Dear Attorney,

I am writing to you as an individual property owner who recently took possession of a house constructed by a developer. During the course of construction, there were certain additional works requested, which resulted in extra costs. However, due to unforeseen circumstances, I was not able to settle these additional fees on the handover date. Now, the developer is demanding payment of these unpaid amounts together with penalties and interest. I have concerns about whether they are legally authorized to do so under Philippine law, particularly given that this specific charge was not prominently discussed at the time of contract signing. I would greatly appreciate your guidance on whether these penalties and interest charges are permissible, and under what conditions they may be imposed.

Thank you in advance for your assistance.

Sincerely,
[A Concerned Homeowner]

COMPREHENSIVE LEGAL ANALYSIS

Introduction
When developers construct residential properties, there can be changes, modifications, or additional works requested by the buyer. Sometimes, extra costs are incurred that go beyond the originally contracted sum. Once the project is completed and the property is turned over, questions can arise regarding the imposition of penalties and interest on amounts that remain unpaid. Under Philippine law, the validity of such charges is contingent on several considerations, including the existence of relevant contract stipulations, applicable provisions in the Civil Code, established jurisprudence, and the principles of fairness and reasonableness.
Contractual Foundation
Under Philippine law, the terms and conditions of a contract serve as the binding agreement between the parties. Article 1159 of the Civil Code of the Philippines states that obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith. Thus, in determining whether a developer can charge penalties and interest on unpaid fees for additional works, the first inquiry is whether these specific charges were provided for in the construction agreement, supplemental contract, or any addendum.

2.1 Stipulation in the Original Contract
- If the original contract (or purchase agreement) already contemplates the possibility of extra work, it often includes provisions that specify how additional expenses will be charged and how any resulting late payments will be handled.
- In many standard real estate purchase agreements, a clause addresses variation orders or subsequent addenda that may arise. Such clauses typically describe the procedure for billing, the deadlines for payment, and whether or not interest and penalties apply.
2.2 Separate Agreement or Change Order
- If the additional work was not contemplated in the original contract, developers commonly issue a separate change order or supplemental contract. Such a document usually requires the buyer’s express consent, specifying the scope of work, pricing, and deadlines for payment.
- A well-drafted supplemental agreement will also clarify how the developer can address late payments and whether a specific penalty rate or interest rate is imposed.
Legal Basis for Imposing Penalties and Interest
In Philippine contract law, the general rule is that interest and penalties must be based on an agreement between the parties or a statutory provision. If there is no contract, or if the contract does not allow for the imposition of interest or penalties, developers typically cannot unilaterally require such payment.

3.1 Conventional Interest under the Civil Code
Article 2209 of the Civil Code of the Philippines provides the legal foundation for interest on unpaid obligations when such interest is stipulated or when the law otherwise provides. Generally, the parties can agree on a rate of interest, subject to certain limitations. The Supreme Court has consistently held that while parties may stipulate a rate, excessive interest rates could be declared void for being contrary to morals or public policy.

3.2 Legal Interest in the Absence of Stipulation
- If no rate of interest is stated in the contract, the applicable interest rate (sometimes called the legal rate) may be determined by the prevailing rules or by Bangko Sentral ng Pilipinas (BSP) circulars. Historically, the legal interest used to be 6% or 12% depending on the nature of the obligation. However, the Supreme Court, in various circulars and rulings, has adjusted these rates.
- As of more recent jurisprudence, the legal interest for judgments in the absence of contractual stipulations is 6% per annum, but it remains vital to check for the updated rates promulgated by the BSP or clarified by court rulings.
3.3 Penalties (Penalty Clause) under the Civil Code
- Articles 1226 through 1230 of the Civil Code discuss penalty clauses. A penalty clause is an accessory undertaking to assume greater liability on the part of the debtor in case of breach. This requires a specific agreement within the contract.
- The validity of penalty clauses remains subject to the principle that penalties should not be unconscionable or exorbitant. Courts may reduce the penalty if it is iniquitous or excessive based on Article 1229 of the Civil Code.
Requisites for Enforceability
For developers to legally charge penalties and interest on unpaid additional construction costs, the following key points must be satisfied:

4.1 Existence of a Written Agreement
- Philippine courts generally require that interest and penalty charges be grounded on a written instrument. An oral agreement alone to pay interest is generally not enforceable unless proven by clear evidence of the parties’ true intention, but even then, documentary proof is crucial to avoid ambiguities.
4.2 Clear and Definite Terms
- The stipulated penalty or interest rate must be expressly stated. Vague language that does not set a specific rate or method of computation may be insufficient.
- Also, the agreement should specify the point in time when interest or penalties begin to accrue—typically from the date the payment is due, unless otherwise stated.
4.3 No Contrary Public Policy
- If the penalty or interest charged is excessive to the point of being “iniquitous,” courts can step in. Jurisprudence provides that when an interest rate is unconscionable, the Supreme Court may reduce it to a more reasonable figure.
Applicability of the Maceda Law (Republic Act No. 6552)
The Maceda Law, or the Realty Installment Buyer Protection Act, generally protects buyers of real estate on installment payments. However, this law mainly addresses rights of buyers who default on installment payments for the principal amount of the property, not necessarily additional works that arise under a separate arrangement.

5.1 Scope of the Maceda Law
- RA 6552 concerns defaults in paying the principal purchase price on installment terms. The law extends certain rights, like the right to cure the default or to receive refunds depending on the number of installments paid.
- If the additional work arrangement is embedded in the main purchase agreement and the cost of that additional work becomes part of the installment purchase price, the Maceda Law might come into play. But if the extra work is covered by a separate contract, it may not be governed by RA 6552.
5.2 Developer’s Recourse under Maceda Law
- Developers typically rely on the law to justify forfeiture of payments or interest on overdue accounts. However, the Maceda Law also upholds consumer protection principles, meaning that extraneous fees or obligations not covered by the original or amended purchase agreement might not be enforceable under RA 6552.
Practical Considerations for the Buyer
When faced with a developer’s claim for penalty and interest on unpaid additional works, a buyer should do the following:

6.1 Review All Agreements and Correspondence
- Carefully examine the primary purchase agreement, any supplemental contracts, and any exchanges (emails, letters, or text messages) that might indicate acceptance of the penalty or interest terms.
6.2 Request a Detailed Billing Statement
- Ask the developer to provide an itemized account of all charges, including the principal amount for the additional works, the penalty percentage, and how the interest rate was computed.
- This allows you to compare the charges against the actual cost agreed upon and verify whether any clauses authorizing such charges exist.
6.3 Negotiate Amicably
- Even if an agreement includes a penalty clause, it is not uncommon for developers to waive or reduce penalties and interest as part of a settlement agreement to maintain goodwill.
- Attempting to resolve any disagreements amicably may be less costly and time-consuming than pursuing litigation.
Remedies and Defenses under Philippine Law
If the buyer believes that the developer’s imposition of penalties and interest is unwarranted or excessive, there are several potential defenses and remedies:

7.1 Demand for Contract Clarification
- Before resorting to legal remedies, the buyer can formally request the developer to clarify the basis for imposing penalties and interest. The developer must show the contractual provision or relevant legal principle that justifies these charges.
7.2 Action for Reformation of Instrument
- Under certain circumstances, if the written agreement does not reflect the true intent of the parties or if there was mistake, fraud, inequitable conduct, or accident, the buyer may file a case for reformation of the contract. This would allow the court to correct the contract to conform to what was truly agreed upon.
7.3 Petition for Reduction of Penalty
- If the penalty is found to be iniquitous or unconscionable, the courts, applying Article 1229 of the Civil Code, can order its reduction. Similarly, if the interest rate charged is patently exorbitant, the court may reduce it to a more reasonable rate.
7.4 Nullification of Penalty Clause
- In extreme cases where the clause imposing the penalty is deemed contrary to public policy, courts can nullify the clause entirely. This is relatively rare, but it is possible if the penalty is oppressive.
Key Jurisprudence
Philippine jurisprudence has multiple rulings addressing the validity of interest and penalty clauses. While each case is unique, certain common principles emerge:

8.1 Articulation of Interest in Writing
- The Supreme Court has repeatedly emphasized that interest is not due unless expressly stipulated. (See Reyes vs. Lim, G.R. No. 191477, among other cases.)
8.2 Reasonableness of Rates
- In cases like Medel vs. Court of Appeals (G.R. No. 131622), the Supreme Court struck down interest rates that were found to be clearly excessive. Courts will step in if the penalty or interest rate is so high as to be inequitable.
8.3 Contractual Autonomy vs. Equity
- Generally, courts respect the freedom of the parties to enter into contracts (Article 1306, Civil Code). However, that freedom is not absolute. Contracts whose stipulations run contrary to law, morals, good customs, or public policy will be deemed void.
Practical Steps for Developers
On the side of the developer, if they wish to impose penalties and interest, they should ensure:

9.1 Explicit and Transparent Contract Provisions
- Draft the contract so that any additional works and corresponding payments are expressly stated, including the timeline, the penalty clause, and the interest rate.
9.2 Reasonable Rates
- Stick to interest rates that align with legal and market standards to avoid running afoul of public policy or the judiciary’s power to reduce excessive rates.
9.3 Clear Invoicing and Communication
- Provide buyers with prompt, detailed invoices. In all communications, be transparent about the basis for charging penalty and interest.
Implications of Default and Turnover
The fact that the property was handed over does not by itself extinguish the buyer’s obligation to pay for additional works. Normally, property turnover is contingent on the buyer meeting all financial obligations. If the contract indicates that turnover will not be withheld even if additional fees remain unpaid, developers commonly retain the right to collect on such obligations post-turnover, including applicable penalty and interest if contractually allowed.

10.1 Constructive Acceptance

Accepting the additional works without lodging any objection or request for modification can be interpreted as consent to pay the corresponding charges. However, the developer still bears the burden of showing that the buyer was fully informed of, and agreed to, any penalties or interest.

10.2 Failure to Disclose

If the developer failed to disclose the possibility of interest or penalty at the time of agreement, they might be estopped from later imposing such charges. Nonetheless, the final determination would depend on the specific facts and the contract language.

Checklist for Buyers Concerned About Penalties
Obtain a copy of all relevant documents (the original purchase agreement, any supplemental agreements, emails, or letters).
Check if there is a written penalty clause that specifically allows the developer to charge interest or penalties for late payment of additional works.
Assess the reasonableness of the penalty or interest rate. Compare it with prevailing rates and jurisprudential guidelines.
Communicate formally with the developer to verify the basis of the charges before taking any legal action.
Consult a legal professional to ascertain whether the developer’s imposition is enforceable or subject to reduction.
Conclusion
Whether a developer is authorized to charge penalty and interest for unpaid additional construction costs largely hinges on what is stipulated in the contract. If there is a clear agreement addressing extra work, and if it includes a valid penalty clause or interest provision, the developer may lawfully impose such charges. Absent an express written stipulation, or if the penalty or interest is excessive, the buyer has grounds to question its legality under Philippine law.

Ultimately, clarity in the contract, the presence (or absence) of a valid stipulation, and adherence to the principles of fairness and reasonableness will guide whether the penalty and interest demands can be enforced. If no explicit clause exists and no prior acceptance or knowledge by the buyer is established, the developer risks having these charges questioned or invalidated. On the other hand, if such charges were validly agreed upon, the buyer may still seek equitable relief from the courts if the amounts claimed are disproportionate or unconscionable.

Buyers who find themselves in this situation should first carefully analyze the contract documents and any addenda, then seek professional legal advice if uncertainties remain. Given that real estate transactions often involve substantial sums, it is in both parties’ best interests to discuss and clarify these matters promptly and in good faith, especially before proceeding to litigation.

Disclaimer: This discussion is provided for informational purposes only and does not constitute legal advice. No attorney-client relationship is formed by virtue of this explanation. For questions or clarifications specific to your situation, please consult an attorney who is well-versed in Philippine real estate law.