OPTION TO PURCHASE AND EARNEST MONEY DEPOSIT

Having been active in the real estate market in the Dominican Republic for many years, particularly in the tourist sector, we have at times noted a great confusion between the legal notion of the option to purchase and its effects when accompanied by a sum, which in our legislation is typified as earnest money.

First, we should point out that, although in practice an earnest money deposit usually consist of an amount of money, it does not neccesarily or indispensably have to be so. A financial instrument or any chattel that the parties deem of adequate value for entering into a contract may be considered as earnest money for the purpose of a real estate-operation. This leads to the conclusion that earnest money consitutes essentially a typical security for the fulfillment of such obligations as are normally established in an agreement of option to purchase, and it is therefore also known as handsel; and at the same time such term implies the granting of money or chattel as security or guarantee in a typical real-estate buying/selling deal.

The core of such constant confusion is the implementation of earnest money deposit in options to purchase. The option to purchase, also known as promise of sale, implies the unequivocal manifestation of one (or sometimes both) of the parties to sell a property to another in a given time. Therefore, in principle, an option to purchase should include a rescission period in order for the agreeement to be perfected and for the two wills to meet. What happens then, when a promise of sale has been made with earnest money or handsel? Such promise of sale implies the ability to retract because it gives both parties the right to withdraw from their commitment and to terminate their covenant sustaining a double penalty as established in article 1590 of our Civil Code, which reads as follows: "If a promise of sale has been made with an earnest money deposit or handsel, each of the contracting parties is entitled to rescind the contract, and the party who made such deposit shall forfeit it, and the party who received it should return such amount twofold" Many lawyers are wrong in understanding that a promise of sale always has the same force as a sale pursuant to article 1589.

In this case, the legislator has in fact introduced an extenuation to one of the effects of a consensual sale, i.e. the transmission of the premises and its risks. In other words, such effects are retarded pendente conditione until the parties waive their right to withdraw by executing a final contract. Thus, there is no actual sale until such time, the contents of article 1589 notwithstanding, since there con be no final agreement while a rescission is possible. Such misunderstanding is apparent when attempting to combine both articles. For many, a promise of sale has the same effect as a sale until it is rescinded.

This would imply that all risk of the chose would be born by th buyer. This notion is erroneous, according to our position regarding this matter. These two provisions may not be combined because they are antagonistic. The legislator´s intent was to sever one from the other. A promise of sale pure an simple, i.e. without earnest money deposit, has the same effect as a sale. A promise of sale with earnest money deposit involves the possibility to rescind such promise, to revoke it, to change one´s mind; it does not have the same effect as a sale until the parties involved give their final consent.

Freddy Miranda, Esq.
Former Professor Pontifical Catholic University PUCAMAIMA
Attorney at Law Figueroa Guilamo & Associates
www.fgasoc.com.do
fmiranda@fgasoc.com.do