contract of sale is what the law defines it to be, taking into consideration its
essential elements, and not what the contracting parties call it.

b. Consensual (Art. 1475)

A contract of sale is not a real, but a consensual contract, and becomes valid and
binding upon the meeting of the minds of the parties as to the object and the price, that:
• Upon its perfection, the parties may reciprocally demand performance, subject
only to the provisions of the law governing the form of contracts.
• It remains valid even if parties have not affixed their signatures to its written
form, or the manner of payment is breached.
• The binding effect of sale is based on the principle that the obligations arising
therefrom have the force of law between the parties.
Perfection Distinguished from Demandability – Not all contracts of sale become
automatically and immediately effective. In sales with assumption of mortgage, there is a
condition precedent to the seller’s consent and without the approval of the mortgagee,
the sale is not perfected.

1
Ownership is the independent and general power of a person over a thing for purposes recognized by law and within
the limits established thereby. According to Art. 428 of the Civil Code, this means that: The owner has the right to enjoy
and dispose of a thing, without other limitations than those established by law. x x x Aside from the jus utendi and the jus
abutendi inherent in the right to enjoy the thing, the right to dispose, or the jus disponendi, is the power of the owner to
alienate, encumber, transform and even destroy the thing owned. Flancia v. Court of Appeals, 457 SCRA 224 (2005).
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“No Contract Situation” versus “Void Contract” – Absence of consent (i.e.,
complete meeting of minds) negates the existence of a perfected sale. The contract then
is null and void ab initio, absolutely wanting in civil effects; hence, it does not create,
modify, or extinguish the juridical relation to which it refers.
When there is no meeting of the minds on price, the contract “is not perfected” and
does not serve as a binding juridical relation between the parties. and should be more
accurately denominated as inexistent, as it did not pass the stage of generation to the
point of perfection.

c. Bilateral and Reciprocal (Arts. 1169 and 1191)

A contract of sale gives rise to “reciprocal obligations”, which arise from the same
cause with each party being a debtor and creditor of the other, such that the obligation of
one is dependent upon the obligation of the other; and they are to be performed
simultaneously, so that the performance of one is conditioned upon the simultaneous
fulfillment of the other.
The power to rescind is implied in reciprocal ones in case one of the obligors should
not comply with what is incumbent upon him, and without need of prior demand.

d. Onerous

e. Commutative (BUT SEE: Arts. 1355 and 1470)

In a contract of sale, there is no requirement that the price be equal to the exact
value of the subject matter of sale; all that is required is that the parties believed that they
will receive good value in exchange for what they will give.

f. Sale Is Title and Not Mode

Sale is not a mode, but merely a title. A mode is the legal means by which dominion
or ownership is created, transferred or destroyed, but title is only the legal basis by which
to affect dominion or ownership. Sale by itself does not transfer or affect ownership; the
most that sale does is to create the obligation to transfer ownership. It is tradition or
delivery, as a consequence of sale, that actually transfers ownership.
Seller’s ownership of the thing sold is not an element of perfection; what the law
requires is that seller has the right to transfer ownership at the time the of delivery.

B. SALE DISTINGUISHED FROM SIMILAR CONTRACTS

A contract is what the law defines it to be, taking into consideration its essential elements,
and the title given to it by the parties is not as much significant as its substance. The transfer of
ownership in exchange for a price paid or promised is the very essence of a contract of sale.
In determining the real character of sale, courts look at the intent of the parties, their true
aim and purpose in entering into the contract, as well as “by their conduct, words, actions and
deeds prior to, during and immediately after executing the agreement,” and not at the
nomenclature used to describe it,

1. Donation (Arts. 725 and 1471)

Unlike a donation, sale is a disposition for valuable consideration with no diminution of
the estate but merely substitution of values, with the property sold replaced by the equivalent
monetary consideration; unlike donation, a valid sale cannot have the legal effect of depriving
the compulsory heirs of their legitimes.
The rules on double sales under Art. 1544 find no relevance to contracts of donation.

