1) What a pasalo is (in the lease setting)

In everyday Philippine practice, a pasalo is a “take-over” arrangement where a current occupant/tenant (“seller”) transfers to another person (“buyer”) whatever the seller has in relation to the premises—commonly:

the right to occupy under an existing lease,
physical improvements (renovations, partitions, built-ins),
movables (equipment, furniture),
goodwill or business position (if commercial),
and sometimes the security deposit and advance rent already paid.

Legally, a pasalo is not a single named contract under the Civil Code. It is usually a bundle of contracts and legal acts that may include: assignment of lease, sublease, sale of improvements/movables, and sometimes novation (substitution of the tenant with the landlord’s consent).

The biggest legal mistake in pasalo deals is treating it as a private agreement between seller and buyer that “automatically binds the landlord.” It usually does not—unless the landlord validly consents in the proper way.

2) The core legal relationships: why landlord consent matters

A lease creates a contractual relationship (privity of contract) between landlord (lessor) and tenant (lessee). The landlord’s rights (rent collection, enforcement of use restrictions, termination for breach) are against the tenant recognized in the lease.

When a seller tries to “transfer” a lease to a buyer, there are three common structures:

A. Assignment of lease (transfer of the tenant’s position)

The seller transfers to the buyer the seller’s rights under the lease, and typically the buyer assumes the seller’s obligations.

Key rule in Philippine civil law practice: An assignment that effectively replaces the tenant generally requires the landlord’s consent, unless the lease itself clearly allows assignment without consent.

Consequence if consent is absent: the landlord may treat the buyer as an unauthorized occupant and may enforce remedies under the lease and law (including termination and ejectment), while still holding the seller liable as the original tenant.

B. Sublease (tenant remains tenant; buyer becomes subtenant)

The seller remains the tenant vis-à-vis the landlord, and the buyer occupies under the seller. Whether sublease is allowed depends on the lease terms; many contracts prohibit it without written consent.

Consequence: the landlord’s claims remain against the seller. The buyer’s rights are mainly against the seller (as sublessor). If the seller defaults, the buyer’s occupancy becomes fragile.

C. Novation / substitution of debtor (new tenant replaces old tenant)

This is the cleanest structure: the landlord expressly agrees that the buyer becomes the tenant and the seller is released.

This is usually done by:

signing a new lease, or
executing a tripartite agreement (landlord–seller–buyer) clearly stating substitution and release.

Consequence: privity shifts to landlord–buyer; the seller is typically freed (if clearly released).

3) “Transfer of Lease” is not the same as “transfer of possession”

A buyer can be placed in possession by the seller immediately, but possession alone does not make the buyer the tenant in the landlord’s eyes.

Practical effect: even if the seller hands over keys and the buyer pays the seller, the landlord may still:

insist rent must be paid by the original tenant,
refuse to accept rent from the buyer,
demand the buyer vacate for unauthorized assignment/sublease,
apply the security deposit only to the seller’s obligations.

This is why landlord consent (and properly documenting it) is central.

4) Security deposit: what it legally is, and why it does not “automatically transfer”

A. What a security deposit is

A security deposit is usually money held by the landlord as security for the tenant’s obligations—unpaid rent, utilities if contracted, repair of damages beyond ordinary wear and tear, and other charges allowed by the lease.

In most leases, the deposit is:

owned by the tenant but held by the landlord as security, or
treated as a fund the landlord may apply to defined obligations, with any balance refundable under conditions.

The deposit is governed primarily by:

the lease contract, and
general obligations and contracts principles (good faith, fulfillment of obligations, damages, etc.).

There is no universal “automatic deposit transfer” rule. The controlling document is typically the lease.

B. Why the deposit usually cannot be transferred by seller alone

The deposit is a contractual arrangement between landlord and tenant. If the tenant changes, the deposit’s status changes only if the landlord agrees.

Without landlord participation, a seller’s promise that “the deposit will be yours” is often only a promise between seller and buyer, not enforceable against the landlord.

Resulting risk: the buyer pays the seller for the “deposit,” but later the landlord refunds the deposit to the seller (the named tenant), or applies it to the seller’s arrears/damages, leaving the buyer to chase the seller.

