Earnest Money vs Down Payment vs Option Money (Article 1482)

Direct answer: Earnest money, a down payment and option money are three different payments. Under Article 1482 of the Civil Code, earnest money is part of the price and proof that a contract of sale is already perfected. A down payment is an initial part-payment of the agreed price. Option money, under Article 1479, is a separate consideration paid only for the right to decide whether to buy within a set period. While an option runs, there is no sale yet. The label on the receipt does not control; the actual agreement does.

The three payments compared

All three payments change hands before a property sale closes, so they are often mixed up on receipts. For short definitions, see the glossary entries for earnest money and option money.

Feature	Earnest money	Down payment	Option money
Legal basis	Article 1482, Civil Code	Contract terms; Articles 1458 and 1475 on the price; RA 6552 for covered instalment sales	Article 1479, second paragraph
What it presupposes	A perfected contract of sale (object and price agreed)	An agreed price, whether under a contract of sale or a contract to sell	No sale yet; only an accepted unilateral promise to sell or buy
Part of the price?	Yes	Yes	No, unless the parties clearly agree it will be credited
Buyer bound to pay the balance?	Yes	Yes, under the payment schedule	No; the buyer may simply not exercise the option
If the deal fails	Follows the rules on breach: specific performance or resolution with damages; forfeiture only with a valid basis	Follows the contract, Article 1191 and, for covered sales, the Maceda Law refund rules	Usually kept by the seller if the option lapses unused

Earnest money under Article 1482

Article 1482 says that whenever earnest money is given in a contract of sale, it shall be considered as part of the price and as proof of the perfection of the contract. So earnest money does two things: it reduces the balance of the price, and it is evidence that buyer and seller have already agreed on the object and the price.

The rule is a disputable presumption, not an absolute one. It applies only where a sale has in fact been reached, meaning the parties agreed on a determinate thing and a price certain and intended to be bound (Articles 1458 and 1475). If they were still negotiating, a payment called “earnest money” may prove nothing. Once those elements exist, the sale is perfected even before the balance is paid or the deed of absolute sale is signed. The requisites of consent, object and cause are covered in what makes a contract valid.

Article 1482 does not fix any minimum or maximum amount. It also does not say that earnest money is forfeited when the buyer defaults. That is a separate question, covered below. Earnest money is also not automatically the same as option money, a reservation fee or a cancellation charge.

Evidence to preserve. Keep the receipt or acknowledgment, the offer, reservation or sale agreement, messages showing agreement on the object and price, and any term stating whether the amount forms part of the price. These decide whether Article 1482 applies.

Option money under Article 1479

Article 1479 provides that a promise to buy and sell a determinate thing for a price certain is reciprocally demandable. Its second paragraph adds that an accepted unilateral promise to buy or to sell a determinate thing for a price certain binds the promisor if it is supported by a consideration distinct from the price. That separate consideration is option money.

An option contract is a preparatory contract. The owner gives the prospective buyer an exclusive right, but not an obligation, to buy within a stated period. If the buyer exercises it on time, a sale arises and the price becomes payable.

If no separate consideration was paid, the promise is not binding as an option. In Sanchez v. Rigos (G.R. No. L-25494, June 14, 1972), the Supreme Court held that such a promise is still an offer. If the offeree accepts it before it is withdrawn, a bilateral contract of sale is perfected (see Article 1324).

Where a down payment fits

A down payment is the first part of an agreed price and, like earnest money, is credited to the price. Down payments usually appear in instalment deals, such as a developer’s contract to sell, where ownership stays with the seller until full payment.

A reservation fee is often stated to form part of the down payment. If the unit and total price are fixed, it will usually be treated as part of the price. If the buyer was only holding a unit while the price and terms were still open, it may be neither earnest money nor a down payment. For residential real estate bought on instalments, the Maceda Law treats down payments and deposits as part of the total payments used to compute grace periods and refunds. On getting money back after cancellation, see Can I recover my down payment?.

How courts classify a payment when labels conflict

Courts look at the agreement and the surrounding facts, not the caption. In Adelfa Properties, Inc. v. Court of Appeals (G.R. No. 111238, January 25, 1995), a ₱50,000 payment was called option money in the document. The Supreme Court held it was actually earnest money because it was intended to form part of the purchase price. The Court listed the distinctions: earnest money is part of the price, while option money is a distinct consideration for an option; earnest money is given only where there is already a sale, while option money applies to a sale not yet perfected; and a buyer who gives earnest money is bound to pay the balance, while a party who pays option money is not required to buy.

