Dear PAO,

I was looking for sample contracts of sale online when I came across the terms “earnest money” and” option money.” What is an earnest money, in contrast to option money? What is the purpose of earnest money?

Sakka

Dear Sakka,

The difference between “earnest money” and “option money” is explained by the Supreme Court in the case of Rizalino, et al. vs. Paraiso Development Corporation, G.R. No. 157493, February 05, 2007, penned by Associate Justice Minita V. Chico-Nazario, saying:

“In the instant case, the consideration of ₱100,000.00 paid by respondent to petitioners was referred to as “option money.” However, a careful examination of the words used in the contract indicates that the money is not option money but earnest money. “Earnest money” and “option money” are not the same but distinguished thus: (a) earnest money is part of the purchase price, while option money is the money given as a distinct consideration for an option contract; (b) earnest money is given only where there is already a sale, while option money applies to a sale not yet perfected; and, (c) when earnest money is given, the buyer is bound to pay the balance, while when the would-be buyer gives option money, he is not required to buy, but may even forfeit it depending on the terms of the option”

Additionally, the purpose of earnest money is discussed in the case of Racelis vs. Spouses Javier, G.R. No. 189609, January 29, 2018, penned by Senior Associate Justice Marvic M.V.F. Leonen, saying:

“In a contract to sell, earnest money is generally intended to compensate the seller for the opportunity cost of not looking for any other buyers. It is a show of commitment on the part of the party who intimates his or her willingness to go through with the sale after a specified period or upon compliance with the conditions stated in the contract to sell.

Opportunity cost is defined as “the cost of the foregone alternative.” In a potential sale, the seller reserves the property for a potential buyer and foregoes the alternative of searching for other offers. This Court in Philippine National Bank v. Court of Appeals construed earnest money given in a contract to sell as “consideration for [seller’s] promise to reserve the subject property for [the buyer].” The seller, “in excluding all other prospective buyers from bidding for the subject property… [has given] up what may have been more lucrative offers or better deals.”

Thus, earnest money is part of the whole purchase price, thereby signifying that the sale is already perfected: on the other hand, “option money” applies to a sale that is not yet perfected, thereby giving an option whether to proceed to the sale or not.

We hope that we were able to answer your queries. This advice was solely based on the facts you have narrated and our appreciation of the same. Our opinion may vary when other facts are changed or elaborated.

Thank you for your continued trust and support.

Editor’s note: Dear PAO is a daily column of the Public Attorney’s Office. Questions for Chief Acosta may be sent to [email protected]