Are Property Buyer Deposits Forfeited if the Sale Falls Through?

Earnest Money vs. Down Payment (Philippines)

Buying or selling real estate in the Philippines almost always involves money changing hands before title transfer: “reservation fees,” “earnest money,” “option money,” and “down payments.” When a transaction collapses, the first and fiercest question is: who keeps the money? This article explains—under Philippine civil law and common real-estate practice—when deposits are kept, returned, or partially refunded.

1) The Legal Building Blocks

A. Perfection of a sale and the Statute of Frauds

A contract of sale is perfected when the parties agree on the object (the property) and the price—even before a deed is signed.
The Statute of Frauds requires a sale of real property to be in writing to be enforceable in court; however, actual performance (e.g., payment and possession) may affect enforceability.
Article 1482 (Civil Code): Earnest money given in a sale is part of the price and proof the sale was perfected.

B. Reciprocal obligations and rescission

In sales, each party’s duty (to pay; to deliver and transfer ownership) is reciprocal.
If one party substantially breaches, the other may seek rescission (Art. 1191) and damages, or specific performance—subject to equitable defenses.

C. Penalties, liquidated damages, and courts’ power to reduce

Contracts often label a deposit “non-refundable” or “forfeited upon default.”
Philippine law generally honors penalty clauses and liquidated damages, but courts may reduce unconscionable penalties (Arts. 1226–1230). Labels are not absolute; substance and fairness matter.

2) What Each Up-Front Payment Really Is

Payment Type	Legal Nature	Default Rule on Refund/Forfeiture
Reservation Fee (developer projects)	Usually a pre-contract payment to hold a unit and start processing. It is not automatically earnest money unless the contract says so.	Governed by contract. Often non-refundable, but consumer/real-estate regulations and fairness principles apply.
Option Money	Consideration for an option (a separate promise to keep an offer open). It is distinct from the price.	If the buyer doesn’t exercise the option on time, option money is kept by the seller (that was the price of the option). If exercised, treatment depends on stipulation (often imputed to price).
Earnest Money (Art. 1482)	Part of the purchase price and proof of a perfected sale.	If buyer unjustifiably backs out, the seller may keep it as damages/penalty if stipulated or provable as damages. If seller breaches, buyer can demand return plus damages. Courts may moderate forfeiture.
Down Payment	A first installment of the price under a perfected sale (often at contract signing or closing).	Generally refundable or forfeitable depending on who breached, the contract’s penalty clause, and special laws (e.g., Maceda Law for installment buyers).

Key distinction: Option money pays for the privilege to choose; earnest money is part of the sale itself.

3) Common Scenarios—and Who Keeps the Money

Scenario A: Buyer backs out without seller breach

Earnest money/down payment: May be forfeited if the contract provides a penalty for buyer’s default, or retained as liquidated damages (subject to reduction if unconscionable).
No penalty clause? Seller may still claim actual damages proven with evidence (e.g., lost opportunities, re-marketing costs), but not automatically keep everything.

Scenario B: Seller refuses to proceed or cannot deliver clean title

Buyer may rescind and recover earnest money/down payment, possibly with interest and damages (e.g., costs of loan processing, appraisal, due diligence), especially where the seller was in breach (e.g., title defects, failure to obtain necessary clearances, unauthorized encumbrances).

Scenario C: Sale subject to a condition—e.g., buyer’s financing is disapproved

If the contract has a financing contingency (loan approval is a condition), failure of the condition typically means the sale does not proceed without fault, so deposits should be returned (often less reasonable processing costs if agreed).
If no contingency clause, a loan denial is generally buyer’s risk; deposits may be forfeited per penalty clause.

Scenario D: Delayed or failed development (subdivision/condo projects)

Special real-estate rules and consumer protections may entitle buyers to refunds and/or cancellation if the developer materially defaults (e.g., failure to deliver on time, material changes in plans, quality or amenities). Contract, regulations, and adjudicatory rulings control how much and when.

4) Installment Purchases: The Maceda Law (Realty Installment Buyer Act)

For sales of real property on installments—particularly residential—Philippine law grants additional protections commonly known as the Maceda Law. In essence:

After at least two (2) years of installment payments, a buyer who defaults is entitled to a cash surrender value of not less than 50% of total payments made.
After five (5) years, the buyer gets an additional 5% per year beyond five years, capped at 90%.
The buyer gets a grace period (at least one month per year of paid installments) to pay without additional interest before cancellation, and has a right to reinstate upon updated terms.
Cancellation generally requires proper notice (commonly formal/notarized) and compliance with statutory prerequisites.

