Interest on Installment Sale of Real Property and Suspension of Payment

Law and jurisprudence

Cash Sale and Installment Sale

Subdivision and condominium units are normally sold under 2 general schemes: 1) Cash and 2) Installment. The difference primarily lies on the total amount paid by the buyer and the length of time within which payment may be completed.

These cash and installment schemes give rise to 2 concepts of price: 

  1. Contract Price; and 
  2. Installment Price

Contract Price and Installment Price

Contract Price is the cash price of the property, that is, the amount payable if the price is paid in cash and in full upon the execution of the contract.

Installment Price is the amount paid by the buyer when he is given more time to pay the price in full after the execution of the contract. It consists of 2 components: Contract Price and Interest.

Validity of Interest on Installment Sale of Real Property

In the case of IRENE P. RELUCIO vs. ZEIDA B. BRILLANTE-GARFIN and COURT OF APPEALS, the Supreme Court sustained the validity of imposing interest on an installment sale of real property.

The interest serves as compensation to the seller for the years that he is unable to benefit from his or her  property or its value. Moreover, it takes into account the time-value of money. The value of  ₱100.00 today is considerably more than the value of  ₱100.00 a year later.

Had the seller received the full value of his or her property, he or she could have invested the amount and he or she could have derived income from such investment. Let’s say, the seller received the full amount of ₱100.00 and deposited it in the bank, earning an interest of 5% for one year. After one year, the amount would already be ₱105.00.

Effects of Valid Suspension of Payment by the Buyer

The Supreme Court has repeatedly upheld the right of the installment buyer of a subdivision lot to withhold payment of amortizations when the developer fails to timely complete the project, including the amenities and facilities (Section 23, P.D. No. 957).

In such a case, the buyer has the option whether 1) to demand for the refund of total payments made, except delinquency interests, plus legal interest, or 2) to wait for further development of the project. It should be emphasized that the option belongs to the buyer, and the seller has no other recourse but to accept whatever choice the buyer elects.

A controversy may arise when the buyer opts to wait for further development of the project and offers to continue payment when the development is resumed. Is the buyer still obliged to pay the installment price (including interest) or is he bound to pay only the contract price?

Although the suspension of payment by the buyer was valid, he is still liable for interest…

The Supreme Court holds that the buyer is still liable to pay the installment price (which includes interest) even when the developer has failed to complete the project on time (Tagaytay Realty Co., Inc. versus Arturo G. Gacutan  – G.R. No. 160033; July 1, 2015). Such failure on the part of the developer does not relieve the buyer of his or her obligation to pay interest. Although the developer is at fault for failing to complete the project as required by Presidential Decree No. 957, such fault does not erase the fact that the developer has  to wait for several years before the developer could enjoy the full value of the property. For having to forego instant benefit, the developer remains entitled to receive interest as has been validly agreed.