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Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 199852 November 12, 2014

SPS. FELIPE SOLITARIOS and JULIA TORDA, Petitioners,


vs.
SPS. GASTON JAQUE and LILIA JAQUE, Respondents.

DECISION

VELASCO, JR., J.:

Nature of the Case

In this Petition for Review on Certiorari under Rule 45 of the Rules of Court, petitioners spouses Felipe Solitarios and Julia
Torda (spouses Solitarios) seek the reversal of the August 31, 2010 Decision and November 24, 2011 Resolution of the
Court of Appeals (CA) in CA-G.R. CEB-CV No. 00112, which in tum set aside the Decision of the Regional Trial Court of
Calbayog City, Branch 31 (RTC), in Civil Case No. 772.

The Facts

The property subject of this suit is a parcel of agricultural land designated as Lot 4089, consisting of 40,608 square meters
(sq. m.), and located in Calbayog, Samar. It was originally registered in the name of petitioner Felipe Solitarios under
Original Certificate of Title (OCT) No. 1249, and, thereafter, in the name of the respondents, spouses Gaston and Lilia
Jaque (the Jaques), under Transfer Certificate of Title (TCT) No. 745.

In a Complaint for Ownership and Recovery of Possession with the RTC of Calbayog City, the respondents spouses
Jaque alleged that they purchased Lot 4089 from the petitioners, spouses Solitarios in stages. According to respondents,
they initially bought one-half of Lot No. 4089 for ₱7,000.00. This sale is allegedly evidenced by a notarized Deed of Sale
dated May 8, 1981. Two months later, the spouses Solitarios supposedly mortgaged the remaining half of Lot 4089 to the
Jaques via a Real Estate Mortgage (REM) dated July 15, 1981, to securea loan amounting to ₱3,000.00.

After almost two (2) years, the spouses Solitarios finally agreed to sell the mortgaged half. However, instead of executing
a separate deed of sale for the second half, they executed a Deed of Sale dated April 26, 1983 for the whole lot to save
on taxes, by making it appear that the consideration for the sale of the entire lot was only ₱12,000.00 when the Jaques
actually paid ₱19,000.00 in cash and condoned the spouses Solitarios’ ₱3,000.00 loan.

On the basis of this second notarized deed, the Jaques had OCT No. 1249 cancelled and registered Lot 4089 in their
name under Transfer Certificate of Title (TCT) No. 745.

In spite of the sale, the Jaques, supposedly out of pity for the spouses Solitarios, allowed the latter to retain possession of
Lot 4089, subject only to the condition that the spouses Solitarioswill regularly deliver a portion of the property’s produce.
In an alleged breach of their agreement, however, the spouses Solitarios stopped delivering any produce sometime in
2000. Worse, the spouses Solitarios even claimed ownership over Lot 4089. Thus, the Jaques filed the adverted
complaint with the RTC.

For their part, the spouses Solitarios denied selling Lot 4089 and explained that they merely mortgaged the same to the
Jaques after the latter helped them redeem the land from the Philippine National Bank (PNB).

The spouses Solitarios narrated that, way back in 1975, they obtained a loan from PNB secured by a mortgage over Lot
4089. They were able to pay this loan and redeem their property with their own funds. Shortly thereafter, in 1976, they
again mortgaged their property to PNB to secure a ₱5,000.00 loan. This time, the Jaques volunteered to pay the
mortgage indebtedness, including interests and charges and so gave the spouses Solitarios ₱7,000.00 for this purpose.
However, this accommodation was made, so the spouses Solitarios add, with the understanding that they would pay back
the Jaques by delivering to them a portion of the produce of Lot 4089, in particular, onehalf of the produce of the rice land
and one-fourth of the produce of the coconut land. The spouses Solitarios contended that this agreement was observed
by the parties until May 2000, when Gaston Jaque informed them that he was taking possession of Lot 4089 as owner.
And to their surprise, Gaston Jaque showed them the Deeds of Sale dated May 8, 1981 and April 26, 1983, the REM
contract dated July 15, 1981, and TCT No. 745 to prove his claim. The spouses Solitarios contended that these deeds of
sale were fictitious and their signatures therein forged. Further, the spouses Solitarios challenge the validity of TCT No.
745, alleging thatthe Jaques acquired it through fraud and machinations and by taking advantage of their ignorance and
educational deficiency. Thus, they prayed that the RTC: (1) cancel TCT No. 745; (2) declare the adverted deeds of sales
dated May 8, 1981 and April 26, 1983 as null and void; (3) declare them the true and lawful owners of Lot 4089; and (4)
award them moral and actual damages.

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During the course of the trial, and in compliance with the February 7, 2001 Order of the RTC, the spouses Solitarios
deposited with the court a quothe Jaques’ purported share in the produce of Lot 4089 for the years 2001-2003, which
amounted to 16,635.60.1

On April 15, 2004, the RTC rendered a Decision2 upholding the validity of the deeds of sale in question and TCT No. 745,
rejecting the allegations of forgery and fraud. However, in the same breath, the RTC declared that what the parties
entered into was actually an equitable mortgage as defined under Article 1602 in relation to Article 1604 of the New Civil
Code, and not a sale. Consequently, the RTC ordered, among others, the reformation of the Deeds ofSale dated May
9,1981 and April 26, 1983, and the cancellation of TCT No. 745 in the name of the Jaques. The dispositive portion of the
RTC Decision reads:

WHEREFORE, this Court dismisses the instant case and pronounces Judgment against plaintiffs and hereby orders the
following:

1. Reformation of the Deed of Sale dated May 9, 1981 (Exhibit "E") and the Deed of Sale dated April 26, 1983 (Exhibit
"G") into contracts of mortgage;

2. Cancellation of TCT No. 745 in the name of spouses Gaston Jaque and Lilia Laure Jaque;

3. Considering the total mortgage debt of Php 12,000.00 as totally paid pursuant to Article 1602 of the New Civil Code;

4. Release of the amounts deposited to the Court by defendants to them minus lawful charges for their safekeeping, if
any; and

5. Payment of costs of the proceedings by the plaintiffs.

SO ORDERED.3

The RTC anchored its holding on the nature of the pertinent contracts in question on its findings that: (1) after the alleged
sale, the spouses Solitarios remained in possession ofthe land; (2) the Jaques did not physically occupy Lot 4089; (3) the
consideration for the sale of the whole land as stated in the Deed of Sale dated April 26, 1983, was only ₱12,000.00, an
amount grossly inadequate for a titled coconut and rice lands consisting of 40,608 sq. m.; (3) the Jaques did not disturb
the possession of Lot 4089 by Leonora Solitarios, Felipe’s sister-in-law, who resided therein; and (4) the Jaques never
had a tenant in the subject property.

On appeal, the CA4 reversed and set aside the RTC Decision, rejecting the trial court’s holding that the contract between
the parties constituted an equitable mortgage.

The CA noted that the allegation thatthe transaction is an equitable mortgage and not one of sale was not presented
before the trial court and was raised belatedly on appeal. Even then, the CA held that the spouses Solitarios failed to
convincingly prove that the deeds of sale were sham, noting that their bare denial as to their authenticity was insufficient
to overcome the positive value of the notarized deeds of sale. The CA further found that the spouses Solitarios’ claim of
inadequacy of the purchase price is unsupported by any evidence on record and that the spouses Solitarios’ possession
of Lot 4089 after the sale was not in the concept of an owner. In addition, the appellate court gave weight to the fact that
the Jaques paid the taxes on Lot 4089 since 1984. The CA, thus, concluded that based on the parties’ actuations before,
during, and after the transactions, it was unmistakable that they had no other intention but to enter into a contract of sale
of Lot 4089.

Their Motion for Reconsideration having thereafter been denied by the CA in its Resolution dated November 24, 2011, the
spouses Solitarios5 have filed the instant petition.

Issue

From the foregoing narration of facts,it is abundantly clear that the only material point of inquiry is whether the parties
effectively entered into a contract of absolute sale or anequitable mortgage of Lot 4089.

The Court's Ruling

The petition is impressed with merit.

At the outset, We note that, contrary to the finding of the CA, petitioner spouses Solitarios actually presented before the
RTC their position that the real agreement between the parties was a mortgage, and not a sale. Being unlettered,
petitioners may have averred that the deeds of sale and TCT presented by respondents were forgeries, obtained as they
were through fraud and machination. However, their saying that the sale instruments were "fictitious" and their signatures
thereon were "forged" amounts to alleging that they never agreed to the sale of their lot, and they never intended to sign
such conveyances. This reality is supported by the testimony of petitioner Felipe Solitarios that was offered to prove the
true intention of the parties ―that Lot 4089 was only mortgaged, not sold, to the Jaques. Before Felipe’s direct
examination, his counsel stated thus-

"ATTY. MARTIRES

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With the permission of the Court.This witness is one of the defendants; he will testify that the land was just mortgaged to
the plaintiff contrary to the claim of the plaintiff that the defendants sold the same to the plaintiffs; he will also testify that
the defendants never executed deed of sale in favor of the plaintiffs; he will also testify that ½ of the produce of the
cocoland subject of this case was delivered by the defendants to the plaintiffs and with regards to the riceland, ¼ of the
produce was also delivered to the plaintiffs; and he will also testify other matters related to this case."6

The Court is, therefore, not precluded from looking into the real intentions of the parties in order to resolve the present
controversy. For that reason, the Court takes guidance from Article 1370 of the Civil Code, which instructs that "if the
words [of a contract] appear to be contrary to the evident intention of the parties, the latter shall prevail over the former."
Indeed, it is firmly settled that clarity of contract terms and the name given to it does not bar courts from determining the
true intent of the parties. In Zamora vs. Court of Appeals,7 the Court elucidated that —

In determining the nature of a contract, courts are not bound by the title or name given by the parties. The decisive factor
in evaluating such agreement is the intention of the parties, as shown not necessarily by the terminology used in the
contract but by their conduct, words, actions and deeds prior to, during and immediately after executing the agreement.
As such therefore, documentary and parol evidence may be submitted and admitted to prove such intention.8 Further, in
resolving this kind of controversy, the doctrinal teaching of Reyes vs. Court of Appeals 9 impels us to give utmost
consideration to the intention of the parties in light of the relative situation of each, and the circumstances surrounding the
execution of the contract, thus: In determining whether a deed absolute in form is a mortgage, the court is not limited to
the written memorials of the transaction. The decisive factor in evaluating such agreement is the intention of the parties,
as shown not necessarily bythe terminology used in the contract but by all the surrounding circumstances, such as the
relative situation of the parties at that time, the attitude, acts, conduct, declarations of the parties, the negotiations
between them leading to the deed, and generally, all pertinent facts having a tendency to fix and determine the real nature
of their design and understanding. x x x

There is no single conclusive test to determine whether a deed of sale, absolute on its face, is really a simple loan
accommodation secured by a mortgage.10 However, Article 1602 in relation to Article 1604 of the Civil Code enumerates
several instances whena contract, purporting to be, and in fact styled as, an absolute sale, is presumed to be an equitable
mortgage, thus:

Art. 1602. The contract shall be presumed to be an equitable mortgage, in any of the following cases:

(1) When the price of a sale withright to repurchase is unusually inadequate;

(2) When the vendor remains inpossession as lessee or otherwise;

(3) When upon or after the expiration of the right to repurchase another instrument extending the period of redemption or
granting a new period is executed;

(4) When the purchaser retains for himself a part of the purchase price;

(5) When the vendor binds himself to pay the taxes on the thing sold;

(6) In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure
the payment of a debt or the performance of any other obligation.

In any of the foregoing cases, any money, fruits, or other benefit to be received by the vendee as rent or otherwise shall
be considered as interest which shall be subject to the usury laws. 11 Art. 1604. The provisions of Article 1602 shall also
apply to a contract purporting to be an absolute sale.

As evident from Article 1602 itself, the presence of anyof the circumstances set forth therein suffices for a contract to be
deemed an equitable mortgage. No concurrence or an overwhelming number is needed. 12

With the foregoing in mind, We thus declare that the transaction between the parties of the present case is actually one of
equitable mortgage pursuant to the foregoing provisions ofthe Civil Code. It has never denied by respondents that the
petitioners, the spouses Solitarios, have remained in possession of the subject property and exercised acts of ownership
over the said lot even after the purported absolute sale of Lot 4089. This fact is immediately apparent from the testimonies
of the parties and the evidence extant on record, showing that the real intention of the parties was for the transaction to
secure the payment of a debt. Nothing more.

Petitioner’s Possession of the Subject Property after the Purported Sale

During pre-trial, the Jaques admitted that the spouses Solitarios were in possession of the subject property.13Gaston
Jaque likewise confirmed that petitioners were allowed to produce copra and till the rice field, which comprise one-half of
the lot that was previously covered by the real estate mortgage, after said portion was allegedly sold to them. 14

This Court had held that a purportedcontract of sale where the vendor remains in physical possession of the land, as
lessee or otherwise, is an indiciumof an equitable mortgage.15 In Rockville v. Sps. Culla,16 We explained that the reason
for this rule lies in the legal reality that in a contract of sale, the legal title to the property is immediately transferred to the
vendee. Thus, retention by the vendor of the possession of the property is inconsistent with the vendee’s acquisition of

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ownership under a true sale. It discloses, in the alleged vendee, a lack of interest in the property that belies the
truthfulness of the sale.

During the period material to the present controversy, the petitioners, spouses Solitarios, retained actual possession of
the property. This was never disputed. If the transaction had really been one of sale, as the Jaques claim, they should
have asserted their rights for the immediate delivery and possession of the lot instead of allowing the spouses Solitarios to
freely stay in the premises for almost seventeen (17) years from the time of the purported sale until their filing ofthe
complaint. Human conduct and experience reveal that an actual owner of a productive land will not allow the passage of a
long period of time, as in this case, without asserting his rights of ownership.

Further, Gaston Jaque first claimed possession of the subject property through his mother-in-law, and then through hired
workers when the latter passed away;17 not personally. It is also undisputed that the Jaques never installed a tenant on
Lot 4089 and did not disturb the Solitarios’ possession of the same. 18 On this note, We agree with the finding of the RTC
that the Jaques’ alleged possession of the subject property is suspect and unsubstantial, and they never possessed the
same in the concept of owners, viz:

Even as to the first half portion of the land allegedly sold by the defendants to the plaintiffs, the evidence too tends to
show that the plaintiffs did not really possess it asowners. Plaintiffs’ evidence with regards to their possession over this
portion is very doubtful. According to plaintiff Gaston Jaque when he testified in Court, they possessed this portion
through his mother-in-law till she died in 1992 or 1992: that when she died, they possessed it already through hired
workers. However, in the statement of facts of the resolution of the public prosecutor in the case of Qualified Theft which
plaintiffs filed against the defendants, it is clearly shown that the plaintiffs stated thatthe defendants took possession of the
entire property since 1983 yet.

On the other hand, in this case, they are now claiming that it was actually in the year 2000 that the defendants bid claim
on this land.

xxxx

Third, the fact that defendants’ witness Leonora Solitarios [Felipe’s sister] resides and has a house in the land in question
without having been disturbed by the plaintiffs and the fact that the plaintiffs never have a tenant in the land even if they
reside in Cebu City also show in some manner that they are not really the owners of the land, but the defendants.19

Not only is there a presumption that the deeds of sale are an equitable mortgage, it has been amply demonstrated by
petitioners that the deed of sale is intended to be one of mortgage based on the proof presented by petitioners and
propped up even by the admissions of respondents. The intention of the parties was for the transaction to secure the
payment of a debt

To stress, Article 1602(6) of the Civil Code provides that a transaction is presumed to be an equitable mortgage:

(6) In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure
the payment of a debt or the performance of any other obligation.

This provision may very well be applied in this case. There is sufficient basis to indulge in the presumption that the
transaction between the parties was that of an equitable mortgage and that the spouses Solitarios never wanted to sell
the same to the Jaques.

The foregoing presumption finds support in the following: First, the very testimony of Gaston Jaque and the documents he
presented establish the existence of two loans, which the Jaques extended to the spouses Solitarios, that were secured
by the subject property; and, second, the testimonies of the parties reveal that they came to an agreement as to how
these loans would be paid.

The first loan was contracted when Gaston Jaque gave the spouses Solitarios ₱7,000.00 to help them redeem the subject
property from PNB.20 In effect, by extending the ₱7,000.00 financial assistance to the spouses Solitarios, Gaston Jaque
took over the loan, became the lender and assumed the role of mortgagee in place of PNB.

Thereafter, the spouses Solitarios obtained a second loan from the Jaques amounting to ₱3,000.00. This is evidenced by
an REM dated July 15, 1981 by virtue of which the spouses Solitarios mortgaged one-half of the subject property to the
Jaques to secure the payment of said loan.

The parties testified that they entered into a verbal agreement on the sharing of the produce of the subject property. For
his part, it seemed that Gaston Jaque wanted to impress upon the lower court that this sharing agreement was fixed as a
condition for his allowing the Solitarios’ continued possession and cultivation of the subject property. However, there is a
strong reason to believe that this arrangement was, in fact, a payment scheme for the debts that the spouses Solitarios
incurred.

During his testimony, Felipe Solitarios explained that after the Jaques gave him funds to redeemthe property from PNB,
they entered into an agreement on the sharing of the produce and that this arrangement would last until they shall have
redeemed the land from the Jaques. We note that this assertion by Felipe Solitarios was never refuted on cross or re-
cross examination. Felipe Solitarios explained–

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DIRECT EXAMINATION BY

ATTY. MELINDA MARTIRES

Q When did Lilia Jaque give you the money to redeem the mortgage indebtedness from the Philippine National Bank?

A In 1976

Q How much did she give you?

A ₱5,000.00

Q After giving you the amount of 5,000.00 to be used to redeem the mortgage indebtedness, was there any agreement
between you and Lilia Jaque?

A Our agreement was, on the produce of the riceland, she will be given 1/4 and on the coconut land 1/2. 21

xxx xxx xxx

Q Where were the spouses when the land was already redeemed from the PNB?

A They were in Cebu.

Q So, to whom did you deliver their share of the produce of the land?

A To Yaning, the mother of Ma Lilia.

Q When did you start delivering the share of the plaintiff of the land in question?

A From the time I mortgaged this land to them.

Q You mean to say from 1976?

A Yes.

Q How many times did you deliver tothe parents of the plaintiffs the share of the plaintiffs ofthe produce of the land?

A Every harvest, we deliver their share and everytime we make copra, we also deliver their share to Ma Yaning.

xxx xxx xxx

ATTY. MARTIRES

Q Per condition with the plaintiffs which you have told us a while ago, for how long will you deliver their share?

A Every harvest we have to give their share because we have not yet redeemed the land.

Q So there was no duration of your giving their share of the land?

A If I desire to redeem the land from them.22

Furthermore, Gaston Jaque himself testified receiving a portion of the produce of the subject property preciselybecause of
the loan covered by the July 15, 1981 REM.23

It is, thus, clear from the foregoing that the Jaques extended two loans to the spouses Solitarios, who in exchange,
offered tothe former the subject property, not to transfer ownership thereto, but to merely secure the payment of their
debts. This may be deduced from the testimonies of both Felipe Solitarios and Gaston Jaque, revealing the fact that they
agreed upon terms for the payment of the loans, in particular, the sharing in the produce of the lot.

Verily, the fact that the parties agreed on payment terms is inconsistent with the claim of the Jaques that when the
spouses Solitarios executed the questioned deeds of sale they had no other intention but to transfer ownership over the
subject property.

Thus, there is ground to presume that the transaction between the parties was an equitable mortgage and not a sale.
There is nothing in the records sufficient enough to overturn this presumption.

The contracts of sale and mortgage are of doubtful veracity

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Furthermore, an examination of the transaction documents casts doubts on their validity. As alleged by petitioners, their
signatures therein appear to be forged. We distinctlyobserve that each of the three (3) documents bears different versions
of petitioner Julia Solitarios’ signatures. First, on the first page of the 1981 Deed of Sale, particularly on the space
provided for Julia Solitarios to express her marital consent to the sale, the signature "Julia Torda Solitarios"
appears.24 What is strange is that in the acknowledgement page of the very same document, Julia Solitarios purportedly
signed as "Julia T. Solitarios,"25 which is obviously different from the signature appearing on the first page. Further, while
the 1981 REM document contains the signature "Julia Turda,"26 the 1983 Deed of Sale bears the signature "Julia Torda."
These discrepancies suggest that the documents were signed by different persons.

Nevertheless, assuming arguendo that these documents were really signed by petitioners, there is reason to believe that
they did so without understanding their real nature and thatthe Jaques never explained to them the effects and
consequencesof signing the same.

In negotiating the transactions, the parties did not deal with each other on equal terms

The Civil Code provisions that consider certain types of sales as equitable mortgages are intended for the protection of
the unlettered such as the spouses Solitarios, who are penurious vis-à-vis their creditors.27 In Cruz v. Court of
Appeals,28 the Court held -

Vendors covered by Art. 1602 usually find themselves in an unequal position when bargaining with the vendees, and will
readily sign onerous contracts to get the money they need. Necessitous men are not really free men in the sense that
toanswer a pressing emergency they will submit to any terms that the crafty may impose on them. This is precisely the
evil that Art. 1602 seeks to guard against. The evident intent of the provision is to give the supposed vendor maximum
safeguards for the protection of his legal rights under the true agreement of the parties.

Without doubt, the spouses Solitarios need the protection afforded by the Civil Code provisions on equitable mortgage.
Certainly, the parties were negotiating on unequal footing. As opposed to the uneducated29 and impoverished farmer,
Felipe Solitarios,30 Gaston Jaque, was a 2nd Lieutenant of the Armed Forces of the Philippines when he retired. 31 Further,
Felipe Solitarios was constantly infinancial distress. He was constantly in debt and in dire financial need. That he
borrowed money from the PNB twice, first in 1975 then in 1976, and mortgaged the subject property to the Jaques
suggest as much.

While Felipe Solitarios was able to settle his 1975 loan and redeem the mortgage with his own money, 32 he no longer had
enough funds to redeem the subject property after obtaining a loan in 1976. Thus, he was impelled to borrow money from
the Jaques to get his property back in 1981. Shortly after, on July 15, 1981, Felipe Solitarios, again indesperate need,
borrowed money from Gaston Jaque and mortgaged to the latter a portion of the subject property.

It is, therefore, not difficult to imagine that Felipe Solitarios quickly consented to arrangements proposed to him by a
seemingly trustworthy Gaston Jaque, and mindlessly signed instrumental documents that were never explained to him
and he never fully understood but nonetheless assured him of fast cash and easy payment terms. What the court a quo
wrote in this regard merits concurrence:

Still another fact which militates against plaintiffs’ cause is their failure to prove during trial that they really endeavored to
explain to the defendants the real nature of the contract they were entering into, it appearing that the defendants are of
low education compared to them especially plaintiff Gaston Jaque who is a retired military officer. The law requires that in
case one of the partiesto a contract is unable to read (or maybe of low education), and fraud isalleged, the person
enforcing the contract must show that the term thereof have been fully explained to the former (Spouses Nena Arriola and
Francisco Adolfo, et.al. vs. Demetrio Lolita, Pedro, Nena, Braulio and Dominga, all surnamed Mahilum, et. al. G.R. No.
123490, August 9, 2000).33

The law favors the least transmission of rights

It is further established that when doubt exists as to the true nature of the parties’ transaction, courts must construe such
transaction purporting to be a sale as an equitable mortgage, as the latter involves a lesser transmission of rights and
interests over the property in controversy.34 Thus, in several cases, the Court has not hesitated to declare a purported
contract of sale to be an equitable mortgage based solely on one of the enumerated circumstances under Article 1602. So
it should be in the present case.

In Sps. Raymundo v. Sps. Bandong,35 the Court observed that it is contrary to human experience that a person would
easily part with his property after incurring a debt. Rather, he would first look for means to settle his obligation, and the
selling of a propertyon which the house that shelters him and his family stands, would be his last resort.

Here, the Court finds the spouses Solitarios’ alleged sale of the subject property in favor of the Jaques simply contrary to
normal human behavior. Be it remembered that the spouses Solitarios depended much on this property as source of
income and livelihood. Further, they made use of it to obtain and secure badly needed loans. This property was so
important to them that they had to borrow money from the Jaques to raise funds to ensure its redemption. Furthermore,
even after the supposed sale, the spouses Solitarios remained tied to this land asthey never left it to live in another place
and continued tilling and cultivating the same. Thus, considering how valuable this land was to the spouses Solitarios,
being their main, if not, only source of income, it is hard to believe that they would easily part with it and sell the same to
another.

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Furthermore, it is also difficult to understand why, after going through all the complications in redeeming the property from
PNB, the spouses Solitarios would simply transfer this tothe Jaques. It is inconceivable that the spouses Solitarios would
sell their property just to pay the PNB loan. It is more believable that, if at all, they conveyed their land on a temporary
basis only, without any intention to transfer ownership thereto and with the assurance that upon the payment of their
debts, the same would be returned to them.

The only reasonable conclusion that may be derived from the execution of the Deeds of Sale in favor of the Jaques is to
ensure that the Solitarios will pay their obligation.

The transfer of the subject property is a pactum commissorium

Further, We cannot allow the transfer of ownership ofLot 4098 to the Jaques as it would amount to condoning the
prohibited practice of pactum comissorium. Article 2088 of the Civil Code clearly provides that a creditor cannot
appropriate or consolidate ownership over a mortgaged property merely upon failure of the mortgagor to pay a debt
obligation,36 viz.:

Art. 2088. The creditor cannot appropriate the things given by way of pledge or mortgage, or dispose of them. Any
stipulation to the contrary is null and void.

The essence of pactum commissorium is that ownership of the security will pass to the creditor by the mere default of the
debtor. This Court has repeatedly declared such arrangements as contrary to morals and public policy. 37

As We have repeatedly held, the only right of a mortgagee in case of non-payment of debt secured by mortgage would be
to foreclose the mortgage and have the encumbered property sold to satisfy the outstanding indebtedness. The
mortgagor’s default does not operate to automatically vest on the mortgagee the ownership of the encumbered property,
for any such effect is against public policy, as earlier indicated.38

Applying the principle of pactum commissorium to equitable mortgages, the Court, in Montevirgen vs. CA, 39enunciated
that the consolidation of ownership in the person of the mortgagee in equity, merely upon failure of the mortgagor in
equityto pay the obligation, would amount to a pactum commissorium.The Court further articulated that if a mortgagee in
equity desires to obtain title to a mortgaged property, the mortgagee’s proper remedy is to cause the foreclosure of the
mortgage in equity and buy it at a foreclosure sale.

In Sps. Cruz vs. CA,40 the Court again reiteratedthat, in an equitable mortgage, perfect title over the mortgaged property
may not be secured in a pactum commissorium fashion, but only by causing the foreclosure of the mortgage and buying
the same in an auction sale. The Court held –

Indeed, all the circumstances, taken together, are familiar badges of an equitable mortgage. Private respondents could
not in a pactum commissorium fashion appropriate the disputed property for themselves as they appeared to have done;
otherwise, their act will not be countenanced by this Court being contrary to goodmorals and public policy hence void. If
they wish to secure a perfect title over the mortgaged property, they should do so in accordance with law, i.e., by
foreclosing the mortgage and buying the property in the auction sale.

It does not appear, under the premises, that the Jaques availed themselves of the remedy of foreclosure, or that they
bought the subject property in an auction sale after the spouses Solitarios failed to pay their debt obligation. What seems
clear is that the Jaques took advantage of the spouses Solitarios’ intellectual and educational deficiency and urgent need
of money and made it appear that the latter executed in their favor the questioned Deeds of Sale, thereby automatically
appropriating unto themselves the subject property upon their debtors’ default. The amount reflected in the 1981 Deedof
Sale is telling. The sum of ₱7,000.00 representing the alleged purchase price of one-half of the subject property in the
1981 Deed of Sale is actually the amount advanced to the spouses Solitarios by way of loan. Other than the testimony of
Gaston Jaque, there is no evidence showing that this purchase price was actually paid or that the subject property was
bought in a foreclosure sale.

Further, it can be gleaned from the testimony of Gaston Jaque that when the spouses Solitarios failed to pay their loan of
₱3,000.00, reflected in the July 15, 1981 REM covering the remaining half of the subject property,41 the Jaques did not
foreclose the mortgage and purchase the said lot in an auction sale. Rather, they supposedly bought the lot directly from
the spouses Solitarios and offset the loan amount against a portion of the supposed purchase price they agreed upon. 42

Indubitably, the subject property was transferred to the Jaques in a prohibited pactum commisorium manner and,
therefore, void. Thus, the foregoing transaction and the registration of the deeds of sale, by virtue of which the Jaques
were able to obtain the impugned TCT No. 745 must be declared void. 43

Furthermore, given that the transaction between the parties is an equitable mortgage, this means that the title to the
subject property actually remained with Felipe Solitarios, as owner-mortgagor, conformably with the well-established
doctrine that the mortgagee does not become the owner of the mortgaged property because the ownership remains with
the mortgagor.44 Thus, Felipe Solitarios’ ownership over the subject property is not affected by the fact that the same was
already registered in the name of the Jaques. The pronouncement in Montevirgen v. Court of Appeals is instructive:

x x x Equity looks through the form and considers the substance, and no kind of engagement can be allowed which will
enable the parties to escape from the equitable doctrine adverted to. In other words, a conveyance of land, accompanied
by registration in the name of the transferee and the issuance of a new certificate, is no more secured from the operation
of this equitable doctrine than the most informal conveyance that could be devised.
Page | 7
Finally, the circumstance that the original transaction was subsequently declared to be an equitable mortgage must mean
that the title to the subject landwhich had been transferred to private respondents actually remained or is transferred back
to petitioners herein as ownersmortgagors, conformably to the well-established doctrine that the mortgagee does not
become the owner of the mortgaged property because the ownership remains with the mortgagor (Art. 2088, New Civil
Code).45

Finally, We agree with the RTC that the mortgage debt of the spouses Solitarios had been fully paid.1âwphi1 This holds
true whether the amount of the debt is ₱12,000.00, as found by the RTC or ₱22,000.00, the amount which the Jaques
claim they paid for the subject property. The RTC elucidated as follows -

2. The total mortgage debt of Php12,000.00 which was the consideration in Exh. "G" is deemed totally paid.

This finding is based on the last paragraph of Article 1602 of the New Civil Code of the Philippines which provides that "In
any of the foregoing cases, any money, fruits, or other benefit to be received by the vendee as rent or otherwise shall be
considered as interest which shall be subject to the usury laws." (underscoring ours)

If this Court will take at its face value plaintiffs’ claim in their complaint that they get Php10,000.00 every quarter or
Php40,000.00 a year from the coconut portion and Php5,000.00 every planting season or Php10,000.00 a year from the
rice land portion of the subject land, then plaintiffs could have earned Php50,000.00 a year or more or less one million
pesos already when they filed this case in the year 2000.

