An option money is paid in relation to an option contract, which is a preparatory contract. An option, as used in the law on sales, is a continuing offer or contract by which a property's owner, say the owner of a piece of land, gives the potential buyer a certain time to buy the property. Sometimes called an "unaccepted offer," an option is not yet a purchase contract, but merely secures the privilege to buy.  It is not yet a sale of the property, but a sale of the right to purchase that property. Considering that an option is an independent contract, the payment in connection therewith -- the option money -- is distinct and separate from the contract of sale. This means that if the sale doesn't push through, the option money is not reimbursed.

 

The parties must remember, however, that contracts are defined by principles of law, and not how the parties call it. Even if the parties call it an "option money," courts will treat it as an earnest money if, by nature and based on the language of the contract, among other factors, it's an earnest money. Earnest money is clearly distinguished from option money:

(a) earnest money is part of the purchase price, while option money is the money given as a distinct consideration for an option contract;

(b) earnest money is given only where there is already a sale, while option money applies to a sale not yet perfected; and

(c) when earnest money is given, the buyer is bound to pay the balance, while when the would-be buyer gives option money, he is not required to buy.

In other words, whenever earnest money is given in a contract of sale, it shall be considered as part of the price. It's a proof of the perfection of the contract. Earnest money is given by the buyer to the seller to bind the bargain. It constitutes an advance payment (or downpayment) and must, therefore, be deducted from the total price.

These discussions are basically the tip of the iceberg, so to speak. To complicate matters, we could say that payment of the earnest money need not necessarily give rise to a valid contract of sale. The parties could also treat an "earnest money" as a form of guarantee that the buyer will not back out and, should it do so, the amount will be forfeited in favor of the seller. There are other complications that need not be discussed in this introductory post. (Sources: Cavite Development Bank vs. Spouses Lim, G.R. No. 131679, 1 February 2000; Adelfa Properties vs. CA, G.R. No. 111238, 25 January 1995)