Division of Proceeds Between Landowner and Tenant When Selling Agricultural Land in the Philippines

Executive summary

In Philippine agrarian law, there is no automatic “division of the sale price” between a private landowner and a tenant. The sale proceeds belong to the landowner–seller, subject to taxes and transaction costs. What the tiller (legally, an agricultural lessee, since share tenancy has long been abolished) gets are statutory rights that can affect, delay, or even displace the sale—most notably pre-emption and redemption—plus security of tenure and, in certain cases, disturbance compensation (e.g., on lawful conversion). In CARP/CARPER acquisitions (government acquisition for agrarian reform), the “proceeds” are the landowner’s just compensation, while qualified farmers receive land under separate terms; that is a different legal pathway from a private sale.

Below is a comprehensive guide that maps the legal landscape, the practical consequences on money flows, and careful drafting approaches when a sale involves a sitting tenant.

1) Governing legal framework

Tenurial regime
- Share tenancy is abolished. Philippine law transformed share tenants into agricultural lessees under a leasehold system. The lessee pays a legally regulated rent (in cash or kind) and enjoys security of tenure.
- The buyer of the land takes title subject to the existing agricultural leasehold; purchase does not by itself eject the lessee.
Key statutes
- Code of Agrarian Reforms (creating and defining leasehold; security of tenure; rights of pre-emption and redemption).
- Presidential Decree No. 27 (for rice and corn lands, land transfer to tenants) and subsequent issuances.
- Comprehensive Agrarian Reform Law (CARL), R.A. 6657, as amended by R.A. 9700 (CARPER): acquisition and distribution of agricultural lands; just compensation to landowners; beneficiary rights.
- Special conversion rules (reclassification/land use conversion) and disturbance compensation principles.

Practical effect: The controlling question is what kind of transfer is happening (private sale vs. CARP acquisition vs. conversion), because money flows differ radically across those pathways.

2) Private sale with an existing agricultural lessee

A. Who gets the sale price?

The landowner receives the sale price in full. There is no statutory rule that slices the price between landowner and tenant.
Usual taxes and expenses (e.g., capital gains tax or, in certain cases, creditable withholding tax; documentary stamp tax; transfer tax; registration fees; broker’s fees) are borne by the parties as agreed or as provided by tax law, not by tenancy law.

B. What monetary interests does the tenant have at/around the time of sale?

Pre-emption
- If the landowner intends to sell, the agricultural lessee has a right of first refusal to buy the landholding at a reasonable price and on reasonable terms, within statutory time limits after proper notice.
- If the lessee validly exercises pre-emption, the purchase price is paid by the lessee to the landowner. No “division” occurs; the lessee simply becomes the buyer.
Redemption
- If the landowner sells to a third person without giving the lessee the chance to pre-empt, the law grants the lessee a right to redeem (to take the land back from the buyer by paying the price), again within a fixed statutory period after the lessee learns of the sale or after registration/notice.
- Upon valid redemption, the buyer receives the price paid, and the lessee becomes the owner. Again, no “proceeds split”; the remedy reverses or re-routes the sale.
Security of tenure
- If the lessee does not pre-empt or redeem, the sale does not terminate the leasehold. The buyer is subrogated to the seller’s position as lessor and must respect existing leasehold rights (including rent level, possession, and cause-only termination).
Crops/rent around closing
- Standing crops and rental obligations follow the existing leasehold and civil code rules on fruits. Typically, the party who is the lessor at the time the rent becomes due collects the rent; the lessee continues to till and harvest as usual. Any prorations (e.g., if rent or sharing-in-kind straddles the closing date) are contractual matters between the seller and buyer, not a statutory division with the lessee.

C. Can the buyer or seller pay the tenant anything at closing?

They may, by agreement, pay the lessee an amount (often called a “surrender fee,” “goodwill,” or “disturbance settlement”) in exchange for a voluntary, lawful termination of the leasehold or the lessee’s waiver of pre-emption/redemption.
Caveat: Any waiver of the lessee’s statutory rights must be clear, voluntary, and compliant with agrarian laws and public policy. Coercive or simulated waivers are void and may expose parties to criminal, administrative, or civil liability.

3) Sale plus conversion (e.g., to residential/industrial use)

If a sale is coupled with or followed by land use conversion (lawful change of use authorized by the government):

The lessee may be lawfully dispossessed only after compliance with conversion rules and payment of disturbance compensation (a legislated monetary remedy for the loss of tenurial rights).
Who pays? Typically the landowner–developer or buyer who benefits from conversion, as a pre-condition to ejectment or as part of compliance undertakings.
How much? The amount is set by statute/regulations (often keyed to average harvests/rents/time periods). Because figures depend on the specific law/regulatory text in force at the time of conversion and the kind of crop/holding, parties should compute strictly per current regulations and local agency practice.

