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Option Money v Earnest Money

What is an option contract?

An option contract is a contract granting a privilege in one person, for which he has paid a consideration, which gives him the right to buy certain merchandise at anytime within the agreed period, at a fixed price. It is separate and distinct from the main contract itself which the parties may enter into upon the consummation of the option. An option contract should have a consideration at all times or else it would be void.

What is an option in a contract of sale?

Option is a mere promise or offer to buy or sell real estate. An option to purchase, for instance is a right of election of a prospective buyer to purchase which when exercised by him becomes a contract of sale.

What does the law say about option contract?

Art. 1479. A promise to buy and sell a determinate thing for a price certain is reciprocally demandable.

An accepted unilateral promise to buy or to sell a determinate thing for a price certain is binding upon the promissor if the promise is supported by a consideration distinct from the price. (1451a)

*The second paragraph in this provision is referred to as option. This unilateral promise to sell or buy a determinate thing does not bind the promissor though accepted until a consideration distinct from the price supports this perfected contract.

Example would be when A promises to sell to B a car which B accepts. S is not bound to sell his car if there is not promise on the part of B to buy. However if the promise is supported by a consideration distinct from the price, as when B paid or promised to pay a sum of money to A for giving him the right to buy the car whenever he pleases during a certain period of time, then a perfected option contract is entered in to.

 

What is earnest money?

An earnest money is something of value to show that the buyer was really in earnest, and given to the seller to bind the bargain. It is a partial payment or a part of the purchase price and may prove to show the perfection of a contract.

What does the law say about earnest money?

Art. 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. (1454a)

*This payment function as the consideration to be paid by the buyer and is given to show interest in the sale. In law, it is considered a part of the purchase price and give rise to a consummated contract of sale.

 

What is the difference between option money and earnest money?

In paying earnest money it forms part of the purchase price, given when there is already a perfected sale, and the buyer must pay the balance.

While an option money is distinct and separate from the purchase price of the principal contract, may apply to a sale not yet perfected and the buyer is not bound to buy despite payment of option money. However an option money can become an option money so long as the parties agree to it.

References:

De Leon, H. (2010). Comments and Cases on Sales. Quezon City: Rex Printing Company, Inc.

The New Civil Code of the Philippines

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