2. Barter (Arts. 1468, 1638 to 1641)

3. Contract for Piece-of-Work (Arts. 1467, 1713 to 1715)

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The Crux: “Ineluctably, whether the contract be one of sale or one for a piece of work,
a transfer of ownership is involved and a party necessarily walks away with an object.” In
both provisions on warranty of title against hidden defects applies.
When a person stipulates for the future sale of articles which he is habitually making,
and which at the time are not made or finished, it is essentially a contract of sale and not a
contract for labor; even when he executes production thereof only after an order is placed
by customers.
If the thing is specially done only upon the specific order of another, this is a contract
for a piece of work; if the thing is manufactured or procured for the general market in the
ordinary course of business, it is a contract of sale.
To Tolentino, the distinction depends on the intention of parties: if parties intended that
at some future date an object has to be delivered, without considering the work or labor of
the party bound to deliver, the contract is one of sale; but if one of the parties accepts the
undertaking on the basis of some plan, taking into account the work he will employ
personally or through another, the contract is for a piece of work.

4. Agency to Sell (Art. 1466)

Assumption by “agent” of the risk pertaining to the cost or price of the subject matter
makes the relationship that of buyer-seller, for the agent does not assume risk with respect
to the price or the property subject of the relationship. Consequently: (a) the contractual
relationship is not inherently revocable.; or (b) the purported agent does not have to
account for the profit margin earned from acquiring the property for the purported principal.
One factor that most clearly distinguishes agency from other legal concepts, including
sale, is control; one person – the agent – agrees to act under the control or direction of
another – the principal.
Commercial broker, commission merchant or indentor is a middleman acting in his own
name, and acts as agent for both seller and buyer to effect a sale between them. Although
he is neither seller nor buyer to the contract effected he may voluntarily assume warranties
of seller

5. Dacion En Pago (Arts. 1245 and 1934)

Governed by the law on sales, dation in payment is a transaction that takes place when
property is alienated to the creditor in full satisfaction of a debt in money—it involves the
delivery and transmission of ownership of a thing as an accepted equivalent of the
performance of the obligation.
In its modern concept, what actually takes place in dacion en pago is an objective
novation of the obligation where the thing offered as an accepted equivalent of the
performance of an obligation is considered as the object of the contract of sale, while the
debt is considered as the purchase price.
Elements of dation in payment: (a) performance of the prestation in lieu of payment
(animo solvendi) which may consist in the delivery of a corporeal thing or a real right or a
credit against the third person; (b) some difference between the prestation due and that
which is given in substitution (aliud pro alio); and (c) agreement between the creditor and
debtor that the obligation is immediately extinguished by reason of the performance of a
presentation different from that due.
For dacion to arise, there must be actual delivery of the property to the creditor by way
of extinguishment of the pre-existing debt.
There is no dation when there is no such transfer of ownership in favor of the creditor,
as when the possession is only by way of security.
A creditor, especially a bank, which enters into dacion en pago, should know and must
accept the legal consequence thereof, that the pre-existing obligation is totally extinguished.
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6. Lease (Arts. 1484 and 1485)
When rentals in a “lease” are clearly meant to be installment payments to a sale
contract, despite the nomenclature given by the parties, it is a sale by installments and
governed by the Recto Law.

