Escalation clause in Philippine Property Purchases

Do not be fooled into accepting the escalation clause even if it is provided under the Philippines law. In fact, the law allows the buyer to disagree with this provision. Article 1250 of the Philippines Civil Code provides that: In case an extraordinary inflation or deflation of the Philippine currency stipulated should supervene, the value of the currency at the time of he establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary.

The provision of Article 1250 requires for its application a declaration of inflation by the Bangko Sentral ng Pilipinas. Without such declaration, creditors cannot demand an increase of what is due them.

The escalation clause is sometimes based on the cost of living index. It is widely used in commercial contracts in an effort to maintain fiscal stability and to certain 'real dollar’ value to the price terms of long term contracts. It has been universally agreed upon to have a binding effect. However, if the agreement with the character of a contract of adhesion where the parties do not bargain on equal footing, the weaker party's participation being reduced to the alternative 'to take it or leave it,' such a contract is a veritable trap for the weaker party whom the Philippines court of justice must protect against abuse and imposition.

The basis of this clause is the buying power of the pesos. Others based it on the dollar exchange rate vis-à-vis the philippine pesos. The escalation clause comes into effect when the buying power fell by an arbitrary percentage, usually 25%. However, there is no justification for the increase for several reasons.

1. The project was supposed to start as soon as possible without waiting for the complete or major sell-out. Buyers should not be penalized for their short-selling.
2. The procrastination is not the fault of the buyers.
3. The periodic payments could have been used to purchase the needed materials and therefore arrest the price increase. If this was done, how is it possible to compute equitably the share increase? Who is to choose which items are to be price averted? Are the buyers given a choice as to how the money advanced is to be used?
4. For the sake of equity, the buyers should also benefit from the decrease in prices of materials.
5. What happens during the period when the escalation clause has not taken effect? Who and how is the percentage of the remaining work affected by the escalation clause to be determined?
6. Like all business ventures, developers should also take the risk of losing or earning less, instead of passing off all losses to the buyers.
7. The advances made by buyers should be put to good use and should offset any appreciation in prices of materials.
8. How is the mechanics for implementing the escalation clause to be applied? There are just too many factors that are sure to delay the project to the detriment of the buyers.
9. Developers in business must also take the risk of losing instead of forcing the small homeowners to shoulder their losses due to their ineptness, balloon salaries and bonuses, luxurious lifestyle at the expense of the homebuyers.
10. Last but not least, there is already an artificial large margin of profit made by developers that easily compensate for the price increase.

Installment buyers waiting for the home to be built can be in for some surprises. Economic and political crises can affect their investment. When the Asian currency crisis hit the Philippines, many developers were forced to close shop as banks closed down or topped their heavy exposure to the real estate loans. Many developers were unable to finish their projects and their properties foreclosed, and the installment buyers were forced to wait, hoping the developer will still be able to finish the project. Many have resigned to their misfortune.

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