But this Court has given more credence to defendants’ assertion that from 1976 to 2000, hewas giving the one-half share
of the plaintiffs from the proceeds of the copras and rice land to plaintiffs’ alleged caretaker, Yaning. So, if the produce of
the land in question as claimed by the plaintiffs is about Php50,000.00 a year, one-half (1/2) of it would be Php25,000.00
which is 25 times higher than the Php1,000.00 interest at 12% per year for the alleged purchase price of Php12,000.00 of
the land in question. The Php24,000.00 excess interest would have already been sufficient to pay even the principal of
Php12,000.00. Thus, clearly, the Php12,000.00 purchase price of the land should now be considered fully paid.

WHEREFORE, premises considered, the petition is GRANTED. The assailed August 31, 2010 Decision and November
24, 2011 Resolution of the Court of Appeals in CA-G.R. CEB-CV No. 00112 are, thus, SET ASIDE. The Decision of the
Regional Trial Court, Calbayog City Branch 21 in Civil Case No. 772 is REINSTATED, with modification that the
reformation of the Deeds of Absolute Sale dated May 9, 1981 and April 26, 1983 is deleted as it is unnecessary, and that
the transfer of the title to the name of petitioners shall be exempt from registration fees and taxes and other charges. As
Modified, the Decision of the trial court shall read:

WHEREFORE, this Court dismisses the instant case and pronounces Judgment against plaintiffs and hereby orders the
following:

1. TCT No. 745 in the name of spouses Gaston Jaque and Lilia Laure Jaque is declared void and cancelled. Furthermore,
the Register of Deeds of the City of Calbayog is ordered to issue a new title in the name of petitioners Felipe Solitarios
and Julia Torda without need of payment of registration fees, taxes, and other charges;

2. The total mortgage debt is considered and deemed totally paid pursuant to Article 1602 of the New Civil Code;

3. The amounts deposited to the Court by defendants Solitarios are ordered released to plaintiffs Spouses Gaston and
Lilia Jaque minus lawful charges for their safekeeping, if any; and

4. The costs of the proceedings shall be paid by the plaintiffs.

SO ORDERED.

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Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. L-45164 March 16, 1987

DOMINICO ETCUBAN, petitioner,


vs.
THE HONORABLE COURT OF APPEALS, JESUS C. SONGALIA & GUADALUPE S. SONGALIA, respondents.

Basilio E. Duaban for petitioner.

PARAS, J.:

Before Us is a petition to review the judgment of the respondent Court of Appeals 1 in CA-G.R. No. 53258-R reversing the
decision of the court a quo in Civil Case No. BN-109, entitled Dominico Etcuban vs. Jesus G. Songalia, et. al., by ruling
that plaintiff-appellee (petitioner herein) failed to avail himself of the right of legal redemption within the period provided for
by law.

Plaintiff inherited a piece of land with an area of approximately 14.0400 hectares together with his co-heirs from their
deceased father. Said piece of land was declared in their names as heirs of Eleuterio Etcuban under Tax Declaration No.
06837 and was the subject matter in dispute in SP No. 1192-R, of the Court of First Instance of Cebu, a case for the
settlement of the estate of the late Eleuterio Etcuban In said case, petitioner Dominico Etcuban the spouse of the decease
Demetria Initan and Pedro, Vicente, Felicitas, Anastacio, Froilan, Alfonso, Advincula, Anunciaciori Jesus, Aguinaldo,
surnamed Etcuban were declared as co-owners of the property in question. Thereafter the 11 co-heirs executed in favor
of defendants (private respondents herein) 11 deeds of sale of their respective shares in the co-ownership for the total
sum of P26,340.00. It is not disputed that the earliest of the 11 deeds of sale was made on December 9, 1963 and the last
one in December 1967. (Annexes " 1-11 ").

In his complaint before the trial court, plaintiff alleged that his co-owners leased and/or sold their respective shares without
giving due notice to him as a co-owner notwithstanding his intimations to them that he was willing to buy all their
respective shares. He further maintained that even upon inquiry from his co-heirs/co-owners, and also from the alleged
buyers (defendants) he elicited nothing from them. Plaintiff discovered for the first time the existence of these 11 deeds of
sale during the hearing on January 31, 1972 of Civil Case No. BN-87, entitled Jesus C. Songalia vs. Dominico ETCUBAN
in the Court of First Instance of Cebu, Branch XI. When he verified the supposed sales with his co-owners only 3 of them
admitted their respective sales. Hence, the filing of Civil Case No.BN-109 by petitioner for legal redemption.

Defendants (private respondents herein) in denying the material allegations of the complaint, argued by way of affirmative
and special defenses that plaintiff has no cause of petition against them; that the action is barred by prescription or
laches; that the complaint is barred by the pendency of Civil Case No. BN-87 involving the same parties, same subject
matter and same cause of action; that the provisions of the law pertaining to legal redemption have been fully complied
with in respect to the sale of the disputed land to them; that plaintiff came to know of the sale of the land in question to
them in August, 1968 or sometime prior thereto; that acting on this knowledge, plaintiff thru his lawyers wrote defendants
on August 15, 1968 about the matter; that Jesus Songalia personally went to the office of Atty. Vicente Faelner or counsel
for plaintiff to inform him of the sale of the disputed land to them; that again another demand letter was received on May
30, 1969 by defendants from the lawyers of plaintiff but on both occasions, no action was taken by plaintiff despite the
information plaintiff received from defendants thru his counsel and that consequently plaintiff lost his right to redeem under
Art. 1623 of the new Civil Code because the right of redemption may be exercised only within 30 days from notice of sale
and plaintiff was definitely notified of the sale years ago as shown by the records.

During the pre-trial conference, the parties failed to agree on any stipulation of facts. Judgment was rendered after due
trial with the following dispositive portion:

WHEREFORE, JUDGMENT is hereby rendered in favor of the plaintiff and against the defendants as follows.

1. Allowing the plaintiff to exercise his right of redemption over the land in question;
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2. Ordering the defendants to accept the redemption price of P26,340.00 which plaintiff should deposited with this Court
within 30 days from and after this decision becomes final and executory and thereafter to execute a deed of reconveyance
in favor of the plaintiff and to surrender the possession and ownership of the property in question to the plaintiff; and

3. The defendants are ordered to pay the costs.

Defendants appealed to the Court of Appeals assigning several errors but the appellate court centered its dissertation on
the first assignment of error as the issue to be most decisive and, therefore confined its discussion to it.

Defendants in their first assignment of error assailed the lower court in not holding that the failure of the plaintiff-appellee
to tender to the defendants-appellants the redemption price or to consign the same in court or to make a specific offer to
redeem the property before filing the complaint for legal redemption has barred the appellee's right to redeem the property
pursuant to the doctrine of the Supreme court in Conejero vs. Court of Appeals (16 SCRA 775).

The appellate court in tackling this issue declared that plaintiff failed to make a valid tender of the sale price of the land
paid by the defendants within the period fixed by Art. 1623 of the Civil Code which provides as follows:

ART. 1623. The right of legal pre-emption or redemption shall not be exercised except within thirty (30) days from the
notice in writing by the prospective vendor, or by the vendor, as the case may be. The deed of sale shall not be recorded
in the Registry of Property, unless accompanied by an affidavit of the vendor that he has given written notice thereof to all
possible redemptioners.

The right of redemption of co-owners excludes that of adjoining owners. (1524a)

The respondent court found that written notice was given to plaintiff-appellee in the form of an answer with counterclaim to
the complaint in Civil Case No. BN-109 which appears on the records to have been filed on March 18, 1972. Said court
ruled that "this notice is sufficient to inform the plaintiff about the sale and the reckoning date for the 30-day period
commenced upon receipt thereof. No other notice is needed under the premises because it is the substance conveyed
rather than the form embodying it, that counts.

The records reveal that on May 27, 1974, plaintiff-appellee deposited with the lower court the amount of P26,340.00 the
redemption price. Since the answer with counterclaim was filed on March 18, 1972, the deposit made on May 27, 1974
was clearly outside the 30-day period of legal redemption. The period within which the right of legal redemption or
preemption may be exercised is non-extendible.

Petitioner contends that vendors (his co-heirs) should be the ones to give him written notice and not the vendees
(defendants or private respondent herein) citing the case of Butte vs. Manuel Uy & Sons, Inc., 4 SCRA 526. Such
contention is of no moment. While it is true that written notice is required by the law (Art. 1623), it is equally true that the
same "Art. 1623 does not prescribe any particular form of notice, nor any distinctive method for notifying the redemptioner.
"So long, therefore, as the latter is informed in writing of the sale and the particulars thereof, the 30 days for redemption
start running, and the redemptioner has no real cause to complain. (De Conejero et al v. Court of Appeals, et al., 16
SCRA 775). In the Conejero case, We ruled that the furnishing of a copy of the disputed deed of sale to the redemptioner,
was equivalent to the giving of written notice required by law in "a more authentic manner than any other writing could
have done," and that We cannot adopt a stand of having to sacrifice substance to technicality. More so in the case at bar,
where the vendors or co-owners of petitioner stated under oath in the deeds of sale. (Annexes "1" to "11 ") that notice of
sale had been given to prospective redemptioners in accordance with Art. 1623 of the Civil Code. "A sworn statement or
clause in a deed of sale to the effect that a written notice of sale was given to possible redemptioners or co-owners might
be used to determine whether an offer to redeem was made on or out of time, or whether there was substantial
compliance with the requirement of said Art. 1623. 2

In resume, We find that petitioner failed to substantially comply with the requirements of Art. 1623 on legal redemption
and We see no reason to reverse the assailed decision of the respondent court.

WHEREFORE, premises considered, the petition is hereby DISMISSED and the appealed decision is hereby AFFIRMED.

SO ORDERED.

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Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 137677 May 31, 2000

ADALIA B. FRANCISCO, petitioner,


vs.
ZENAIDA F. BOISER, respondent.

MENDOZA, J.:

This is a petition for review of the decision of the Court of Appeals in CA-G.R. CV No. 55518 which affirmed in totothe
decision of the Regional Trial Court, Branch 122, Caloocan City, dismissing petitioner's complaint for redemption of
property against respondent.

The facts are as follows:

Petitioner Adalia B. Francisco and three of her sisters, Ester, Elizabeth and Adeluisa, were co-owners of four parcels of
registered lands1 on which stands the Ten Commandments Building at 689 Rizal Avenue Extension, Caloocan City. On
August 6, 1979, they sold 1/5 of their undivided share in the subject parcels of land to their mother, Adela Blas, for
P10,000.00, thus making the latter a co-owner of said real property to the extent of the share sold.

On August 8, 1986, without the knowledge of the other co-owners, Adela Blas sold her 1/5 share for P10,000.00 to
respondent Zenaida Boiser who is another sister of petitioner.

On August 5, 1992, petitioner received summons, with a copy of the complaint in Civil Case No. 15510, filed by
respondent demanding her share in the rentals being collected by petitioner from the tenants of the building. Petitioner
then informed respondent that she was exercising her right of redemption as a co-owner of the subject property. On
August 12, 1992, she deposited the amount of P10,000.00 as redemption price with the Clerk of Court. This move to
redeem the property was interposed as a permissive counterclaim in Civil Case No. 15510. However, said case was
dismissed after respondent was declared non-suited with the result that petitioner's counterclaim was likewise dismissed.

On September 14, 1995, petitioner instituted Civil Case No. C-17055 before the Regional Trial Court in Caloocan City.
She alleged that the 30-day period for redemption under Art. 1623 of the Civil Code had not begun to run against her
since the vendor, Adela Blas, never informed her and the other owners about the sale to respondent. She learned about
the sale only on August 5, 1992, after she received the summons in Civil Case No. 15510, together with the complaint.

Respondent, on the other hand, contended that petitioner knew about the sale as early as May 30, 1992, because, on that
date, she wrote petitioner a letter2 informing the latter about the sale, with a demand that the rentals corresponding to her
1/5 share of the subject property be remitted to her. Said letter was sent with a copy of the Deed of Sale 3 between
respondent and Adela Blas. On the same date, letters 4 were likewise sent by respondent to the tenants of the building,
namely, Seiko Service Center and Glitters Corporation, informing them of the sale and requesting that, thenceforth, they
pay 1/5 of the monthly rentals to respondent. That petitioner received these letters is proved by the fact that on June 8,
1992, she wrote5 the building's tenants advising them to disregard respondent's request and continue paying full rentals
directly to her.

On August 19, 1996, the trial court dismissed petitioner's complaint for legal redemption. It ruled that Art. 1623 does not
prescribe any particular form of notifying co-owners about a sale of property owned in common to enable them to exercise
their right of legal redemption.6 While no written notice was given by the vendor, Adela Blas, to petitioner or the other
owners, petitioner herself admitted that she had received respondent's letter of May 30, 1992 and was in fact furnished a
copy of the deed evidencing such sale.7 The trial court considered the letter sent by respondent to petitioner with a copy of
the deed of sale as substantial compliance with the required written notice under Art. 1623 of the New Civil
Code.8 Consequently, the 30-day period of redemption should be counted not from August 5, 1992, when petitioner
Page | 11
received summons in Civil Case No. 15510, but at the latest, from June 8, 1992, the date petitioner wrote the tenants of
the building advising them to continue paying rentals in full to her. Petitioner failed to redeem the property within that
period.

Petitioner brought the matter to the Court of Appeals, which, on October 26, 1998, affirmed the decision of the Regional
Trial Court. She moved for reconsideration, but her motion was denied by the appellate court on February 16, 1999.
Hence, this petition.

The sole issue presented in this appeal is whether the letter of May 30, 1992 sent by respondent to petitioner notifying her
of the sale on August 8, 1986 of Adela Blas' 1/5 share of the property to respondent, containing a copy of the deed
evidencing such sale, can be considered sufficient as compliance with the notice requirement of Art. 1623 for the purpose
of legal redemption. The trial court and the Court of Appeals relied on the ruling in Distrito v.Court of
Appeals9 that Art. 1623 does not prescribe any particular form of written notice, nor any distinctive method for notifying the
redemptioner. They also invoked the rulings in De Conejero v. Court of Appeals 10 and Badillo v. Ferrer11 that furnishing
the redemptioner with a copy of the deed of sale is equivalent to giving him the written notice required by law.

On the other hand, petitioner points out that the cited cases are not relevant because the present case does not concern
the particular form in which notice must be given. Rather, the issue here is whether a notice sent by the vendee may be
given in lieu of that required to be given by the vendor or prospective vendor. 12

Art. 1623 of the Civil Code provides:

The right of legal pre-emption or redemption shall not be exercised except within thirty days from the notice in writing by
the prospective vendor, or by the vendor, as the case maybe. The deed of sale shall not be recorded in the Registry of
Property, unless accompanied by an affidavit of the vendor that he has given written notice thereof to all possible
redemptioners.

The right of redemption of co-owners excludes that of adjoining owners.

In ruling that the notice given by the vendee was sufficient, the appellate court cited the case of Etcuban v. Court of
Appeals 1 in which it was held:

Petitioner contends that vendors (his co-heirs) should be the ones to give him written notice and not the vendees
(defendants or private respondent herein) citing the case of Butte vs. Manuel Uy & Sons. Inc.,4 SCRA 526. Such
contention is of no moment. While it is true that written notice is required by the law (Art. 1623), it is equally true that, the
same "Art. 1623 does not prescribe any particular form of notice, nor any distinctive method for notifying the
redemptioner." So long, therefore, as the latter is informed in writing of the sale and the particulars thereof, the 30 days for
redemption start running, and the redemptioner has no real cause to complain. (De Conejero et al v. Court of Appeals, et
al., 16 SCRA 775). In the Conejero case, we ruled that the furnishing of a copy of the disputed deed of sale to the
redemptioner was equivalent to the giving of written notice required by law in "a more authentic manner than any other
writing could have done," and that We cannot adopt a stand of having to sacrifice substance to technicality. More so in the
case at bar, where the vendors or co-owners of petitioner stated under oath in the deeds of sale that notice of sale had
been given to prospective redemptioners in accordance with Art. 16232 of the Civil Code. "A sworn statement or clause in
a deed of sale to the effect that a written notice of sale was given to possible redemptioners or co-owners might be used
to determine whether an offer to redeem was made on or out of time, or whether there was substantial compliance with
the requirement of said Art. 1623." 14

In Etcuban, notice to the co-owners of the sale of the share of one of them was given by the vendees through their
counterclaim in the action for legal redemption. Despite the apparent meaning of Art. 1623, it was held in that case that it
was "of no moment" that the notice of sale was given not by the vendor but by the vendees. "So long as the [co-owner] is
informed in writing of the sale and the particulars thereof, the 30 days for redemption stair running, and the redemptioner
has no cause to complain," so it was held. The contrary doctrine of Butte v. Manuel Uy and Sons,Inc. 15 was thus
overruled sub silencio.

However, in the later case of Salatandol v. Retes, 16 decided a year after the Etcuban case, the Court expressly affirmed
the ruling in Butte that the notice required by Art. 1623 must be given by the vendor. In Salatandol, the notice given to the
redemptioner by the Register of Deeds of the province where the subject land was situated was held to be insuffucient.
Resolving the issue of whether such notice was equivalent to the notice from the vendor required under Art. 1623, this
Court stated:

The appeal is impressed with merit. In Butte vs. Manuel Uy and Sons, Inc., the Court ruled that Art. 1623 of the Civil Code
clearly and expressly prescribes that the thirty (30) days for making the pre-emption or redemption are to be counted from
notice in writing by the vendor. The Court said:

. . . The test of Article 1623 clearly and expressly prescribes that the thirty days for making the redemption are to be
counted from notice in writing by the vendor. Under the old law (Civil Code of 1889, Art. 1524), it was immaterial who gave
the notice; so long as the redeeming co-owner learned of the alienation in favor of the stranger, the redemption period
began to run. It is thus apparent that the Philippine legislature in Article 1623 deliberately selected a particular method of
giving notice, and that method must be deemed exclusive (39 Am. Jur., 237; Payne vs. State, 12 S.W. (2d) (528). As ruled
in Wampher vs. Lecompte, 150 Atl. 458 (aff'd. in 75 Law Ed. [U.S.] 275) —

Page | 12
Why these provisions were inserted in the statute we are not informed, but we may assume until the contrary is shown,
that a state of facts in respect thereto existed, which warranted the legislature in so legislating.

The reasons for requiring that the notice should be given by the seller, and not by the buyer, are easily divined. The seller
of an undivided interest is in the best position to know who are his co-owners that under the law must be notified of the
sale. Also, the notice by the seller removes all doubts as to fact of the sale, its perfection, and its validity, the notice being
a reaffirmation thereof; so that that party notified need not entertain doubt that the seller may still contest the alienation.
This assurance would not exist if the notice should be given by the buyer.

In the case at bar, the plaintiffs have not been furnished any written notice of sale or a copy thereof by Eufemia Omole,
the vendor. Said plaintiffs' right to exercisethe legal right of preemption or redemption, given to a co-owner when any one
of the other co-owners sells his share in the thing owned in common to a third person, as provided for in Article 1623 of
the Civil Code, has not yet accrued.

There was thus a return to the doctrine laid down in Butte. That ruling is sound. In the first place, reversion to the ruling
in Butte is proper. Art. 1623 of the Civil Code is clear in requiring that the written notification should come from the vendor
or prospective vendor, not from any other person. There is, therefore, no room for construction. Indeed, the principal
difference between Art. 1524 of the former Civil Code and Art. 1623 of the present one is that the former did not specify
who must give the notice, whereas the present one expressly says the notice must be given by the vendor. Effect must be
given to this change in statutory language.

In the second place, it makes sense to require that the notice required in Art. 1623 be given by the vendor and by nobody
else. As explained by this Court through Justice J.B.L. Reyes in Butte, the vendor of an undivided interest is in the best
position to know who are his co-owners who under the law must be notified of the sale. It is likewise the notification from
the seller, not from anyone else, which can remove all doubts as to the fact of the sale, its perfection, and its validity, for in
a contract of sale, the seller is in the best position to confirm whether consent to the essential obligation of selling the
property and transferring ownership thereof to the vendee has been given.

Now, it is clear that by not immediately notifying the co-owner, a vendor can delay or even effectively prevent the
meaningful exercise of the right of redemption. In the present case, for instance, the sale took place in 1986, but it was
kept secret until 1992 when vendee (herein respondent) needed to notify petitioner about the sale to demand 1/5 rentals
from the property sold. Compared to serious prejudice to petitioner's right of legal redemption, the only adverse effect to
vendor Adela Blas and respondent-vendee is that the sale could not be registered. It is non-binding, only insofar as third
persons are concerned. 17 It is, therefore, unjust when the subject sale has already been established before both lower
courts and now, before this Court, to further delay petitioner's exercise of her right of legal redemption by requiring that
notice be given by the vendor before petitioner can exercise her right. For this reason, we rule that the receipt by
petitioner of summons in Civil Case No. 15510 on August 5, 1992 constitutes actual knowledge on the basis of which
petitioner may now exercise her right of redemption within 30 days from finality of this decision.

Our ruling is not without precedent. In Alonzo v. Intermediate Appellate Court, 18 we dispensed with the need for written
notification considering that the redemptioners lived on the same lot on which the purchaser lived and were thus deemed
to have actual knowledge of the sales. We stated that the 30-day period of redemption started, not from the date of the
sales in 1963 and 1964, but sometime between those years and 1976, when the first complaint for redemption was
actually filed. For 13 years, however, none of the co-heirs moved to redeem the property. We thus ruled that the right of
redemption had already been extinguished because the period for its exercise had already expired.

In the present case, as previously discussed, receipt by petitioner of summons in Civil Case No. 15510 on August 5, 1992
amounted to actual knowledge of the sale from which the 30-day period of redemption commenced to run. Petitioner had
until September 4, 1992 within which to exercise her right of legal redemption, but on August 12, 1992 she deposited the
P10,000.00 redemption price. As petitioner's exercise of said right was timely, the same should be given effect.

WHEREFORE, in view of the foregoing, the petition is GRANTED and the decision of the Court of Appeals is REVERSED
and the Regional Trial Court, Branch 122, Caloocan City is ordered to effect petitioner's exercise of her right of legal
redemption in Civil Case No. C-17055.

SO ORDERED.

Page | 13
Page | 14
Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 202358 November 27, 2013

GATCHALIAN REALTY, INC., Petitioner,


vs.
EVELYN M. ANGELES, Respondent.

DECISION

CARPIO, J.:

The Case G.R. No. 202358 is a petition for review 1 assailing the Decision2 promulgated on 11 November 2011 as well as
the Resolution3 promulgated on 19 June 2012 by the Court of Appeals (CA) in CA-G.R. SP No. 105964. The CA reversed
and set aside the 8 October 2008 Order4 of Branch 197 of the Regional Trial Court of Las Piñas City (RTC) in Civil Case
No. LP-07-0143. The CA also dismissed the unlawful detainer case filed by Gatchalian Realty, Inc. GRI) against Evelyn
M. Angeles (Angeles).

The Metropolitan Trial Court (MeTC) rendered on 28 February 2006 a decision 5 in Civil Case No. 6809 in favor of GRI and
against Angeles. In its decision6 dated 13 February 2008, the RTC set aside the decision of the MeTC and dismissed the
ejectment case filed by GRI against Angeles. The RTC reversed itself in an Order 7 dated 17 June 2008, and affirmed with
modification the decision of the MeTC. The RTC denied Angeles’ Motion for Reconsideration in an Order dated 8 October
2008.

The Facts

The CA recited the facts as follows:

On 28 December 1994, [Angeles] purchased a house (under Contract to Sell No. 2272) and lot (under Contract to Sell No.
2271) from [GRI] valued at Seven Hundred Fifty Thousand Pesos (Php 750,000.00) and Four Hundred Fifty Thousand
Pesos (Php 450,000.00), respectively, with twenty-four percent (24%) interest per annum to be paid by installment within
a period of ten years.

The house and lot were delivered to [Angeles] in 1995. Nonetheless, under the contracts to sell executed between the
parties, [GRI] retained ownership of the property until full payment of the purchase price.

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After sometime, [Angeles] failed to satisfy her monthly installments with [GRI]. [Angeles] was only able to pay thirty-five
(35) installments for Contract to Sell No. 2271 and forty-eight (48) installments for Contract to Sell No. 2272. According to
[GRI], [Angeles] was given at least twelve (12) notices for payment in a span of three (3) years but she still failed to settle
her account despite receipt of said notices and without any valid reason. [Angeles] was again given more time to pay her
dues and likewise furnished with three (3) notices reminding her to pay her outstanding balance with warning of
impending legal action and/or rescission of the contracts, but to no avail. After giving a total of fifty-one (51) months grace
period for both contracts and in consideration of the continued disregard of the demands of [GRI], [Angeles] was served
with a notice of notarial rescission dated 11 September 2003 by registered mail which she allegedly received on 19
September 2003 as evidenced by a registry return receipt.

Consequently [Angeles] was furnished by [GRI] with a demand letter dated 26 September 2003 demanding her to pay the
amount of One Hundred Twelve Thousand Three Hundred Four Pesos and Forty Two Centavos (Php 112,304.42) as
outstanding reasonable rentals for her use and occupation of the house and lot as of August 2003 and to vacate the
same. She was informed in said letter that the fifty percent (50%) refundable amount that she is entitled to has already
been deducted with the reasonable value for the use of the properties or the reasonable rentals she incurred during such
period that she was not able to pay the installments due her. After deducting the rentals from the refundable amount, she
still had a balance of One Hundred Twelve Thousand Three Hundred Four Pesos and Forty Two Centavos (Php
112,304.42) which she was required to settle within fifteen (15) days from receipt of the letter.

Allegedly, [Angeles] subsequently sent postal money orders through registered mail to [GRI]. In a letter dated 27 January
2004 [Angeles] was notified by [GRI] of its receipt of a postal money order sent by [Angeles]. More so, she was requested
to notify [GRI] of the purpose of the payment. [Angeles] was informed that if the postal money order was for her monthly
amortization, the same will not be accepted and she was likewise requested to pick it up from [GRI’s] office. On 29
January 2004, another mail with a postal money order was sent by [Angeles] to [GRI]. In her 6 February 2004 letter, [GRI]
was informed that the postal money orders were supposed to be payments for her monthly amortization. Again, in its 8
February 2004 letter, it was reiterated by [GRI] that the postal money orders will only be accepted if the same will serve as
payment of her outstanding rentals and not as monthly amortization. Four (4) more postal money orders were sent by
[Angeles] by registered mail to [GRI].

For her continued failure to satisfy her obligations with [GRI] and her refusal to vacate the house and lot, [GRI] filed a
complaint for unlawful detainer against [Angeles] on 11 November 2003.8

The MeTC’s Ruling

The MeTC of Branch 79, Las Piñas City ruled in favor of GRI. The MeTC determined that the case was for an unlawful
detainer, and thus assumed jurisdiction. The MeTC further held that the facts show that GRI was able to establish the
validity of the rescission:

A careful scrutiny of the evidence presented by both parties regarding payments made clearly show that [Angeles]
defaulted in the payment of the monthly installments due. Repeated notices and warnings were given to her but she still
and failed to update her account (Exhibits "E" to "E-1" and "G" to "G-2", [GRI’s] Position Paper). This is a clear violation of
the condition of their contracts. An ample grace period, i.e., 51 months, was granted to her by [GRI] but she still failed to
pay the whole amount due as provided in paragraph 6 of the contracts and Section 3 of RA 6552. [Angeles] has been in
arrears beyond the grace period provided under the contracts and law. The last payment received by [GRI], which
represents [Angeles’] 35th installment, was made in July 2002. On the other hand, the last payment, which represents her
48th installment, [was] received [by GRI] in April 1999. Thus, [GRI], as seller, can terminate or rescind the contract by
giving her the notice of notarial rescission of the contracts. The notarial rescission of the contracts was executed on
September 26, 2003 and served upon [Angeles].9

Although the MeTC agreed with Angeles that her total payment is already more than the contracted amount, the MeTC
found that Angeles did not pay the monthly amortizations in accordance with the terms of the contract. Interests and
penalties accumulated and increased the amount due. Furthermore, the MeTC found the monthly rentals imposed by GRI
reasonable and within the range of the prevailing rental rates in the vicinity. Compensation between GRI and Angeles
legally took effect in accordance with Article 129010 of the Civil Code. The MeTC ruled that GRI is entitled to
₱1,060,896.39 by way of reasonable rental fee less ₱574,148.40 as of May 2005, thus leaving a balance of ₱486,747.99
plus the amount accruing until Angeles finally vacates the subject premises.

The dispositive portion of the MeTC’s Decision reads:

WHEREFORE, in view of the foregoing, the Court renders judgment for [GRI] and against [Angeles] and all persons
claiming rights under her, as follows:

1. Ordering [Angeles] and all persons claiming rights under her to immediately vacate the property subject of this case
situated at Blk. 3, Lot 8, Lanzones St., Phase 3-C, Gatchalian Subdivision, Las Piñas City and surrender possession
thereof to [GRI];

2. Ordering the encashment of the Postal Money Order (PMO) in the total amount of Php 120,000.00 in favor of [GRI];

3. Ordering [Angeles] to pay [GRI] the outstanding amount of Php 486,747.99 representing reasonable monthly rentals of
the subject premises as of May 2005 less the amount of the postal money orders [worth] Php 120,000.00 and all the
monthly rentals that will accrue until she vacates the subject premises and have possession thereof turned over to [GRI],
plus the interests due thereon at the rate of twelve percent (12%) per annum from the time of extra-judicial demand;

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4. Ordering [Angeles] to pay [GRI] the amount of Php 20,000.00 as attorney’s fees; and

5. Costs of suit.

[Angeles’] counterclaims are hereby dismissed for lack of merit.

SO ORDERED.11

On 21 March 2006, Angeles filed a notice of appeal with the MeTC. A week later, on 28 March 2006, Angeles filed a
motion to dismiss based on lack of jurisdiction. The Las Piñas RTC denied Angeles’ motion to dismiss in an order dated
28 July 2006.

Angeles also filed on 2 October 2006 a Petition for Certiorari with Immediate Issuance of Temporary Restraining Order
and Injunction, which was docketed as SCA Case No. 06-008.12 On 3 May 2007, Branch 201 of the Las Piñas RTC
dismissed Angeles’ Petition for Certiorari for forum-shopping.13

GRI, on the other hand, filed a Motion for Execution Pending Appeal. A Writ of Execution Pending Appeal was issued in
favor of GRI on 25 August 2006, and the properties were turned over to GRI on 10 October 2006. 14

The RTC’s Ruling

Angeles’ appeal before Branch 197 of the Las Piñas RTC initially produced a result favorable to her. The RTC found that
the case was one for ejectment. As an ejectment court, the MeTC’s jurisdiction is limited only to the issue of possession
and does not include the title or ownership of the properties in question.

The RTC pointed out that Republic Act No. 6552 (R.A. 6552) provides that the non-payment by the buyer of an installment
prevents the obligation of the seller to convey title from acquiring binding force. Moreover, cancellation of the contract to
sell may be done outside the court when the buyer agrees to the cancellation. In the present case, Angeles denied
knowledge of GRI’s notice of cancellation. Cancellation of the contract must be done in accordance with Section 3 of R.A.
6552, which requires a notarial act of rescission and refund to the buyer of the cash surrender value of the payments on
the properties. Thus, GRI cannot insist on compliance with Section 3(b) of R.A. 6552 by applying Angeles’ cash surrender
value to the rentals of the properties after Angeles failed to pay the installments due. Contrary to the MeTC’s ruling, there
was no legal compensation between GRI and Angeles. The RTC ruled:

There being no valid cancellation of the Contract to Sell, this Court finds merit in the appeal filed by [Angeles] and
REVERSES the decision of the court a quo. This Court recognized [Angeles’] right to continue occupying the property
subject of the Contract to Sell.