Key takeaway: Disturbance compensation is separate from the sale price. It doesn’t “divide” the sale proceeds; it compensates the lessee for the loss of tenure caused by a permitted change.

4) Government acquisition under CARP/CARPER (not a private sale)

When land is acquired by the State for agrarian reform:

The landowner receives just compensation (often through the Land Bank), not a market-negotiated sale price.
Qualified tillers become agrarian reform beneficiaries and acquire ownership under amortization and conditions (e.g., non-transferability periods, collective/individual titles).
No division of “sale proceeds” occurs between landowner and tenant; each side’s entitlements flow from the statute (compensation for owner, land award/tenurial benefits for the farmer).

5) Practical money-flow maps

Scenario A — Ordinary private sale; tenant stays

Buyer pays price → landowner.
Leasehold continues; no payout to tenant unless agreed (e.g., courtesy payment).
Rents after closing go to the buyer/lessor.

Scenario B — Tenant pre-empts

Tenant pays price → landowner.
Tenant becomes owner.
No “proceeds sharing.”

Scenario C — Third-party sale; tenant redeems

Buyer pays price → landowner (closing).
Tenant exercises redemption; tenant pays price → buyer; tenant becomes owner.
No division; rather, replacement of the buyer.

Scenario D — Sale + lawful conversion; tenant must vacate

Buyer/developer pays sale price → landowner.
Buyer/developer (or landowner per agreement) pays disturbance compensation → tenant separately, per law/regulations.

Scenario E — CARP acquisition

Land Bank pays just compensation → landowner.
Beneficiary farmer acquires land per agrarian reform rules.
No divided sale proceeds.

6) Documentation and drafting essentials

Due diligence
- Ascertain whether the tiller is a bona fide agricultural lessee, an AR beneficiary, a caretaker, or a laborer—the label matters.
- Secure farm maps, proof of cultivation, rental records, and any agency orders (DAR, LBP, LRA records; prior conversion orders; retention rulings).
Contract architecture
- Disclosure clause: Seller warrants presence/absence and status of any lessee, and the lease terms.
- Subject-to-tenancy clause: Buyer acknowledges leasehold and assumes lessor obligations from closing.
- Notice & coordination: Seller undertakes to notify the lessee of intent to sell (to respect pre-emption); if already sold, ensure post-sale notice (implicating redemption periods).
- Holdbacks/escrows: If pre-emption/redemption is possible, place escrows or price holdbacks pending lapse of statutory periods.
- Conditional possession: Clarify who bears risk and benefits (crops, rents) during the interval between signing and closing.
- Optional settlement: If parties and lessee agree to an early termination or waiver consistent with law, set a separate disturbance/settlement agreement that:
  - States voluntariness and compliance with agrarian laws,
  - Details computation and payment mechanics,
  - Provides agency clearances where required.
Tax and fees
- Allocate capital gains (or creditable withholding), DST, transfer taxes, registration fees, and brokerage by contract; these are between seller and buyer and independent of tenancy rights.

7) Common pitfalls (and how to avoid them)

Assuming “clean title” equals vacant possession. Leasehold rights bind successors-in-interest; a buyer can end up owning land they cannot freely possess.
Ignoring pre-emption/redemption windows. A sale can be unwound or displaced by a vigilant lessee.
Relying on generic waivers. Courts and agencies scrutinize waivers that impair statutory rights.
Confusing private sale with CARP acquisition. The money trail and remedies differ completely.
Skipping disturbance compensation on conversion. This can halt projects and trigger liability.

8) Checklist for transactions involving a sitting tenant

Identify the tenurial status (lessee vs. other).
Confirm if the land is CARP-covered/retained/exempt/converted.
Serve proper notice of intent to sell (pre-emption).
Calendar the redemption period post-sale.
Decide whether to:
- Proceed subject to leasehold; or
- Negotiate a lawful settlement/termination with the lessee; or
- Pursue conversion (with disturbance compensation), if consistent with zoning and policy.
Allocate taxes/fees in the sale contract.
Consider escrows/holdbacks until pre-emption/redemption risk lapses.

9) Bottom line

In a private sale, proceeds belong to the landowner; the tenant does not share in the sale price by force of law.
The tenant’s leverage lies in pre-emption, redemption, and security of tenure—rights that can redirect or condition the sale.
In conversion cases, the tenant may receive disturbance compensation, which is a separate payment, not a slice of the sale price.
In CARP acquisitions, the landowner receives just compensation, and beneficiaries receive land through statutory processes—again, not a division of sale proceeds.

Final practical note

Exact amounts, deadlines, and procedural steps for pre-emption/redemption and disturbance compensation are set by statute and regulations and may vary by crop, area, or regulatory updates. In any specific transaction, ensure precise computations and notices are made against the current text of the applicable laws and implementing rules, and align your strategy with the Department of Agrarian Reform and local registry practices.