Use these questions to test a payment:

• Price fixed? A price certain for a determinate object points to a sale and earnest money.
• Credited to the price? Words like “deducted from” or “forms part of” the price point to earnest money or a down payment.
• Buys only time? A payment for the right to decide later, with no duty to buy, points to option money.
• Separate option period? A window to exercise a right, distinct from a payment schedule, points to an option.
• Obligations on both sides? Mutual duties to deliver and to pay point to a perfected sale.
• What happens if no deal? Forfeiture merely for not proceeding suggests option money. Clauses on default, resolution or return of “the price paid” suggest earnest money.

No single factor decides the case; the document and the parties’ conduct are read as a whole.

Keeping earnest money after buyer default

A seller cannot keep earnest money automatically just because the buyer defaulted. Because Article 1482 makes earnest money part of the price in a perfected sale, the seller’s ordinary remedies are specific performance or resolution with damages under Article 1191, and retention needs a valid forfeiture clause, a damages basis or a special law that allows it.

Retention is stronger when:

• the buyer clearly defaulted and the seller was ready to perform;
• the contract expressly and lawfully provides that earnest money is forfeited on default;
• the seller complied with notice, demand or cure requirements;
• the buyer took possession or enjoyed the property’s use or fruits; and
• no special law requires a different refund or cancellation treatment.

Forfeiture is more vulnerable when:

• the seller materially breached first, for example by failing to deliver the title;
• the buyer was not yet legally in default, because no demand was made or the period had not expired;
• the clause works as an excessive penalty, which courts may reduce under Articles 1229 and 2227 when it is iniquitous or unconscionable or the obligation was partly performed; or
• the deal is covered by a protective instalment-sale statute such as the Maceda Law.

For a sale of immovable property, Article 1592 adds a buyer protection. Even if the contract says the sale is automatically rescinded on non-payment, the buyer may still pay after the due date as long as no demand for rescission has been made on him judicially or by notarial act. After that demand, the court may not grant him a new term. This applies to a contract of sale, not to a contract to sell where ownership was reserved; see contract of sale vs contract to sell.

If the sale is resolved, the parties generally return what they received, with adjustments for use, fruits and damages. See mutual restitution under Article 1191. Keep this issue separate from general down-payment disputes, which are covered in recovering a down payment.

Worked examples

Example 1: earnest money and a buyer who does not pay. On March 3, 2026, Ramon Dizon and Liza Manalo sign a receipt for a 300-square-metre lot in Lipa, Batangas. The receipt fixes the price at ₱2,400,000. Ramon pays ₱120,000 “as earnest money, to form part of the price”, with the balance due on June 30, 2026. A clause says the earnest money is forfeited if the balance is not paid. Ramon does not pay by June 30. The sale was perfected on March 3 under Article 1482. Liza may demand payment or seek resolution. Because the sale involves land, Ramon may still pay until Liza serves a notarial or judicial demand for rescission (Article 1592). If the sale is resolved, the forfeiture clause gives Liza a basis to keep the ₱120,000, which is 5% of the price, subject to reduction if a court finds it unconscionable. If Liza had failed to show a clean title, her claim to keep the money would be much weaker.

Example 2: option money that lapses. On January 10, 2026, Carmela Reyes pays Jose Bautista ₱50,000 for the exclusive right to buy his Quezon City house for ₱6,000,000 within 60 days. The agreement says the fee is non-refundable and not credited to the price. Carmela does not exercise the option by March 11, 2026. No sale ever arose. The ₱50,000 was the price of the option and Jose may keep it.

Example 3: instalment down payment. Joy Santos signs a developer’s contract to sell for a ₱3,500,000 condominium unit. She pays a ₱25,000 reservation fee and ₱300,000 in monthly down payments over 12 months, then stops. Her payments are part of the price. Because she paid for less than two years, the Maceda Law gives her a 60-day grace period and requires a notarial notice of cancellation, but it does not itself require a cash surrender value. Any refund depends on her contract and other applicable rules.

Decision guide

1. Find the document. Read the receipt, reservation form, option agreement or contract as a whole.
2. Check whether the object and price were fixed. If yes, the payment is likely earnest money or a down payment. If no, it may be option money or a mere deposit.
3. Check whether it is credited to the price. Crediting points away from option money.
4. Identify the contract type. A contract of sale transfers ownership on delivery. A contract to sell reserves ownership until full payment.
5. Check for a Maceda Law sale. Residential real estate on instalments triggers grace periods, notarial notice and possible refunds.
6. Check who breached first and whether demand was made. This decides default, Article 1592 rights and the strength of any forfeiture.