WHEREFORE, premises considered, the decision of the lower court is hereby SET ASIDE and the ejectment case filed
by [GRI] is hereby DISMISSED.

SO ORDERED.15

GRI filed a Motion for Reconsideration. The RTC issued an Order on 17 June 2008 which ruled that GRI had complied
with the provisions of R.A. 6552, and had refunded the cash surrender value to Angeles upon its cancellation of the
contract to sell when it deducted the amount of the cash surrender value from rentals due on the subject properties. The
RTC relied on this Court’s ruling in Pilar Development Corporation v. Spouses Villar. 16 The RTC ruled:

Applying the above Pilar ruling in the present case, the cash surrender value of the payments made by [Angeles] shall be
applied to the rentals that accrued on the property occupied by [Angeles], which rental is fixed by this Court in the amount
of seven thousand pesos per month (₱7,000.00). The total rental payment due to Gatchalian Realty Inc. is six hundred
twenty three thousand (₱623,000.00) counted from June 1999 to October 2006. According to R.A. 6552, the cash
surrender value, which in this case is equivalent to fifty percent (50%) of the total payment made by [Angeles], should be
returned to her by [GRI] upon cancellation of the contract to sell on September 11, 2003. Admittedly no such return was
ever made by [GRI]. Thus, the cash surrender value, which in this case is equivalent to ₱182,094.48 for Contract to Sell
No. 2271 and ₱392,053.92 for Contract to Sell No. 2272 or a total cash surrender value of ₱574,148.40 should be
deducted from the rental payment or award owing to [Angeles].

WHEREFORE, premises considered, the Motion for Reconsideration is hereby GRANTED. The earlier decision dated
February 13, 2008 is SET ASIDE and the decision of the court a quo is MODIFIED to wit:

1. Ordering [Angeles] and all persons claiming rights under her to immediately vacate the property subject of this case
situated at Blk. 3, Lot 8, Lanzones St., Phase 3-C, Gatchalian Subdivision, Las Piñas City and surrender possession
thereof to [GRI];

2. Ordering the encashment of the Postal Money Order (PMO) in the total amount of Php 120,000.00 in favor of [GRI];

3. Ordering defendant, Evelyn M. Angeles, to pay plaintiff, Gatchalian Realty Inc., the outstanding rental amount of forty
eight thousand eight hundred fifty one pesos and sixty centavos (₱48,851.60) and legal interest of six percent (6%) per
annum, until the above amount is paid;

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4. Ordering [Angeles] to pay [GRI] the amount of Php 20,000.00 as attorney’s fees; and

5. Costs of suit.

SO ORDERED.17

The Court of Appeals’ Ruling

The CA dismissed GRI’s complaint for unlawful detainer, and reversed and set aside the RTC’s decision. Although the CA
ruled that Angeles received the notice of notarial rescission, it ruled that the actual cancellation of the contract between
the parties did not take place because GRI failed to refund to Angeles the cash surrender value. The CA denied GRI’s
motion for reconsideration.

GRI filed the present petition for review before this Court on 10 August 2012.

The Issues

GRI assigned the following errors of the CA:

The court a quo committed reversible error when it declared that there was no refund of the cash surrender value in favor
of [Angeles] pursuant to R.A. No. 6552; and

The court a quo erred in holding that the actual cancellation of the contract between the parties did not take place. 18

The Court’s Ruling

GRI’s petition has no merit. We affirm the ruling of the CA with modification.

Validity of GRI’s
Cancellation of the Contracts

Republic Act No. 6552, also known as the Maceda Law, or the Realty Installment Buyer Protection Act, has the declared
public policy of "protecting buyers of real estate on installment payments against onerous and oppressive
conditions."19 Section 3 of R.A. 6552 provides for the rights of a buyer who has paid at least two years of installments but
defaults in the payment of succeeding installments. Section 3 reads:

Section 3. In all transactions or contracts involving the sale or financing of real estate on installment payments, including
residential condominium apartments but excluding industrial lots, commercial buildings and sales to tenants under
Republic Act Numbered Thirty-eight hundred forty-four, as amended by Republic Act Numbered Sixty-three hundred
eighty-nine, where the buyer has paid at least two years of installments, the buyer is entitled to the following rights in case
he defaults in the payment of succeeding 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 every one 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 cancelled, 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.

Down payments, deposits or options on the contract shall be included in the computation of the total number of installment
payments made.

The sixth paragraph of the contracts between Angeles and GRI similarly provides:

SIXTH - Should the VENDEE/S fail to pay due any monthly installment the VENDOR shall have the right to cancel this
Contract and resell the lot/s subject matter of this contract to another buyer, provided, however, that where the
VENDEE/S has/have already paid at least two years of installments, the VENDEE/S will have the right:

a) to pay without additional interest, the installments in arrears within the total grace period earned by him/her/them which
is hereby fixed at the rate of one (1) month grace period for every one (1) year of installment payment made, but this right
can be exercised by the VENDEE/S only once in every five (5) years of the life of this contract and its extension, if any,
and

b) if the contract is cancelled, the VENDOR shall refund to the VENDEE/S the cash surrender value of the payments
made on the lot/s equivalent to fifty per cent (50%) of the total payments made, and after five (5) years of installment, an
additional five per cent (5%) every year but not to exceed ninety per cent (90%) of the total payments made; Provided,
that the actual cancellation of the contract shall take place after thirty (30) days from the receipt by the VENDEE/S of the

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notice of cancellation or the demand for rescission of the contract by a notarial act upon full payment of the cash
surrender value to the VENDEE/S; where, however, the VENDEE/S has/have paid less than two (2) years of installments,
the VENDOR shall give the VENDEE/S [a] grace period of sixty (60) days from the date the installment became due; and
if the VENDEE/S fail/s to pay the installment due after the expiration of the grace period, the VENDOR may cancel the
contract after thirty (30) days from receipt by the VENDEE/S of the notice of cancellation or the demand for rescission of
the contract by a notarial act; and in case of cancellation and/or rescission of this contract, all improvements on the lot/s
above-described shall be forfeited in favor of the VENDOR, and in this connection, the VENDEE/S obligate/s
himself/herself/themselves to peacefully vacate the premises mentioned above without necessity of notice or demand by
the VENDOR.20

We examine GRI’s compliance with the requirements of R.A. 6552, as it insists that it extended to Angeles considerations
that are beyond what the law provides.

Grace Period

It should be noted that Section 3 of R.A. 6552 and paragraph six of Contract Nos. 2271 and 2272, speak of "two years of
installments." The basis for computation of the term refers to the installments that correspond to the number of months of
payments, and not to the number of months that the contract is in effect as well as any grace period that has been given.
Both the law and the contracts thus prevent any buyer who has not been diligent in paying his monthly installments from
unduly claiming the rights provided in Section 3 of R.A. 6552.

The MeTC, the RTC, and the CA all found that Angeles was able to pay 35 installments for the lot (Contract No. 2271)
and 48 installments for the house (Contract No. 2272).21 Angeles thus made installment payments for less than three
years on the lot, and exactly four years on the house.

Section 3(a) of R.A. 6552 provides that the total grace period corresponds to one month for every one year of installment
payments made, provided that the buyer may exercise this right only once in every five years of the life of the contract and
its extensions. The buyer’s failure to pay the installments due at the expiration of the grace period allows the seller to
cancel the contract after 30 days from the buyer’s receipt of the notice of cancellation or demand for rescission of the
contract by a notarial act. Paragraph 6(a) of the contract gave Angeles the same rights.

Both the RTC and the CA found that GRI gave Angeles an accumulated grace period of 51 months. 22 This extension went
beyond what was provided in R.A. 6552 and in their contracts.

Receipt of the Notice of Notarial Rescission

The registry return of the registered mail is prima facie proof of the facts indicated therein.23 Angeles failed to present
contrary evidence to rebut this presumption with competent and proper evidence. To establish its claim of service of the
notarial rescission upon Angeles, GRI presented the affidavit of its liaison officer Fortunato Gumahad, 24 the registry
receipt from the Greenhills Post Office,25 and the registry return receipt.26 We affirm the CA’s ruling that GRI was able to
substantiate its claim that it served Angeles the notarial rescission sent through registered mail in accordance with the
requirements of R.A. 6552.

Amount of the Cash Surrender Value

GRI claims that it gave Angeles a refund of the cash surrender value of both the house and the lot in the total amount of
₱574,148.40 when it deducted the amount of the cash surrender value from the amount of rentals due.

For paying more than two years of installments on the lot, Angeles was entitled to receive cash surrender value of her
payments on the lot equivalent to fifty per cent of the total payments made. This right is provided by Section 3(b) of R.A.
6552, as well as paragraph 6(b) of the contract. Out of the contract price of ₱450,000, Angeles paid GRI a total of
₱364,188.96 consisting of ₱135,000 as downpayment and ₱229,188.96 as installments and penalties. 27 The cash
surrender value of Angeles’ payments on the lot amounted to ₱182,094.48.28

For the same reasons, Angeles was also entitled to receive cash surrender value of the payments on the house
equivalent to fifty per cent of the total payments made. Out of the contract price of ₱750,000, Angeles paid GRI a total of
₱784,107.84 consisting of ₱165,000 as downpayment and ₱619,107.84 as installments and penalties. 29 The cash
surrender value of Angeles’ payments on the house amounted to ₱392,053.92. 30

Actual Cancellation of the Contracts

There was no actual cancellation of the contracts because of GRI’s failure to actually refund the cash surrender value to
Angeles.

Cancellation of the contracts for the house and lot was contained in a notice of notarial rescission dated 11 September
2003.31 The registry return receipts show that Angeles received this notice on 19 September 2003. 32GRI’s demand for
rentals on the properties, where GRI offset Angeles’ accrued rentals by the refundable cash surrender value, was
contained in another letter dated 26 September 2003. 33 The registry return receipts show that Angeles received this letter
on 29 September 2003.34 GRI filed a complaint for unlawful detainer against Angeles on 11 November 2003, 61 days after
the date of its notice of notarial rescission, and 46 days after the date of its demand for rentals. For her part, Angeles sent
GRI postal money orders in the total amount of ₱120,000.35

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The MeTC ruled that it was proper for GRI to compensate the rentals due from Angeles’ occupation of the property from
the cash surrender value due to Angeles from GRI. The MeTC stated that compensation legally took effect in accordance
with Article 1290 of the Civil Code, which reads: "When all the requisites mentioned in Article 1279 are present,
compensation takes effect by operation of law and extinguishes both debts to the concurrent amount, even though the
creditors and debtors are not aware of the compensation." In turn, Article 1279 of the Civil Code provides:

In order that compensation may be proper, it is necessary:

(1) That each one of the obligors be bound principally, and that he be at the same time a principal creditor of the other;

(2) That both debts consist of a sum of money, or if the things due are consumable, they be of the same kind, and also of
the same quality if the latter has been stated;

(3) That the two debts are due;

(4) That they be liquidated and demandable;

(5) That over neither of them there be any retention or controversy, commenced by third persons and communicated in
due time to the debtor.

However, it was error for the MeTC to apply Article 1279 as there was nothing in the contracts which provided for the
amount of rentals in case the buyer defaults in her installment payments. The rentals due to GRI were not liquidated. GRI,
in its letter to Angeles dated 26 September 2003, unilaterally imposed the amount of rentals, as well as an annual 10%
increase:

We cannot subscribe to GRI’s view that it merely followed our ruling in Pilar Development Corporation v. Spouses
Villar37 (Pilar) when it deducted the cash surrender value from the rentals due. In Pilar, the developer also failed to refund
the cash surrender value to the defaulting buyer when it cancelled the Contract to Sell through a Notice of Cancellation. It
was this Court, and not the developer, that deducted the amount of the cash surrender value from the accrued rentals.
Moreover, the developer in Pilar did not unilaterally impose rentals. It was the MeTC that decreed the amount of monthly
rent. Neither did the developer unilaterally reduce the accrued rentals by the refundable cash surrender value. The
cancellation of the contract took effect only by virtue of this Court’s judgment because of the developer’s failure to return
the cash surrender value.

This was how we ruled in Pilar:

According to R.A. 6552, the cash surrender value, which in this case is equivalent to fifty percent (50%) of the total
payment made by the respondent spouses, should be returned to them by the petitioner upon the cancellation of the
contract to sell on August 31, 1998 for the cancellation to take effect. Admittedly, no such return was ever made by
petitioner. Thus, the said cash surrender value is hereby ordered deducted from the award owing to the petitioner based
on the MeTC judgment, and cancellation takes effect by virtue of this judgment.

Finally, as regards the award of ₱7,000.00/month as rental payment decreed by the MeTC for the use of the property in
question from the time the respondent spouses obtained possession thereof up to the time that its actual possession is
surrendered or restored to the petitioner, the Court finds the same just and equitable to prevent the respondent spouses,
who breached their contract to sell, from unjustly enriching themselves at the expense of the petitioner which, for all legal
intents and purposes, never ceased to be the owner of the same property because of the respondents’ non-fulfillment of
the indispensable condition of full payment of the purchase price, as embodied in the parties’ contract to sell. However, as
earlier explained, this sum is to be reduced by the cash surrender value of the payments so far made by the spouses, and
the resulting net amount still owing as accrued rentals shall be subject to legal interest from finality of this Decision up to
the time of actual payment thereof.38

Mandatory Twin Requirements:


Notarized Notice of Cancellation and
Refund of Cash Surrender Value

This Court has been consistent in ruling that a valid and effective cancellation under R.A. 6552 must comply with the
mandatory twin requirements of a notarized notice of cancellation and a refund of the cash surrender value.

In Olympia Housing, Inc. v. Panasiatic Travel Corp., 39 we ruled that the notarial act of rescission must be accompanied by
the refund of the cash surrender value.

x x x The actual cancellation of the contract can only be deemed to take place upon the expiry of a 30-day period
following the receipt by the buyer of the notice of cancellation or demand for rescission by a notarial act and the full
payment of the cash surrender value.

In Pagtalunan v. Dela Cruz Vda. De Manzano,40 we ruled that there is no valid cancellation of the Contract to Sell in the
absence of a refund of the cash surrender value. We stated that:

x x x Sec. 3 (b) of R.A. No. 6552 requires refund of the cash surrender value of the payments on the property to the buyer
before cancellation of the contract. The provision does not provide a different requirement for contracts to sell which allow

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possession of the property by the buyer upon execution of the contract like the instant case. Hence, petitioner cannot
insist on compliance with the requirement by assuming that the cash surrender value payable to the buyer had been
applied to rentals of the property after respondent failed to pay the installments due. (Emphasis supplied)

Remedies of the Buyer


in the Absence of a Valid Cancellation of a Contract to Sell

In view of the absence of a valid cancellation, the Contract to Sell between GRI and Angeles remains valid and subsisting.
Apart from Olympia and Pagtalunan, we are guided by our rulings in Active Realty & Development Corp. v.
Daroya41 (Active) and Associated Marine Officers and Seamen’s Union of the Philippines PTGWO-ITF v.
Decena42 (Associated).

In Olympia , this Court dismissed the complaint for recovery of possession for having been prematurely filed without
complying with the mandate of R.A. 6552. We ordered the defaulting buyer to pay the developer the balance as of the
date of the filing of the complaint plus 18% interest per annum computed from the day after the date of the filing of the
complaint, but within 60 days from the receipt of a copy of the decision. Upon payment, the developer shall issue the
corresponding certificate of title in favor of the defaulting buyer. If the defaulting buyer fails to pay the full amount, then the
defaulting buyer shall vacate the subject property without need of demand and all payments will be charged as rentals to
the property. There was no award for damages and attorney’s fees, and no costs were charged to the parties.

In Pagtalunan, this Court dismissed the complaint for unlawful detainer. We also ordered the defaulting buyer to pay the
developer the balance of the purchase price plus interest at 6% per annum from the date of filing of the complaint up to
the finality of judgment, and thereafter, at the rate of 12% per annum. Upon payment, the developer shall issue a Deed of
Absolute Sale of the subject property and deliver the corresponding certificate of title in favor of the defaulting buyer. If the
defaulting buyer fails to pay the full amount within 60 days from finality of the decision, then the defaulting buyer should
vacate the subject property without need of demand and all payments will be charged as rentals to the property. No costs
were charged to the parties.

In Active, this Court held that the Contract to Sell between the parties remained valid because of the developer’s failure to
send a notarized notice of cancellation and to refund the cash surrender value. The defaulting buyer thus had the right to
offer to pay the balance of the purchase price, and the developer had no choice but to accept payment. However, the
defaulting buyer was unable to exercise this right because the developer sold the subject lot. This Court ordered the
developer to refund to the defaulting buyer the actual value of the lot with 12% interest per annum computed from the date
of the filing of the complaint until fully paid, or to deliver a substitute lot at the option of the defaulting buyer.

In Associated, this Court dismissed the complaint for unlawful detainer. We held that the Contract to Sell between the
parties remained valid because the developer failed to send to the defaulting buyer a notarized notice of cancellation and
to refund the cash surrender value. We ordered the MeTC to conduct a hearing within 30 days from receipt of the decision
to determine the unpaid balance of the full value of the subject properties as well as the current reasonable amount of rent
for the subject properties. We ordered the defaulting buyer to pay, within 60 days from the trial court’s determination of the
amounts, the unpaid balance of the full value of the subject properties with interest at 6% per annum computed from the
date of sending of the notice of final demand up to the date of actual payment. Upon payment, we ordered the developer
to execute a Deed of Absolute Sale over the subject properties and deliver the transfer certificate of title to the defaulting
buyer. In case of failure to pay within the mandated 60-day period, we ordered the defaulting buyer to immediately vacate
the premises without need for further demand. The developer should also pay the defaulting buyer the cash surrender
value, and the contract should be deemed cancelled 30 days after the defaulting buyer’s receipt of the full payment of the
cash surrender value. If the defaulting buyer failed to vacate the premises, he should be charged reasonable rental in the
amount determined by the trial court.

We observe that this case has, from the institution of the complaint, been pending with the courts for 10 years. As both
parties prayed for the issuance of reliefs that are just and equitable under the premises, and in the exercise of our
discretion, we resolve to dispose of this case in an equitable manner. Considering that GRI did not validly rescind
Contracts to Sell Nos. 2271 and 2272, Angeles has two options:

1. The option to pay, within 60 days from the MeTC’s determination of the proper amounts, the unpaid balance of the full
value of the purchase price of the subject properties plus interest at 6% per annum from 11 November 2003, the date of
filing of the complaint, up to the finality of this Decision, and thereafter, at the rate of 6% per annum. 43 Upon payment of
the full amount, GRI shall immediately execute Deeds of Absolute Sale over the subject properties and deliver the
corresponding transfer certificate of title to Angeles.

In the event that the subject properties are no longer available, GRI should offer substitute properties of equal
value. Acceptance of the suitability of the substitute properties is Angeles’ sole prerogative. Should Angeles refuse the
substitute properties, GRI shall refund to Angeles the actual value of the subject properties with 6% interest per
annum44 computed from 11 November 2003, the date of the filing of the complaint, until fully paid; and

2. The option to accept from GRI ₱574,148.40, the cash surrender value of the subject properties, with interest at 6% per
annum,45 computed from 11 November 2003, the date of the filing of the complaint, until fully paid. Contracts to Sell Nos.
2271 and 2272 shall be deemed cancelled 30 days after Angeles’ receipt of GRI’s full payment of the cash surrender
value. No rent is further charged upon Angeles as GRI already had possession of the subject properties on 10 October
2006.

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WHEREFORE, we DENY the petition. The Decision of the Court of Appeals in CA-G.R. SP No. 105964 promulgated on
11 November 2011 and the Resolution promulgated on 19 June 2012 are AFFIRMED with MODIFICATIONS.

1. The Metropolitan Trial Court of Las Piñas City is directed to conduct a hearing within a maximum period of 30 days
from finality of this Decision to (1) determine Evelyn M. Angeles’ unpaid balance on Contracts to Sell Nos. 2271 and 2272;
and (2) the actual value of the subject properties as of 11 November 2003.

2. Evelyn M. Angeles shall notify the Metropolitan Trial Court of Las Piñas City and Gatchalian Realty, Inc. within a
maximum period of 60 days from the Metropolitan Trial Court of Las Piñas City’s determination of the unpaid balance
whether she will pay the unpaid balance or accept the cash surrender value.

Should Evelyn M. Angeles choose to pay the unpaid balance, she shall pay, within 60 days from the MeTC’s
determination of the proper amounts, the unpaid balance of the full value of the purchase price of the subject properties
plus interest at 6% per annum from 11 November 2003, the date of filing of the complaint, up to the finality of this
Decision, and thereafter, at the rate of 6% per annum. Upon payment of the full amount, GRI shall immediately execute
Deeds of Absolute Sale over the subject properties and deliver the corresponding transfer certificate of title to Angeles.

In the event that the subject properties are no longer available, GRI should offer substitute properties of equal value.
Should Angeles refuse the substitute properties, GRI shall refund to Angeles the actual value of the subject properties
with 6 interest per annum computed from November 2003, the date of the filing of the complaint, until fully paid. Should
Evelyn M. Angeles choose to accept payment of the cash surrender value, she shall receive from GRI ₱574,148.40 with
interest at 6 per annum computed from November 2003, the date of the filing of the complaint, until fully paid. Contracts to
Sell Nos. 2271 and 2272 shall be deemed cancelled 30 days after Angeles' receipt of GRI's full payment of the cash
surrender value. No rent is further charged upon Evelyn M. Angeles.

No costs.

SO ORDERED.

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Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 131679 February 1, 2000

CAVITE DEVELOPMENT BANK and FAR EAST BANK AND TRUST COMPANY, petitioners,
vs.
SPOUSES CYRUS LIM and LOLITA CHAN LIM and COURT OF APPEALS, respondents.

MENDOZA, J.:

This is a petition for review on certiorari of the decision1 of the Court of Appeals in C.A. GR CV No. 42315 and the order
dated December 9, 1997 denying petitioners' motion for reconsideration.

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The following facts are not in dispute.

Petitioners Cavite Development Bank (CDB) and Far East Bank and Trust Company (FEBTC) are banking institutions
duly organized and existing under Philippine laws. On or about June 15, 1983, a certain Rodolfo Guansing obtained a
loan in the amount of P90,000.00 from CDB, to secure which he mortgaged a parcel of land situated at No. 63 Calavite
Street, La Loma, Quezon City and covered by TCT No. 300809 registered in his name. As Guansing defaulted in the
payment of his loan, CDB foreclosed the mortgage. At the foreclosure sale held on March 15, 1984, the mortgaged
property was sold to CDB as the highest bidder. Guansing failed to redeem, and on March 2, 1987, CDB consolidated title
to the property in its name. TCT No. 300809 in the name of Guansing was cancelled and, in lieu thereof, TCT No. 355588
was issued in the name of CDB.

On June 16, 1988, private respondent Lolita Chan Lim, assisted by a broker named Remedios Gatpandan, offered to
purchase the property from CDB. The written Offer to Purchase, signed by Lim and Gatpandan, states in part:

We hereby offer to purchase your property at #63 Calavite and Retiro Sts., La Loma, Quezon City for P300,000.00 under
the following terms and conditions:

(1) 10% Option Money;

(2) Balance payable in cash;

(3) Provided that the property shall be cleared of illegal occupants or tenants.

Pursuant to the foregoing terms and conditions of the offer, Lim paid CDB P30,000.00 as Option Money, for which she
was issued Official Receipt No. 3160, dated June 17, 1988, by CDB. However, after some time following up the sale, Lim
discovered that the subject property was originally registered in the name of Perfecto Guansing, father of mortgagor
Rodolfo Guansing, under TCT No. 91148. Rodolfo succeeded in having the property registered in his name under TCT
No. 300809, the same title he mortgaged to CDB and from which the latter's title (TCT No. 355588) was derived. It
appears, however, that the father, Perfecto, instituted Civil Case No. Q-39732 in the Regional Trial Court, Branch 83,
Quezon City, for the cancellation of his son's title. On March 23, 1984, the trial court rendered a decision 2 restoring
Perfecto's previous title (TCT No. 91148) and cancelling TCT No. 300809 on the ground that the latter was fraudulently
secured by Rodolfo. This decision has since become final and executory.

Aggrieved by what she considered a serious misrepresentation by CDB and its mother-company, FEBTC, on their ability
to sell the subject property, Lim, joined by her husband, filed on August 29, 1989 an action for specific performance and
damages against petitioners in the Regional Trial Court, Branch 96, Quezon City, where it was docketed as Civil Case No.
Q-89-2863. On April 20, 1990, the complaint was amended by impleading the Register of Deeds of Quezon City as an
additional defendant.

On March 10, 1993, the trial court rendered a decision in favor of the Lim spouses. It ruled that: (1) there was a perfected
contract of sale between Lim and CDB, contrary to the latter's contention that the written offer to purchase and the
payment of P30,000.00 were merely pre-conditions to the sale and still subject to the approval of FEBTC; (2) performance
by CDB of its obligation under the perfected contract of sale had become impossible on account of the 1984 decision in
Civil Case No. Q-39732 cancelling the title in the name of mortgagor Rodolfo Guansing; (3) CDB and FEBTC were not
exempt from liability despite the impossibility of performance, because they could not credibly disclaim knowledge of the
cancellation of Rodolfo Guansing's title without the admitting their failure to discharge their duties to the public as
reputable banking institutions; and (4) CDB and FEBTC are liable for damages for the prejudice caused against the
Lims.3 Based on the foregoing findings, the trial court ordered CDB and FEBTC to pay private respondents, jointly and
severally, the amount of P30,000.00 plus interest at the legal rate computed from June 17, 1988 until full payment. It also
ordered petitioners to pay private respondents, jointly and severally, the amounts of P250,000.00 as moral damages,
P50,000.00 as exemplary damages, P30,000.00 as attorney's fees, and the costs of the suit. 4

Petitioners brought the matter to the Court of Appeals, which, on October 14, 1997, affirmed in toto the decision of the
Regional Trial Court. Petitioners moved for reconsideration, but their motion was denied by the appellate court on
December 9, 1997. Hence, this petition. Petitioners contend that —

1. The Honorable Court of Appeals erred when it held that petitioners CDB and FEBTC were aware of the decision dated
March 23, 1984 of the Regional Trial Court of Quezon City in Civil Case No. Q-39732.

2. The Honorable Court of Appeals erred in ordering petitioners to pay interest on the deposit of THIRTY THOUSAND
PESOS (P30,000.00) by applying Article 2209 of the New Civil Code.

3. The Honorable Court of Appeals erred in ordering petitioners to pay moral damages, exemplary damages, attorney's
fees and costs of suit.

I.

At the outset, it is necessary to determine the legal relation, if any, of the parties.

Petitioners deny that a contract of sale was ever perfected between them and private respondent Lolita Chan Lim. They
contend that Lim's letter-offer clearly states that the sum of P30,000,00 was given as option money, not as earnest

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money.5 They thus conclude that the contract between CDB and Lim was merely an option contract, not a contract of
sale.

The contention has no merit. Contracts are not defined by the parries thereto but by principles of law. 6 In determining the
nature of a contract, the courts are not bound by the name or title given to it by the contracting parties. 7 In the case at bar,
the sum of P30,000.00, although denominated in the offer to purchase as "option money," is actually in the nature of
earnest money or down payment when considered with the other terms of the offer. In Carceler v. Court of Appeals,8 we
explained the nature of an option contract, viz. —

An option contract is a preparatory contract in which one party grants to the other, for a fixed period and under specified
conditions, the power to decide, whether or not to enter into a principal contract, it binds the party who has given the
option not to enter into the principal contract with any other person during the period; designated, and within that period, to
enter into such contract with the one to whom the option was granted, if the latter should decide to use the option. It is a
separate agreement distinct from the contract to which the parties may enter upon the consummation of the option.

An option contract is therefore a contract separate from and preparatory to a contract of sale which, if perfected, does not
result in the perfection or consummation of the sale. Only when the option is exercised may a sale be perfected.

In this case, however, after the payment of the 10% option money, the Offer to Purchase provides for the payment only of
the balance of the purchase price, implying that the "option money" forms part of the purchase price. This is precisely the
result of paying earnest money under Art. 1482 of the Civil Code. It is clear then that the parties in this case actually
entered into a contract of sale, partially consummated as to the payment of the price. Moreover, the following findings of
the trial court based on the testimony of the witnesses establish that CDB accepted Lim's offer to purchase:

It is further to be noted that CDB and FEBTC already considered plaintiffs' offer as good and no longer subject to a final
approval. In his testimony for the defendants on February 13, 1992, FEBTC's Leomar Guzman stated that he was then in
the Acquired Assets Department of FEBTC wherein plaintiffs' offer to purchase was endorsed thereto by Myoresco
Abadilla, CDB's senior vice-president, with a recommendation that the necessary petition for writ of possession be filed in
the proper court; that the recommendation was in accord with one of the conditions of the offer, i.e., the clearing of the
property of illegal occupants or tenants (tsn, p. 12); that, in compliance with the request, a petition for writ of possession
was thereafter filed on July 22, 1988 (Exhs. 1 and 1-A); that the offer met the requirements of the banks; and that no
rejection of the offer was thereafter relayed to the plaintiffs (p. 17); which was not a normal procedure, and neither did the
banks return the amount of P30,000.00 to the plaintiffs.9

Given CDB's acceptance of Lim's offer to purchase, it appears that a contract of sale was perfected and, indeed, partially
executed because of the partial payment of the purchase price. There is, however, a serious legal obstacle to such sale,
rendering it impossible for CDB to perform its obligation as seller to deliver and transfer ownership of the property.

Nemo dat quod non habet, as an ancient Latin maxim says. One cannot give what one does not have. In applying this
precept to a contract of sale, a distinction must be kept in mind between the "perfection" and "consummation" stages of
the contract.

A contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the contract
and upon the price.10 It is, therefore, not required that, at the perfection stage, the seller be the owner of the thing sold or
even that such subject matter of the sale exists at that point in time. 11 Thus, under Art. 1434 of the Civil Code, when a
person sells or alienates a thing which, at that time, was not his, but later acquires title thereto, such title passes by
operation of law to the buyer or grantee. This is the same principle behind the sale of "future goods" under Art. 1462 of the
Civil Code.However, under Art. 1459, at the time of delivery or consummation stage of the sale, it is required that the
seller be the owner of the thing sold. Otherwise, he will not be able to comply with his obligation to transfer ownership to
the buyer. It is at the consummation stage where the principle of nemo dat quod non habet applies.