II. PARTIES TO A CONTRACT OF SALE (Arts. 1489-1492)

1. General Rule: Every person having legal capacity to obligate himself, may validly enter into
a contract of sale, whether as seller or as buyer. (Art. 1489)

2. Minors, Insane and Demented Persons, Deaf-Mutes (Arts. 1327, 1397 and 1399)
A minor cannot be deemed to have given her consent to a contract of sale; consent is
among the essential requisites of a contract, including one of sale, absent of which there
can be no valid contract.

a. Necessaries (Arts. 1489 and 290)

b. xEmancipation (Arts. 399 and 1397; Inutile: Majority age now at 18 years, Arts. 234
and 236, Family Code, amended by R.A. 6809).

c. Protection of the Senile and Elderly (Art. 24) and Illiterates (Art. 1332)
Under Art. 1332, when one of the parties is unable to read, or if the contract is in a
language not understood by him, and mistake or fraud is alleged, the person enforcing the
contract must show that the terms thereof have been fully explained to the former;
otherwise, sale is void.
While a person is not incompetent to contract merely because of advanced years or by
reason of physical infirmities, when such age or infirmities have impaired the mental
faculties so as to prevent the person from properly, intelligently or firmly protecting his
property rights, then he is undeniably incapacitated, and the sale he entered into is void

3. Sales By and Between Spouses:

a. Contracts with Third Parties (Arts. 73, 96, and 124, Family Code)
Under Art. 124 of Family Code, sale by husband of a conjugal property without the
wife’s consent is void, not merely voidable, since the resulting contract lacks one of the
essential elements of full “consent”.
A wife affixing her signature to a Deed of Sale as a witness is deemed to have given
her consent.
As an exception, husband may dispose of conjugal property without wife’s consent if
such sale is necessary to answer for conjugal liabilities mentioned in Articles 161 and 162.

b. Between Spouses (Arts. 133, 1490, 1492; Sec. 87, Family Code)
Sales between spouses who are not governed by a complete separation of property
regime are void, not just voidable.
Sale by husband of conjugal land to his concubine is null and void for being contrary to
morals and public policy and “subversive of the stability of the family, a basic social
institution which public policy cherishes and protects.”
Since under Art. 1490, the spouses cannot validly sell property to one another, then
policy consideration and the dictates of morality require that the prohibition should apply
also to common-law relationships.
Nevertheless, when property resold to a third-party buyer in good faith and for value,
reconveyance is no longer available.
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The in pari delicto doctrine would apply to the spouses-parties under Art. 1490, since
only the heirs and the creditors can question the sale’s nullity.

4. Others Relatively Disqualified (Arts. 1491 and 1492)

Contracts entered into in violation of Arts. 1490 and 1492 are not merely voidable, but
are null and void.

a. Guardians, Agents and Administrators

The presumption now is that such disqualified party obtained the property in violation
of said article.
Prohibition against agents does not apply if the principal consents to the sale of the
property in the hands of the agent.
Hereditary rights are not included in the prohibition insofar as administrator or
executor of the estate of the deceased.

b. Attorneys.
Prohibition applies only while litigation is pending; even when the litigation is not
adversarial in nature; or when it is a certiorari proceeding that may have no merit
Prohibition applies only to a sale to a lawyer of record, and does not cover
assignment of the property given in judgment made by a client to an attorney, who has
not taken part in the case nor to a lawyer who acquired property prior to the time he
intervened as counsel in the suit involving such property.
Prohibition does not apply: (a) to sale of a land acquired by a client to satisfy a
judgment in his favor, to his attorney as long as the property was not the subject of the
litigation; or (b) to a contingency fee arrangement which grants the lawyer of record
proprietary rights to the property in litigation since the payment of said fee is not made
during the pendency of litigation but only after judgment has been rendered.

c. Judges
A judge should restrain himself from participating in the sale of properties—it is
incumbent upon him to advise the parties to discontinue the transaction if it is contrary to
law.
A judge who buys property in litigation before his court after the judgment becomes
final does not violate Art. 1491, but he can be administratively disciplined for violation of
the Code of Judicial Ethics.
Even when the main cause is a collection of a sum of money, the properties levied
are still subject to the prohibition.