C. Common lawful ways deposit issues are handled in pasalo

Tripartite deposit recognition Landlord acknowledges that the existing deposit will be:
- credited to the buyer as the incoming tenant, or
- transferred/assigned to the buyer, or
- retained under the lease but deemed “belonging” to the buyer for refund purposes.
Refund-then-repay method On turnover date, landlord refunds the seller (subject to inspection), and buyer pays a new deposit to landlord.
Holdback / escrow concept (private) Buyer withholds part of the pasalo payment equal to potential deductions until the landlord returns the deposit or confirms transfer. This reduces buyer’s risk if landlord later deducts or refuses transfer.
Seller-buyer internal allocation (without landlord) Seller “sells” the economic value of the deposit to buyer. This can work only if seller remains liable and trustworthy—because landlord may still treat deposit as seller’s.

5) Rights and liabilities of the seller (original tenant)

A. Right to receive pasalo consideration (from buyer)

The seller can sell:

movable property,
improvements (subject to lease restrictions),
goodwill,
and the seller’s contractual rights (if assignable and with required consents).

But if the seller represents that the buyer will become tenant or that the deposit will be recognized, the seller should deliver what was promised—or face liability.

B. Continuing liability to the landlord (the “stuck tenant” problem)

Unless there is a valid release or novation, the seller typically remains liable to the landlord for:

rent,
damages to the premises,
violations of use restrictions,
unpaid utilities if part of obligations,
and any other lease charges.

Even if the buyer is in possession, the landlord may still pursue the seller because the landlord’s contract is still with the seller.

C. Right to enforce buyer obligations (if buyer takes over)

If the pasalo agreement requires the buyer to:

assume rent from a specific date,
shoulder repairs,
reimburse deposit value,
keep the premises compliant,

the seller can sue for:

specific performance (where proper),
rescission (cancellation) if the breach is substantial,
damages.

D. Risk of breach by seller toward buyer

The seller may be liable to the buyer if the seller:

transfers possession without landlord consent despite knowing it’s prohibited,
misrepresents that landlord approval exists,
hides arrears or violations that will be charged against the deposit,
cannot deliver a valid assignment/novation.

Seller liability may include refund of pasalo amount, damages, and in serious cases where deceit is proven, potential criminal exposure (fact-specific).

6) Rights and liabilities of the buyer (incoming occupant)

A. Rights depend on what the buyer legally becomes

If recognized tenant (via novation/new lease/consented assignment): buyer has direct rights against landlord under the lease.
If subtenant/occupant only: buyer’s rights are mainly against the seller; buyer may have weak standing against landlord.

B. Buyer’s main risks without landlord consent

Non-recognition: landlord refuses to deal with buyer.
Termination/ejectment exposure: unauthorized transfer may be grounds to terminate the lease; buyer may be removed along with seller.
Double payment: buyer pays seller for deposit, then landlord demands a new deposit anyway.
Deposit loss: landlord applies deposit to seller’s arrears/damages; buyer gets nothing unless seller reimburses.

C. Buyer’s remedies against seller

If seller promised landlord consent, valid transfer, or deposit credit, and those fail:

rescission (return of what was paid, with damages where warranted),
damages (actual, sometimes moral/exemplary depending on circumstances),
specific performance (e.g., compel seller to secure consent if contractually obligated and feasible).

The practical value of these remedies depends on evidence (written terms, receipts, messages) and the seller’s ability to pay.

7) The landlord’s position (often the deciding factor)

Even though the topic focuses on seller and buyer, landlord rights determine whether the pasalo is stable.

Landlords commonly have rights under the lease to:

approve or reject assignment/sublease,
require screening (IDs, business permits for commercial spaces),
impose transfer fees (if contract allows),
demand updated post-dated checks or new deposit,
inspect premises before recognizing turnover,
apply deposit to arrears and damages.

A landlord may also accept rent from the buyer “without paperwork,” but acceptance alone can be legally messy; it may or may not amount to consent depending on facts, documents, and conduct. The safest route is always explicit written consent.

