It is no secret that Filipinos prefer to use the installment method of payment. According to the most recent data from the state-run Credit Information Corporation (CIC), installment transactions is a series of payments on dates contracted, instead of a lump sum made for afforded goods, usually with corresponding interest rates—dominate the credit reports of Filipino borrowers. As of the 16th of December of 2019, about 36,833,166 or 65 percent of the 56,481,088 contract data in the country’s sole public credit registry are installment transactions. As the rise of installment contracts attracts more Filipinos, it is only necessary to have laws protecting its consumer such as the Maceda Law. In this article, a comprehensive guide on Maceda Law shall be made available.
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What is an Installment Contract?
An installment contract or also known as a land purchase contract, articles of agreement for warranty deed, or contract for deed is an agreement between a real estate seller and buyer in which the buyer agrees to pay the purchase price which is the principal plus interest to the seller in installments over a specified period. The buyer takes immediate possession upon contract execution, but the seller retains legal title to the property until the buyer pays the full purchase price agreed upon. Once the final payment is made, the seller hands over the deed to the buyer. Installment contracts are a type of mortgage financing that can benefit both the seller and the buyer in a real estate transaction.
With the constant rise of property development, like affordable houses and condominium projects of Bria Homes, comes a slew of issues for real estate buyers, especially if the chosen mode of payment by the buyer is through installment contracts. Furthermore, payment and amortization defaults on condominium and house and lot properties have been a common story for some time. The cause can be traced to a variety of factors, ranging from general economic volatility and inflation to intervening events unique to each buyer. In some cases, if not most, the buyer’s financial situation when deciding to own a residential property will not be the same financial situation when the residential units near turnover.
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In accordance to this, an installment contract provides less protection to the buyer than a traditional mortgage. This is primarily due to forfeiture provisions, which give the buyer no right of redemption and allow the buyer to lose all interest in the property for the smallest breach. Because of the possibility of inequitable outcomes, courts generally view forfeiture clauses negatively, and they will be strictly and narrowly construed. As a result, “the party seeking to enforce the forfeiture bears the burden of demonstrating that the right to forfeiture clearly and unequivocally exists and that its exercise will result in no injustice.”
Developers and sellers must rigorously adhere to the Maceda Law, which became law on August 26, 1972, and protects customers who pay in installments. Prior to Maceda Law, the seller may terminate the contract and keep any payments received by the installment customer. If the contract was a Contract to Sell, automatic cancellation or rescission is permitted. In the case of a contract of sale, the vendor must withdraw the contract by a legal or notarial act. However, under the Maceda Law, a buyer who has paid at least two (2) years of payments is eligible for the rights.
What is Maceda Law?
Senator Ernesto M. Maceda has a distinguished public service career spanning 43 years in senior government posts. His career has been defined by multiple great achievements, beginning with his election as Manila’s No. 1 Councilor at the age of 23 in 1959. After securing a senate seat in 1971, Maceda’s measure guaranteeing protection to real estate buyers on an installment basis was the sole bill approved into law before Martial Law was declared. The legislation is known as the Maceda Law.
The Realty Installment Buyer Act, also known as the Maceda Law, aims to protect buyers of real estate on installment payments from common adverse conditions when purchasing properties. A sale transaction is considered installment when at least two installments are due in the future at the time of sale perfection. Because the law only applies to residential real estate transactions, industrial lots, commercial buildings, and real estate sold to tenants under agrarian laws are not covered.
In addition, to provide protection for its buyer the law provided the following provisions:
- Section 3 of Maceda Law provides protection for the buyer who has paid at least two years of installments, he is entitled to the following rights if he fails to make further installments:
(a) To pay, without additional interest, the unpaid installments due within the total grace period earned by him which is hereby fixed at the rate of one month grace period for everyone year of installment payments made: Provided, That this right shall be exercised by the buyer only once in every five ‘years of the life of the contract and its extensions,’ if any.
(b) If the contract is canceled, the seller shall refund to the buyer the cash surrender value of the payments on the property equivalent to fifty per cent of the total payments made, and, after five years of installments, an additional five per cent every year but not to exceed ninety per cent of the total payments made: Provided, That the actual cancellation of the contract shall take place after thirty days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act and upon full payment of the cash surrender value to the buyer.
