In Philippine real estate transactions, the distinction between a Deed of Absolute Sale and a Deed of Conditional Sale is fundamental. When the property in question is subject to an existing mortgage, these distinctions become even more critical, as they dictate when ownership actually transfers and what happens to the underlying debt.
1. The Deed of Absolute Sale (DOAS)
A Deed of Absolute Sale is a contract where the seller transfers the ownership of the property to the buyer without any conditions other than the payment of the purchase price.
- Transfer of Ownership: Ownership (title) passes to the buyer upon the execution of the deed and delivery of the property.
- Nature of the Contract: It is an executed contract. Once signed and notarized, the sale is final.
- Application to Mortgaged Property: If a property is mortgaged, an Absolute Sale usually occurs only after the mortgage is settled or if the bank/mortgagee provides a "Letter of Guarantee" or "Release of Mortgage."
- Risk: In an absolute sale of a mortgaged property without bank clearance, the buyer takes the property "as is," including the encumbrance. If the debt isn't paid, the bank can still foreclose on the buyer’s new property.
2. The Deed of Conditional Sale (DCS)
A Deed of Conditional Sale is a contract where the seller agrees to sell the property, but the transfer of ownership is subject to the fulfillment of a specific condition—most commonly the full payment of the purchase price.
- Transfer of Ownership: Ownership does not pass to the buyer upon signing. The seller retains the title as security until the condition is met.
- Nature of the Contract: It is an executory contract. The sale only becomes "absolute" once the conditions are satisfied.
- Application to Mortgaged Property: This is the preferred vehicle for "Assume Balance" or "Pasalo" transactions. The buyer pays an initial amount to the seller (the equity) and agrees to pay the remaining balance to the bank or to the seller over time.
- The "Condition": Usually, the condition is that the buyer must fully pay the bank mortgage or the agreed price before the seller is obligated to execute a Deed of Absolute Sale.
Key Differences at a Glance
| Feature | Deed of Absolute Sale | Deed of Conditional Sale |
|---|---|---|
| Transfer of Title | Immediate upon execution/delivery. | Suspended until condition is met. |
| Payment | Usually full payment upfront. | Often involves installments or "assuming" a debt. |
| Seller’s Rights | Seller loses all rights to the property. | Seller retains ownership as security. |
| Risk of Default | Buyer owns it; seller must sue for money. | Seller can usually cancel the sale and keep the title. |
| Mortgage Status | Mortgage is typically cleared first. | Mortgage is often "assumed" or paid during the term. |
Practical Implications for Mortgaged Properties
When dealing with a property currently under mortgage (e.g., with PAG-IBIG or a commercial bank), the process follows specific legal nuances under Philippine law:
The "Assume Balance" Scenario
In many cases, a seller cannot yet provide an Absolute Sale because the bank holds the Transfer Certificate of Title (TCT). Here, a Deed of Conditional Sale is used.
- The buyer pays the seller for the "equity" (the portion already paid off).
- The parties agree that once the buyer finishes the mortgage payments, the seller will execute the Deed of Absolute Sale.
- Note: Most bank mortgages contain a "Prohibition to Sell" or "Due on Sale" clause. Without the bank's written consent, the private agreement between buyer and seller may not bind the bank.
The Role of the Contract to Sell
It is important not to confuse a Conditional Sale with a Contract to Sell.
- In a Conditional Sale, the sale is perfected, but the transfer of title is deferred.
- In a Contract to Sell, the seller explicitly reserves ownership and does not even "sell" the property until the price is paid in full. If the buyer defaults in a Contract to Sell, the seller can simply cancel without a full judicial rescission (subject to the Maceda Law for residential properties).
Legal Requirements and Taxes
Regardless of the type of deed, several Philippine taxes and requirements apply:
- Capital Gains Tax (CGT): 6% of the Gross Selling Price or Fair Market Value, whichever is higher.
- Documentary Stamp Tax (DST): 1.5% of the transaction value.
- Transfer Tax: Usually 0.5% to 0.75% depending on the local government unit.
- Registration Fees: Paid to the Register of Deeds to issue a new title.
In a Conditional Sale, the CGT and DST are technically due when the "sale" is perfected. However, in practice, many parties wait until the final Absolute Sale is executed to file these with the BIR, though this carries the risk of penalties if the BIR views the initial conditional deed as the taxable event.
Protection for the Buyer
Because a Deed of Conditional Sale leaves the title in the seller's name while the buyer pays off the mortgage, the buyer is at risk. To protect oneself:
- Register an Adverse Claim: The buyer should annotate the Deed of Conditional Sale on the title at the Register of Deeds. This serves as a notice to the whole world that the property is already promised to someone else.
- Verify Bank Standing: Ensure the mortgage is not in default or facing foreclosure before signing any deed.
- Escrow: Use an escrow agreement where the final payment is only released to the seller once the bank's "Release of Mortgage" is secured.