Legal basis

Authority	What it says	How it applies
Civil Code, Article 1482	Earnest money given in a contract of sale is part of the price and proof of perfection.	Classifies earnest money and shows a sale already exists.
Civil Code, Article 1479	A promise to buy and sell is reciprocally demandable; an accepted unilateral promise binds only if supported by consideration distinct from the price.	Source of the option-money rule.
Civil Code, Arts. 1458, 1475, 1324	A sale is perfected on agreement on object and price; an offer may be withdrawn unless backed by an option consideration.	Tests perfection and options without option money.
Civil Code, Article 1191	The injured party in a reciprocal obligation may choose fulfilment or resolution, with damages.	Main remedy when a buyer who gave earnest money defaults.
Civil Code, Article 1592	In a sale of immovables, the buyer may pay after the due date until demanded judicially or by notarial act.	Limits automatic forfeiture in land sales.
Civil Code, Articles 1229 and 2227	Courts may equitably reduce penalties and liquidated damages that are iniquitous or unconscionable.	Controls excessive earnest-money forfeiture clauses.
Republic Act No. 6552 (Maceda Law)	Protects buyers of residential real estate on instalments with grace periods, notarial cancellation and refunds after two years of payments.	Covers down payments and deposits in qualifying instalment sales.
Adelfa Properties, Inc. v. Court of Appeals, G.R. No. 111238	Sets out the distinctions between earnest money and option money; substance over label.	Leading case for classifying a disputed payment.
Sanchez v. Rigos, G.R. No. L-25494	An option without separate consideration is an offer that becomes a sale if accepted before withdrawal.	Explains the effect of missing option money.

Frequently asked questions

Can a seller keep earnest money after buyer default?

Not automatically. Earnest money is part of the price in a perfected sale, so the seller’s basic remedies are fulfilment or resolution with damages under Article 1191. Retention is stronger if the contract has a valid forfeiture clause, the buyer clearly defaulted after proper demand, and no special law applies. Courts may reduce an excessive forfeiture under Articles 1229 and 2227.

Is earnest money part of the purchase price?

Yes. Article 1482 says earnest money given in a contract of sale is considered part of the price and proof that the contract was perfected. It is deducted from the total price, so the buyer pays only the balance. This differs from option money, which is a separate consideration and is not credited unless the parties agree.

Is option money refundable if the buyer does not buy?

Usually not. Option money pays for the privilege of deciding within a fixed period, and the seller kept the property off the market during that time. If the buyer lets the option lapse, the money has served its purpose. The option agreement may provide otherwise, so read its refund and crediting terms carefully.

Is a reservation fee the same as earnest money?

Not always. A reservation fee paid when the unit and total price are fixed, and stated to form part of the down payment, will usually be treated as part of the price. A fee paid only to hold a unit while terms remain open may not prove a perfected sale. The document and conduct of the parties decide.

Does earnest money have to be a certain percentage of the price?

No. Article 1482 sets no minimum or maximum amount. Any sum given as part of an agreed price in a perfected sale may be earnest money. In practice, amounts of a few percent of the price are common, but the size of the payment does not change its legal character.

Does the Maceda Law cover earnest money and down payments?

It can. The Maceda Law covers sales and financing of residential real estate on instalments and counts down payments and deposits as payments. A buyer with at least two years of payments may be entitled to a cash surrender value on cancellation. Industrial lots, commercial buildings and certain agrarian sales are excluded.

What if the seller backs out after receiving earnest money?

A seller who refuses to perform a perfected sale without legal cause is in breach. The buyer may sue for specific performance or ask for resolution with damages under Article 1191. If the sale is resolved, the earnest money is ordinarily returned as part of mutual restitution, not kept by the seller who broke the contract.

Related CivilLaw.ph guides

• Contract of Sale vs Contract to Sell
• Can I Recover My Down Payment if the Contract Is Cancelled?
• Maceda Law: When Does It Apply?
• Resolution Under Article 1191
• Mutual Restitution Under Article 1191
• Specific Performance in the Philippines
• What Should Be in a Contract to Sell for Property?
• Sales and Buyer–Seller Remedies hub

Sources and legal citations

1. Republic Act No. 386, Civil Code of the Philippines, Articles 1191, 1229, 1324, 1458, 1475, 1479, 1482, 1592 and 2227: LawPhil.
2. Republic Act No. 6552, Realty Installment Buyer Protection Act (Maceda Law): LawPhil.
3. Adelfa Properties, Inc. v. Court of Appeals, G.R. No. 111238, January 25, 1995: LawPhil.
4. Sanchez v. Rigos, G.R. No. L-25494, June 14, 1972: LawPhil.

Editorially reviewed: September 24, 2026.