III. SUBJECT MATTER OF SALE (Arts. 1459 to 1465)

“Transfer of title or an agreement to transfer it for a price paid or promised to be paid is
the essence of sale.”
The Civil Code provisions defining sales is a “catch-all” provision which effectively brings
within it grasp a whole gamut of transfers whereby ownership of a thing is ceded for a
consideration.
Where under an agreement, a party renounces and transfers whatever rights, interests,
or claims she has over a parcel of land in favor of another party in consideration of the latter’s
payment of therein loan, the agreement is essentially a sale, and the rule on delivery effected
through a public instrument apply.
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1. Must Be Existing, Future or Contingent (Arts. 1347, 1348, and 1462)

a. Emptio Rei Speratae (Arts. 1461 and 1347)

Pending crops which have potential existence may be valid object of sale; and such
transaction cannot be considered to effectively be sale of the land or any part thereof.

b. Emptio Spei (Art. 1461)

c. Subject to Resolutory Condition (Art. 1465)

2. Must Be Licit (Arts. 1347, 1459 and 1575)

Under Art. 1347, a sale involving future inheritance is void and cannot be the source
of any right nor create any obligation.
Article 1347 does not cover waiver of hereditary rights which is not equivalent to sale,
since waiver is a mode of extinction of ownership in favor of the other persons who are
co-heirs.
A mortgagor is not prevented from selling the property, since it is merely
encumbrance and effect a loss of his principal attribute as owner to dispose of the
property. Law even considers void a stipulation forbidding the owner from alienating
mortgaged immovable.

3. Must Be Determinate or At Least “Determinable” (Art. 1460)

When the deed of sale describes a lot adjacent to the land seen, agreed upon and
delivered to the buyer, such land is the one upon which the minds have met, and not that
erroneously described in the deed.
a. Generic things may be object of sale (Arts. 1246 and 1409[6])
Subject matter is determinable when by a formula or description agreed upon at
perfection there is a way by which the courts can delineate independent of the will of
the parties.
Where the lot sold is said to adjoin the “previously paid lot” on three sides thereof,
the subject lot is capable of being determined without the need of any new contract,
even when the exact area of the adjoining residential lot is subject to the result of a
survey.
Determinable subject matter of sale are not subject to risk of loss until they are
physically segregated or particularly designated.
b. Undivided Interest (Art. 1463) or Undivided Share in a Mass of Fungible Goods
(Art. 1464) – May result it co-ownership.

4. Quantity of Subject Matter Not Essential for Perfection? (Art. 1349)

Sale of grains is perfected even when the exact quantity or quality is not known, so
long as the source of the subject is certain.
Where seller quoted to buyer the items offered for sale, by item number, part number,
description and unit price, and the buyer had sent in reply a purchase order without
indicating the quantity being order, there was already a perfected contract of sale, even
when required letter of credit had not been opened by the buyer.

5. Seller’s Obligation to Transfer Title to Buyer (Art. 1459, 1462, and 1505)
a. Seller's Ownership Need Not Exist at Perfection:
Sale of copra for future delivery does not make seller liable for estafa for failing to
deliver because the contract is still valid and the obligation was civil and not criminal.
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A perfected contract of sale cannot be challenged on the ground of the seller’s
non-ownership of the thing sold at the time of the perfection of the contract; it is at
delivery that the law requires the seller to have the right to transfer ownership of the
thing sold
It is essential that seller is owner of the property he is selling. The principal
obligation of a seller is “to transfer the ownership of” the property sold (Art. 1458). This
law stems from the principle that nobody can dispose of that which does not belong to
him. NEMO DAT QUOD NON HABET.
That the sellers are no longer owners of the goods at perfection does not appear
to be one of the void contracts enumerated in Art. 1409 of Civil Code, and under Art.
1402 the Civil Code itself recognizes a sale where the goods are to be “acquired x x x
by the seller after the perfection of the contract of sale” clearly implying that a sale is
possible even if the seller was not the owner at the time of sale, provided he acquires
title to the property later on; nevertheless such contract may be deemed to be
inoperative and may thus fall, by analogy, under Art. 1409(5): “Those which
contemplate an impossible service.”
b. Subsequent Acquisition of Title by Non-Owner Seller (Art. 1434) – validates the
sale and title passes to the seller by operation of law.
c. Acquisition by the Buyer May Even Depend on Contingency (Art. 1462).