Brief Explanation of Section 3: Buyers who have paid at least two years of installments have the following rights if they fail to pay future installments:
- Pay with no extra interest. Unpaid installments are payable within the buyer’s total grace term, which is set at one month grace period for every year of installment payments completed. However, the buyer may only use this privilege once per five years throughout the duration of the contract and any extensions, if any.
- If the contract is canceled, refund the cash surrender value of the property payments to fifty percent of the total payments made, plus an additional five percent per year after five years of installments, not to exceed ninety percent of the total payments made. Provided, however, that the contract will be cancelled thirty days after the buyer receives the notice of cancellation or the deed.
- Section 4 of Maceda Law provides protection for buyers of which fewer than two years of payments have been paid, the seller must provide the buyer with a grace period of at least sixty days from the day the installment became due.
Brief Explanation of Section 4: If the buyer has made less than two years of installment payments, the buyer is only entitled to a 60-day grace period, as specified in Section 4.
- More notably, the Maceda Law has a part that shields buyers from the small print of contracts imposed by contractors or developers. These minor print provisions are frequently overlooked by purchasers during contract signing.
Finally, Maceda Law states that no contract shall be above this law.
Any stipulation in any contract hereafter entered into contrary to the provisions of Sections 3,4,5, and 6 shall be null and void.
Who is qualified for Maceda Law?
According to the section 3 of the law, for you to be eligible for the Maceda Law protection, the buyer must have paid at least two years of payments. The law gives him the right “to pay, without additional interest, the unpaid installments due within the total grace period earned by him, which is hereby fixed at the rate of one month grace period for every one year of installment payments made.” However, he may only exercise this right once every five years of the contract’s life, and any extensions. In contrast, if the contract is cancelled during the first five years, the seller must restore fifty percent of the cash surrender value of the buyer’s payments. After five years of installments, an extra 5% per year, up to a maximum of 90% of the total payments made, becomes payable.
Does it apply if I have previously chosen to pay through the bank?
Today, it is usual for developers to need only the equity to be paid in installments. This equity, often known as a “down payment,” ranges from 10% to 50% (typically 20%), depending on the developer and the specific development project. The remaining amount after the equity will be borne by some kind of financing.
The answer to the issue of whether the Maceda Law will still apply if you choose to settle your remaining debt with bank financing is no it cannot apply to this case. This is due to the fact that when you begin making payments to the bank, it signifies you have already obtained a mortgage from them. When you took out a bank loan, you simply borrowed money and then utilized it to pay the developer in full. But this all transpired in the background, and the money no longer passed through your hands. The developer received it directly from the bank. This is what most folks get wrong.
Since the property has already been paid for in full, as far as the developer/seller is concerned, your property is now completely paid. According to the law, your property has already been paid for in full. However, your bank loan is still owed. The money you borrowed to pay the developer is now your debt to the bank.
It is also important to note that banks also do not provide refunds. One alternative is to sell the property. If you are unable to locate a buyer, you can cut your losses and request a “Dacion en pago” from the bank. Rather than not paying and fleeing the bank, “dacion en pago” refers to returning the property to the lender after the latter has dismissed the mortgage obligation.
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Can you make advance payments to lower the debt without incurring additional interest?
The buyer shall have the right, at any time, to pay any installment or the whole outstanding balance of the purchase price in advance without interest, and such full payment of the purchase price shall be noted in the certificate of title covering the property.
What happens in the case of transfer of property rights by sale or assignment?
Buyers have the option of selling or assigning their property rights to another. If the buyer so desires, they may reestablish a new contract by making modifications to the account within the grace period. However, before the contract can be formally terminated, the transaction must be completed. A notarial act must also be used to complete the requisite sale or assignment deed.
Other Laws to Know Before Buying Your Next Real Estate Property
Finally, there are a lot of laws to know of before actual purchase of real estate properties. These other laws which safeguard condominium and subdivision property buyers’ rights include the Philippine Condominium Act (RA 4726) and the Subdivision and Condominium Buyers’ Protective Decree (Presidential Decree 957). Although both laws cover the same issue, ‘refunds,’ they cover distinct scenarios, as laws are not assumed, for how refunds are intended to be issued.
There are regulations that protect you as a buyer depending on your position. Know your rights, as an empowered buyer, you have particular rights to a claim relevant to your situation, such as no refund for less than two years of payment history save for extensions of payment, but a fifty percent return at a minimum for two years or more.