Takeaways:

The cash surrender value is a statutory refund from total payments (which include down payments and subsequent installments).
These rights typically apply to installment sales (not one-time cash sales) and are meant primarily for residential real estate buyers.
Contracts cannot waive these minimum protections; they can, however, grant more to the buyer.

5) Penalty & Forfeiture Clauses: What Courts Look At

Even when a contract states “non-refundable,” courts consider:

Who caused the failure (breach/fault vs. failed condition without fault).
Good faith and fair dealing (e.g., did the seller cooperate with bank requirements? Did the buyer obstruct inspections?).
Proportionality—Is forfeiture grossly excessive relative to harm? Courts may reduce penalties.
Consumer protection context—Developers and professional sellers are often held to stricter standards of disclosure and fairness.
Proof of actual losses where no enforceable penalty exists.

6) Drafting for Clarity (for Sellers and Buyers)

A. Make the label match the legal effect

If you intend a true option, say “OPTION”, define the option period, and state that option money is separate and non-refundable if not exercised.
If the payment is earnest money, explicitly cite Article 1482 and say it is part of the price.

B. State contingencies plainly

Financing contingency: “This sale is subject to Buyer’s bank loan approval on or before [date]. If disapproved despite Buyer’s good-faith submission, deposits are refunded less [identified actual costs].”
Title/clearance contingency: “Closing is conditioned upon Seller’s delivery of a clean title, updated tax receipts, and cancellation of liens.”
Development/turnover dates with remedies for delay.

C. Define default, remedies, and timelines

Specify what constitutes buyer default (missed payments, failure to submit bank documents) and seller default (failure to deliver title, encumbrances).
Provide a cure period and describe forfeiture or refund mechanisms.
If you stipulate liquidated damages, keep them reasonable to avoid court reduction.

D. Use escrow and instructions

Keep larger deposits in a neutral escrow, with written release conditions (e.g., “release to Seller upon loan approval and title due diligence; refund to Buyer if financing is denied under clause 4”).

7) Practical Quick-Guide

I paid a reservation fee to a condo developer and changed my mind. Do I get it back? Check the reservation agreement. Many are non-refundable unless the developer is at fault or a law/regulation says otherwise. Fairness and consumer rules can still matter.
I paid “earnest money” then the seller refused to sell at the last minute. You may rescind and demand return of earnest money plus damages (e.g., valuation, loan fees). Earnest money shows a perfected sale.
My bank disapproved my loan. If you had a financing contingency, deposits are usually returned (minus agreed processing costs). Without a contingency, the risk is typically on the buyer—the deposit may be forfeited per penalty clause.
I defaulted on installment payments after two years. You likely have Maceda Law rights to cash surrender value and grace periods before cancellation.
The contract says “non-refundable.” Is that the end of it? Not necessarily. Courts may strike or reduce unconscionable penalties, especially where seller fault exists or consumer norms are implicated.

8) Evidence You’ll Want Ready

Signed reservation agreement, offer to buy, option contract, contract to sell, and deed drafts.
Receipts identifying what each payment was for (option, earnest, down payment, processing).
Emails/letters showing contingencies (loan approval, title clearances) and who defaulted.
Developer notices (demand letters, cancellation notices), and loan communications (approval/denial).
Title documents (TCT/CCT, tax declarations, tax clearances, lien releases) and unit turnover records.

9) Negotiation Tips to Avoid Painful Forfeitures

Ask for a clear refund schedule and what-if matrix (loan denial; delayed title; turnover slippage; force majeure).
Prefer escrow for substantial deposits with dual-signature release.
Keep deadlines realistic; build automatic extensions for bank processing.
For developers: offer a cool-off period and capped admin fees—it reduces disputes and preserves goodwill.
For private sellers: require bank pre-approval before accepting large down payments.

10) Bottom Line

Earnest money is part of the price and proves a perfected sale; down payments are installments toward that price.
Forfeiture turns on fault, contract terms, reasonableness of penalties, and in installment settings, statutory buyer protections (e.g., Maceda Law).
Labels like “non-refundable” help—but do not guarantee—forfeiture; courts examine equity and proportionality.
The safest path is precise drafting, clear contingencies, and escrowed deposits.

This article provides general legal information for Philippine real-estate transactions. For a live dispute or contract review, consult counsel with your documents in hand to assess remedies, timelines, and negotiation posture.