The clause we keep seeing
In many of the real estate installment cases our office handles, the buyer signed a contract prepared by the seller or developer. The title varies: “Contract to Sell,” “Contract to Sell and Buy,” “Contract to Sell and Lease,” “Rent-to-Own Agreement,” “Lease with Option to Purchase,” and others. Almost all of them carry a forfeiture clause worded along these lines:
“Should the BUYER fail to pay any installment when due, this Contract shall be automatically cancelled without need of notice or judicial action, and all payments made by the BUYER shall be forfeited in favor of the SELLER as rentals for the use of the property and as liquidated damages, without any obligation on the part of the SELLER to refund the same.”
Buyers who have paid for years are then told they lose everything because the payments were “just rent.” Our clients usually ask one question: is that clause valid?
The short answer
The contract itself is generally not void, but the forfeiture clause is void to the extent it takes away rights the Maceda Law guarantees the buyer. Neither the title of the contract nor calling the installments “rent” changes this.
- Paid at least 2 years of installments: the clause cannot strip you of your refund. You are entitled to a cash surrender value of at least 50% of total payments made, and cancellation takes effect only after you receive it.
- Paid less than 2 years: forfeiture may be allowed, but only after a 60-day grace period and a proper notarial notice of cancellation. “Automatic” cancellation without notice is not effective.
The rest of the contract (price, payment terms, transfer upon full payment) generally stays in force.
Whatever the contract is called
What matters is the substance of the transaction, not its title. If the buyer is paying the price of residential real estate in installments, with ownership to pass upon full payment, the Maceda Law applies, whether the document says “Contract to Sell,” “Contract to Sell and Buy,” “Contract to Sell and Lease,” or anything else. Courts interpret contracts by the parties’ real intent and the nature of what they agreed to (Civil Code, Arts. 1370 to 1371).
A clause forfeiting the buyer’s installments violates the law in two ways:
- Directly. A clause that cancels the contract and forfeits all payments without the grace period, notarial notice or cash surrender value is a stipulation contrary to Sections 3 and 4. Section 7 declares it null and void. A waiver of Maceda rights written into the contract is void for the same reason.
- Indirectly. Relabeling purchase installments as “rent,” “occupancy fees” or “liquidated damages,” or dressing the sale up as a lease, does the same thing by another route: it takes away rights the law says cannot be stipulated away. What the law prohibits directly cannot be achieved indirectly, and a contract term used to circumvent a mandatory law is contrary to law (Civil Code, Arts. 1306 and 1409).
One limit. A genuine lease, where the payments are true rent for use of the property and any purchase is a separate, optional future sale, is not an installment sale and is not covered. The question in every case is what the payments were really for.
The governing law: the Maceda Law (R.A. No. 6552)
The Realty Installment Buyer Act, better known as the Maceda Law, protects buyers of real estate on installment. It covers sales of residential real estate, including condominium units, house and lot packages, and residential lots, whether sold by a developer or a private individual.
It does not cover industrial lots, commercial buildings, or sales to tenants under the agrarian reform law (R.A. No. 3844).
The key provision is Section 7: any stipulation in a contract that is contrary to the Act is null and void. A clause that says all payments are forfeited as rent, regardless of how much the buyer has paid, collides directly with the buyer’s rights under Sections 3 and 4. That clause, or the part of it that violates the law, is therefore void, while the contract survives.
What the buyer is entitled to
Your rights depend on how long you have been paying installments.
Swipe the table sideways to see both columns →
| Paid at least 2 years (Sec. 3) | Paid less than 2 years (Sec. 4) | |
|---|---|---|
| Grace period | 1 month for every year of installments paid, without interest; usable once every 5 years | At least 60 days from the date the installment fell due |
| Refund if cancelled | Cash surrender value of 50% of total payments; plus 5% per year after the 5th year, up to 90% | None required by law |
| When cancellation takes effect | 30 days after receipt of a notarial notice of cancellation and full payment of the cash surrender value | 30 days after receipt of a notarial notice of cancellation or demand for rescission |
“Total payments” include the down payment, deposits and option money, not just monthly amortizations.