X6. Illegality of Subject Matter (Arts. 1409, 1458, 1461, 1462, and 1575)
a. Special Laws: narcotics (R.A. 6425); wild bird or mammal (Act 2590, Sec. 7); rare wild
plants (Act 3983); poisonous plants or fruits (R.A. 1288); dynamited fish (R.A 428);
gunpowder and explosives (Act 2255); firearms and ammunitions (P.D. 9); sale of
realty by non-Christians (Sec. 145, Revised Adm. Code, R.A 4252)
b. Following Sales of Land Void:
• By Non-Christian if not approved by Provincial Governor per Sec. 145 of Revised
Administrative Code.
• Friar land without consent of Secretary of Agriculture required under Act No. 1120.
• Made in violation of land reform laws declaring tenant-tillers as the full owners of the lands
they tilled.
• Reclaimed lands are of the public domain and cannot, without congressional fiat, be sold,
public or private.

IV. PRICE AND OTHER CONSIDERATION (Arts. 1469-1474)

“Price” signifies the sum stipulated as the equivalent of the thing sold and also every
incident taken into consideration for the fixing of the price put to the debit of the buyer and
agreed to by him.
Seller cannot unilaterally increase the price previously agreed upon with the buyer, even
when due to increased construction costs.
Buyer who opted to purchase the land on installment basis with imposed interest, cannot
later unilaterally disavow the obligation created by the stipulation in the contract which sets
the interest at 24% per annum: “The rationale behind having to pay a higher sum on the
installment is to compensate the vendor for waiting a number of years before receiving the
total amount due. The amount of the stated contract price paid in full today is worth much
more that a series of small payments totaling the same amount. x x x To assert that mere
prompt payment of the monthly installments should obviate imposition of the stipulated
interest is to ignore an economic fact and negate one of the most important principles on
which commerce operates.”

1. Price Must Be Real (Art. 1471)

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a. When Price “Simulated”
(1) When two aged ladies, not versed in English, sign a Deed of Sale on representation
by buyer that it was merely to evidence their lending of money, the situation
constitutes more than just fraud and vitiation of consent to give rise to a voidable
contract, since there was in fact no intention to enter into a sale, there was no
consent at all, and more importantly, there was no consideration or price agreed
upon, which makes the contract void ab initio.
(2) When Deed of Sale was executed to facilitate transfer of property to buyer to enable
him to construct a commercial building and to sell the property to the children, such
arrangement being merely a subterfuge on the part of buyer, the agreement cannot
also be taken as a consideration and sale is void.

(3) Effects When Price Simulated – The principle of in pari delicto nonoritur action,
which denies all recovery to the guilty parties inter se, where the price is simulated;
the doctrine applies only where the nullity arises from the illegality of the
consideration or the purpose of the contract.

b. When Price is “False” (Arts. 1353 and 1354)

When the parties intended to be bound but the deed did not reflect the actual price
agreed upon, there is only a relative simulation of the contract which remains valid and
enforceable, but subject to reformation.
When price indicated in deed of absolute sale is undervalued consideration
pursuant to intention to avoid payment of higher capital gains taxes, the price stated is
false, but the sale is still valid and binding on the real terms.

c. Non-Payment of Price
Sale being consensual, failure of buyer to pay the price does not make the contract
void for lack of consideration or simulation, but results in buyer’s default, for which the
seller may exercise his legal remedies.
“In a contract of sale, the non-payment of the price is a resolutory condition which
extinguishes the transaction that, for a time, existed and discharges the obligations
created thereunder. The remedy of an unpaid seller in a contract of sale is to seek
either specific performance or rescission.”
Badge That Price Is Simulated, Not Just Unpaid: It is a badge of simulated price,
which render the sale void, when the price, which appears thereon as paid, has in fact
never been paid by the purchaser to the seller.