In Dignos v. Court of Appeals,12 the subject contract of sale was held void as the sellers of the subject land were no longer
the owners of the same because of a prior sale.13 Again, in Nool v. Court of Appeals,14 we ruled that a contract of
repurchase, in which the seller does not have any title to the property sold, is invalid:

We cannot sustain petitioners' view. Article 1370 of the Civil Code is applicable only to valid and enforceable contracts.
The Regional Trial Court and the Court of Appeals rules that the principal contract of sale contained in Exhibit C and the
auxiliary contract of repurchase in Exhibit D are both void. This conclusion of the two lower courts appears to find support
in Dignos v. Court of Appeals, where the Court held:

Be that as it may, it is evident that when petitioners sold said land to the Cabigas spouses, they were no longer owners of
the same and the sale is null and void.

In the present case, it is clear that the sellers no longer had any title to the parcels of land at the time of sale. Since Exhibit
D, the alleged contract of repurchase, was dependent on the validity of Exhibit C, it is itself void. A void contract cannot
give rise to a valid one. Verily, Article 1422 of the Civil Code provides that (a) contract which is the direct result of a
previous illegal contract, is also void and inexistent.

We should however add that Dignos did not cite its basis for ruling that a "sale is null and void" where the sellers "were no
longer the owners" of the property. Such a situation (where the sellers were no longer owners) does not appear to be one
of the void contracts enumerated in Article 1409 of the Civil Code. Moreover, the Civil Code itself recognizes a sale where

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the goods are to be acquired . . . by the seller after the perfection of the contract of sale, clearly implying that a sale is
possible even if the seller was not the owner at the time of sale, provided he acquires title to the property later on.

In the present case, however, it is likewise clear that the sellers can no longer deliver the object of the sale to the buyers,
as the buyers themselves have already acquired title and delivery thereof from the rightful owner, the DBP. Thus, such
contract may be deemed to be inoperative and may thus fall, by analogy, under item No. 5 of Article 1409 of the Civil
Code: Those which contemplate an impossible service. Article 1459 of the Civil Code provides that "the vendor must have
a right to transfer the ownership thereof [subject of the sale] at the time it is delivered." Here, delivery of ownership is no
longer possible. It has become impossible.15

In this case, the sale by CDB to Lim of the property mortgaged in 1983 by Rodolfo Guansing must, therefore, be deemed
a nullity for CDB did not have a valid title to the said property. To be sure, CDB never acquired a valid title to the property
because the foreclosure sale, by virtue of which, the property had been awarded to CDB as highest bidder, is likewise
void since the mortgagor was not the owner of the property foreclosed.

A foreclosure sale, though essentially a "forced sale," is still a sale in accordance with Art. 1458 of the Civil Code, under
which the mortgagor in default, the forced seller, becomes obliged to transfer the ownership of the thing sold to the
highest bidder who, in turn, is obliged to pay therefor the bid price in money or its equivalent. Being a sale, the rule that
the seller must be the owner of the thing sold also applies in a foreclosure sale. This is the reason Art. 2085 16 of the Civil
Code, in providing for the essential requisites of the contract of mortgage and pledge, requires, among other things, that
the mortgagor or pledgor be the absolute owner of the thing pledged or mortgaged, in anticipation of a possible
foreclosure sale should the mortgagor default in the payment of the loan.

There is, however, a situation where, despite the fact that the mortgagor is not the owner of the mortgaged property, his
title being fraudulent, the mortgage contract and any foreclosure sale arising therefrom are given effect by reason of
public policy. This is the doctrine of "the mortgagee in good faith" based on the rule that all persons dealing with property
covered by a Torrens Certificate of Title, as buyers or mortgagees, are not required to go beyond what appears on the
face of the title.17 The public interest in upholding the indefeasibility of a certificate of title, as evidence of the lawful
ownership of the land or of any encumbrance thereon, protects a buyer or mortgagee who, in good faith, relied upon what
appears on the face of the certificate of title.

This principle is cited by petitioners in claiming that, as a mortgagee bank, it is not required to make a detailed
investigation of the history of the title of the property given as security before accepting a mortgage.

We are not convinced, however, that under the circumstances of this case, CDB can be considered a mortgagee in good
faith. While petitioners are not expected to conduct an exhaustive investigation on the history of the mortgagor's title, they
cannot be excused from the duty of exercising the due diligence required of banking institutions. In Tomas v. Tomas,18 we
noted that it is standard practice for banks, before approving a loan, to send representatives to the premises of the land
offered as collateral and to investigate who are real owners thereof, noting that banks are expected to exercise more care
and prudence than private individuals in their dealings, even those involving registered lands, for their business is affected
with public interest. We held thus:

We, indeed, find more weight and vigor in a doctrine which recognizes a better right for the innocent original registered
owner who obtained his certificate of title through perfectly legal and regular proceedings, than one who obtains his
certificate from a totally void one, as to prevail over judicial pronouncements to the effect that one dealing with a
registered land, such as a purchaser, is under no obligation to look beyond the certificate of title of the vendor, for in the
latter case, good faith has yet to be established by the vendee or transferee, being the most essential condition, coupled
with valuable consideration, to entitle him to respect for his newly acquired title even as against the holder of an earlier
and perfectly valid title. There might be circumstances apparent on the face of the certificate of title which could excite
suspicion as to prompt inquiry, such as when the transfer is not by virtue of a voluntary act of the original registered
owner, as in the instant case, where it was by means of a self-executed deed of extra-judicial settlement, a fact which
should be noted on the face of Eusebia Tomas certificate of title. Failing to make such inquiry would hardly be consistent
with any pretense of good faith, which the appellant bank invokes to claim the right to be protected as a mortgagee, and
for the reversal of the judgment rendered against it by the lower court. 19

In this case, there is no evidence that CDB observed its duty of diligence in ascertaining the validity of Rodolfo Guansing's
title. It appears that Rodolfo Guansing obtained his fraudulent title by executing an Extra-Judicial Settlement of the Estate
With Waiver where he made it appear that he and Perfecto Guansing were the only surviving heirs entitled to the property,
and that Perfecto had waived all his rights thereto. This self-executed deed should have placed CDB on guard against any
possible defect in or question as to the mortgagor's title. Moreover, the alleged ocular inspection report 20 by CDB's
representative was never formally offered in evidence. Indeed, petitioners admit that they are aware that the subject land
was being occupied by persons other than Rodolfo Guansing and that said persons, who are the heirs of Perfecto
Guansing, contest the title of Rodolfo.21

II.

The sale by CDB to Lim being void, the question now arises as to who, if any, among the parties was at fault for the nullity
of the contract. Both the trial court and the appellate court found petitioners guilty of fraud, because on June 16, 1988,
when Lim was asked by CDB to pay the 10% option money, CDB already knew that it was no longer the owner of the said
property, its title having been cancelled.22 Petitioners contend that: (1) such finding of the appellate court is founded
entirely on speculation and conjecture; (2) neither CDB nor FEBTC was a party in the case where the mortgagor's title

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was cancelled; (3) CDB is not privy to any problem among the Guansings; and (4) the final decision cancelling the
mortgagor's title was not annotated in the latter's title.

As a rule, only questions of law may be raised in a petition for review, except in circumstances where questions of fact
may be properly raised.23 Here, while petitioners raise these factual issues, they have not sufficiently shown that the
instant case falls under any of the exceptions to the above rule. We are thus bound by the findings of fact of the appellate
court. In any case, we are convinced of petitioners' negligence in approving the mortgage application of Rodolfo
Guansing.

III.

We now come to the civil effects of the void contract of sale between the parties. Article 1412(2) of the Civil Code
provides:

If the act in which the unlawful or forbidden cause consists does not constitute a criminal offense, the following rules shall
be observed:

xxx xxx xxx

(2) When only one of the contracting parties is at fault, he cannot recover what he has given by reason of the contract, or
ask for the fulfillment of what has been promised him. The other, who is not at fault, may demand the return of what he
has given without any obligation to comply with his promise.

Private respondents are thus entitled to recover the P30,000,00 option money paid by them. Moreover, since the filing of
the action for damages against petitioners amounted to a demand by respondents for the return of their money, interest
thereon at the legal rate should be computed from August 29, 1989, the date of filing of Civil Case No. Q-89-2863, not
June 17, 1988, when petitioners accepted the payment. This is in accord with our ruling in Castillo v. Abalayan24 that in
case of avoid sale, the seller has no right whatsoever to keep the money paid by virtue thereof and should refund it, with
interest at the legal rate, computed from the date of filing of the complaint until fully paid. Indeed, Art. 1412(2) which
provides that the non-guilty party "may demand the return of what he has given" clearly implies that without such prior
demand, the obligation to return what was given does not become legally demandable.

Considering CDB's negligence, we sustain the award of moral damages on the basis of Arts. 21 and 2219 of the Civil
Code and our ruling in Tan v. Court of Appeals25 that moral damages may be recovered even if a bank's negligence is not
attended with malice and bad faith. We find, however, that the sum of P250,000.00 awarded by the trial court is
excessive. Moral damages are only intended to alleviate the moral suffering undergone by private respondent, not to
enrich them at the expenses of the petitioners.26 Accordingly, the award of moral damages must be reduced to
P50,000.00.

Likewise, the award of P50,000.00 as exemplary damages, although justified under Art. 2232 of the Civil Code, is
excessive and should be reduced to P30,000.00. The award of P30,000.00 attorney's fees based on Art. 2208, pars. 1, 2,
5 and 11 of the Civil Code should similarly be reduced to P20,000.00.

WHEREFORE, the decision of the Court of Appeals is AFFIRMED with the MODIFICATION as to the award of damages
as above stated.1âwphi1.nêt

SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 199648 January 28, 2015

FIRST OPTIMA REALTY CORPORATION, Petitioner,


vs.
SECURITRON SECURITY SERVICES, INC., Respondent.

Page | 27
DECISION

DEL CASTILLO, J.:

In a potential sale transaction, the prior payment of earnest money even before the property owner can agree to sell his
property is irregular, and cannot be used to bind the owner to the obligations of a seller under an otherwise perfected
contract of sale; to cite a well-worn cliche, the carriage cannot be placed before the horse. The property owner-
prospective seller may not be legally obliged to enter into a sale with a prospective buyer through the latter's employment
of questionable practices which prevent the owner from freely giving his consent to the transaction; this constitutes a
palpable transgression of the prospective seller's rights of ownership over his property, an anomaly which the Court will
certainly not condone.

This Petition for Review on Certiorari1 seeks to set aside: 1) the September 30, 2011 Decision2 of the Court of Appeals
(CA) in CA-G.R. CV No. 93715 affirming the February 16, 2009 Decision' of the Regional Trial Court (RTC) of Pasay City,
Branch 115 in Civil Case No. 06-0492 CFM; and 2) the CA’s December 9, 2011 Resolution4 denying the herein
petitioner’s Motion for Reconsideration5 of the assailed judgment.

Factual Antecedents

Petitioner First Optima Realty Corporation is a domestic corporation engaged in the real estate business. It is the
registered owner of a 256-square meter parcel of land with improvements located in Pasay City, covered by Transfer
Certificate of Title No. 125318 (the subject property).6 Respondent Securitron Security Services, Inc., on the other hand, is
a domestic corporation with offices located beside the subject property.

Looking to expand its business and add toits existing offices, respondent – through its General Manager, Antonio Eleazar
(Eleazar) – sent a December 9, 2004 Letter7 addressed to petitioner – through its Executive Vice-President, Carolina T.
Young (Young) – offering to purchase the subject property at ₱6,000.00 per square meter. A series of telephone calls
ensued, but only between Eleazar and Young’s secretary; 8 Eleazar likewise personally negotiated with a certain Maria
Remoso (Remoso), who was an employee of petitioner.9 At this point, Eleazar was unable to personally negotiate with
Young or the petitioner’s board of directors.

Sometime thereafter, Eleazar personally went to petitioner’s office offering to pay for the subject property in cash, which
he already brought with him. However, Young declined to accept payment, saying that she still needed to secure her
sister’s advice on the matter.10 She likewise informed Eleazar that prior approval of petitioner’s Board of Directors was
required for the transaction, to which remark Eleazar replied that respondent shall instead await such approval.11

On February 4, 2005, respondent sent a Letter 12 of even date to petitioner. It was accompanied by Philippine National
Bank Check No. 24677 (the subject check), issued for ₱100,000.00 and made payable to petitioner. The letter states thus:

Gentlemen:

As agreed upon, we are making a deposit of ONE HUNDRED THOUSAND PESOS (Php 100,000.00) as earnest money
for your property at the corner of Layug St., & Lim-An St., Pasay City as per TCT No. 125318 with an area of 256 sq. m. at
6,000.00/ sq. m. for a total of ONE MILLION FIVE HUNDRED THIRTY SIX THOUSAND PESOS (Php 1,536,000.00).

Full payment upon clearing of the tenants at said property and signing of the Deed of Sale.

(signed)
ANTONIO S. ELEAZAR13

Despite the delicate nature of the matter and large amount involved, respondent did not deliver the letter and check
directly to Young or her office; instead, they were coursed through an ordinary receiving clerk/receptionist of the petitioner,
who thus received the same and therefor issued and signed Provisional Receipt No. 33430.14 The said receipt reads:

Received from x x x Antonio Eleazar x x x the sum of Pesos One Hundred Thousand x x x

IN PAYMENT OF THE FOLLOWING x x x

Earnest money or Partial payment of

Pasay Property Layug & Lim-an St. x x x.

Note: This is issued to transactions not


yet cleared but subsequently an OfficialReceipt will be issued. x x x 15

The check was eventually deposited with and credited to petitioner’s bank account.

Thereafter, respondent through counsel demanded in writing that petitioner proceed with the sale of the property.16In a
March 3, 2006 Letter17 addressed to respondent’s counsel, petitioner wrote back:

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Dear Atty. De Jesus:

Anent your letter dated January 16, 2006 received on February 20, 2006, please be informed of the following:

1. It was your client SECURITRON SECURITY SERVICES, INC. represented by Mr. Antonio Eleazar who offered to buy
our property located at corner Layug and Lim-An St., Pasay City;

2. It tendered an earnest money despite the fact that we are still undecided to sell the said property;

3. Our Board of Directors failed to pass a resolution to date whether it agrees to sell the property;

4. We have no Contract for the earnest money nor Contract to Sell the said property with your client;

Considering therefore the above as well as due to haste and demands which we feel [are forms] of intimidation and
harassment, we regret to inform you that we are now incline (sic) not to accept your offer to buy our property. Please
inform your client to coordinate with us for the refund of this (sic) money.

Very truly yours,

(signed)
CAROLINA T. YOUNG
Executive Vice[-]President18

Ruling of the Regional Trial Court of Pasay City

On April 18, 2006, respondent filed with the Pasay RTC a civil case against petitioner for specific performance with
damages to compel the latter to consummate the supposed sale of the subject property. Docketed as Civil Case No. 06-
0492 CFM and assigned to Branch 115 of the Pasay RTC, the Complaint 19 is predicated on the claim that since a
perfected contract of sale arose between the parties after negotiations were conducted and respondent paid the
₱100,000.00 supposed earnest money – which petitioner accepted, the latter should be compelled to sell the subject
property to the former. Thus, respondent prayed that petitioner be ordered to comply with its obligation as seller, accept
the balance of the purchase price, and execute the corresponding deed of sale in respondent’s favor; and that petitioner
be made to pay ₱200,000.00 damages for its breach and delay in the performance of its obligations, ₱200,000.00 by way
of attorney's fees, and costs of suit.

In its Answer with Compulsory Counterclaim,20 petitioner argued that it never agreed to sell the subject property; that its
board of directors did not authorize the sale thereof to respondent, as no corresponding board resolution to such effect
was issued; that the respondent’s ₱100,000.00 check payment cannot be considered as earnest money for the subject
property, since said payment was merely coursed through petitioner’s receiving clerk, who was forced to accept the same;
and that respondent was simply motivated by a desire to acquire the subject property at any cost. Thus, petitioner prayed
for the dismissal of the case and, by way of counterclaim, it sought the payment of moral damages in the amount of
₱200,000.00; exemplary damages in the amount of ₱100,000.00; and attorney’s fees and costs of suit.

In a Reply,21 respondent countered that authorization by petitioner’s Board of Directors was not necessary since it is a real
estate corporation principally engaged in the buying and selling of real property; that respondent did not force nor
intimidate petitioner’s receiving clerk into accepting the February 4, 2005 letter and check for ₱100,000.00; that
petitioner’s acceptance of the check and its failure – for more than a year – to return respondent’s payment amounts to
estoppel and a ratification of the sale; and that petitioner is not entitled to its counterclaim.

After due proceedings were taken, the Pasay RTC issued its Decision dated February 16, 2009, decreeing as follows:

WHEREFORE, defendant First Optima Realty Corporation is directed to comply with its obligation by accepting the
remaining balance of One Million Five Hundred Thirty-Six Thousand Pesos and Ninety-Nine Centavos (₱1,536,000.99),
and executing the corresponding deed of sale in favor of the plaintiff Securitron Security Services, Inc. over the subject
parcel of land.

No costs.

SO ORDERED.22

In ruling for the respondent, the trial court held that petitioner’s acceptance of ₱100,000.00 earnest money indicated the
existence of a perfected contract of sale between the parties; that there is no showing that when respondent gave the
February 4, 2005 letter and check to petitioner’s receiving clerk, the latter was harassed or forced to accept the same; and
that for the sale of the subject property, no resolution of petitioner’s board of directors was required since Young was "free
to represent" the corporation in negotiating with respondent for the sale thereof. Ruling of the Court of Appeals

Petitioner filed an appeal with the CA. Docketed as CA-G.R. CV No. 93715, the appeal made out a case that no earnest
money can be considered to have been paid to petitioner as the supposed payment was received by a mere receiving
clerk, who was not authorized to accept the same; that the required board of directors resolution authorizing the sale of
corporate assets cannot be dispensed with in the case of petitioner; that whatever negotiations were held between the
parties only concerned the possible sale, not the sale itself, of the subject property; that without the written authority of
Page | 29
petitioner’s board of directors, Young cannot enter into a sale of its corporate property; and finally, that there was no
meeting of the minds between the parties in the first place.

On September 30, 2011, the CA issued the assailed Decision affirming the trial court’s February 16, 2009Decision,
pronouncing thus:

Article 1318 of the Civil Code declares that no contract exists unless the following requisites concur: (1) consent of the
contracting parties; (2) object certain which is the subject matter of the contract; and (3) cause of the obligation
established.

A careful perusal of the records of the case show[s] that there was indeed a negotiation between the parties as regards
the sale of the subject property, their disagreement lies on whether they have arrived on an agreement regarding said
sale. Plaintiff-appellee avers that the parties have already agreed on the sale and the price for it and the payment of
earnest money and the remaining balance upon clearing of the property of unwanted tenants. Defendant-appellant on the
other hand disputes the same and insists that there was no concrete agreement between the parties.

Upon a careful consideration of the arguments of the parties and the records of the case, we are more inclined to sustain
the arguments of the plaintiff-appellee and affirm the findings of the trial court that there was indeed a perfected contract
of sale between the parties. The following instances militate against the claim of the defendant-appellant: First. The letter
of the plaintiff-appellee dated February 4, 2005 reiterating their agreement as to the sale of the realty for the consideration
of Php 1,536,000.00 was not disputed nor replied to by the defendant-appellant, the said letter also provides for the
payment of the earnest money of Php 100,000.00 and the full payment upon the clearing of the property of unwanted
tenants, if the defendant-appellant did not really agree on the sale of the property it could have easily replied to the said
letter informing the plaintiff-appellee that it is not selling the property or that the matter will be decided first by the board of
directors, defendant-appellant’s silence or inaction on said letter shows its conformity or consent thereto; Second. In
addition to the aforementioned letter, defendant-appellant’s acceptance of the earnest money and the issuance of a
provisional receipt clearly shows that there was indeed an agreement between the parties and we do not subscribe to the
argument of the defendant-appellant that the check was merely forced upon its employee and the contents of the receipt
was just dictated by the plaintiff-appellee’s employee because common sense dictates that a person would not issue a
receipt for a check with a huge amount if she does not know what that is for and similarly would not issue [a] receipt which
would bind her employer if she does not have prior instructions to do [so] from her superiors; Third. The said check for
earnest money was deposited in the bank by defendant-appellant and not until after one year did it offer to return the
same. Defendant-appellant cannot claim lack of knowledge of the payment of the check since there was a letter for it, and
it is just incredible that a big amount of money was deposited in [its] account [without knowing] about it [or] investigat[ing]
what [it was] for. We are more inclined to believe that their inaction for more than one year on the earnest money paid was
due to the fact that after the payment of earnest money the place should be cleared of unwanted tenants before the full
amount of the purchase price will be paid as agreed upon as shown in the letter sent by the plaintiff-appellee.

As stated above the presence of defendant-appellant’s consent and, corollarily, the existence of a perfected contract
between the parties are evidenced by the payment and receipt of Php 100,000.00 as earnest money by the contracting
parties’ x x x. Under the law on sales, specifically Article 1482 of the Civil Code, it provides that whenever earnest money
is given in a contract of sale, it shall be considered as part of the price and proof of the perfection of the contract. Although
the presumption is not conclusive, as the parties may treat the earnest money differently, there is nothing alleged in the
present case that would give rise to a contrary presumption.

We also do not find merit in the contention of the defendant-appellant that there is a need for a board resolution for them
to sell the subject property since it is a corporation, a juridical entity which acts only thru the board of directors. While we
agree that said rule is correct, we must also point out that said rule is the general rule for all corporations [but] a
corporation [whose main business is buying and selling real estate] like herein defendant-appellant, is not required to
have a board resolution for the sale of the realty in the ordinary course of business, thus defendant-appellant’s claim
deserves scant consideration.

Furthermore, the High Court has held that "a corporate officer or agent may represent and bind the corporation in
transactions with third persons to the extent that the authority to do so has been conferred upon him, and this includes
powers which have been intentionally conferred, and also such powers as, in the usual course of the particular business,
are incidental to, or may be implied from, the powers intentionally conferred, powers added by custom and usage, as
usually pertaining to the particular officer or agent, and such apparent powers as the corporation has caused persons
dealing with the officer or agent to believe that it was conferred."

In the case at bench, it is not disputed and in fact was admitted by the defendant-appellant that Ms. Young, the Executive
Vice-President was authorized to negotiate for the possible sale of the subject parcel of land. Therefore, Ms. Young can
represent and bind defendant-appellant in the transaction.

Moreover, plaintiff-appellee can assume that Ms. Young, by virtue of her position, was authorized to sell the property of
the corporation. Selling of realty is not foreign to [an] executive vice[-]president’s function, and the real estate sale was
shown to be a normal business activity of defendant-appellant since its primary business is the buy and sell of real estate.
Unmistakably, its Executive Vice-President is cloaked with actual or apparent authority to buy or sell real property, an
activity which falls within the scope of her general authority.

Furthermore, assuming arguendo that a board resolution was indeed needed for the sale of the subject property, the
defendant-appellant is estopped from raising it now since, [it] did not inform the plaintiff-appellee of the same, and the
latter deal (sic) with them in good faith. Also it must be stressed that the plaintiff-appellee negotiated with one of the top

Page | 30
officer (sic) of the company thus, any requirement on the said sale must have been known to Ms. Young and she should
have informed the plaintiff-appellee of the same.

In view of the foregoing we do not find any reason to deviate from the findings of the trial court, the parties entered into the
contract freely, thus they must perform their obligation faithfully. Defendant-appellant’s unjustified refusal to perform its
part of the agreement constitutes bad faith and the court will not tolerate the same.

WHEREFORE, premises considered, the Decision of the Regional Trial Court of Pasay City Branch 115, in Civil Case No.
06-0492 CFM is hereby AFFIRMED.

SO ORDERED.23

Petitioner moved for reconsideration,24 but in a December 9, 2011 Resolution, the CA held its ground. Hence, the present
Petition.

Issues

In an October 9,2013 Resolution,25 this Court resolved to give due course to the Petition, which raises the following
issues:

THE HONORABLE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT RULED THAT THE MONEY
RESPONDENT DELIVERED TO PETITIONER WAS EARNEST MONEY THEREBY PROVIDING A PERFECTED
CONTRACT OF SALE.

II

THE HONORABLE COURT OF APPEALS ERRED ON A QUESTION OF LAW WHEN IT RULED THAT THE TIME THAT
LAPSED IN RETURNING THE MONEY AND IN REPLYING TO THE LETTER IS PROOF OF ACCEPTANCE OF
EARNEST MONEY.

III

THE HONORABLE COURT OF APPEALS COMMITTED SERIOUS AND GRAVE ERROR WHEN IT IGNOREDTHE
RESERVATION IN THE PROVISIONAL RECEIPT – "Note: This is issued to transactions not yet cleared but
subsequently an Official Receipt will be issued."26

Petitioner’s Arguments

In its Petition and Reply27 seeking to reverse and set aside the assailed CA dispositions and in effect to dismiss Civil Case
No. 06-0492 CFM, petitioner argues that respondent failed to prove its case that a contract of sale was perfected between
the parties. It particularly notes that, contrary to the CA’s ruling, respondent’s delivery of the February 4, 2005 letter and
check; petitioner’s failure to respond to said letter; petitioner’s supposed acceptance of the check by depositing the same
in its account; and its failure to return the same after more than one year from its tender – these circumstances do not at
all prove that a contract of sale was perfected between the parties. It claims that there was never an agreement in the first
place between them concerning the sale of the subject property, much less the payment of earnest money therefor; that
during trial, Eleazar himself admitted that the check was merely a "deposit"; 28 that the February 4, 2005 letter and check
were delivered not to Young, but to a mere receiving clerk of petitioner who knew nothing about the supposed transaction
and was simply obliged to accept the same without the prerogative to reject them; that the acceptance of respondent’s
supposed payment was not cleared and was subject to approval and issuance of the corresponding official receipt as
noted in Provisional Receipt No. 33430; that respondent intentionally delivered the letter and check in the manner that it
did in order to bind petitioner to the supposed sale with or without the latter’s consent; that petitioner could not be faulted
for receiving the check and for depositing the same as a matter of operational procedure with respect to checks received
in the course of its day-to-day business.

Petitioner argues that ultimately, it cannot be said that it gave its consent to any transaction with respondent or to the
payment made by the latter. Respondent’s letter and check constitute merely an offer which required petitioner’s
acceptance in order to give rise to a perfected sale; "[o]therwise, a buyer can easily bind any unsuspecting seller to a
contract of sale by merely devising a way that prevents the latter from acting on the communicated offer." 29

Petitioner thus theorizes that since it had no perfected agreement with the respondent, the latter’s check should be treated
not as earnest money, but as mere guarantee, deposit or option money to prevent the prospective seller from backing out
from the sale,30 since the payment of any consideration acquires the character of earnest money only after a perfected
sale between the parties has been arrived at.31

Respondent’s Arguments

In its Comment,32 respondent counters that petitioner’s case typifies a situation where the seller has had an undue change
of mind and desires to escape the legal consequences attendant to a perfected contract of sale. It reiterates the appellate
court’s pronouncements that petitioner’s failure to reply to respondent’s February 4, 2005 letter indicates its consent to the
Page | 31
sale; that its acceptance of the check as earnest money and the issuance of the provisional receipt prove that there is a
prior agreement between the parties; that the deposit of the check in petitioner’s account and failure to timely return the
money to respondent militates against petitioner’s claim of lack of knowledge and consent. Rather they indicate
petitioner’s decision to sell subject property as agreed. Respondent adds that contrary to petitioner’s claim, negotiations
were in fact held between the parties after it sent its December 9, 2004 letter-offer, which negotiations precisely
culminated in the preparation and issuance of the February4, 2005 letter; that petitioner’s failure to reply to its February 4,
2005 letter meant that it was amenable to respondent’s terms; that the issuance of a provisional receipt does not prevent
the perfection of the agreement between the parties, since earnest money was already paid; and that petitioner cannot
pretend to be ignorant of respondent’s check payment, as it involved a large sum of money that was deposited in the
former’s bank account.

Our Ruling

The Court grants the Petition. The trial and appellate courts erred materially in deciding the case; they overlooked
important facts that should change the complexion and outcome of the case.

It cannot be denied that there were negotiations between the parties conducted after the respondent’s December 9, 2004
letter-offer and prior to the February 4, 2005 letter. These negotiations culminated in a meeting between Eleazar and
Young whereby the latter declined to enter into an agreement and accept cash payment then being tendered by the
former. Instead, Young informed Eleazar during said meeting that she still had to confer with her sister and petitioner’s
board of directors; in turn, Eleazar told Young that respondent shall await the necessary approval.

Thus, the trial and appellate courts failed to appreciate that respondent’s offer to purchase the subject property was never
accepted by the petitioner at any instance, even after negotiations were held between them. Thus, as between them,
there is no sale to speak of. "When there is merely an offer by one party without acceptance of the other, there is no
contract."33 To borrow a pronouncement in a previously decided case,

The stages of a contract of sale are: (1) negotiation, starting from the time the prospective contracting parties indicate
interest in the contract to the time the contract is perfected; (2) perfection, which takes place upon the concurrence of the
essential elements of the sale; and (3) consummation, which commences when the parties perform their respective
undertakings under the contract of sale, culminating in the extinguishment of the contract.

In the present case, the parties never got past the negotiation stage. Nothing shows that the parties had agreed on any
final arrangement containing the essential elements of a contract of sale, namely, (1) consent or the meeting of the minds
of the parties; (2) object or subject matter of the contract; and (3) price or consideration of the sale. 34

Respondent’s subsequent sending of the February 4, 2005 letter and check to petitioner – without awaiting the approval of
petitioner’s board of directors and Young’s decision, or without making a new offer – constitutes a mere reiteration of its
original offer which was already rejected previously; thus, petitioner was under no obligation to reply to the February 4,
2005 letter. It would be absurd to require a party to reject the very same offer each and every time it is made; otherwise, a
perfected contract of sale could simply arise from the failure to reject the same offer made for the hundredth time.Thus,
said letter cannot be considered as evidence of a perfected sale, which does not exist in the first place; no binding
obligation on the part of the petitioner to sell its property arose as a consequence. The letter made no new offer replacing
the first which was rejected.

Since there is no perfected sale between the parties, respondent had no obligation to make payment through the check;
nor did it possess the right to deliver earnest money to petitioner in order to bind the latter to a sale. As contemplated
under Art. 1482 of the Civil Code, "there must first be a perfected contract of sale before we can speak of earnest
money."35 "Where the parties merely exchanged offers and counter-offers, no contract is perfected since they did not yet
give their consent to such offers. Earnest money applies to a perfected sale."36

This Court is inclined to accept petitioner’s explanation that since the check was mixed up with all other checks and
correspondence sent to and received by the corporation during the course of its daily operations, Young could not have
timely discovered respondent’s check payment; petitioner’s failure to return the purported earnest money cannot mean
that it agreed to respondent’s offer.

