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  • Writer's pictureZiggurat Realestatecorp

Is Earnest Money Refundable?

The determination whether an earnest money is refundable or not in a contract to sell would largely depend on the presence of fault on the part of the seller. To elucidate this point, allow me to lead your attention to the law regarding earnest money and to some relevant jurisprudence regarding the matter.

Article 1482 of Republic Act 386, otherwise known as the Civil Code of the Philippines, states the law on earnest money, viz:

“Article 1482. Whenever earnest money is given in a contract of sale, it shall be considered as part of the price and as proof of the perfection of the contract.”

Pursuant to the cited provision, an earnest money is considered as part of the purchase price and serves as proof of a perfected contract of sale.

In Racelis vs Spouses Javier (GR 189609, Jan. 29, 2018) penned by Associate Justice Mario Victor Leonen, the Supreme Court explained the nature of an earnest money in a contract to sell, to wit:

“Earnest money, under Article 1482 of the Civil Code, is ordinarily given in a perfected contract of sale. However, earnest money may also be given in a contract to sell.

“In a contract to sell, earnest money is generally intended to compensate the seller for the opportunity cost of not looking for any other buyers. It is a show of commitment on the part of the party who intimates his or her willingness to go through with the sale after a specified period or upon compliance with the conditions stated in the contract to sell. Opportunity cost is defined as ‘the cost of the foregone alternative.’

“In a potential sale, the seller reserves the property for a potential buyer and foregoes the alternative of searching for other offers. This Court in Philippine National Bank vs Court of Appeals construed earnest money given in a contract to sell as ‘consideration for seller’s promise to reserve the subject property for the buyer.’ The seller, ‘in excluding all other prospective buyers from bidding for the subject property…[has given] up what may have been more lucrative offers or better deals.’

“Earnest money, therefore, is paid for the seller’s benefit. It is part of the purchase price while at the same time proof of commitment by the potential buyer. Absent proof of a clear agreement to the contrary, it is intended to be forfeited if the sale does not happen without the seller’s fault. The potential buyer bears the burden of proving that the earnest money was intended other than as part of the purchase price and to be forfeited if the sale does not occur without the fault of the seller. Respondents were unable to discharge this burden.

“There is no unjust enrichment on the part of the seller should the initial payment be deemed forfeited. After all, the owner could have found other offers or a better deal. The earnest money given by respondents is the cost of holding this search in abeyance.”

Applying the court’s pronouncement, we can deduce that an earnest money, unless a contrary agreement dictates, is not refundable in a contract to sell in the absence of fault on the part of the seller. Stated otherwise, the only time that a buyer may refund an earnest money is when the cause of the cancellation of the contract is imputable to the seller’s own fault.

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