2. Must Be in Money or Its Equivalent (Arts. 1458 and 1468)

Price must be “valuable consideration” as mandated by Civil Law, instead of “any
price” mandated in common law.
Consideration for sale can take different forms, such as the prestation or promise of a
thing or service by another, thus:
• When deed provides that the consideration was the expected profits from the subdivision
project.
• Cancellation of liabilities on the property in favor of the seller.
• Assumption of mortgage constituted on the property sold.

3. Must Be Certain or Ascertainable at Perfection (Art. 1469)

a. How Price Determined to be Ascertainable

(i) Set by third person appointed at perfection (Art. 1469)
(ii) Set by the courts (Art. 1469)
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(iii) By reference to a definite day, particular exchange or market (Art. 1472)
(iv) By reference to another thing certain, such as to invoices then in existence and
clearly identified by the agreement or known factors or stipulated formula
Price is ascertainable if the terms of the contract furnishes the courts a basis or
measure for determining the amount agreed upon, without having to refer back to either
or both parties.
Where the sale involves an asset under a privatization scheme which attaches a
peculiar meaning or signification to the term “indicative price” as merely constituting a
ball-park figure, then the price is not certain.
Consideration is generally agreed upon as whole even if it consists of several parts,
and even if it is contained in one or more instruments; otherwise there would be no price
certain, and the contract of sale not perfected.

b. Price Never Set By One or Both Parties (Arts. 1473, 1182), unless the price is
separately accepted by the other party.

c. Effects of Unascertainability: Sale is inefficacious..

BUT: If Buyer Appropriates the Object, He Must Pay Reasonable Price. (Art. 1474)
There can be no concept of “appropriation” when it comes to land? –
Where a church organization has been allowed possession and introduce
improvements on the land as part of its application to purchase with the NHA, and
thereafter it refused the formal resolution of the NHA Board setting the price and
insisted on paying the lower price allegedly given by the NHA Field Office, there can
be no binding contract of sale upon which an action for specific performance can
prosper, not even on fixing the price equal to the fair market value of the property.

4. Manner of Payment of Price ESSENTIAL

A definite agreement on the manner of payment of price is an essential element in the
formation of a binding and enforceable contract sale; without it the sale is void and an action
for specific performance must fail.
When the manner of payment of the price is discussed after “acceptance,” then such
“acceptance” did not produce a binding and enforceable contract of sale.
Where there is no other basis for the payment of the subsequent amortizations in a Deed
of Conditional Sale, the reasonable conclusion one can reach is that the subsequent
payments shall be made in the same amount as the first payment.

5. Inadequacy of Price Does Not Affect Ordinary Sale (Arts. 1355 and 1470)
Mere inadequacy of the price does not affect the validity of the sale when both parties are
in a position to form an independent judgment concerning the transaction, unless fraud,
mistake, or undue influence indicative of a defect in consent is present. The contract may be
annulled for vitiated consent and not due to the inadequacy of price.
Absent any evidence of the fair market value of a land as of the time of its sale, it cannot
be concluded that the price at which it was sold was inadequate.
a. Gross Inadequacy of Price May Avoid Judicial Sale:
(i) Only when it is shocking to the conscience of man; and
(ii) There is showing that, in the event of a resale, a better price can be obtained.
UNLESS: There is right of redemption, in which case the proper remedy is to redeem.
But: By way of extraordinary circumstances perceived, when in a judicial sale the right of
redemption has been lost, where the inadequacy of the price is purely shocking to
the conscience, such that the mind revolts at it and such that a reasonable man
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would neither directly or indirectly be likely to consent to it, the same will be se
aside.
There is “gross inadequacy in price” if a reasonable man will not agree to dispose of
his property.
When judicial sale is voided without fault of purchaser, the latter is entitled return of
price with simple interest, together with all sums paid out by him in improvements
introduced on the property, taxes, and other expenses.

b. Lesion of more than 1/4 of value of thing makes sale rescissible unless approved
by court . (Art. 1386).
c. Gross inadequacy of price may raise the presumption of equitable mortgage. (Art.
1602).