8) Improvements and fixtures: who owns what at turnover?

In pasalo deals, the buyer often pays for renovations. But lease contracts frequently regulate improvements:

requiring landlord permission,
requiring restoration to original condition at end of lease,
stating that certain improvements become landlord property,
prohibiting structural changes.

If the lease says improvements become landlord property or must be removed/restored, then the seller may have limited ability to “sell” them. A buyer paying for improvements should verify:

whether the improvements are removable movables or fixed fixtures,
whether landlord consent exists for the improvements,
whether the landlord requires restoration (which could eat the deposit).

9) How to structure a legally safer pasalo (the standard “best practice” documents)

A. Tripartite agreement (landlord–seller–buyer): the gold standard

A strong tripartite document typically includes:

Landlord consent to assignment/transfer or a brand-new lease.
Effective date and time of turnover.
Release clause: landlord releases seller from obligations after turnover (or states remaining liabilities).
Deposit treatment: credit/transfer/refund mechanics and any deductions.
Condition report: agreed premises condition, meter readings, inventory of items included.
Arrears disclosure: rent/utilities/association dues (if applicable) as of turnover date.
Use compliance: permitted use, permits, signage rules (commercial).
Default allocation: who pays what if hidden defects/arrears are discovered.

B. Seller–buyer pasalo agreement (still important even with tripartite)

This covers:

purchase price breakdown (deposit value, improvements, goodwill, equipment),
warranties and disclosures,
timeline for securing landlord documents,
refund/penalty clauses if landlord consent fails,
attorney’s fees/liquidated damages if agreed.

C. Receipts and proof trail

Document:

all payments (with purpose stated),
IDs of parties,
authority to sign (if corporate tenants/owners).

10) Common dispute scenarios and how rights usually shake out

Scenario 1: Buyer paid seller, moved in, landlord refuses consent

Landlord vs seller: landlord can enforce lease terms against seller; seller remains liable.
Landlord vs buyer: buyer may be treated as unauthorized occupant; eviction risk.
Buyer vs seller: buyer may seek rescission/damages for failed transfer if seller promised consent or valid turnover.

Scenario 2: Deposit was “sold” to buyer; landlord later refunds deposit to seller

Unless landlord agreed otherwise, landlord typically pays the named tenant.
Buyer’s remedy is against seller (reimbursement), not landlord.

Scenario 3: Landlord applies deposit to arrears discovered after turnover

If arrears belong to seller’s period, seller is economically responsible—but only if the seller-buyer agreement says so clearly.
Without clear terms, buyer may be stuck negotiating or litigating.

Scenario 4: Buyer becomes tenant via novation; seller not released in writing

Seller may still face claims if release is unclear.
Clean drafting should state release expressly and define survival obligations (e.g., unpaid rent prior to turnover remains seller’s).

Scenario 5: Sublease disguised as “transfer”

Seller remains tenant; buyer’s occupancy depends on seller’s compliance.
If seller defaults, buyer can lose the premises even if buyer paid.

11) Practical checklist (seller and buyer)

For the seller

Check lease clauses on assignment/sublease and improvements.
Secure landlord’s written consent before turnover.
Disclose arrears, damages, and pending issues that can be charged to deposit.
Clarify in writing whether seller remains liable if consent/novation fails.

For the buyer

Demand to see the lease and all amendments/receipts.
Verify landlord’s policy: consent, screening, new deposit requirements, transfer fees (if any).
Require a tripartite agreement or, at minimum, written landlord acknowledgment of:
- acceptance of buyer as tenant (or approved subtenant),
- how the deposit will be handled.
Protect payments with holdbacks tied to deposit confirmation and inspection.

12) Key takeaways

A pasalo is not automatically binding on the landlord.
“Transfer of lease” can mean assignment, sublease, or novation—each has different consequences.
Seller usually remains liable to the landlord unless there is a clear written release/novation.
A security deposit usually does not transfer by seller-buyer agreement alone; landlord recognition is crucial.
The safest approach is a tripartite agreement that settles tenant substitution and deposit treatment, supported by a turnover inspection and clear accounting.