Option money

In sales negotiation the buyer could not sometimes make up his mind right away on whether or not to buy the thing offered for sale. If the seller gives the prospective buyer time to make up his mind, the buyer usually gives what is called option money. Option money is an amount distinct from the purchase price, in order to secure for the buyer the opportunity to make up his mind. Once it is put up, the seller cannot dispose of the thing during the time agreed upon, otherwise the seller can be sued for damages. The following case between Leo and Lita explains the meaning of option money.

Lita owned a piece of land somewhere in the city. One time she promised to sell it to Leo at the price of P60,000. She told Leo that the said price was to be payable at anytime within a three-year period provided that Leo constructed on the lot a house of strong materials and paid a nominal monthly rental in the meantime while the amount has not been tendered. Leo told Lita that he accepted her conditions and he committed to buy the land but did not pay any option money.

Leo occupied the land and paid nominal rentals thereon. He even constructed a house of strong materials on the lot. Two years later, while Leo had not yet paid the purchase price nor paid any option money, Lita decided to convey ownership of the land to her son. Then subsequently, prior to the end of the three-year period, Leo tendered the purchase price. But Lita refused and told him that the land had already been conveyed to her son.

So Leo sued Lita to compel her to fulfill her promise to sell to him the piece of land.

Was Leo correct?

No.

Lita’s promise to sell was not binding upon her in view of the absence of any consideration distinct from the stipulated price. This is the principle laid down by the second paragraph of Art. 1479 of the New Civil Code: "An accepted unilateral promise to sell a determinate thing for a certain price is binding upon the "promisor" if the promise is supported by a consideration distinct from the price".

The option money serves as an assurance for the seller that there is a considerable degree of certainty that the buyer will buy. It also serves as an assurance for the buyer that he can freely make up his mind without fear that somebody else might buy the thing. Since Leo did not give option money, Lita can dispose of the land without any liability for damages. For after all, during the time she conveyed the land to her son, she had no assurance that Leo will eventually buy it (Montilla vs. CA 161 SCRA 167).

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