Besides, respondent’s payment of supposed earnest money was made under dubious circumstances and in disregard of
sound business practice and common sense. Indeed, respondent must be faulted for taking such a course of action that is
irregular and extraordinary: common sense and logic dictate that if any payment is made under the supposed sale
transaction, it should have been made directly to Young or coursed directly through her office, since she is the officer
directly responsible for negotiating the sale, as far as respondent is concerned and considering the amount of money
involved; no other ranking officer of petitioner can be expected to know of the ongoing talks covering the subject property.
Respondent already knew, from Eleazar’s previous meeting with Young, that it could only effectively deal with her; more
than that, it should know that corporations work only through the proper channels. By acting the way it did – coursing the
February 4, 2005 letter and check through petitioner’s mere receiving clerk or receptionist instead of directly with Young’s
office, respondent placed itself under grave suspicion of putting into effect a premeditated plan to unduly bind petitioner to
its rejected offer, in a manner which it could not achieve through negotiation and employing normal business practices. It
impresses the Court that respondent attempted to secure the consent needed for the sale by depositing part of the
purchase price and under the false pretense that an agreement was already arrived at, even though there was none.
Respondent achieved the desired effect up to this point, but the Court will not be fooled.

Page | 32
Thus, as between respondent’s irregular and improper actions and petitioner’s failure to timely return the ₱100,000.00
purported earnest money, this Court sides with petitioner. In a manner of speaking, respondent cannot fault petitioner for
not making a refund since it is equally to blame for making such payment under false pretenses and irregular
circumstances, and with improper motives. Parties must come to court with clean hands, as it were.

In a potential sale transaction, the prior payment of earnest money even before the property owner can agree to sell his
property is irregular, and cannot be used to bind the owner to the obligations of a seller under an otherwise perfected
contract of sale; to cite a well-worn cliché, the carriage cannot be placed before the horse. The property owner-
prospective seller may not be legally obliged to enter into a sale with a prospective buyer through the latter’s employment
of questionable practices which prevent the owner from freely giving his consent to the transaction; this constitutes a
palpable transgression of the prospective seller’s rights of ownership over his property, an anomaly which the Court will
certainly not condone. An agreement where the prior free consent of one party thereto is withheld or suppressed will be
struck down, and the Court shall always endeavor to protect a property owner’s rights against devious practices that put
his property in danger of being lost or unduly disposed without his prior knowledge or consent. As this ponente has held
before, "[t]his Court cannot presume the existence of a sale of land, absent any direct proof of it." 37

Nor will respondent's supposed payment be 'treated as a deposit or guarantee; its actions will not be dignified and must
be called for what they are: they were done irregularly and with a view to acquiring the subject property against petitioner's
consent.

Finally, since there is nothing in legal contemplation which petitioner must perform particularly for the respondent, it
should follow that Civil Case No. 06-0492 CFM for specific performance with damages is left with no leg. to stand on; it
must be dismissed.

With the foregoing view, there is no need to resolve the other specific issues and arguments raised by the petitioner, as
they do not materially affect the rights and obligations of the parties - the Court having declared that no agreement exists
between them; nor do they have the effect of altering the outcome of the case.

WHEREFORE, the Petition is GRANTED. The September 30, 2011 Decision and December 9, 2011 Resolution of the
Court of Appeals in CA-G.R. CV No. 93715, as well as the February 16, 2009 Decision of the Regional Trial Court of
Pasay City, Branch 115 in Civil Case No. 06-0492 CFM are REVERSED and SET ASIDE. Civil Case No. 06-0492 CFM is
ordered DISMISSED. , Petitioner First Optima Realty Corporation is ordered to REFUND the amount of ₱100,000.00 to
respondent Securitron Security Services, Inc. without interest, unless petitioner has done so during the course of the
proceedings.

SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila

SECOND DIVISION

Page | 33
G.R. No. 179965 February 20, 2013

NICOLAS P. DIEGO, Petitioner,


vs.
RODOLFO P. DIEGO and EDUARDO P. DIEGO, Respondents.

DECISION

DEL CASTILLO, J.:

It is settled jurisprudence, to the point of being elementary, that an agreement which stipulates that the seller shall
execute a deed of sale only upon or after tl1ll payment of the purchase price is a contract to sell, not a contract of sale.
In Reyes v. Tuparan, 1 this Court declared in categorical terms that "[w]here the vendor promises to execute a deed of
absolute sale upon the completion by the vendee of the payment of the price, the contract is only a contract to
sell. The aforecited stipulation shows that the vendors reserved title to the subject property until full payment of
the purchase price."

In this case, it is not disputed as in tact both parties agreed that the deed of sale shall only be executed upon payment of
the remaining balance of the purchase price. Thus, pursuant to the above stated jurisprudence, we similarly declare that
the transaction entered into by the parties is a contract to sell.

Before us is a Petition for Review on Certiorari2 questioning the June 29, 2007 Decision3 and the October 3, 2007
Resolution4 of the Court of Appeals (CA) in CA-G.R. CV No. 86512, which affirmed the April 19, 2005 Decision5 of the
Regional Trial Court (RTC), Branch 40, of Dagupan City in Civil Case No. 99-02971-D.

Factual Antecedents

In 1993, petitioner Nicolas P. Diego (Nicolas) and his brother Rodolfo, respondent herein, entered into an oral contract to
sell covering Nicolas’s share, fixed at ₱500,000.00, as co-owner of the family’s Diego Building situated in Dagupan City.
Rodolfo made a downpayment of ₱250,000.00. It was agreed that the deed of sale shall be executed upon payment of the
remaining balance of ₱250,000.00. However, Rodolfo failed to pay the remaining balance.

Meanwhile, the building was leased out to third parties, but Nicolas’s share in the rents were not remitted to him by herein
respondent Eduardo, another brother of Nicolas and designated administrator of the Diego Building. Instead, Eduardo
gave Nicolas’s monthly share in the rents to Rodolfo. Despite demands and protestations by Nicolas, Rodolfo and
Eduardo failed to render an accounting and remit his share in the rents and fruits of the building, and Eduardo continued
to hand them over to Rodolfo.

Thus, on May 17, 1999, Nicolas filed a Complaint6 against Rodolfo and Eduardo before the RTC of Dagupan City and
docketed as Civil Case No. 99-02971-D. Nicolas prayed that Eduardo be ordered to render an accounting of all the
transactions over the Diego Building; that Eduardo and Rodolfo be ordered to deliver to Nicolas his share in the rents; and
that Eduardo and Rodolfo be held solidarily liable for attorney’s fees and litigation expenses.

Rodolfo and Eduardo filed their Answer with Counterclaim 7 for damages and attorney’s fees. They argued that Nicolas
had no more claim in the rents in the Diego Building since he had already sold his share to Rodolfo. Rodolfo admitted
having remitted only ₱250,000.00 to Nicolas. He asserted that he would pay the balance of the purchase price to Nicolas
only after the latter shall have executed a deed of absolute sale.

Ruling of the Regional Trial Court

After trial on the merits, or on April 19, 2005, the trial court rendered its Decision 8 dismissing Civil Case No. 99-02971-D
for lack of merit and ordering Nicolas to execute a deed of absolute sale in favor of Rodolfo upon payment by the latter of
the ₱250,000.00 balance of the agreed purchase price. It made the following interesting pronouncement:

It is undisputed that plaintiff (Nicolas) is one of the co-owners of the Diego Building, x x x. As a co-owner, he is entitled to
[his] share in the rentals of the said building. However, plaintiff [had] already sold his share to defendant Rodolfo Diego in
the amount of ₱500,000.00 and in fact, [had] already received a partial payment in the purchase price in the amount of
₱250,000.00. Defendant Eduardo Diego testified that as per agreement, verbal, of the plaintiff and defendant
Rodolfo Diego, the remaining balance of ₱250,000.00 will be paid upon the execution of the Deed of Absolute
Sale. It was in the year 1997 when plaintiff was being required by defendant Eduardo Diego to sign the Deed of Absolute
Sale. Clearly, defendant Rodolfo Diego was not yet in default as the plaintiff claims which cause [sic] him to refuse to sign
[sic] document. The contract of sale was already perfected as early as the year 1993 when plaintiff received the partial
payment, hence, he cannot unilaterally revoke or rescind the same. From then on, plaintiff has, therefore, ceased to be a
co-owner of the building and is no longer entitled to the fruits of the Diego Building.

Equity and fairness dictate that defendant [sic] has to execute the necessary document regarding the sale of his share to
defendant Rodolfo Diego. Correspondingly, defendant Rodolfo Diego has to perform his obligation as per their verbal
agreement by paying the remaining balance of ₱250,000.00.9

To summarize, the trial court ruled that as early as 1993, Nicolas was no longer entitled to the fruits of his aliquot share in
the Diego Building because he had "ceased to be a co-owner" thereof. The trial court held that when Nicolas received the

Page | 34
₱250,000.00 downpayment, a "contract of sale" was perfected. Consequently, Nicolas is obligated to convey such share
to Rodolfo, without right of rescission. Finally, the trial court held that the ₱250,000.00 balance from Rodolfo will only be
due and demandable when Nicolas executes an absolute deed of sale.

Ruling of the Court of Appeals

Nicolas appealed to the CA which sustained the trial court’s Decision in toto. The CA held that since there was a perfected
contract of sale between Nicolas and Rodolfo, the latter may compel the former to execute the proper sale document.
Besides, Nicolas’s insistence that he has since rescinded their agreement in 1997 proved the existence of a perfected
sale. It added that Nicolas could not validly rescind the contract because: "1) Rodolfo ha[d] already made a partial
payment; 2) Nicolas ha[d] already partially performed his part regarding the contract; and 3) Rodolfo opposes the
rescission."10

The CA then proceeded to rule that since no period was stipulated within which Rodolfo shall deliver the balance of the
purchase price, it was incumbent upon Nicolas to have filed a civil case to fix the same. But because he failed to do so,
Rodolfo cannot be considered to be in delay or default.

Finally, the CA made another interesting pronouncement, that by virtue of the agreement Nicolas entered into with
Rodolfo, he had already transferred his ownership over the subject property and as a consequence, Rodolfo is legally
entitled to collect the fruits thereof in the form of rentals. Nicolas’ remaining right is to demand payment of the balance of
the purchase price, provided that he first executes a deed of absolute sale in favor of Rodolfo.

Nicolas moved for reconsideration but the same was denied by the CA in its Resolution dated October 3, 2007.

Hence, this Petition.

Issues

The Petition raises the following errors that must be rectified:

THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT THERE WAS NO PERFECTED
CONTRACT OF SALE BETWEEN PETITIONER NICOLAS DIEGO AND RESPONDENT RODOLFO DIEGO OVER
NICOLAS’S SHARE OF THE BUILDING BECAUSE THE SUSPENSIVE CONDITION HAS NOT YET BEEN FULFILLED.

II

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT THE CONTRACT OF SALE BETWEEN
PETITIONER AND RESPONDENT RODOLFO DIEGO REMAINS LEGALLY BINDING AND IS NOT RESCINDED
GIVING MISPLACED RELIANCE ON PETITIONER NICOLAS’ STATEMENT THAT THE SALE HAS NOT YET BEEN
REVOKED.

III

THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT PETITIONER NICOLAS DIEGO ACTED
LEGALLY AND CORRECTLY WHEN HE UNILATERALLY RESCINDED AND REVOKED HIS AGREEMENT OF SALE
WITH RESPONDENT RODOLFO DIEGO CONSIDERING RODOLFO’S MATERIAL, SUBSTANTIAL BREACH OF THE
CONTRACT.

IV

THE HONORABLE COURT OF APPEALS ERRED IN HOLDING THAT PETITIONER HAS NO MORE RIGHTS OVER
HIS SHARE IN THE BUILDING, DESPITE THE FACT THAT THERE WAS AS YET NO PERFECTED CONTRACT OF
SALE BETWEEN PETITIONER NICOLAS DIEGO AND RODOLFO DIEGO AND THERE WAS YET NO TRANSFER OF
OWNERSHIP OF PETITIONER’S SHARE TO RODOLFO DUE TO THE NON-FULFILLMENT BY RODOLFO OF THE
SUSPENSIVE CONDITION UNDER THE CONTRACT.

THE HONORABLE COURT OF APPEALS ERRED IN NOT HOLDING THAT RESPONDENT RODOLFO HAS
UNJUSTLY ENRICHED HIMSELF AT THE EXPENSE OF PETITIONER BECAUSE DESPITE NOT HAVING PAID THE
BALANCE OF THE PURCHASE PRICE OF THE SALE, THAT RODOLFO HAS NOT YET ACQUIRED OWNERSHIP
OVER THE SHARE OF PETITIONER NICOLAS, HE HAS ALREADY BEEN APPROPRIATING FOR HIMSELF AND FOR
HIS PERSONAL BENEFIT THE SHARE OF THE INCOME OF THE BUILDING AND THE PORTION OF THE BUILDING
ITSELF WHICH WAS DUE TO AND OWNED BY PETITIONER NICOLAS.

VI

Page | 35
THE HONORABLE COURT OF APPEALS ERRED IN NOT AWARDING ACTUAL DAMAGES, ATTORNEY’S FEES AND
LITIGATION EXPENSES TO THE PETITIONER DESPITE THE FACT THAT PETITIONER’S RIGHTS HAD BEEN
WANTONLY VIOLATED BY THE RESPONDENTS.11

Petitioner’s Arguments

In his Petition, the Supplement12 thereon, and Reply,13 Nicolas argues that, contrary to what the CA found, there was no
perfected contract of sale even though Rodolfo had partially paid the price; that in the absence of the third element in a
sale contract – the price – there could be no perfected sale; that failing to pay the required price in full, Nicolas had the
right to rescind the agreement as an unpaid seller.

Nicolas likewise takes exception to the CA finding that Rodolfo was not in default or delay in the payment of the agreed
balance for his (Nicolas’s) failure to file a case to fix the period within which payment of the balance should be made. He
believes that Rodolfo’s failure to pay within a reasonable time was a substantial and material breach of the agreement
which gave him the right to unilaterally and extrajudicially rescind the agreement and be discharged of his obligations as
seller; and that his repeated written demands upon Rodolfo to pay the balance granted him such rights.

Nicolas further claims that based on his agreement with Rodolfo, there was to be no transfer of title over his share in the
building until Rodolfo has effected full payment of the purchase price, thus, giving no right to the latter to collect his share
in the rentals.

Finally, Nicolas bewails the CA’s failure to award damages, attorney’s fees and litigation expenses for what he believes is
a case of unjust enrichment at his expense.

Respondents’ Arguments

Apart from echoing the RTC and CA pronouncements, respondents accuse the petitioner of "cheating" them, claiming that
after the latter received the ₱250,000.00 downpayment, he "vanished like thin air and hibernated in the USA, he being an
American citizen,"14 only to come back claiming that the said amount was a mere loan.

They add that the Petition is a mere rehash and reiteration of the petitioner’s arguments below, which are deemed to have
been sufficiently passed upon and debunked by the appellate court.

Our Ruling

The Court finds merit in the Petition.

The contract entered into by Nicolas and Rodolfo was a contract to sell.

a) The stipulation to execute a deed of sale upon full payment of the purchase price is a unique and
distinguishing characteristic of a contract to sell. It also shows that the vendor reserved title to the property until
full payment.

There is no dispute that in 1993, Rodolfo agreed to buy Nicolas’s share in the Diego Building for the price of ₱500,000.00.
There is also no dispute that of the total purchase price, Rodolfo paid, and Nicolas received, ₱250,000.00. Significantly, it
is also not disputed that the parties agreed that the remaining amount of ₱250,000.00 would be paid after Nicolas shall
have executed a deed of sale.

This stipulation, i.e., to execute a deed of absolute sale upon full payment of the purchase price, is a unique and
distinguishing characteristic of a contract to sell. In Reyes v. Tuparan,15 this Court ruled that a stipulation in the
contract, "[w]here the vendor promises to execute a deed of absolute sale upon the completion by the vendee of
the payment of the price," indicates that the parties entered into a contract to sell. According to this Court, this
particular provision is tantamount to a reservation of ownership on the part of the vendor. Explicitly stated, the Court ruled
that the agreement to execute a deed of sale upon full payment of the purchase price "shows that the vendors
reserved title to the subject property until full payment of the purchase price." 16

In Tan v. Benolirao,17 this Court, speaking through Justice Brion, ruled that the parties entered into a contract to sell as
revealed by the following stipulation:

d) That in case, BUYER has complied with the terms and conditions of this contract, then the SELLERS shall execute and
deliver to the BUYER the appropriate Deed of Absolute Sale; 18

The Court further held that "[j]urisprudence has established that where the seller promises to execute a deed of
absolute sale upon the completion by the buyer of the payment of the price, the contract is only a contract to
sell."19

b) The acknowledgement receipt signed by Nicolas as well as the contemporaneous acts of the parties show that
they agreed on a contract to sell, not of sale. The absence of a formal deed of conveyance is indicative of a
contract to sell.

Page | 36
In San Lorenzo Development Corporation v. Court of Appeals,20 the facts show that spouses Miguel and Pacita Lu (Lu)
sold a certain parcel of land to Pablo Babasanta (Pablo). After several payments, Pablo wrote Lu demanding "the
execution of a final deed of sale in his favor so that he could effect full payment of the purchase price."21 To prove his
allegation that there was a perfected contract of sale between him and Lu, Pablo presented a receipt signed by Lu
acknowledging receipt of ₱50,000.00 as partial payment.22

However, when the case reached this Court, it was ruled that the transaction entered into by Pablo and Lu was only
a contract to sell, not a contract of sale. The Court held thus:

The receipt signed by Pacita Lu merely states that she accepted the sum of fifty thousand pesos (₱50,000.00) from
Babasanta as partial payment of 3.6 hectares of farm lot situated in Sta. Rosa, Laguna. While there is no stipulation that
the seller reserves the ownership of the property until full payment of the price which is a distinguishing feature of a
contract to sell, the subsequent acts of the parties convince us that the Spouses Lu never intended to transfer
ownership to Babasanta except upon full payment of the purchase price.

Babasanta’s letter dated 22 May 1989 was quite telling. He stated therein that despite his repeated requests for the
execution of the final deed of sale in his favor so that he could effect full payment of the price, Pacita Lu allegedly refused
to do so. In effect, Babasanta himself recognized that ownership of the property would not be transferred to him
until such time as he shall have effected full payment of the price. Moreover, had the sellers intended to transfer
title, they could have easily executed the document of sale in its required form simultaneously with their
acceptance of the partial payment, but they did not. Doubtlessly, the receipt signed by Pacita Lu should legally
be considered as a perfected contract to sell.23

In the instant case, records show that Nicolas signed a mere receipt 24 acknowledging partial payment of ₱250,000.00
from Rodolfo. It states:

July 8, 1993

Received the amount of [₱250,000.00] for 1 share of Diego Building as partial payment for Nicolas Diego.

(signed)
Nicolas Diego25

As we ruled in San Lorenzo Development Corporation v. Court of Appeals,26 the parties could have executed a document
of sale upon receipt of the partial payment but they did not. This is thus an indication that Nicolas did not intend to
immediately transfer title over his share but only upon full payment of the purchase price. Having thus reserved title over
the property, the contract entered into by Nicolas is a contract to sell. In addition, Eduardo admitted that he and Rodolfo
repeatedly asked Nicolas to sign the deed of sale 27 but the latter refused because he was not yet paid the full amount. As
we have ruled in San Lorenzo Development Corporation v. Court of Appeals,28the fact that Eduardo and Rodolfo asked
Nicolas to execute a deed of sale is a clear recognition on their part that the ownership over the property still remains with
Nicolas. In fine, the totality of the parties’ acts convinces us that Nicolas never intended to transfer the ownership over his
share in the Diego Building until the full payment of the purchase price. Without doubt, the transaction agreed upon by the
parties was a contract to sell, not of sale.

In Chua v. Court of Appeals,29 the parties reached an impasse when the seller wanted to be first paid the consideration
before a new transfer certificate of title (TCT) is issued in the name of the buyer. Contrarily, the buyer wanted to secure a
new TCT in his name before paying the full amount. Their agreement was embodied in a receipt containing the following
terms: "(1) the balance of ₱10,215,000.00 is payable on or before 15 July 1989; (2) the capital gains tax is for the account
of x x x; and (3) if [the buyer] fails to pay the balance x x x the [seller] has the right to forfeit the earnest money x x
x."30 The case eventually reached this Court. In resolving the impasse, the Court, speaking through Justice Carpio, held
that "[a] perusal of the Receipt shows that the true agreement between the parties was a contract to sell." 31 The Court
noted that "the agreement x x x was embodied in a receipt rather than in a deed of sale, ownership not having passed
between them."32 The Court thus concluded that "[t]he absence of a formal deed of conveyance is a strong
indication that the parties did not intend immediate transfer of ownership, but only a transfer after full payment of
the purchase price."33 Thus, the "true agreement between the parties was a contract to sell."34

In the instant case, the parties were similarly embroiled in an impasse. The parties’ agreement was likewise embodied
only in a receipt. Also, Nicolas did not want to sign the deed of sale unless he is fully paid. On the other hand, Rodolfo did
not want to pay unless a deed of sale is duly executed in his favor. We thus say, pursuant to our ruling in Chua v. Court of
Appeals35 that the agreement between Nicolas and Rodolfo is a contract to sell.

This Court cannot subscribe to the appellate court’s view that Nicolas should first execute a deed of absolute sale in favor
of Rodolfo, before the latter can be compelled to pay the balance of the price. This is patently ridiculous, and goes against
every rule in the book. This pronouncement virtually places the prospective seller in a contract to sell at the mercy of the
prospective buyer, and sustaining this point of view would place all contracts to sell in jeopardy of being rendered
ineffective by the act of the prospective buyers, who naturally would demand that the deeds of absolute sale be first
executed before they pay the balance of the price. Surely, no prospective seller would accommodate.

In fine, "the need to execute a deed of absolute sale upon completion of payment of the price generally indicates
that it is a contract to sell, as it implies the reservation of title in the vendor until the vendee has completed the
payment of the price."36 In addition, "[a] stipulation reserving ownership in the vendor until full payment of the price is x x
x typical in a contract to sell."37 Thus, contrary to the pronouncements of the trial and appellate courts, the parties to this

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case only entered into a contract to sell; as such title cannot legally pass to Rodolfo until he makes full payment of the
agreed purchase price.

c) Nicolas did not surrender or deliver title or possession to Rodolfo.

Moreover, there could not even be a surrender or delivery of title or possession to the prospective buyer Rodolfo. This
was made clear by the nature of the agreement, by Nicolas’s repeated demands for the return of all rents unlawfully and
unjustly remitted to Rodolfo by Eduardo, and by Rodolfo and Eduardo’s repeated demands for Nicolas to execute a deed
of sale which, as we said before, is a recognition on their part that ownership over the subject property still remains with
Nicolas.

Significantly, when Eduardo testified, he claimed to be knowledgeable about the terms and conditions of the transaction
between Nicolas and Rodolfo. However, aside from stating that out of the total consideration of ₱500,000.00, the amount
of ₱250,000.00 had already been paid while the remaining ₱250,000.00 would be paid after the execution of the Deed of
Sale, he never testified that there was a stipulation as regards delivery of title or possession. 38

It is also quite understandable why Nicolas belatedly demanded the payment of the rentals. Records show that the
structural integrity of the Diego Building was severely compromised when an earthquake struck Dagupan City in
1990.39 In order to rehabilitate the building, the co-owners obtained a loan from a bank.40 Starting May 1994, the property
was leased to third parties and the rentals received were used to pay off the loan. 41 It was only in 1996, or after payment
of the loan that the co-owners started receiving their share in the rentals.42 During this time, Nicolas was in the USA but
immediately upon his return, he demanded for the payment of his share in the rentals which Eduardo remitted to Rodolfo.
Failing which, he filed the instant Complaint. To us, this bolsters our findings that Nicolas did not intend to immediately
transfer title over the property.

It must be stressed that it is anathema in a contract to sell that the prospective seller should deliver title to the property to
the prospective buyer pending the latter’s payment of the price in full. It certainly is absurd to assume that in the absence
of stipulation, a buyer under a contract to sell is granted ownership of the property even when he has not paid the seller in
full. If this were the case, then prospective sellers in a contract to sell would in all likelihood not be paid the balance of the
price.

This ponente has had occasion to rule that "[a] contract to sell is one where the prospective seller reserves the transfer of
title to the prospective buyer until the happening of an event, such as full payment of the purchase price. What the seller
obliges himself to do is to sell the subject property only when the entire amount of the purchase price has already been
delivered to him. ‘In other words, the full payment of the purchase price partakes of a suspensive condition, the
nonfulfillment of which prevents the obligation to sell from arising and thus, ownership is retained by the prospective seller
without further remedies by the prospective buyer.’ It does not, by itself, transfer ownership to the buyer." 43

The contract to sell is terminated or cancelled.

Having established that the transaction was a contract to sell, what happens now to the parties’ agreement?

The remedy of rescission is not available in contracts to sell.44 As explained in Spouses Santos v. Court of Appeals:45

In view of our finding in the present case that the agreement between the parties is a contract to sell, it follows that the
appellate court erred when it decreed that a judicial rescission of said agreement was necessary. This is because there
was no rescission to speak of in the first place. As we earlier pointed out, in a contract to sell, title remains with the vendor
and does not pass on to the vendee until the purchase price is paid in full. Thus, in a contract to sell, the payment of the
purchase price is a positive suspensive condition. Failure to pay the price agreed upon is not a mere breach, casual or
serious, but a situation that prevents the obligation of the vendor to convey title from acquiring an obligatory force. This is
entirely different from the situation in a contract of sale, where non-payment of the price is a negative resolutory condition.
The effects in law are not identical. In a contract of sale, the vendor has lost ownership of the thing sold and cannot
recover it, unless the contract of sale is rescinded and set aside. In a contract to sell, however, the vendor remains the
owner for as long as the vendee has not complied fully with the condition of paying the purchase price. If the vendor
should eject the vendee for failure to meet the condition precedent, he is enforcing the contract and not rescinding it.
When the petitioners in the instant case repossessed the disputed house and lot for failure of private respondents to pay
the purchase price in full, they were merely enforcing the contract and not rescinding it. As petitioners correctly point out,
the Court of Appeals erred when it ruled that petitioners should have judicially rescinded the contract pursuant to Articles
1592 and 1191 of the Civil Code. Article 1592 speaks of non-payment of the purchase price as a resolutory condition. It
does not apply to a contract to sell. As to Article 1191, it is subordinated to the provisions of Article 1592 when applied to
sales of immovable property. Neither provision is applicable in the present case. 46

Similarly, we held in Chua v. Court of Appeals47 that "Article 1592 of the Civil Code permits the buyer to pay, even after
the expiration of the period, as long as no demand for rescission of the contract has been made upon him either judicially
or by notarial act. However, Article 1592 does not apply to a contract to sell where the seller reserves the ownership until
full payment of the price,"48 as in this case.1âwphi1

Applying the above jurisprudence, we hold that when Rodolfo failed to fully pay the purchase price, the contract to sell
was deemed terminated or cancelled.49 As we have held in Chua v. Court of Appeals,50 "[s]ince the agreement x x x is a
mere contract to sell, the full payment of the purchase price partakes of a suspensive condition. The non-fulfillment of
the condition prevents the obligation to sell from arising and ownership is retained by the seller without further
remedies by the buyer." Similarly, we held in Reyes v. Tuparan51 that "petitioner’s obligation to sell the subject properties

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becomes demandable only upon the happening of the positive suspensive condition, which is the respondent’s full
payment of the purchase price. Without respondent’s full payment, there can be no breach of contract to speak of
because petitioner has no obligation yet to turn over the title. Respondent’s failure to pay in full the purchase price in
full is not the breach of contract contemplated under Article 1191 of the New Civil Code but rather just an event that
prevents the petitioner from being bound to convey title to respondent." Otherwise stated, Rodolfo has no right to compel
Nicolas to transfer ownership to him because he failed to pay in full the purchase price. Correlatively, Nicolas has no
obligation to transfer his ownership over his share in the Diego Building to Rodolfo. 52

Thus, it was erroneous for the CA to rule that Nicolas should have filed a case to fix the period for Rodolfo’s payment of
the balance of the purchase price. It was not Nicolas’s obligation to compel Rodolfo to pay the balance; it was Rodolfo’s
duty to remit it.

It would appear that after Nicolas refused to sign the deed as there was yet no full payment, Rodolfo and Eduardo hired
the services of the Daroya Accounting Office "for the purpose of estimating the amount to which [Nicolas] still owes
[Rodolfo] as a consequence of the unconsummated verbal agreement regarding the former’s share in the co-ownership of
[Diego Building] in favor of the latter."53 According to the accountant’s report, after Nicolas revoked his agreement with
Rodolfo due to non-payment, the downpayment of ₱250,000.00 was considered a loan of Nicolas from Rodolfo. 54 The
accountant opined that the ₱250,000.00 should earn interest at 18%. 55 Nicolas however objected as regards the
imposition of interest as it was not previously agreed upon. Notably, the contents of the accountant’s report were not
disputed or rebutted by the respondents. In fact, it was stated therein that "[a]ll the bases and assumptions made
particularly in the fixing of the applicable rate of interest have been discussed with [Eduardo]." 56

We find it irrelevant and immaterial that Nicolas described the termination or cancellation of his agreement with Rodolfo as
one of rescission. Being a layman, he is understandably not adept in legal terms and their implications. Besides, this
Court should not be held captive or bound by the conclusion reached by the parties. The proper characterization of an
action should be based on what the law says it to be, not by what a party believed it to be. "A contract is what the law
defines it to be x x x and not what the contracting parties call it."57

On the other hand, the respondents’ additional submission – that Nicolas cheated them by "vanishing and hibernating" in
the USA after receiving Rodolfo’s ₱250,000.00 downpayment, only to come back later and claim that the amount he
received was a mere loan – cannot be believed. How the respondents could have been cheated or disadvantaged by
Nicolas’s leaving is beyond comprehension. If there was anybody who benefited from Nicolas’s perceived "hibernation", it
was the respondents, for they certainly had free rein over Nicolas’s interest in the Diego Building. Rodolfo put off payment
of the balance of the price, yet, with the aid of Eduardo, collected and appropriated for himself the rents which belonged to
Nicolas.

Eduardo is solidarily liable with Rodolfo as regards the share of Nicolas in the rents.

For his complicity, bad faith and abuse of authority as the Diego Building administrator, Eduardo must be held solidarily
liable with Rodolfo for all that Nicolas should be entitled to from 1993 up to the present, or in respect of actual damages
suffered in relation to his interest in the Diego Building. Eduardo was the primary cause of Nicolas’s loss, being directly
responsible for making and causing the wrongful payments to Rodolfo, who received them under obligation to return them
to Nicolas, the true recipient.1âwphi1 As such, Eduardo should be principally responsible to Nicolas as well. Suffice it to
state that every person must, in the exercise of his rights and in the performance of his duties, act with justice, give
everyone his due, and observe honesty and good faith; and every person who, contrary to law, wilfully or negligently
causes damage to another, shall indemnify the latter for the same.58

Attorney’s fees and other costs.