Other rights in every case: before actual cancellation, the buyer may sell or assign the rights to another person (Sec. 5), and may pay the full balance ahead of time without interest (Sec. 6).
Example: A buyer paid ₱900,000 over 7 years, then defaulted. The seller cannot keep the entire ₱900,000 as “rent.” The buyer is entitled to 60% (50% + 5% for each of the 6th and 7th years), or ₱540,000, before cancellation can take effect.
“Automatic cancellation” is not enough
The Supreme Court has consistently held that a seller cannot cancel a Maceda-covered contract by simply declaring it cancelled, by sending an ordinary letter, or by relying on an “automatic cancellation” clause.
- Notarial act required. Cancellation needs a notice of cancellation or demand for rescission by notarial act, actually received by the buyer (Active Realty & Development Corp. v. Daroya, G.R. No. 141205, May 9, 2002).
- No valid cancellation, contract still stands. Without the notarial notice and, where due, payment of the cash surrender value, the contract to sell remains valid and subsisting (Pagtulunan v. Dela Cruz Vda. de Manzano, G.R. No. 154317, July 27, 2007).
- Forfeiture clauses yield to the law. The Court has applied the Maceda Law over contractual forfeiture terms and ordered the refund of the cash surrender value (Leaño v. Court of Appeals, G.R. No. 129018, November 15, 2001).
- Even for under-2-year buyers. The 60-day grace period and notarial notice must still be observed before the seller may recover the property (Optimum Development Bank v. Spouses Jovellanos, G.R. No. 189145, December 4, 2013).
Until cancellation is validly completed, the seller generally cannot eject the buyer or resell the property.
Other protections that may apply
- No waiver by later document. Sellers sometimes ask a defaulting buyer to sign a “voluntary surrender” or quitclaim giving up all payments. Courts scrutinize these closely, and a waiver obtained without informing the buyer of Maceda rights may be challenged.
- Subdivision and condominium projects (P.D. No. 957, Sec. 23). If the developer fails to develop the project according to the approved plans and timeline, the buyer may stop paying after due notice and demand a refund of all payments, including amortization interest (but excluding delinquency interest), with legal interest.
- Unconscionable penalties (Civil Code, Art. 1229). Even where Maceda does not apply, courts may reduce a penalty or liquidated damages that is iniquitous or unconscionable, especially where the obligation was partly performed.
- Commercial or industrial property. Maceda does not apply, so the contract terms and the general rules of the Civil Code govern. Excessive forfeiture may still be challenged under Art. 1229.
If this is happening to you
- Gather your contract to sell, official receipts, statement of account, and every notice you received.
- Count how long you have paid installments and add up your total payments, including the down payment.
- Check whether any cancellation notice you received was notarized.
- Do not sign a waiver, quitclaim or “voluntary surrender” before getting legal advice.
- Respond in writing and keep proof of every payment and letter.
ZZ Law Office and Associates regularly represents installment buyers in Maceda Law disputes, refund claims and HSAC complaints. Contact us for a review of your contract and computation of your cash surrender value.
Frequently asked questions
Is a clause forfeiting all my installments as rent valid?
Not if the Maceda Law covers your purchase. Section 7 voids any stipulation contrary to the Act, so the forfeiture clause cannot take away your grace period, notarial notice, or (after 2 years of payments) your cash surrender value. The rest of the contract generally remains valid.
Does the Maceda Law apply if my contract is called a lease or rent-to-own?
It can. Courts look at the substance of the transaction. If you are really paying the price of residential property in installments, with ownership passing upon full payment, the label does not prevent the law from applying. A genuine lease with a separate, optional purchase is different.
How much is my cash surrender value?
If you have paid at least 2 years of installments, at least 50% of your total payments, including the down payment and deposits. After the 5th year, add 5% for each additional year, up to 90%.
Can the seller cancel my contract by just sending a letter?
No. Cancellation requires a notice of cancellation or demand for rescission by notarial act, actually received by you, and for buyers who paid at least 2 years, full payment of the cash surrender value.
Does the Maceda Law cover commercial property?
No. It does not cover industrial lots or commercial buildings. However, an excessive forfeiture may still be reduced by the courts under Article 1229 of the Civil Code.