The documentation of the purchase and sale of real property could be surprisingly daunting for first-timers who are presented with numerous agreements or contracts to read, comprehend and sign.
Understanding why they are needed and what these documents state—whether as buyers or sellers—are essential for a smooth transaction.
Recognizing their differences will not only ensure a swift closure, it will also allow the buyers to transfer the certificates of title transfer under their names faster, thus protecting them from potential problems brought about by mischievous sellers.
Among the more important legal documents are the Reservation Agreement, Contract To Sell, and Deed of Absolute Sale.
Reservation Agreement (RA)
The Reservation Agreement is a binding document signifying the intents of the parties, where the buyer signifies and reserves the right to buy the property within a specified period (reservation, validity or exclusive period) and secures such intent through a reservation fee; and the seller agrees to sell the same property to the buyer, to the exclusion of other another potential buyer/s during the said period by removing it from the marketable inventory.
It is usually entered into between a seller and buyer as an initial step toward purchasing the subject property, whether it be a lot, house and lot, condominium unit or another types of real estate.
This is done before the buyer commits or pays bigger sums of money. In addition, a buyer who is interested to purchase a property but has concerns on its background or the rights of the seller, or wish to investigate the validity of the title and other documents presented, or further negotiate the terms and conditions of the purchase of the property, may wish to enter into such an agreement to secure the property for a fixed period.
As such, the RA contains the names and particulars of the parties involved, description of the property, reservation fee and conditions governing its application, validity date and or forfeiture clauses, total contract price, general terms and conditions, etc.
The reservation fee is not necessarily based on a fixed percentage of the total contract price.
Rather, it is usually pegged by the seller but eventually, has to be mutually agreed upon by the parties. However, the fee is dependent on the value and size of the property as it aims to also gauge the seriousness of the buyer’s intent while addressing the opportunity cost of the seller.
If the buyer decides to continue with the purchase of the property, the amount equivalent to the reservation fee is usually credited to the total contract price. If the buyer decides not to proceed with such purchase, the potential buyer may opt to have the RA canceled or let it lapse without performing his obligation. In most instances, the seller is expected to forfeit the buyer’s reservation fee, unless otherwise agreed upon by the parties. Thereafter, the seller may re-sell the property to another buyer.
Contract To Sell (CTS)
A CTS is a sales agreement between a buyer and a seller where the latter promises to sell a property exclusively to the buyer and commits to deliver the same to the buyer upon the buyer’s fulfillment or completion of their agreed stipulations. The buyer promises to buy the property and agrees to fully pay the purchase price according to their agreed arrangements and schedules, e.g. when the condominium unit is complete and ready for turnover.
In simple terms, what is being settled by this document is the buyer’s firm commitment and no longer just an intent, to purchase the property from the seller who likewise confirms to sell it, under more defined and or expanded terms and conditions.
Similar to the Reservation Agreement, the CTS also contains the parties’ names and their information, the property description such as the existing Transfer Certificate of Title (TCT) or Condominium Certificate of Title (CCT) number, technical description, lot area and or unit floor area, complete address/location, contract price, terms and conditions, etc.
Upon the signing of the CTS, the ownership and rights to the property are not immediately transferred to the buyer. Only after the parties have fulfilled their obligations can the buyer require that the Contract To Sell be converted to and or demand the execution of a Deed of Absolute Sale.
Deed of Absolute Sale
The Deed of Absolute Sale (DoAS) is a notarized document that confirms the sale and purchase of a subject property.
Similar to the CTS, it contains the parties’ names and their information, the property description, i.e. existing TCT or CCT number, technical description, lot area and or unit floor area, complete address/location, terms and conditions, etc.
Additionally, the DoAS includes statements of the seller’s property rights; details categorically that the seller is relinquishing and transferring his rights to the buyer in consideration of the sum and or obligation paid to the seller; that the buyer acquires full rights that comes with the property’s ownership; and the warranties by both parties.
Moreover, it contains the agreed purchase price as well as who will shoulder the transaction taxes and legal/miscellaneous fees, such as the capital gains tax (CGT)/creditable withholding tax (CWT), documentary stamp tax (DST), transfer tax and registration fee, notarial fee and broker’s or agent’s commission, if applicable.
In the absence of such provisions and based on current local practices, the CGT/CWT and DST are for the account of the seller, while the notarial fee, transfer tax and registration fee are to be paid by the buyer.
The Broker’s or Agent’s Commission is usually for the account of the seller.
The parties may choose to enter and sign one of two types of DoAS. In the Bilateral DoAS, the agreement is signed by both the seller and buyer, while in the Unilateral DoAS, only the seller is required to sign the document.
It should be reiterated that while the DoAS immediately transfers all the rights to the buyer upon full payment, a CTS or Conditional Deed of Sale (CDoS) requires specific conditions to be performed by the parties, e.g. installment payments to be paid to the seller be adhered to, before full property rights and title can be transferred from the seller to the buyer.
The DoAS should not be used when the buyer is not yet ready nor able to fully pay the property or when the seller is not ready to turn over/deliver the property. Doing so may put such party at a disadvantage.
Bottomline
While it is understandable that most people do not want to read long documents, always remember that being careful and conversant with these documents will hasten the closing of the transaction as well as avoid costly delays and problems in the future.
Although sample templates are available online, it is still best to consult a lawyer, broker or professional in crafting these agreements, contracts or deeds.
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Henry L. Yap is an architect, environmental planner, real estate practitioner and former professorial lecturer.