"Although attorney’s fees are not allowed in the absence of stipulation, the court can award the same when the
defendant’s act or omission has compelled the plaintiff to incur expenses to protect his interest or where the defendant
acted in gross and evident bad faith in refusing to satisfy the plaintiff’s plainly valid, just and demandable claim." 59 In the
instant case, it is beyond cavil that petitioner was constrained to file the instant case to protect his interest because of
respondents’ unreasonable and unjustified refusal to render an accounting and to remit to the petitioner his rightful share
in rents and fruits in the Diego Building. Thus, we deem it proper to award to petitioner attorney’s fees in the amount of
₱50,000.00,60 as well as litigation expenses in the amount of ₱20,000.00 and the sum of ₱1,000.00 for each court
appearance by his lawyer or lawyers, as prayed for.

WHEREFORE, premises considered, the Petition is GRANTED. The June 29, 2007 Decision and October 3, 2007
Resolution of the Court of Appeals in CA-G.R. CV No. 86512, and the April 19, 2005 Decision of the Dagupan City
Regional Trial Court, Branch 40 in Civil Case No. 99-02971-D, are hereby ANNULLED and SET ASIDE.

The Court further decrees the following:

1. The oral contract to sell between petitioner Nicolas P. Diego and respondent Rodolfo P. Diego
is DECLARED terminated/cancelled;

2. Respondents Rodolfo P. Diego and Eduardo P. Diego are ORDERED to surrender possession and control, as the case
may be, of Nicolas P. Diego’s share in the Diego Building. Respondents are further commanded to return or surrender to
the petitioner the documents of title, receipts, papers, contracts, and all other documents in any form or manner pertaining
to the latter’s share in the building, which are deemed to be in their unauthorized and illegal possession;

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3. Respondents Rodolfo P. Diego and Eduardo P. Diego are ORDERED to immediately render an accounting of all the
transactions, from the period beginning 1993 up to the present, pertaining to Nicolas P. Diego’s share in the Diego
Building, and thereafter commanded to jointly and severally remit to the petitioner all rents, monies, payments and
benefits of whatever kind or nature pertaining thereto, which are hereby deemed received by them during the said period,
and made to them or are due, demandable and forthcoming during the said period and from the date of this Decision, with
legal interest from the filing of the Complaint;

4. Respondents Rodolfo P. Diego and Eduardo P. Diego are ORDERED, immediately and without further delay upon
receipt of this Decision, to solidarily pay the petitioner attorney’s fees in the amount of ₱50,000.00; litigation expenses in
the amount of ₱20,000.00 and the sum of ₱1,000.00 per counsel for each court appearance by his lawyer or lawyers;

5. The payment of ₱250,000.00 made by respondent Rodolfo P. Diego, with legal interest from the filing of the Complaint,
shall be APPLIED, by way of compensation, to his liabilities to the petitioner and to answer for all damages and other
awards and interests which are owing to the latter under this Decision; and

6. Respondents’ counterclaim is DISMISSED.

SO ORDERED.

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Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 109696 August 14, 1995

THELMA P. OLEA, petitioner,


vs.
COURT OF APPEALS, ELENA VDA. DE PACARDO, JESUS PALENCIA, ELIZABETH PALENCIA AND MONSERRAT
PACIENTE, respondents.

BELLOSILLO, J.:

This is a petition for review of the decision of the Court of Appeals affirming that of the court a quo which dismissed the
complaint of petitioner for recovery of possession on the ground that the action had already prescribed and that the deed
of sale with right to repurchase on which petitioner based her claim was an equitable mortgage.

On 27 January 1947 spouses Filoteo Pacardo and Severa de Pacardo executed a deed of Sale Con Pacto de Retroover
Lot No. 767 of the Passi Cadastre covered by Transfer Certificate of Title No. 26424 in their name for a consideration of
P950.00 in favor of Maura Palabrica, predecessor in interest of petitioner, subject to the condition that —

. . . if we, the said spouses, Filoteo Pacardo and Severa de Pacardo, our heirs, assigns, successors-in-interest, executors
and administrators shall and will truly repurchase the above-described parcel of land from the said Maura Palabrica, her
heirs, assigns, successors-in-interest after THREE YEARS counting from the date of the execution of this instrument, to
wit, on January 27, 1950 in cash payment in the sum of Five Hundred Pesos, Philippine currency, plus Four Hundred and
Fifty Pesos (P450), also lawful currency, in cash or eighteen (18) cavans of palay (Provincial Measurement) at our option,
then this sale shall become null and void and of no force and effect whatsoever. On the contrary, the same will become
irrevocable, definite and final and will vest complete and absolute title on the vendee upon the premises.1

The contract of sale with right to repurchase was acknowledged by the vendors before Notary Public Victorio Tagamolila
on the same day the contract was executed in the Municipality of Passi, Province of Iloilo. The vendors also delivered to
the vendee their owner's copy of the title.

After the execution of the sale, the Pacardo spouses as vendors remained in possession of the land and continued the
cultivation thereof. Since the sale on 27 January 1947 up to August 1987, or for a period of about 40 years, the spouses
delivered annually one-third (1/3) of the produce of the land to Maura Palabrica and kept for themselves the remaining
two-thirds (2/3).

On 27 January 1950, despite the lapse of three (3) years, the Pacardo spouses did not repurchase the land but faithfully
continued to give 1/3 of the produce to Maura Palabrica. When the spouses died, their son Filoteo Jr., took over the
possession and assumed the cultivation of the land and, like his parents, gave 1/3 of the produce to Maura Palabrica and
later to her daughter, petitioner herein, who would eventually buy from her the lot subject of the litigation.
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On 22 September 1966 Maura Palabrica caused the registration of the Sale Con Pacto de Retro with the Register of
Deeds of Iloilo and its annotation on Transfer Certificate of Title No. 26424 covering the subject lot.

On 10 May 1978 Maura Palabrica sold Lot No. 767 for P40,000.00 to one of her daughters, petitioner Thelma Olea. From
then on it was petitioner who received the one-third (1/3) share of the annual produce of the land from Filoteo Pacardo,
Jr., until he died in August 1987. His widow Elena Vda.de Pacardo however refused to give to petitioner the one-third (1/3)
share of the produce. After Elena transferred residence to another barangay the spouses Jesus and Elizabeth Palencia
took over the possession and cultivation of the property. Elizabeth Palencia is a sister of Filoteo Jr., and is one of the
children of spouses Filoteo and Severina Pacardo. The Palencias delivered the share of the produce not to petitioner but
to respondent Elena Pacardo.

Hence, on 25 January 1989, petitioner filed a complaint against Elena Pacardo and the spouses Jesus and Elizabeth
Palencia for recovery of possession with damages. She alleged that she was the owner of Lot No. 767 having acquired
the same from her mother Maura Palabrica through a deed of sale, who in turn acquired the lot from the spouses Filoteo
and Severa Pacardo through a pacto de retro sale, and that due to the failure of the spouses to redeem the property three
(3) years thereafter ownership thereof passed on to Maura Palabrica who later caused the registration of the Sale Con
Pacto de Retro with the Registry of Deeds of Iloilo and its annotation on TCT No. 26424.

Private respondents Elena Vda.de Pacardo and Jesus and Elizabeth Palencia filed their answer alleging that their parents
intended the disputed transaction to be an equitable mortgage and not a sale with right to repurchase. Respondent
Monserrat Paciente, another daughter of the vendor-spouses Filoteo and Severa Pacardo, filed an answer in intervention
raising likewise as defense that the Sale Con Pacto de Retro was indeed an equitable mortgage.

On 19 February 1991 the trial court rendered judgment dismissing the complaint. Petitioner appealed to the Court of
Appeals which on 16 December 1992 affirmed the judgment of the trial court.

In the instant recourse, petitioner assails the Court of Appeals for its conclusions and findings allegedly grounded entirely
on speculations, surmises, conjectures and misapprehension of facts. 2 Petitioner submits that the terms and conditions of
the Sale Con Pacto de Retro between her mother Maura Palabrica and the Pacardos on 27 January 1947 are clear and
leave no room for interpretation; that the parties to the transaction have specified that the consideration of the sale was
P950.00 and the repurchase price was P500.00 in cash plus P450.00 cash or eighteen (18) cavans of palay at the option
of the vendor-spouses in case they repurchased the property three (3) years afterwards; and that the Court of Appeals
erred in holding that the repurchase price was only P450.00 or eighteen cavans of palay.

Petitioner also asserts that the failure of her mother, the vendee Maura Palabrica, to consolidate ownership under Art.
1607 of the New Civil Code should not be a ground for considering the sale to be an equitable mortgage because both
parties have stipulated in the contract that when the spouses should fail to repurchase Lot No. 767 on 27 January 1950
complete and absolute title would forthwith be vested in Maura Palabrica; and that even granting that Art. 1607 of the New
Civil Code, which took effect 30 August 1950, be granted retroactive effect Maura Palabrica had already acquired a
vested right of ownership over the land as of 27 January 1950 which Art. 1607 can no longer invalidate under Art. 2252 of
the New Civil Code. Moreover, petitioner submits that the Pacardo spouses remained in possession of the land they sold
to Palabrica because of their good relations with each other and the latter consented that the spouses would be the ones
to till the land.

We cannot sustain petitioner. Art. 1602 of the New Civil Code provides that the contract of sale with right to repurchase
shall be presumed to be an equitable mortgage in any of the following cases: (a) when the price of the sale is unusually
inadequate; (b) when the vendor remains in possession as lessee or otherwise; (c) when upon or after the expiration of
the right to repurchase another instrument extending the period of redemption or granting a new period is executed; (d)
when the purchaser retains for himself a part of the purchase price; (e) when the vendor binds himself to pay the taxes on
the thing sold; and, (f) in any other case where it may be fairly inferred that the real intention of the parties is that the
transaction shall secure the payment of a debt or the performance of any other obligation. Being remedial in nature, Art.
1602 may be applied retroactively to cases prior to the effectivity of the New Civil Code 3 Hence it may apply to the instant
case where the deed of sale with right to repurchase was executed on 27 January 1947.

It has been held that a contract should be construed as a mortgage or a loan instead of a pacto de retro sale when its
terms are ambiguous or the circumstances surrounding its execution or its performance are incompatible or inconsistent
with the theory that it is a sale.4 Even when a document appears on its face to be a sale with pacto de retro the owner of
the property may prove that the contract is really a loan with mortgage by raising as an issue the fact that the document
does not express the true intent and agreement of the parties. In this case, parol evidence then becomes competent and
admissible to prove that the instrument was in truth and in fact given merely as a security for the repayment of a loan. And
upon proof of the truth of such allegations, the court will enforce the agreement or understanding in consonance with the
true intent of the parties at the time of execution of the contract. 5 This principle is applicable even if the purported Sale
Con Pacto de Retro was registered in the name of the transferee and a new certificate of title was issued in the name of
the latter.6

There is no dispute that when Maura Palabrica "bought" the land on 27 January 1947 the vendors, the Pacardo spouses,
remained in possession of the property and cultivated the same. Their son continued the cultivation when the spouses
died, which cultivation was continued later by his widow Elena Vda. de Pacardo and then by his sister Elizabeth Palencia.
During the direct examination, petitioner admitted —

Q. And who later on cultivated this lot 767 if you know?

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A. When the Pacardos sold to my mother, it was the spouses who cultivated the land. When Filoteo Pacardo Sr. could no
longer till, it was Filoteo Pacardo Jr. who took over.7

Defendant-intervenor Monserrat Paciente also testified —

Q. Do you know whether any transaction was had between your mother Severa Pacardo and Maura Palabrica involving
this Lot No. 767?

A. There was a transaction. Every year, dues was (sic) paid to this land when the land was mortgaged. It was a 1/3
transaction, 1/3 was given to them and 2/3 were taken by us.

Q. When did you come to know that alleged transaction between your parents and the late Maura Palabrica?

A. When I came to the age of reason, it was told to me by my parents. 8

The rule is settled that where in a contract of sale with pacto de retro the vendor remains in physical possession of the
land sold as lessee or otherwise, the contract should be considered an equitable mortgage. 9 The same presumption
applies when the vendee was given the right to appropriate the fruits thereof in lieu of receiving interest on the loan. 10

Moreover, the terms of the document itself can aid in arriving at the true nature of the transaction. Where the contract
contains a stipulation, as in this case, that upon payment by the vendor of the purchase price within a certain period the
document shall become null and void and have no legal force or effect, the purported sale should be considered a
mortgage contract. In pacto de retro sale the payment of the repurchase price does not merely render the document null
and void but there is the obligation on the part of the vendee to sell back the property. 11

It has been consistently held that the presence of even one of the circumstances enumerated in Art. 1602 of the New Civil
Code is sufficient to declare a contract of sale with right to repurchase an equitable mortgage. 12 This is so because pacto
de retro sales with the stringent and onerous effects that accompany them are not favored. In case of doubt, a contract
purporting to be a sale with right to repurchase shall be construed as an equitable mortgage. 13

Petitioner, to prove her claim, cannot rely on the stipulation in the contract providing that complete and absolute title shall
be vested on the vendee should the vendors fail to redeem the property on the specified date. Such stipulation that the
ownership of the property would automatically pass to the vendee in case no redemption was effected within the
stipulated period is void for being a pactum commissorium which enables the mortgagee to acquire ownership of the
mortgaged property without need of foreclosure. Its insertion in the contract is an avowal of the intention to mortgage
rather than to sell the property. 14

Consequently, there was no valid sale to Maura Palabrica. Ownership over the property was not transferred to her for she
was merely a mortgagee. There being no title to the land that Palabrica acquired from the spouses Filoteo and Severa
Pacardo, it follows that Palabrica had no title to the same land which could be conveyed to petitioner. 15Hence there is no
legal basis for petitioner to recover possession of the property.

It is clear from the contract that the amount loaned to the Pacardo spouses was P950.00 and Lot No. 767 was mortgaged
as security. The spouses were allowed under the contract to pay the amount of the loan on 27 January 1950 by tendering
the amount of the P500.00 in cash and P450.00 cash or 18 cavans of palay at their option. The trial court made its factual
finding that from 1947 when the purported sale was executed to 1972 alone, the spouses and their successors in interest
delivered a total of 1,166 cavans of palay to Maura Palabrica. The delivery of 1/3 of the annual produce to Palabrica and
later to petitioner continued until 1987. Under the last paragraph of Art. 1602, this produce received by the alleged vendee
as rent or otherwise should be considered as interest.

There is no dispute that the Pacardo spouses or their successors in interest failed to pay the amount of the loan on 27
January 1950 as stipulated in the contract although they continued to deliver the produce to Palabrica and petitioner until
1987 by way of interest on the loan. Even if we treat petitioner's action to recover possession of Lot No. 767 as one for the
enforcement of her right as mortgagee, the same has already prescribed. Art. 1142 of the New Civil Code provides that a
mortgage action prescribes after ten (10) years. Since 27 January 1950 when the Pacardo spouses failed to pay the loan
up to 1989 when the action for recovery of possession was filed, thirty-nine (39) years had already elapsed. As a result,
petitioner is not only barred by prescription from instituting her action; she is also guilty of estoppel by laches.

WHEREFORE, the petition is DENIED and the assailed decision of the Court of Appeals dated 16 December 1992
sustaining that of the Regional Trial Court of Iloilo City is AFFIRMED. Costs against petitioner.

SO ORDERED.

Page | 44
Page | 45
Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-33182 December 18, 1987

PEDRO A. FELICEN SR. (Deceased), substituted by his widow, BEATRIZ LANUEVO and his children, ELEUTERIO,
PEDRO, JR., CLARITA, FERNANDO and JOSE MARIA, all surnamed FELICEN petitioners,
vs.
SEVERINO ORIAS, MILAGROS ORIAS DE LIM, and the COURT OF APPEALS, respondents.

NARVASA, J.:

This appeal on certiorari 1 involves Article 1606 of the Civil Code. The first paragraph of this article declares that in cases
of conventional redemption, 2i.e., when the vendor reserves the right to repurchase the thing sold — with the obligation to
return the price of the sale as well as the expenses of the contract, any other legitimate payments made by reason of the
sale, the necessary and useful expenses made on the thing sold, 3 and other stipulations which may have been agreed —
upon the right to repurchase, in the absence of an express agreement, shall last four years from the date of the contract.
The second paragraph says that should there be an agreement, the period cannot exceed ten years. And the third and
last paragraph — and it is this which is directly relevant to the case at bar — reads as follows:

Page | 46
However, the vendor may still exercise the right to repurchase within thirty days from the time final judgment was
rendered in a civil action on the basis that the contract was a true sale with right to repurchase.

Under a "Deed of Sale With Right to Repurchase," 4 the spouses Severino Orias and Milagros O. Lim (private
respondents herein) sold to Pedro A. Felicen, Sr. (petitioner) a parcel of land in the Municipality of Salcedo, Province of
Samar with an area of 7.8 hectares at the price of P 3,000.00. The deed expressly reserved to the vendors the right to
redeem within two (2) years. That period expired without any offer having been made by the vendors a retroto repurchase
the land.

Some eight (8) years afterwards" 5 the vendors a retro filed suit in the Court of First Instance against the vendees to
compel the latter to resell and reconvey the property to them. After due proceedings, the Trial Court rendered judgment,
finding that the contract between the parties was in truth one of sale with pacto de retro, and that the period stipulated for
the repurchase had already expired; but this notwithstanding, the vendors a retro still had the right to repurchase the
property within thirty (30) days from the time the judgment becomes final, in accordance with the third paragraph of Article
1606 of the Civil Code, by complying with the requirements of Article 1616. 6

The Court of Appeals affirmed the decision of the Trial Court. 7 It pronounced as correct the Lower Court's conclusion that
the claim of the vendors a retro — that they had twice offered to repurchase the land but that these had been refused —
had not been proven, the proferred proofs being totally devoid of details that could engender persuasiveness. It also
pronounced correct the finding that the contract in question could not be deemed to be one of loan, its terms being so
plainly and distinctly indicative of a sale with pacto de retro as to preclude its construction as some other kind of
agreement, besides bearing none of the well known indicia of a disguised mortgage, enumerated in Article 1602 of the
Civil Code. Nevertheless, the Appellate Court deemed proper the application of the third paragraph of Article 1606 since
the main issue in the case was the obtention of a judicial declaration that the agreement was a simple mortgage.

The thesis of both the Trial Court and the Appellate Court, in other words, was that although the vendors a retro had failed
in their suit to prove that their contract with the vendees was actually one of loan with mortgage, the contract having on
the contrary been confirmed to be a sale with conventional redemption, they could nonetheless still repurchase the
property "within thirty days from the time final ' judgment was rendered in a civil action on the basis that the contract was a
true sale with right to repurchase, 11 pursuant to said third paragraph of Article 1606. The thesis cannot upon the
undisputed facts be sustained.

The application of the third paragraph of Article 1606 is predicated upon the bona fides of the vendor a retro. It must
appear that there was a belief on his part, founded on facts attendant upon the execution of the sale with pacto de retro,
honestly and sincerely entertained, that the agreement was in reality a mortgage, one not intended to affect the title to the
property ostensibly sold, but merely to give it as security for a loan or other obligation. In that event, if the matter of the
real nature of the contract is submitted for judicial resolution, the application of the rule is meet and proper: that the
vendor a retro be allowed to repurchase the property sold within 30 days from rendition of final judgment declaring the
contract to be a true sale with right to repurchase. 8 Conversely, if it should appear that the parties' agreement was really
one of sale — transferring ownership to the vendee, but accompanied by a reservation to the vendor of the right to
repurchase the property — and there are no circumstances that may reasonably be accepted as generating some honest
doubt as to the parties' intention, the proviso is inapplicable. The reason is quite obvious. If the rule were otherwise, it
would be within the power of every vendor a retro to set at naught a pacto de retro, or resurrect an expired right of
repurchase, by simply instituting an action to reform the contract — known to him to be in truth a sale with pacto de retro
— into an equitable mortgage. As postulated by the petitioner, 9 "to allow herein private respondents to repurchase the
property by applying said paragraph .. to the case at bar despite the fact that the stipulated redemption period had already
long expired when they instituted the present action, would in effect alter or modify the stipulation in the contract as to the
definite and specific limitation of the period for repurchase (2 years from date of sale or only until June 25, 1958) thereby
not simply increasing but in reality resuscitating the expired right to repurchase ..and likewise the already terminated and
extinguished obligation to resell by herein petitioner." The rule would thus be a made a tool to spawn protect and even
reward fraud and bad faith, a situation surely never contemplated or intended by the law.

This Court has already had occasion to rule on the proper interpretation of the provision in question. In Adorable v.
Inacala 10 where the proofs established that there could be no honest doubt as to the parties' intention, that the
transaction was clearly and definitely a sale with pacto de retro, the Court adjudged the vendor a retro not to be entitled to
the benefit of the third paragraph of Article 1606.

The case at bar is on all fours with Adorable. Here, as in the earlier case, the evidence persuasively establishes not only
the utter paucity of the vendors' assertion that they had tried to exercise the right to repurchase within the stipulated
period, but also that the contract was clearly and distinctly a contract of sale with pacto de retro and contained no
provision from which another kind of contract could fairly and reasonably be deduced, and furthermore exhibited none cf
the familiar badges of a covert mortgage specified by the Civil Code. The Court perceives no reason to deviate from the
doctrine in Adorable, and a disposition in accord therewith is thus inevitable.

WHEREFORE, the judgments of the Court of Appeals and the Trial Court are reversed, and another entered declaring the
private respondents' right to repurchase to have expired upon expiration of the period stipulated therefore, and that
ownership of the property in question has long since been acquired by and now rests in the petitioner, his heirs,
successors and assigns. Costs against private respondents.

Page | 47
Republic of the Philippines
SUPREME COURT
Manila

SPECIAL FIRST DIVISION

G.R. No. 146651 August 6, 2002

RONALDO P. ABILLA and GERALDA A. DIZON, petitioners,


vs.
CARLOS ANG GOBONSENG, JR. and THERESITA MIMIE ONG, respondents.

RESOLUTION

YNARES-SANTIAGO, J.:

Page | 48
This resolves the Motion for Reconsideration filed by respondents of our Decision dated January 17, 2002 which granted
the instant petition and reversed the Order dated January 14, 2001 of the Regional Trial Court of Dumaguete City, Branch
41 in Civil Case No. 8148.

The Motion for Reconsideration raises the following grounds:

A. WITH DUE RESPECT, THIS HONORABLE HIGHEST COURT ERRED IN NOT AFFIRMING THE ORDER OF THE
REGIONAL TRIAL COURT, BRANCH 41, DUMAGUETE CITY, IN CIVIL CASE NO. 8148 WHICH GRANTED
RESPONDENT SPOUSES GOBONSENG THE RIGHT TO REPURCHASE THE SEVENTEEN (17) LOTS SUBJECT OF
THE PACTO DE RETRO SALE WITHIN THIRTY (30) DAYS FROM THE FINALITY OF THE ORDER.

B. WITH DUE RESPECT, THIS HONORABLE HIGHEST COURT ERRED IN NOT APPLYING TO THE INSTANT CASE
THE THIRD PARAGRAPH OF ARTICLE 1606 OF THE NEW CIVIL CODE, HENCE, THE PERIOD TO REPURCHASE
ON THE PART OF RESPONDENTS HAS NOT YET EXPIRED.

C. WITH DUE RESPECT, THIS HONORABLE HIGHEST COURT ERRED IN APPLYING TO THE CASE AT BAR THE
CASE OF VDA. DE MACOY VS. COURT OF APPEALS (206 SCRA 244) CITING THE CASE OF FELICEN, SR. VS.
ORIAS (156 SCRA 586).1

In compliance with our resolution,2 petitioners filed their Comment to the motion for reconsideration, arguing that
respondents failed to seasonably exercise their right of redemption; and that this Court was correct in its application of the
case of Vda. de Macoy v. Court of Appeals, which held that Article 1606, third paragraph, of the Civil Code does not apply
to cases where the parties intended their contract of sale not as an equitable mortgage but a true sale involving transfer of
ownership.3

It may be helpful to restate the undisputed facts. Respondent contracted a loan from petitioner in the sum of P550,000.00,
secured by a real estate mortgage over two parcels of land, covered by TCT Nos. 13607 and 13535. Respondent
defaulted in the payment of the loan, which had reached the amount of P700,000.00. He sought a renewal of the loan and
issued two postdated checks, one for P10,000.00 and the other for P690,000.00, representing the full amount of his
obligation.

The second check was dishonored by the drawee bank. Respondent promised to pay petitioner the sum of P690,000.00
upon approval of his pending loan application with the State Investment House, Inc. However, the said lending institution
required a collateral before approving and releasing the loan, for which reason respondent borrowed from petitioner the
two titles, TCT Nos. 13607 and 13535, so he can mortgage the same. Thus, petitioner cancelled the mortgage in his favor
and delivered the two titles to respondent. Despite approval of the loan, respondent failed to make good on his promise to
pay his outstanding obligation to petitioner. Hence, the latter threatened to sue him for Estafa. Respondent thus executed
a deed of absolute sale over his seventeen lots in Dumaguete City in favor of petitioner. On the same day, the parties
executed an Option to Buy whereby respondent was allowed to repurchase the lots within a period of six months.

Respondent failed to repurchase the seventeen lots within the stipulated period of six months. Consequently, petitioners
instituted an action for specific performance, praying that respondent be made to pay the capital gains tax and registration
expenses for the transfer of title to the said lots, pursuant to the deed of absolute sale. In his answer, respondent
interposed the defense that the transaction was in reality an equitable mortgage. On October 29, 1990, the Regional Trial
Court of Dumaguete City, Branch 42, rendered judgment in favor of petitioner and ruled that the Option to Buy was
rendered null and void by respondent's failure to exercise the option within the period of six months. 4 On appeal, the Court
of Appeals affirmed the decision of the trial court, but further declared that "the deed of sale and option to buy actually
constitute a pacto de retro sale."5 Respondent's motion for reconsideration was denied,6 and the petition filed with this
Court was dismissed.7 Hence, the decision became final on February 8, 1999 and was duly entered in the Book of Entries
of Judgments.8

On February 27, 1999, respondent filed with the court of origin a motion to repurchase the lots with tender of payment,
which was denied.9 Subsequently, the trial court issued an Order granting respondent's motion for reconsideration and
allowing him to repurchase the lots within thirty days from finality thereof. 10Thus, petitioner brought the instant petition for
review.

On January 17, 2002, we rendered the assailed Decision reversing the Order of the Regional Trial Court of Dumaguete
City, in effect denying respondent the right to repurchase the subject lots.

Respondent's claim of the right to repurchase the lots is anchored on the third paragraph of Article 1606 of the Civil Code,
which states:

However, the vendor may still exercise the right to repurchase within thirty days from the time final judgment was
rendered in a civil action on the basis that the contract was a true sale with right to repurchase.

The above-quoted provision applies only where the nature and character of the transaction – whether as a pacto de
retro sale or as an equitable mortgage – was put in issue before the court.11 In other words, it applies in a situation where,
in a case, one of the contending parties claims that the transaction was a sale with right to repurchase and the other
counters that the same was an equitable mortgage, and the court declares in a final judgment that the transaction was
really a sale with pacto de retro.

Page | 49
In our Decision, we ruled that Article 1606 of the Civil Code does not apply to the case at bar because the transaction
between the parties was a pacto de retro sale, citing the case of Vda. de Macoy v. Court of Appeals.12However, upon a
careful review and analysis of the antecedent facts, we are convinced that the right granted under the third paragraph of
Article 1606 may be invoked by respondent.

In Vda.de Macoy,13 citing the earlier ruling in Felicen, Sr. v. Orias,14 we held:

The application of the third paragraph of Article 1606 is predicated upon the bona fides of the vendor a retro.It must
appear that there was a belief on his part, founded on facts attendant upon the execution of the sale with pacto de
retro, honestly and sincerely entertained, that the agreement was in reality a mortgage, one not intended to affect the title
to the property ostensibly sold, but merely to give it as security for a loan or other obligation. In that event, if the matter of
the real nature of the contract is submitted for judicial resolution, the application of the rule is meet and proper; that the
vendor a retro be allowed to repurchase the property sold within 30 days from rendition of final judgment declaring the
contract to be a true sale with right to repurchase. Conversely, if it should appear that the parties' agreement was really
one of sale — transferring ownership to the vendee, but accompanied by a reservation to the vendor of the right to
repurchase the property — and there are no circumstances that may reasonably be accepted as generating some honest
doubt as to the parties' intention, the proviso is inapplicable. The reason is quite obvious. If the rule were otherwise, it
would be within the power of every vendor a retro to set at naught a pacto de retro, or resurrect an expired right of
repurchase, by simply instituting an action to reform the contract — known to him to be in truth a sale with pacto de
retro — into an equitable mortgage. xxx xxx xxx. (Underscoring ours)

Therefore, the applicability of Article 1606 rests on the bona fide intent of the vendor a retro, i.e., respondent in this case.
If he honestly believed that the transaction was an equitable mortgage, the said article applies and he can still repurchase
the property within thirty days from finality of the judgment declaring the transaction as a sale with pacto de
retro. Parenthetically, it matters not what the vendee intended the transaction to be. As we stated above, we analyzed the
peculiar factual background of this case in order to determine the true intent of respondent. We noted that his contractual
relations with petitioner commenced with a loan secured by a real estate mortgage over two parcels of registered land.
Said mortgage was cancelled by petitioner when respondent borrowed the titles to the properties so that he can mortgage
the same to the State Investment House, Inc. Respondent applied for a loan with the said lending institution precisely to
settle his unpaid obligation to petitioner. However, respondent still failed to settle his obligation to petitioner.

When petitioner lent the two titles to respondent, the loan he extended to respondent became unsecured. Naturally, there
was a need to secure respondent's obligation after he reneged on his promise to pay the same out of the loan proceeds
from State Investment House. Thus, it may well be that the deed of sale, together with the option to buy executed on the
same day, was meant to serve as security for the indebtedness of respondent which had become long overdue. Said
obligation would have been satisfied had respondent exercised the option to buy within the stipulated period. These
circumstances, peculiar to the case at bar, make this case fall squarely within the situation contemplated in the above-
quoted doctrine – that there was a belief on the part of the vendor a retro, founded on facts attendant upon the execution
of the sale with pacto de retro, honestly and sincerely entertained, that the agreement was in reality a mortgage, one not
intended to affect the title to the property ostensibly sold, but merely to give it as security for a loan or other obligation.
Consistently therewith, respondent has maintained throughout the proceedings that transaction between him and
petitioner was really an equitable mortgage. As such, respondent may avail of the third paragraph of Article 1606 of the
Civil Code and repurchase the lots affected by the deed of absolute sale and option to buy.

The trial court, however, erred in holding that respondent shall be allowed to repurchase the subject lots within thirty days
from finality of its Order dated January 14, 2001. Pursuant to Article 1606, third paragraph, of the Civil Code, the thirty-day
period shall be counted from the date of finality of the decision declaring the transaction to be a pacto de
retro sale, i.e., February 8, 1999.15 Consequently, the urgent motion to repurchase the lots with tender of payment which
respondent filed on February 27, 1999 was on time. Petitioners should, therefore, be ordered to accept the tendered
payment for the lots and to execute the necessary deed of sale conveying the same to respondents.1âwphi1.nêt

WHEREFORE, in view of the foregoing, the Decision dated January 17, 2002 is SET ASIDE. The instant petition
is DENIED. Petitioners are ORDERED to accept the payment tendered by respondents and to execute the necessary
deed of sale conveying the subject lots to respondents.

SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 194846 June 19, 2013

*HOSPICIO D. ROSAROSO, ANTONIO D. ROSAROSO, MANUEL D. ROSAROSO, ALGERICA D. ROSAROSO, and


CLEOFE R. LABINDAO, Petitioners,
vs.
LUCILA LABORTE SORIA, SPOUSES HAM SOLUTAN and **LAILA SOLUTAN, and MERIDIAN REALTY
CORPORATION, Respondents.

DECISION

Page | 50
MENDOZA, J.:

This is a petition for review on certiorari under Rule 45 of the Rules of Court assailing the December 4, 2009 Decision 1 of
the Court of Appeals (CA). in CA G.R. CV No. 00351, which reversed and set aside the July 30, 2004 Decision2 of the
Regional Trial Court, Branch 8, 7th Judicial Region, Cebu City (RTC), in Civil Case No. CEB-16957, an action for
declaration of nullity of documents.

The Facts

Spouses Luis Rosaroso (Luis) and Honorata Duazo (Honorata) acquired several real properties in Daan Bantayan, Cebu
City, including the subject properties. The couple had nine (9) children namely: Hospicio, Arturo, Florita, Lucila, Eduardo,
Manuel, Cleofe, Antonio, and Angelica. On April 25, 1952, Honorata died. Later on, Luis married Lourdes Pastor
Rosaroso (Lourdes).

On January 16, 1995, a complaint for Declaration of Nullity of Documents with Damages was filed by Luis, as one of the
plaintiffs, against his daughter, Lucila R. Soria (Lucila); Lucila’s daughter, Laila S. Solutan (Laila); and Meridian Realty
Corporation (Meridian). Due to Luis’ untimely death, however, an amended complaint was filed on January 6, 1996, with
the spouse of Laila, Ham Solutan (Ham); and Luis’ second wife, Lourdes, included as defendants. 3

In the Amended Complaint, it was alleged by petitioners Hospicio D. Rosaroso, Antonio D. Rosaroso (Antonio), Angelica
D. Rosaroso (Angelica), and Cleofe R. Labindao (petitioners) that on November 4, 1991, Luis, with the full knowledge and
consent of his second wife, Lourdes, executed the Deed of Absolute Sale4 (First Sale) covering the properties with
Transfer Certificate of Title (TCT) No. 31852 (Lot No. 8); TCT. No. 11155 (Lot 19); TCT No. 10885 (Lot No. 22); TCT No.
10886 (Lot No. 23); and Lot Nos. 5665 and 7967, all located at Daanbantayan, Cebu, in their favor. 5

They also alleged that, despite the fact that the said properties had already been sold to them, respondent Laila, in
conspiracy with her mother, Lucila, obtained the Special Power of Attorney (SPA), 6 dated April 3, 1993, from Luis (First
SPA); that Luis was then sick, infirm, blind, and of unsound mind; that Lucila and Laila accomplished this by affixing Luis’
thumb mark on the SPA which purportedly authorized Laila to sell and convey, among others, Lot Nos. 8, 22 and 23,
which had already been sold to them; and that on the strength of another SPA 7 by Luis, dated July 21, 1993 (Second
SPA), respondents Laila and Ham mortgaged Lot No. 19 to Vital Lending Investors, Inc. for and in consideration of the
amount of ₱150,000.00 with the concurrence of Lourdes.8

Petitioners further averred that a second sale took place on August 23, 1994, when the respondents made Luis sign the
Deed of Absolute Sale9 conveying to Meridian three (3) parcels of residential land for ₱960,500.00 (Second Sale); that
Meridian was in bad faith when it did not make any inquiry as to who were the occupants and owners of said lots; and that
if Meridian had only investigated, it would have been informed as to the true status of the subject properties and would
have desisted in pursuing their acquisition.

Petitioners, thus, prayed that they be awarded moral damages, exemplary damages, attorney’s fees, actual damages,
and litigation expenses and that the two SPAs and the deed of sale in favor of Meridian be declared null and void ab
initio.10

On their part, respondents Lucila and Laila contested the First Sale in favor of petitioners. They submitted that even
assuming that it was valid, petitioners were estopped from questioning the Second Sale in favor of Meridian because they
failed not only in effecting the necessary transfer of the title, but also in annotating their interests on the titles of the
questioned properties. With respect to the assailed SPAs and the deed of absolute sale executed by Luis, they claimed
that the documents were valid because he was conscious and of sound mind and body when he executed them. In fact, it
was Luis together with his wife who received the check payment issued by Meridian where a big part of it was used to foot
his hospital and medical expenses.11

Respondent Meridian, in its Answer with Compulsory Counterclaim, averred that Luis was fully aware of the conveyances
he made. In fact, Sophia Sanchez (Sanchez), Vice-President of the corporation, personally witnessed Luis affix his thumb
mark on the deed of sale in its favor. As to petitioners’ contention that Meridian acted in bad faith when it did not endeavor
to make some inquiries as to the status of the properties in question, it countered that before purchasing the properties, it
checked the titles of the said lots with the Register of Deeds of Cebu and discovered therein that the First Sale
purportedly executed in favor of the plaintiffs was not registered with the said Register of Deeds. Finally, it argued that the
suit against it was filed in bad faith.12

On her part, Lourdes posited that her signature as well as that of Luis appearing on the deed of sale in favor of petitioners,
was obtained through fraud, deceit and trickery. She explained that they signed the prepared deed out of pity because
petitioners told them that it was necessary for a loan application. In fact, there was no consideration involved in the First
Sale. With respect to the Second Sale, she never encouraged the same and neither did she participate in it. It was purely
her husband’s own volition that the Second Sale materialized. She, however, affirmed that she received Meridian’s
payment on behalf of her husband who was then bedridden.13

RTC Ruling

After the case was submitted for decision, the RTC ruled in favor of petitioners. It held that when Luis executed the
second deed of sale in favor of Meridian, he was no longer the owner of Lot Nos. 19, 22 and 23 as he had already sold
them to his children by his first marriage. In fact, the subject properties had already been delivered to the vendees who
had been living there since birth and so had been in actual possession of the said properties. The trial court stated that
Page | 51
although the deed of sale was not registered, this fact was not prejudicial to their interest. It was of the view that the actual
registration of the deed of sale was not necessary to render a contract valid and effective because where the vendor
delivered the possession of the parcel of land to the vendee and no superior rights of third persons had intervened, the
efficacy of said deed was not destroyed. In other words, Luis lost his right to dispose of the said properties to Meridian
from the time he executed the first deed of sale in favor of petitioners. The same held true with his alleged sale of Lot 8 to
Lucila Soria.14 Specifically, the dispositive portion of the RTC decision reads:

IN VIEW OF THE FOREGOING, the Court finds that a preponderance of evidence exists in favor of the plaintiffs and
against the defendants. Judgment is hereby rendered:

a. Declaring that the Special Power of Attorney, Exhibit "K," for the plaintiffs and Exhibit "3" for the defendants null and
void including all transactions subsequent thereto and all proceedings arising therefrom;

b. Declaring the Deed of Sale marked as Exhibit "E" valid and binding;

c. Declaring the Deed of Absolute Sale of Three (3) Parcels of Residential Land marked as Exhibit "F" null and void from
the beginning;

d. Declaring the Deed of Sale, Exhibit "16" (Solutan) or Exhibit "FF," null and void from the beginning;

e. Declaring the vendees named in the Deed of Sale marked as Exhibit "E" to be the lawful, exclusive and absolute
owners and possessors of Lots Nos. 8, 19, 22, and 23;

f. Ordering the defendants to pay jointly and severally each plaintiff ₱50,000.00 as moral damages; and

g. Ordering the defendants to pay plaintiffs ₱50,000.00 as attorney’s fees; and ₱20,000.00 as litigation expenses.

The crossclaim made by defendant Meridian Realty Corporation against defendants Soria and Solutan is ordered
dismissed for lack of sufficient evidentiary basis.

SO ORDERED."15

Ruling of the Court of Appeals

On appeal, the CA reversed and set aside the RTC decision. The CA ruled that the first deed of sale in favor of petitioners
was void because they failed to prove that they indeed tendered a consideration for the four (4) parcels of land. It relied on
the testimony of Lourdes that petitioners did not pay her husband. The price or consideration for the sale was simulated to
make it appear that payment had been tendered when in fact no payment was made at all. 16

With respect to the validity of the Second Sale, the CA stated that it was valid because the documents were notarized
and, as such, they enjoyed the presumption of regularity. Although petitioners alleged that Luis was manipulated into
signing the SPAs, the CA opined that evidence was wanting in this regard. Dr. Arlene Letigio Pesquira, the attending
physician of Luis, testified that while the latter was physically infirmed, he was of sound mind when he executed the first
SPA.17

With regard to petitioners’ assertion that the First SPA was revoked by Luis when he executed the affidavit, dated
November 24, 1994, the CA ruled that the Second Sale remained valid. The Second Sale was transacted on August 23,
1994, before the First SPA was revoked. In other words, when the Second Sale was consummated, the First SPA was still
valid and subsisting. Thus, "Meridian had all the reasons to rely on the said SPA during the time of its validity until the time
of its actual filing with the Register of Deeds considering that constructive notice of the revocation of the SPA only came
into effect upon the filing of the Adverse Claim and the aforementioned Letters addressed to the Register of Deeds on 17
December 1994 and 25 November 1994, respectively, informing the Register of Deeds of the revocation of the first
SPA."18 Moreover, the CA observed that the affidavit revoking the first SPA was also revoked by Luis on December 12,
1994.19

Furthermore, although Luis revoked the First SPA, he did not revoke the Second SPA which authorized respondent Laila
to sell, convey and mortgage, among others, the property covered by TCT T-11155 (Lot No. 19). The CA opined that had
it been the intention of Luis to discredit the

Second Sale, he should have revoked not only the First SPA but also the Second SPA. The latter being valid, all
transactions emanating from it, particularly the mortgage of Lot 19, its subsequent redemption and its second sale, were
valid.20 Thus, the CA disposed in this wise:

WHEREFORE, the appeal is hereby GRANTED. The Decision dated 30 July 2004 is hereby REVERSED AND SET
ASIDE, and in its stead a new decision is hereby rendered:

1. DECLARING the Special Power of Attorney, dated 21 July 1993, as valid;

2. DECLARING the Special Power of Attorney, dated 03 April 1993, as valid up to the time of its revocation on 24
November 1994;

Page | 52
3. DECLARING the Deed of Absolute sale, dated 04 November 1991, as ineffective and without any force and effect;

4. DECLARING the Deed of Absolute Sale of Three (3) Parcels of Residential Land, dated 23 August 1994, valid and
binding from the very beginning;

5. DECLARING the Deed of Absolute Sale, dated 27 September 1994, also valid and binding from the very beginning;

6. ORDERING the substituted plaintiffs to pay jointly and severally the defendant-appellant Meridian Realty Corporation
the sum of Php100,000.00 as moral damages, Php100,000.00 as attorney’s fee and Php100,000.00 as litigation
expenses; and

7. ORDERING the substituted plaintiffs to pay jointly and severally the defendant-appellants Leila Solutan et al., the sum
of Php50,000.00 as moral damages.

SO ORDERED.21

Petitioners filed a motion for reconsideration, but it was denied in the CA Resolution, 22 dated November 18, 2010.
Consequently, they filed the present petition with the following ASSIGNMENT OF ERRORS

I.

THE HONORABLE COURT OF APPEALS (19TH DIVISION) GRAVELY ERRED WHEN IT DECLARED AS VOID THE
FIRST SALE EXECUTED BY THE LATE LUIS ROSAROSO IN FAVOR OF HIS CHILDREN OF HIS FIRST MARRIAGE.

II.

THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN NOT SUSTAINING AND AFFIRMING THE RULING OF
THE TRIAL COURT DECLARING THE MERIDIAN REALTY CORPORATION A BUYER IN BAD FAITH, DESPITE THE
TRIAL COURT’S FINDINGS THAT THE DEED OF SALE (First Sale), IS GENUINE AND HAD FULLY COMPLIED WITH
ALL THE LEGAL FORMALITIES.

III.

THE HONORABLE COURT OF APPEALS FURTHER ERRED IN NOT HOLDING THE SALE (DATED 27 SEPTEMBER
1994), NULL AND VOID FROM THE VERY BEGINNING SINCE LUIS ROSAROSO ON NOVEMBER 4, 1991 WAS NO
LONGER THE OWNER OF LOTS 8, 19, 22 AND 23 AS HE HAD EARLIER DISPOSED SAID LOTS IN FAVOR OF THE
CHILDREN OF HIS (LUIS ROSAROSO) FIRST MARRIAGE. 23

Petitioners argue that the second deed of sale was null and void because Luis could not have validly transferred the
ownership of the subject properties to Meridian, he being no longer the owner after selling them to his children. No less
than Atty. William Boco, the lawyer who notarized the first deed of sale, appeared and testified in court that the said deed
was the one he notarized and that Luis and his second wife, Lourdes, signed the same before him. He also identified the
signatures of the subscribing witnesses.24 Thus, they invoke the finding of the RTC which wrote:

In the case of Heirs of Joaquin Teves, Ricardo Teves versus Court of Appeals, et al., G.R. No. 109963, October 13, 1999,
the Supreme Court held that a public document executed [with] all the legal formalities is entitled to a presumption of truth
as to the recitals contained therein. In order to overthrow a certificate of a notary public to the effect that a grantor
executed a certain document and acknowledged the fact of its execution before him, mere preponderance of evidence will
not suffice. Rather, the evidence must (be) so clear, strong and convincing as to exclude all reasonable dispute as to the
falsity of the certificate. When the evidence is conflicting, the certificate will be upheld x x x .

A notarial document is by law entitled to full faith and credit upon its face. (Ramirez vs. Ner, 21 SCRA 207). As such it …
must be sustained in full force and effect so long as he who impugns it shall not have presented strong, complete and
conclusive proof of its falsity or nullity on account of some flaw or defect provided against by law (Robinson vs. Villafuerte,
18 Phil. 171, 189-190).25

Furthermore, petitioners aver that it was erroneous for the CA to say that the records of the case were bereft of evidence
that they paid the price of the lots sold to them. In fact, a perusal of the records would reveal that during the cross-
examination of Antonio Rosaroso, when asked if there was a monetary consideration, he testified that they indeed paid
their father and their payment helped him sustain his daily needs. 26

Petitioners also assert that Meridian was a buyer in bad faith because when its representative visited the site, she did not
make the necessary inquiries. The fact that there were already houses on the said lots should have put Meridian on its
guard and, for said reason, should have made inquiries as to who owned those houses and what their rights were over
the same.27

Meridian’s assertion that the Second Sale was registered in the Register of Deeds was a falsity. The subject titles,
namely: TCT No. 11155 for Lot 19, TCT No. 10885 for Lot 22, and TCT No. 10886 for Lot 23 were free from any
annotation of the alleged sale.28

After an assiduous assessment of the records, the Court finds for the petitioners.
Page | 53
The First Deed Of Sale Was Valid

The fact that the first deed of sale was executed, conveying the subject properties in favor of petitioners, was never
contested by the respondents. What they vehemently insist, though, is that the said sale was simulated because the
purported sale was made without a valid consideration.

Under Section 3, Rule 131 of the Rules of Court, the following are disputable presumptions: (1) private transactions have
been fair and regular; (2) the ordinary course of business has been followed; and (3) there was sufficient consideration for
a contract.29 These presumptions operate against an adversary who has not introduced proof to rebut them. They create
the necessity of presenting evidence to rebut the prima facie case they created, and which, if no proof to the contrary is
presented and offered, will prevail. The burden of proof remains where it is but, by the presumption, the one who has that
burden is relieved for the time being from introducing evidence in support of the averment, because the presumption
stands in the place of evidence unless rebutted.30

In this case, the respondents failed to trounce the said presumption. Aside from their bare allegation that the sale was
made without a consideration, they failed to supply clear and convincing evidence to back up this claim. It is elementary in
procedural law that bare allegations, unsubstantiated by evidence, are not equivalent to proof under the Rules of Court. 31

The CA decision ran counter to this established rule regarding disputable presumption. It relied heavily on the account of
Lourdes who testified that the children of Luis approached him and convinced him to sign the deed of sale, explaining that
it was necessary for a loan application, but they did not pay the purchase price for the subject properties.32 This testimony,
however, is self-serving and would not amount to a clear and convincing evidence required by law to dispute the said
presumption. As such, the presumption that there was sufficient consideration will not be disturbed.

Granting that there was no delivery of the consideration, the seller would have no right to sell again what he no longer
owned. His remedy would be to rescind the sale for failure on the part of the buyer to perform his part of their obligation
pursuant to Article 1191 of the New Civil Code. In the case of Clara M. Balatbat v. Court Of Appeals and Spouses Jose
Repuyan and Aurora Repuyan,33 it was written:

The failure of the buyer to make good the price does not, in law, cause the ownership to revest to the seller unless the
bilateral contract of sale is first rescinded or resolved pursuant to Article 1191 of the New Civil Code. Non-payment only
creates a right to demand the fulfillment of the obligation or to rescind the contract. [Emphases supplied]

Meridian is Not a
Buyer in Good Faith

Respondents Meridian and Lucila argue that, granting that the First Sale was valid, the properties belong to them as they
acquired these in good faith and had them first recorded in the Registry of Property, as they were unaware of the First
Sale.34

Again, the Court is not persuaded.

The fact that Meridian had them first registered will not help its cause. In case of double sale, Article 1544 of the Civil
Code provides:

ART. 1544. If the same thing should have been sold to different vendees, the ownership shall be transferred to the person
who may have first possession thereof in good faith, if it should be movable property.

Should it be immovable property, the ownership shall belong to the person acquiring it who in good faith first recorded it in
the Registry of Property.

Should there be no inscription, the ownership shall pertain to the person who in good faith was first in possession; and, in
the absence thereof; to the person who presents the oldest title, provided there is good faith.

Otherwise stated, ownership of an immovable property which is the subject of a double sale shall be transferred: (1) to the
person acquiring it who in good faith first recorded it in the Registry of Property; (2) in default thereof, to the person who in
good faith was first in possession; and (3) in default thereof, to the person who presents the oldest title, provided there is
good faith. The requirement of the law then is two-fold: acquisition in good faith and registration in good faith. Good faith
must concur with the registration. If it would be shown that a buyer was in bad faith, the alleged registration they have
made amounted to no registration at all.

The principle of primus tempore, potior jure (first in time, stronger in right) gains greater significance in case of a double
sale of immovable property. When the thing sold twice is an immovable, the one who acquires it and first records it in the
Registry of Property, both made in good faith, shall be deemed the owner. Verily, the act of registration must be coupled
with good faith— that is, the registrant must have no knowledge of the defect or lack of title of his vendor or must not have
been aware of facts which should have put him upon such inquiry and investigation as might be necessary to acquaint
him with the defects in the title of his vendor.)35 [Emphases and underlining supplied]

When a piece of land is in the actual possession of persons other than the seller, the buyer must be wary and should
investigate the rights of those in possession. Without making such inquiry, one cannot claim that he is a buyer in good
faith. When a man proposes to buy or deal with realty, his duty is to read the public manuscript, that is, to look and see

Page | 54
who is there upon it and what his rights are. A want of caution and diligence, which an honest man of ordinary prudence is
accustomed to exercise in making purchases, is in contemplation of law, a want of good faith. The buyer who has failed to
know or discover that the land sold to him is in adverse possession of another is a buyer in bad faith. 36 In the case of
Spouses Sarmiento v. Court of Appeals,37 it was written:

Verily, every person dealing with registered land may safely rely on the correctness of the certificate of title issued therefor
and the law will in no way oblige him to go behind the certificate to determine the condition of the property. Thus, the
general rule is that a purchaser may be considered a purchaser in good faith when he has examined the latest certificate
of title. An exception to this rule is when there exist important facts that would create suspicion in an otherwise reasonable
man to go beyond the present title and to investigate those that preceded it. Thus, it has been said that a person who
deliberately ignores a significant fact which would create suspicion in an otherwise reasonable man is not an innocent
purchaser for value. A purchaser cannot close his eyes to facts which should put a reasonable man upon his guard, and
then claim that he acted in good faith under the belief that there was no defect in the title of the vendor. As we have held:

The failure of appellees to take the ordinary precautions which a prudent man would have taken under the circumstances,
specially in buying a piece of land in the actual, visible and public possession of another person, other than the vendor,
constitutes gross negligence amounting to bad faith.

In this connection, it has been held that where, as in this case, the land sold is in the possession of a person other than
the vendor, the purchaser is required to go beyond the certificate of title to make inquiries concerning the rights of the
actual possessor. Failure to do so would make him a purchaser in bad faith. (Citations omitted).

One who purchases real property which is in the actual possession of another should, at least make some inquiry
concerning the right of those in possession. The actual possession by other than the vendor should, at least put the
purchaser upon inquiry. He can scarely, in the absence of such inquiry, be regarded as a bona fide purchaser as against
such possessors. (Emphases supplied)

Prescinding from the foregoing, the fact that private respondent RRC did not investigate the Sarmiento spouses' claim
over the subject land despite its knowledge that Pedro Ogsiner, as their overseer, was in actual possession thereof
means that it was not an innocent purchaser for value upon said land. Article 524 of the Civil Code directs that possession
may be exercised in one's name or in that of another. In herein case, Pedro Ogsiner had informed RRC that he was
occupying the subject land on behalf of the Sarmiento spouses. Being a corporation engaged in the business of buying
and selling real estate, it was gross negligence on its part to merely rely on Mr. Puzon's assurance that the occupants of
the property were mere squatters considering the invaluable information it acquired from Pedro Ogsiner and considering
further that it had the means and the opportunity to investigate for itself the accuracy of such information. [Emphases
supplied]

In another case, it was held that if a vendee in a double sale registers the sale after he has acquired knowledge of a
previous sale, the registration constitutes a registration in bad faith and does not confer upon him any right. If the
registration is done in bad faith, it is as if there is no registration at all, and the buyer who has first taken possession of the
property in good faith shall be preferred.38

In the case at bench, the fact that the subject properties were already in the possession of persons other than Luis was
never disputed. Sanchez, representative and witness for Meridian, even testified as follows:

x x x; that she together with the two agents, defendant Laila Solutan and Corazon Lua, the president of Meridian Realty
Corporation, went immediately to site of the lots; that the agents brought with them the three titles of the lots and Laila
Solutan brought with her a special power of attorney executed by Luis B. Rosaroso in her favor but she went instead
directly to Luis Rosaroso to be sure; that the lots were pointed to them and she saw that there were houses on it but she
did not have any interest of the houses because her interest was on the lots; that Luis Rosaroso said that the houses
belonged to him; that he owns the property and that he will sell the same because he is very sickly and he wanted to buy
medicines; that she requested someone to check the records of the lots in the Register of Deeds; that one of the titles was
mortgaged and she told them to redeem the mortgage because the corporation will buy the property; that the registered
owner of the lots was Luis Rosaroso; that in more or less three months, the encumbrance was cancelled and she told the
prospective sellers to prepare the deed of sale; that there were no encumbrances or liens in the title; that when the deed
of absolute sale was prepared it was signed by the vendor Luis Rosaroso in their house in Opra x x x. 39 (Underscoring
supplied)

From the above testimony, it is clear that Meridian, through its agent, knew that the subject properties were in possession
of persons other than the seller. Instead of investigating the rights and interests of the persons occupying the said lots,
however, it chose to just believe that Luis still owned them. Simply, Meridian Realty failed to exercise the due diligence
required by law of purchasers in acquiring a piece of land in the possession of person or persons other than the seller.

In this regard, great weight is accorded to the findings of fact of the RTC. Basic is the rule that the trial court is in a better
position to examine real evidence as well as to observe the demeanor of witnesses who testify in the case. 40

WHEREFORE, the petition is GRANTED. The December 4, 2009 Decision and the November 18, 201 0 Resolution of the
Court of Appeals, in CA-G.R. CV No. 00351, are REVERSED and SET ASIDE. The July 30, 2004 Decision of the
Regional Trial Court, Branch 8, 7th Judicial Region, Cebu City, in Civil Case No. CEB-16957, is hereby REINSTATED.

SO ORDERED.

Page | 55
Republic of the Philippines
SUPREME COURT
Baguio City

SECOND DIVISION

Page | 56
G.R. No. 193787 April 7, 2014

SPOUSES JOSE C. ROQUE AND BEATRIZ DELA CRUZ ROQUE, with deceased Jose C. Roque represented by his
substitute heir JOVETTE ROQUE-LIBREA, Petitioners,
vs.
MA. PAMELA P. AGUADO, FRUCTUOSO C. SABUG, JR., NATIONAL COUNCIL OF CHURCHES IN THE
PHILIPPINES (NCCP), represented by its Secretary General SHARON ROSE JOY RUIZ-DUREMDES, LAND BANK
OF THE PHILIPPINES (LBP), represented by Branch Manager EVELYN M. MONTERO, ATTY. MARIO S.P. DIAZ, in
his Official Capacity as Register of Deeds for Rizal, Morong Branch, and CECILIO U. PULAN, in his Official
Capacity as Sheriff, Office of the Clerk of Court, Regional Trial Court, Binangonan, Rizal,Respondents.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated May 12, 2010 and the Resolution3 dated
September 15, 2010 of the Court of Appeals (CA) in CA G.R. CV No. 92113 which affirmed the Decision 4 dated July 8,
2008 of the Regional Trial Court of Binangonan, Rizal, Branch 69 (RTC) that dismissed Civil Case Nos. 03-022 and 05-
003 for reconveyance, annulment of sale, deed of real estate mortgage, foreclosure and certificate of sale, and damages.

The Facts

The property subject of this case is a parcel of land with an area of 20,862 square meters (sq. m.), located in Sitio
Tagpos, Barangay Tayuman, Binangonan, Rizal, known as Lot 18089.5

On July 21, 1977, petitioners-spouses Jose C. Roque and Beatriz dela Cruz Roque (Sps. Roque) and the original owners
of the then unregistered Lot 18089 – namely, Velia R. Rivero (Rivero), Magdalena Aguilar, Angela Gonzales, Herminia R.
Bernardo, Antonio Rivero, Araceli R. Victa, Leonor R. Topacio, and Augusto Rivero (Rivero, et al.) – executed a Deed of
Conditional Sale of Real Property6 (1977 Deed of Conditional Sale) over a 1,231-sq. m. portion of Lot 18089 (subject
portion) for a consideration of ₱30,775.00. The parties agreed that Sps. Roque shall make an initial payment of
₱15,387.50 upon signing, while the remaining balance of the purchase price shall be payable upon the registration of Lot
18089, as well as the segregation and the concomitant issuance of a separate title over the subject portion in their names.
After the deed’s execution, Sps. Roque took possession and introduced improvements on the subject portion which they
utilized as a balut factory.7

On August 12, 1991, Fructuoso Sabug, Jr. (Sabug, Jr.), former Treasurer of the National Council of Churches in the
Philippines (NCCP), applied for a free patent over the entire Lot 18089 and was eventually issued Original Certificate of
Title (OCT) No. M-59558 in his name on October 21, 1991. On June 24, 1993, Sabug, Jr. and Rivero, in her personal
capacity and in representation of Rivero, et al., executed a Joint Affidavit 9 (1993 Joint Affidavit), acknowledging that the
subject portion belongs to Sps. Roque and expressed their willingness to segregate the same from the entire area of Lot
18089.

On December 8, 1999, however, Sabug, Jr., through a Deed of Absolute Sale 10 (1999 Deed of Absolute Sale), sold Lot
18089 to one Ma. Pamela P. Aguado (Aguado) for ₱2,500,000.00, who, in turn, caused the cancellation of OCT No.M-
5955 and the issuance of Transfer Certificate of Title (TCT) No. M-96692 dated December 17, 199911 in her name.

Thereafter, Aguado obtained an ₱8,000,000.00 loan from the Land Bank of the Philippines (Land Bank) secured by a
mortgage over Lot 18089.12 When she failed to pay her loan obligation, Land Bank commenced extra-judicial foreclosure
proceedings and eventually tendered the highest bid in the auction sale. Upon Aguado’s failure to redeem the subject
property, Land Bank consolidated its ownership, and TCT No. M-11589513 was issued in its name on July 21, 2003.14

On June 16, 2003, Sps. Roque filed a complaint15 for reconveyance, annulment of sale, deed of real estate mortgage,
foreclosure, and certificate of sale, and damages before the RTC, docketed as Civil Case No. 03-022, against Aguado,
Sabug, Jr., NCCP, Land Bank, the Register of Deeds of Morong, Rizal, and Sheriff Cecilio U. Pulan, seeking to be
declared as the true owners of the subject portion which had been erroneously included in the sale between Aguado and
Sabug, Jr., and, subsequently, the mortgage to Land Bank, both covering Lot 18089 in its entirety.

In defense, NCCP and Sabug, Jr. denied any knowledge of the 1977 Deed of Conditional Sale through which the subject
portion had been purportedly conveyed to Sps. Roque. 16

For her part, Aguado raised the defense of an innocent purchaser for value as she allegedly derived her title (through the
1999 Deed of Absolute Sale) from Sabug, Jr., the registered owner in OCT No. M-5955, covering Lot 18089, which
certificate of title at the time of sale was free from any lien and/or encumbrances. She also claimed that Sps. Roque’s
cause of action had already prescribed because their adverse claim was made only on April 21, 2003, or four (4) years
from the date OCT No. M-5955 was issued in Sabug, Jr.’s name on December 17, 1999.17

On the other hand, Land Bank averred that it had no knowledge of Sps. Roque’s claim relative to the subject portion,
considering that at the time the loan was taken out, Lot 18089 in its entirety was registered in Aguado’s name and no lien
and/or encumbrance was annotated on her certificate of title.18

Page | 57
Meanwhile, on January 18, 2005, NCCP filed a separate complaint 19 also for declaration of nullity of documents and
certificates of title and damages, docketed as Civil Case No. 05-003. It claimed to be the real owner of Lot 18089 which it
supposedly acquired from Sabug, Jr. through an oral contract of sale20 in the early part of 1998, followed by the execution
of a Deed of Absolute Sale on December 2, 1998 (1998 Deed of Absolute Sale). 21 NCCP also alleged that in October of
the same year, it entered into a Joint Venture Agreement (JVA) with Pilipinas Norin Construction Development
Corporation (PNCDC), a company owned by Aguado’s parents, for the development of its real properties, including Lot
18089, into a subdivision project, and as such, turned over its copy of OCT No. M-5955 to PNCDC.22 Upon knowledge of
the purported sale of Lot 18089 to Aguado, Sabug, Jr. denied the transaction and alleged forgery. Claiming that the
Aguados23 and PNCDC conspired to defraud NCCP, it prayed that PNCDC’s corporate veil be pierced and that the
Aguados be ordered to pay the amount of ₱38,092,002.00 representing the unrealized profit from the JVA. 24 Moreover,
NCCP averred that Land Bank failed to exercise the diligence required to ascertain the true owners of Lot 18089. Hence,
it further prayed that: (a) all acts of ownership and dominion over Lot 18089 that the bank might have done or caused to
be done be declared null and void; (b) it be declared the true and real owners of Lot 18089; and (c) the Register of Deeds
of Morong, Rizal be ordered to cancel any and all certificates of title covering the lot, and a new one be issued in its
name.25 In its answer, Land Bank reiterated its stance that Lot 18089 was used as collateral for the ₱8,000,000.00 loan
obtained by the Countryside Rural Bank, Aguado, and one Bella Palasaga. There being no lien and/ or encumbrance
annotated on its certificate of title, i.e., TCT No. M-115895, it cannot be held liable for NCCP’s claims. Thus, it prayed for
the dismissal of NCCP’s complaint.26

On September 7, 2005, Civil Case Nos. 02-022 and 05-003 were ordered consolidated.27

The RTC Ruling

After due proceedings, the RTC rendered a Decision 28 dated July 8, 2008, dismissing the complaints of Sps. Roque and
NCCP.