V. FORMATION OF CONTRACT OF SALE (Arts. 1475-1488)

A. POLICITACION STAGE (Art. 1479)
Policitation stage covers the doctrine of “freedom of contract” which signifies or implies
the right to choose with whom to contract. A property owner is free to offer his property for
sale to any interested person, and is not duty bound to sell the same to the occupant
thereof, absent any prior agreement vesting the occupants the right of first priority to buy.
A negotiation is formally initiated by an offer, which, however, must be certain. At any
time prior to the perfection of the contract, either negotiating party may stop the negotiation.
At this stage, the offer may be withdrawn; the withdrawal is effective immediately after its
manifestation. To convert the offer into a contract, the acceptance must be absolute and
must not qualify the terms of the offer; it must be plain, unequivocal, unconditional and
without variance of any sort from the proposal.
An unaccepted unilateral promise (offer to buy or to sell) prior to acceptance, does not
give rise to any obligation or right.
Where the offer is given with a stated time for its acceptance, the offer is terminated at
the expiration of that time.

1. Option Contract
An option is a preparatory contract in which one party grants to the other, for a fixed
period and under specified conditions, the power to decide, whether or not to enter into a
principal contract. It binds the party who has given the option, not to enter into the principal
contract with any other person during the period designated, and, within that period, to
enter into such contract with the one to whom the option was granted, if the latter should
decide to use the option. It is a separate agreement distinct from the contract of sale which
the parties may enter into upon the consummation of the option.
An option imposes no binding obligation on the person holding the option aside from
the consideration for the offer. Until accepted, it is not treated as a sale.
Tenants, not being the registered owners, cannot grant an option on the land, much
less any “exclusive right” to buy the property under the Latin saying “nem dat quod non
habet.”

a. Meaning of “Separate Consideration” (Arts. 1479 and 1324)

A unilateral promise to sell, in order to be binding upon the promissor, must be for a
price certain and supported by a consideration separate from such price.
The “separate consideration” in an option may be anything of value, unlike in sale
where it must be the price certain in money or its equivalent such when the option is
attached to a real estate mortgage.
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Although no consideration is expressly mentioned in an option contract, it is
presumed that it exists and may be proved, and once proven, the option is binding.

b. No Separate Consideration: Void as Option, Valid as a Certain Offer

c. There Must Be Acceptance of Option Offer.

d. Proper Exercise of Option Contract.

An option attached to a lease when not exercised within the option period is
extinguished and cannot be deemed to have been included in the implied renewal
(tacita reconduccion) of the lease.
Proper exercise of an option gives rise to the reciprocal obligations of sale which
must be enforced with ten (10) years as provided under Art. 1144.
There must be “virtual” exercise of option with the option period.

2. Right of First Refusal

A right of first refusal cannot be the subject of specific performance, but breach would
allow a recovery of damages.
Rights of first refusal only constitute “innovative juridical relations”, but do not rise to
the level of contractual commitment since with the absence of agreement on price certain,
they are not subject to contractual enforcement.
Right of first refusal contained in a lease, when breached by promissor allows
enforcement by the promisee by way of rescission of the sale entered into with the third
party, pursuant to Arts. 1381(3) and 1385 of Civil Code.
In a right of first refusal, while the object might be made determinate, the exercise of
the right would be dependent not only on the grantor’s eventual intention to enter into a
binding juridical relation with another but also on terms, including the price, that are yet to
be firmed up. . . . the “offer” may be withdrawn anytime by communicating the withdrawal
to the other party.
A right of first refusal clause simply means that should the lessor decide to sell the
leased property during the term of the lease, such sale should first be offered to the
lessee; and the series of negotiations that transpire between the lessor and the lessee on
the basis of such preference is deemed a compliance of such clause even when no final
purchase agreement is perfected between the parties. The lessor was then at liberty to
offer the sale to a third party who paid a higher price, and there is no violation of the right
of the lessee.
A right of first refusal in a lease in favor of the lessee cannot be availed of by the
sublessee.

4. Mutual Promises to Buy and Sell (Art. 1479): “True Contract to Sell”
Mutual promises to buy and sell a certain thing for a certain price gives each of the
contracting parties a right to demand from the other the fulfillment of the obligation.
Even in this case the certainty of the price must also exist, otherwise, there is no valid
and enforceable contract to sell.
An accepted bilateral promise to buy and sell is in a sense similar to, but not exactly
the same, as a perfected contract of sale because there is already a meeting of minds
upon the thing which is the object of the contract and upon the price. 2 But a contract of
sale is consummated only upon delivery and payment, whereas in a bilateral promise to
buy and sell gives the contracting parties rights in personam, such that each has the right
to demand from the other the fulfillment of their respective undertakings.

2
El Banco Nacional Filipino v. Ah Sing, 69 Phil. 611 (1940); Manuel v. Rodriguez, 109 Phil. 1 (1960).
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The cause of action under a mutual promise to buy and sell is 10 years.

B. PERFECTION STAGE (Arts. 1475, 1319, 1325 and 1326)

Sale is perfected at the moment there is a meeting of minds upon the thing which is the
object of the contract and upon the price. From that moment, the parties may reciprocally
demand performance subject to the law governing the form of contracts.
Mutual consent being a state of mind, its existence may only be inferred from the
confluence of two acts of the parties: an offer certain as to the object of the contract and its
consideration, and an acceptance of the offer which is absolute in that it refers to the exact
object and consideration embodied in said offer.
If a material element of a contemplated contract is left for future negotiations, the same
is too indefinite to be enforceable. For a contract to be enforceable, its terms must be
certain and explicit, not vague or indefinite
So long as there is any uncertainty or indefiniteness, or future negotiations or
consideration yet to be had between the parties, there is no contract at all.

1. Absolute Acceptance of a Certain Offer (Art. 1475)

A qualified acceptance or one that involves a new proposal constitutes a counter-offer
and a rejection of the original offer. The acceptance must be identical in all respects with
that of the offer so as to produce consent or meeting of minds.
Placing the word “Noted” and signing such note at the bottom of the written offer
cannot be considered an acceptance that would give rise to a valid contract of sale.
If sale subject to suspensive condition: No perfected sale of a lot where the award
thereof was expressly made subject to approval by the higher authorities and there
eventually was no acceptance manifested by the supposed awardee.

2. When “Deviation” Allowed

3. Sale by Auction (Arts. 1476, 1403(2)(d), 1326)

The terms and conditions provided by the owner of property to be sold at auction are
binding upon all bidders, whether they knew of such conditions or not.
A auction sale is perfected by the fall of the hammer or in other customary manner
and it does not matter that another was allowed to match the bid of the highest bidder.

4. Earnest Money (Art. 1482)

Earnest money given by the buyer shall be considered as part of the price and as
proof of the perfection of the contract. It constitutes an advance payment to be deducted
from the total price.
Absent proof of the concurrence of all the essential elements of a contract of sale, the
giving of earnest money cannot establish the existence of a perfected contract of sale.
Article 1482 does not apply when earnest money given in a contract to sell, especially
where by stipulation the buyer has the right to walk away from the transaction, with no
obligation to pay the balance, although he will forfeit the earnest money.
When there is no provision for forfeiture of earnest money in the event the sale fails to
materialize, then with the rescission it becomes incumbent upon seller to return the
earnest money as legal consequence of mutual restitution.

5. Difference Between Earnest Money and Option Money.

6. Sale Deemed Perfected Where Offer Was Made. (Art. 1319)