With respect to Sps. Roque’s complaint, the RTC found that the latter failed to establish their ownership over the subject
portion, considering the following: (a) the supposed owners-vendors, i.e., Rivero, et al., who executed the 1977 Deed of
Conditional Sale, had no proof of their title over Lot 18089; (b) the 1977 Deed of Conditional Sale was not registered with
the Office of the Register of Deeds;29 (c) the 1977 Deed of Conditional Sale is neither a deed of conveyance nor a transfer
document, as it only gives the holder the right to compel the supposed vendors to execute a deed of absolute sale upon
full payment of the consideration; (d) neither Sps. Roque nor the alleged owners-vendors, i.e., Rivero, et al., have paid
real property taxes in relation to Lot 18089; and (e) Sps. Roque’s occupation of the subject portion did not ripen into
ownership that can be considered superior to the ownership of Land Bank. 30 Moreover, the RTC ruled that Sps. Roque’s
action for reconveyance had already prescribed, having been filed ten (10) years after the issuance of OCT No. M-5955.31

On the other hand, regarding NCCP’s complaint, the RTC observed that while it anchored its claim of ownership over Lot
18089 on the 1998 Deed of Absolute Sale, the said deed was not annotated on OCT No. M-5955. Neither was any
certificate of title issued in its name nor did it take possession of Lot 18089 or paid the real property taxes therefor. Hence,
NCCP’s claim cannot prevail against Land Bank’s title, which was adjudged by the RTC as an innocent purchaser for
value. Also, the RTC disregarded NCCP’s allegation that the signature of Sabug, Jr. on the 1999 Deed of Absolute Sale in
favor of Aguado was forged because his signatures on both instruments bear semblances of similarity and appear
genuine. Besides, the examiner from the National Bureau of Investigation, who purportedly found that Sabug, Jr.’s
signature thereon was spurious leading to the dismissal of a criminal case against him, was not presented as a witness in
the civil action.32

Finally, the RTC denied the parties’ respective claims for damages.33

The CA Ruling

On appeal, the Court of Appeals (CA) affirmed the foregoing RTC findings in a Decision 34 dated May 12, 2010. While
Land Bank was not regarded as a mortgagee/purchaser in good faith with respect to the subject portion considering Sps.
Roque’s possession thereof,35 the CA did not order its reconveyance or segregation in the latter’s favor because of Sps.
Roque’s failure to pay the remaining balance of the purchase price. Hence, it only directed Land Bank to respect Sps.
Roque’s possession with the option to appropriate the improvements introduced thereon upon payment of
compensation.36

As regards NCCP, the CA found that it failed to establish its right over Lot 18089 for the following reasons: (a) the sale to
it of the lot by Sabug, Jr. was never registered; and (b) there is no showing that it was in possession of Lot 18089 or any
portion thereof from 1998. Thus, as far as NCCP is concerned, Land Bank is a mortgagee/purchaser in good faith. 37

Aggrieved, both Sps. Roque38 and NCCP39 moved for reconsideration but were denied by the CA in a Resolution 40dated
September 15, 2010, prompting them to seek further recourse before the Court.

The Issue Before the Court

The central issue in this case is whether or not the CA erred in not ordering the reconveyance of the subject portion in
Sps. Roque’s favor.

Sps. Roque maintain that the CA erred in not declaring them as the lawful owners of the subject portion despite having
possessed the same since the execution of the 1977 Deed of Conditional Sale, sufficient for acquisitive prescription to set
in in their favor.41 To bolster their claim, they also point to the 1993 Joint Affidavit whereby Sabug, Jr. and Rivero
Page | 58
acknowledged their ownership thereof.42 Being the first purchasers and in actual possession of the disputed portion, they
assert that they have a better right over the 1,231- sq. m. portion of Lot 18089 and, hence, cannot be ousted therefrom by
Land Bank, which was adjudged as a ortgagee/purchaser in bad faith, pursuant to Article 1544 of the Civil Code. 43

In opposition, Land Bank espouses that the instant petition should be dismissed for raising questions of fact, in violation of
the proscription under Rule 45 of the Rules of Court which allows only pure questions of law to be raised.44 Moreover, it
denied that ownership over the subject portion had been acquired by Sps. Roque who admittedly failed to pay the
remaining balance of the purchase price.45 Besides, Land Bank points out that Sps. Roque’s action for reconveyance had
already prescribed.46

Instead of traversing the arguments of Sps. Roque, NCCP, in its Comment 47 dated December 19, 2011, advanced its own
case, arguing that the CA erred in holding that it failed to establish its claimed ownership over Lot 18089 in its entirety.
Incidentally, NCCP’s appeal from the CA Decision dated May 12, 2010 was already denied by the Court, 48 and hence, will
no longer be dealt with in this case.

The Court’s Ruling

The petition lacks merit.

The essence of an action for reconveyance is to seek the transfer of the property which was wrongfully or erroneously
registered in another person’s name to its rightful owner or to one with a better right. 49 Thus, it is incumbent upon the
aggrieved party to show that he has a legal claim on the property superior to that of the registered owner and that the
property has not yet passed to the hands of an innocent purchaser for value. 50

Sps. Roque claim that the subject portion covered by the 1977 Deed of Conditional Sale between them and Rivero, et al.
was wrongfully included in the certificates of title covering Lot 18089, and, hence, must be segregated therefrom and their
ownership thereof be confirmed. The salient portions of the said deed state:

DEED OF CONDITIONAL SALE OF REAL PROPERTY

KNOW ALL MEN BY THESE PRESENTS:

xxxx

That for and in consideration of the sum of THIRTY THOUSAND SEVEN HUNDRED SEVENTY FIVE PESOS
(₱30,775.00), Philippine Currency, payable in the manner hereinbelow specified, the VENDORS do hereby sell, transfer
and convey unto the VENDEE, or their heirs, executors, administrators, or assignors, that unsegregated portion of the
above lot, x x x.

That the aforesaid amount shall be paid in two installments, the first installment which is in the amount of __________
(₱15,387.50) and the balance in the amount of __________ (₱15,387.50), shall be paid as soon as the described portion
of the property shall have been registered under the Land Registration Act and a Certificate of Title issued accordingly;

That as soon as the total amount of the property has been paid and the Certificate of Title has been issued, an absolute
deed of sale shall be executed accordingly;

x x x x51

Examining its provisions, the Court finds that the stipulation above-highlighted shows that the 1977 Deed of Conditional
Sale is actually in the nature of a contract to sell and not one of sale contrary to Sps. Roque’s belief. 52 In this relation, it
has been consistently ruled that where the seller promises to execute a deed of absolute sale upon the completion by the
buyer of the payment of the purchase price, the contract is only a contract to sell even if their agreement is denominated
as a Deed of Conditional Sale,53 as in this case. This treatment stems from the legal characterization of a contract to sell,
that is, a bilateral contract whereby the prospective seller, while expressly reserving the ownership of the subject property
despite delivery thereof to the prospective buyer, binds himself to sell the subject property exclusively to the prospective
buyer upon fulfillment of the condition agreed upon, such as, the full payment of the purchase price. 54 Elsewise stated, in
a contract to sell, ownership is retained by the vendor and is not to pass to the vendee until full payment of the purchase
price.55 Explaining the subject matter further, the Court, in Ursal v. CA,56 held that:

[I]n contracts to sell the obligation of the seller to sell becomes demandable only upon the happening of the suspensive
condition, that is, the full payment of the purchase price by the buyer. It is only upon the existence of the contract of sale
that the seller becomes obligated to transfer the ownership of the thing sold to the buyer. Prior to the existence of the
contract of sale, the seller is not obligated to transfer the ownership to the buyer, even if there is a contract to sell between
them.

Here, it is undisputed that Sps. Roque have not paid the final installment of the purchase price. 57 As such, the condition
which would have triggered the parties’ obligation to enter into and thereby perfect a contract of sale in order to effectively
transfer the ownership of the subject portion from the sellers (i.e., Rivero et al.) to the buyers (Sps. Roque) cannot be
deemed to have been fulfilled. Consequently, the latter cannot validly claim ownership over the subject portion even if
they had made an initial payment and even took possession of the same. 58

Page | 59
The Court further notes that Sps. Roque did not even take any active steps to protect their claim over the disputed portion.
This remains evident from the following circumstances appearing on record: (a) the 1977 Deed of Conditional Sale was
never registered; (b) they did not seek the actual/physical segregation of the disputed portion despite their knowledge of
the fact that, as early as 1993, the entire Lot 18089 was registered in Sabug, Jr.’s name under OCT No. M-5955; and (c)
while they signified their willingness to pay the balance of the purchase price, 59Sps. Roque neither compelled Rivero et
al., and/or Sabug, Jr. to accept the same nor did they consign any amount to the court, the proper application of which
would have effectively fulfilled their obligation to pay the purchase price. 60 Instead, Sps. Roque waited 26 years, reckoned
from the execution of the 1977 Deed of Conditional Sale, to institute an action for reconveyance (in 2003), and only after
Lot 18089 was sold to Land Bank in the foreclosure sale and title thereto was consolidated in its name. Thus, in view of
the foregoing, Sabug, Jr. – as the registered owner of Lot 18089 borne by the grant of his free patent application – could
validly convey said property in its entirety to Aguado who, in turn, mortgaged the same to Land Bank. Besides, as aptly
observed by the RTC, Sps. Roque failed to establish that the parties who sold the property to them, i.e., Rivero, et al.,
were indeed its true and lawful owners.61 In fine, Sps. Roque failed to establish any superior right over the subject portion
as against the registered owner of Lot 18089, i.e., Land Bank, thereby warranting the dismissal of their reconveyance
action, without prejudice to their right to seek damages against the vendors, i.e., Rivero et al. 62 As applied in the case of
Coronel v. CA:63

It is essential to distinguish between a contract to sell and a conditional contract of sale specially in cases where the
subject property is sold by the owner not to the party the seller contracted with, but to a third person, as in the case at
bench. In a contract to sell, there being no previous sale of the property, a third person buying such property despite the
fulfilment of the suspensive condition such as the full payment of the purchase price, for instance, cannot be deemed a
buyer in bad faith and the prospective buyer cannot seek the relief of reconveyance of the property.

There is no double sale in such case.1âwphi1 Title to the property will transfer to the buyer after registration because
there is no defect in the owner-seller’s title per se, but the latter, of course, may be sued for damages by the intending
buyer. (Emphasis supplied)

On the matter of double sales, suffice it to state that Sps. Roque’s reliance 64 on Article 154465 of the Civil Code has been
misplaced since the contract they base their claim of ownership on is, as earlier stated, a contract to sell, and not one of
sale. In Cheng v. Genato,66 the Court stated the circumstances which must concur in order to determine the applicability
of Article 1544, none of which are obtaining in this case, viz.:

(a) The two (or more) sales transactions in issue must pertain to exactly the same subject matter, and must be valid sales
transactions;

(b) The two (or more) buyers at odds over the rightful ownership of the subject matter must each represent conflicting
interests; and

(c) The two (or more) buyers at odds over the rightful ownership of the subject matter must each have bought from the
same seller.

Finally, regarding Sps. Roque’s claims of acquisitive prescription and reimbursement for the value of the improvements
they have introduced on the subject property,67 it is keenly observed that none of the arguments therefor were raised
before the trial court or the CA.68 Accordingly, the Court applies the well-settled rule that litigants cannot raise an issue for
the first time on appeal as this would contravene the basic rules of fair play and justice. In any event, such claims appear
to involve questions of fact which are generally prohibited under a Rule 45 petition.69

With the conclusions herein reached, the Court need not belabor on the other points raised by the parties, and ultimately
finds it proper to proceed with the denial of the petition.

WHEREFORE, the petition is DENIED. The Decision dated May 12, 2010 and the Resolution dated September 15, 2010
of the Court of Appeals in CAG.R. CV No. 92113 are hereby AFFIRMED.

SO ORDERED.

Republic of the Philippines


SUPREME COURT
Baguio City
Page | 60
SECOND DIVISION

G.R. No. 193787 April 7, 2014

SPOUSES JOSE C. ROQUE AND BEATRIZ DELA CRUZ ROQUE, with deceased Jose C. Roque represented by his
substitute heir JOVETTE ROQUE-LIBREA, Petitioners,
vs.
MA. PAMELA P. AGUADO, FRUCTUOSO C. SABUG, JR., NATIONAL COUNCIL OF CHURCHES IN THE
PHILIPPINES (NCCP), represented by its Secretary General SHARON ROSE JOY RUIZ-DUREMDES, LAND BANK
OF THE PHILIPPINES (LBP), represented by Branch Manager EVELYN M. MONTERO, ATTY. MARIO S.P. DIAZ, in
his Official Capacity as Register of Deeds for Rizal, Morong Branch, and CECILIO U. PULAN, in his Official
Capacity as Sheriff, Office of the Clerk of Court, Regional Trial Court, Binangonan, Rizal,Respondents.

DECISION

PERLAS-BERNABE, J.:

Assailed in this petition for review on certiorari1 are the Decision2 dated May 12, 2010 and the Resolution3 dated
September 15, 2010 of the Court of Appeals (CA) in CA G.R. CV No. 92113 which affirmed the Decision 4 dated July 8,
2008 of the Regional Trial Court of Binangonan, Rizal, Branch 69 (RTC) that dismissed Civil Case Nos. 03-022 and 05-
003 for reconveyance, annulment of sale, deed of real estate mortgage, foreclosure and certificate of sale, and damages.

The Facts

The property subject of this case is a parcel of land with an area of 20,862 square meters (sq. m.), located in Sitio
Tagpos, Barangay Tayuman, Binangonan, Rizal, known as Lot 18089.5

On July 21, 1977, petitioners-spouses Jose C. Roque and Beatriz dela Cruz Roque (Sps. Roque) and the original owners
of the then unregistered Lot 18089 – namely, Velia R. Rivero (Rivero), Magdalena Aguilar, Angela Gonzales, Herminia R.
Bernardo, Antonio Rivero, Araceli R. Victa, Leonor R. Topacio, and Augusto Rivero (Rivero, et al.) – executed a Deed of
Conditional Sale of Real Property6 (1977 Deed of Conditional Sale) over a 1,231-sq. m. portion of Lot 18089 (subject
portion) for a consideration of ₱30,775.00. The parties agreed that Sps. Roque shall make an initial payment of
₱15,387.50 upon signing, while the remaining balance of the purchase price shall be payable upon the registration of Lot
18089, as well as the segregation and the concomitant issuance of a separate title over the subject portion in their names.
After the deed’s execution, Sps. Roque took possession and introduced improvements on the subject portion which they
utilized as a balut factory.7

On August 12, 1991, Fructuoso Sabug, Jr. (Sabug, Jr.), former Treasurer of the National Council of Churches in the
Philippines (NCCP), applied for a free patent over the entire Lot 18089 and was eventually issued Original Certificate of
Title (OCT) No. M-59558 in his name on October 21, 1991. On June 24, 1993, Sabug, Jr. and Rivero, in her personal
capacity and in representation of Rivero, et al., executed a Joint Affidavit 9 (1993 Joint Affidavit), acknowledging that the
subject portion belongs to Sps. Roque and expressed their willingness to segregate the same from the entire area of Lot
18089.

On December 8, 1999, however, Sabug, Jr., through a Deed of Absolute Sale 10 (1999 Deed of Absolute Sale), sold Lot
18089 to one Ma. Pamela P. Aguado (Aguado) for ₱2,500,000.00, who, in turn, caused the cancellation of OCT No.M-
5955 and the issuance of Transfer Certificate of Title (TCT) No. M-96692 dated December 17, 199911 in her name.

Thereafter, Aguado obtained an ₱8,000,000.00 loan from the Land Bank of the Philippines (Land Bank) secured by a
mortgage over Lot 18089.12 When she failed to pay her loan obligation, Land Bank commenced extra-judicial foreclosure
proceedings and eventually tendered the highest bid in the auction sale. Upon Aguado’s failure to redeem the subject
property, Land Bank consolidated its ownership, and TCT No. M-11589513 was issued in its name on July 21, 2003.14

On June 16, 2003, Sps. Roque filed a complaint15 for reconveyance, annulment of sale, deed of real estate mortgage,
foreclosure, and certificate of sale, and damages before the RTC, docketed as Civil Case No. 03-022, against Aguado,
Sabug, Jr., NCCP, Land Bank, the Register of Deeds of Morong, Rizal, and Sheriff Cecilio U. Pulan, seeking to be
declared as the true owners of the subject portion which had been erroneously included in the sale between Aguado and
Sabug, Jr., and, subsequently, the mortgage to Land Bank, both covering Lot 18089 in its entirety.

In defense, NCCP and Sabug, Jr. denied any knowledge of the 1977 Deed of Conditional Sale through which the subject
portion had been purportedly conveyed to Sps. Roque. 16

For her part, Aguado raised the defense of an innocent purchaser for value as she allegedly derived her title (through the
1999 Deed of Absolute Sale) from Sabug, Jr., the registered owner in OCT No. M-5955, covering Lot 18089, which
certificate of title at the time of sale was free from any lien and/or encumbrances. She also claimed that Sps. Roque’s
cause of action had already prescribed because their adverse claim was made only on April 21, 2003, or four (4) years
from the date OCT No. M-5955 was issued in Sabug, Jr.’s name on December 17, 1999.17

On the other hand, Land Bank averred that it had no knowledge of Sps. Roque’s claim relative to the subject portion,
considering that at the time the loan was taken out, Lot 18089 in its entirety was registered in Aguado’s name and no lien
and/or encumbrance was annotated on her certificate of title.18

Page | 61
Meanwhile, on January 18, 2005, NCCP filed a separate complaint 19 also for declaration of nullity of documents and
certificates of title and damages, docketed as Civil Case No. 05-003. It claimed to be the real owner of Lot 18089 which it
supposedly acquired from Sabug, Jr. through an oral contract of sale 20 in the early part of 1998, followed by the execution
of a Deed of Absolute Sale on December 2, 1998 (1998 Deed of Absolute Sale). 21 NCCP also alleged that in October of
the same year, it entered into a Joint Venture Agreement (JVA) with Pilipinas Norin Construction Development
Corporation (PNCDC), a company owned by Aguado’s parents, for the development of its real properties, including Lot
18089, into a subdivision project, and as such, turned over its copy of OCT No. M-5955 to PNCDC.22 Upon knowledge of
the purported sale of Lot 18089 to Aguado, Sabug, Jr. denied the transaction and alleged forgery. Claiming that the
Aguados23 and PNCDC conspired to defraud NCCP, it prayed that PNCDC’s corporate veil be pierced and that the
Aguados be ordered to pay the amount of ₱38,092,002.00 representing the unrealized profit from the JVA. 24 Moreover,
NCCP averred that Land Bank failed to exercise the diligence required to ascertain the true owners of Lot 18089. Hence,
it further prayed that: (a) all acts of ownership and dominion over Lot 18089 that the bank might have done or caused to
be done be declared null and void; (b) it be declared the true and real owners of Lot 18089; and (c) the Register of Deeds
of Morong, Rizal be ordered to cancel any and all certificates of title covering the lot, and a new one be issued in its
name.25 In its answer, Land Bank reiterated its stance that Lot 18089 was used as collateral for the ₱8,000,000.00 loan
obtained by the Countryside Rural Bank, Aguado, and one Bella Palasaga. There being no lien and/ or encumbrance
annotated on its certificate of title, i.e., TCT No. M-115895, it cannot be held liable for NCCP’s claims. Thus, it prayed for
the dismissal of NCCP’s complaint.26

On September 7, 2005, Civil Case Nos. 02-022 and 05-003 were ordered consolidated.27

The RTC Ruling

After due proceedings, the RTC rendered a Decision 28 dated July 8, 2008, dismissing the complaints of Sps. Roque and
NCCP.

With respect to Sps. Roque’s complaint, the RTC found that the latter failed to establish their ownership over the subject
portion, considering the following: (a) the supposed owners-vendors, i.e., Rivero, et al., who executed the 1977 Deed of
Conditional Sale, had no proof of their title over Lot 18089; (b) the 1977 Deed of Conditional Sale was not registered with
the Office of the Register of Deeds;29 (c) the 1977 Deed of Conditional Sale is neither a deed of conveyance nor a transfer
document, as it only gives the holder the right to compel the supposed vendors to execute a deed of absolute sale upon
full payment of the consideration; (d) neither Sps. Roque nor the alleged owners-vendors, i.e., Rivero, et al., have paid
real property taxes in relation to Lot 18089; and (e) Sps. Roque’s occupation of the subject portion did not ripen into
ownership that can be considered superior to the ownership of Land Bank. 30 Moreover, the RTC ruled that Sps. Roque’s
action for reconveyance had already prescribed, having been filed ten (10) years after the issuance of OCT No. M-5955.31

On the other hand, regarding NCCP’s complaint, the RTC observed that while it anchored its claim of ownership over Lot
18089 on the 1998 Deed of Absolute Sale, the said deed was not annotated on OCT No. M-5955. Neither was any
certificate of title issued in its name nor did it take possession of Lot 18089 or paid the real property taxes therefor. Hence,
NCCP’s claim cannot prevail against Land Bank’s title, which was adjudged by the RTC as an innocent purchaser for
value. Also, the RTC disregarded NCCP’s allegation that the signature of Sabug, Jr. on the 1999 Deed of Absolute Sale in
favor of Aguado was forged because his signatures on both instruments bear semblances of similarity and appear
genuine. Besides, the examiner from the National Bureau of Investigation, who purportedly found that Sabug, Jr.’s
signature thereon was spurious leading to the dismissal of a criminal case against him, was not presented as a witness in
the civil action.32

Finally, the RTC denied the parties’ respective claims for damages. 33

The CA Ruling

On appeal, the Court of Appeals (CA) affirmed the foregoing RTC findings in a Decision 34 dated May 12, 2010. While
Land Bank was not regarded as a mortgagee/purchaser in good faith with respect to the subject portion considering Sps.
Roque’s possession thereof,35 the CA did not order its reconveyance or segregation in the latter’s favor because of Sps.
Roque’s failure to pay the remaining balance of the purchase price. Hence, it only directed Land Bank to respect Sps.
Roque’s possession with the option to appropriate the improvements introduced thereon upon payment of
compensation.36

As regards NCCP, the CA found that it failed to establish its right over Lot 18089 for the following reasons: (a) the sale to
it of the lot by Sabug, Jr. was never registered; and (b) there is no showing that it was in possession of Lot 18089 or any
portion thereof from 1998. Thus, as far as NCCP is concerned, Land Bank is a mortgagee/purchaser in good faith. 37

Aggrieved, both Sps. Roque38 and NCCP39 moved for reconsideration but were denied by the CA in a Resolution 40dated
September 15, 2010, prompting them to seek further recourse before the Court.

The Issue Before the Court

The central issue in this case is whether or not the CA erred in not ordering the reconveyance of the subject portion in
Sps. Roque’s favor.

Sps. Roque maintain that the CA erred in not declaring them as the lawful owners of the subject portion despite having
possessed the same since the execution of the 1977 Deed of Conditional Sale, sufficient for acquisitive prescription to set
in in their favor.41 To bolster their claim, they also point to the 1993 Joint Affidavit whereby Sabug, Jr. and Rivero
Page | 62
acknowledged their ownership thereof.42 Being the first purchasers and in actual possession of the disputed portion, they
assert that they have a better right over the 1,231- sq. m. portion of Lot 18089 and, hence, cannot be ousted therefrom by
Land Bank, which was adjudged as a ortgagee/purchaser in bad faith, pursuant to Article 1544 of the Civil Code. 43

In opposition, Land Bank espouses that the instant petition should be dismissed for raising questions of fact, in violation of
the proscription under Rule 45 of the Rules of Court which allows only pure questions of law to be raised. 44 Moreover, it
denied that ownership over the subject portion had been acquired by Sps. Roque who admittedly failed to pay the
remaining balance of the purchase price.45 Besides, Land Bank points out that Sps. Roque’s action for reconveyance had
already prescribed.46

Instead of traversing the arguments of Sps. Roque, NCCP, in its Comment47 dated December 19, 2011, advanced its own
case, arguing that the CA erred in holding that it failed to establish its claimed ownership over Lot 18089 in its entirety.
Incidentally, NCCP’s appeal from the CA Decision dated May 12, 2010 was already denied by the Court, 48 and hence, will
no longer be dealt with in this case.

The Court’s Ruling

The petition lacks merit.

The essence of an action for reconveyance is to seek the transfer of the property which was wrongfully or erroneously
registered in another person’s name to its rightful owner or to one with a better right.49 Thus, it is incumbent upon the
aggrieved party to show that he has a legal claim on the property superior to that of the registered owner and that the
property has not yet passed to the hands of an innocent purchaser for value. 50

Sps. Roque claim that the subject portion covered by the 1977 Deed of Conditional Sale between them and Rivero, et al.
was wrongfully included in the certificates of title covering Lot 18089, and, hence, must be segregated therefrom and their
ownership thereof be confirmed. The salient portions of the said deed state:

DEED OF CONDITIONAL SALE OF REAL PROPERTY

KNOW ALL MEN BY THESE PRESENTS:

xxxx

That for and in consideration of the sum of THIRTY THOUSAND SEVEN HUNDRED SEVENTY FIVE PESOS
(₱30,775.00), Philippine Currency, payable in the manner hereinbelow specified, the VENDORS do hereby sell, transfer
and convey unto the VENDEE, or their heirs, executors, administrators, or assignors, that unsegregated portion of the
above lot, x x x.

That the aforesaid amount shall be paid in two installments, the first installment which is in the amount of __________
(₱15,387.50) and the balance in the amount of __________ (₱15,387.50), shall be paid as soon as the described portion
of the property shall have been registered under the Land Registration Act and a Certificate of Title issued accordingly;

That as soon as the total amount of the property has been paid and the Certificate of Title has been issued, an absolute
deed of sale shall be executed accordingly;

x x x x51

Examining its provisions, the Court finds that the stipulation above-highlighted shows that the 1977 Deed of Conditional
Sale is actually in the nature of a contract to sell and not one of sale contrary to Sps. Roque’s belief.52 In this relation, it
has been consistently ruled that where the seller promises to execute a deed of absolute sale upon the completion by the
buyer of the payment of the purchase price, the contract is only a contract to sell even if their agreement is denominated
as a Deed of Conditional Sale,53 as in this case. This treatment stems from the legal characterization of a contract to sell,
that is, a bilateral contract whereby the prospective seller, while expressly reserving the ownership of the subject property
despite delivery thereof to the prospective buyer, binds himself to sell the subject property exclusively to the prospective
buyer upon fulfillment of the condition agreed upon, such as, the full payment of the purchase price. 54 Elsewise stated, in
a contract to sell, ownership is retained by the vendor and is not to pass to the vendee until full payment of the purchase
price.55 Explaining the subject matter further, the Court, in Ursal v. CA,56 held that:

[I]n contracts to sell the obligation of the seller to sell becomes demandable only upon the happening of the suspensive
condition, that is, the full payment of the purchase price by the buyer. It is only upon the existence of the contract of sale
that the seller becomes obligated to transfer the ownership of the thing sold to the buyer. Prior to the existence of the
contract of sale, the seller is not obligated to transfer the ownership to the buyer, even if there is a contract to sell between
them.

Here, it is undisputed that Sps. Roque have not paid the final installment of the purchase price.57 As such, the condition
which would have triggered the parties’ obligation to enter into and thereby perfect a contract of sale in order to effectively
transfer the ownership of the subject portion from the sellers (i.e., Rivero et al.) to the buyers (Sps. Roque) cannot be
deemed to have been fulfilled. Consequently, the latter cannot validly claim ownership over the subject portion even if
they had made an initial payment and even took possession of the same. 58

Page | 63
The Court further notes that Sps. Roque did not even take any active steps to protect their claim over the disputed portion.
This remains evident from the following circumstances appearing on record: (a) the 1977 Deed of Conditional Sale was
never registered; (b) they did not seek the actual/physical segregation of the disputed portion despite their knowledge of
the fact that, as early as 1993, the entire Lot 18089 was registered in Sabug, Jr.’s name under OCT No. M-5955; and (c)
while they signified their willingness to pay the balance of the purchase price, 59Sps. Roque neither compelled Rivero et
al., and/or Sabug, Jr. to accept the same nor did they consign any amount to the court, the proper application of which
would have effectively fulfilled their obligation to pay the purchase price. 60 Instead, Sps. Roque waited 26 years, reckoned
from the execution of the 1977 Deed of Conditional Sale, to institute an action for reconveyance (in 2003), and only after
Lot 18089 was sold to Land Bank in the foreclosure sale and title thereto was consolidated in its name. Thus, in view of
the foregoing, Sabug, Jr. – as the registered owner of Lot 18089 borne by the grant of his free patent application – could
validly convey said property in its entirety to Aguado who, in turn, mortgaged the same to Land Bank. Besides, as aptly
observed by the RTC, Sps. Roque failed to establish that the parties who sold the property to them, i.e., Rivero, et al.,
were indeed its true and lawful owners.61 In fine, Sps. Roque failed to establish any superior right over the subject portion
as against the registered owner of Lot 18089, i.e., Land Bank, thereby warranting the dismissal of their reconveyance
action, without prejudice to their right to seek damages against the vendors, i.e., Rivero et al. 62 As applied in the case of
Coronel v. CA:63

It is essential to distinguish between a contract to sell and a conditional contract of sale specially in cases where the
subject property is sold by the owner not to the party the seller contracted with, but to a third person, as in the case at
bench. In a contract to sell, there being no previous sale of the property, a third person buying such property despite the
fulfilment of the suspensive condition such as the full payment of the purchase price, for instance, cannot be deemed a
buyer in bad faith and the prospective buyer cannot seek the relief of reconveyance of the property.

There is no double sale in such case.1âwphi1 Title to the property will transfer to the buyer after registration because
there is no defect in the owner-seller’s title per se, but the latter, of course, may be sued for damages by the intending
buyer. (Emphasis supplied)

On the matter of double sales, suffice it to state that Sps. Roque’s reliance 64 on Article 154465 of the Civil Code has been
misplaced since the contract they base their claim of ownership on is, as earlier stated, a contract to sell, and not one of
sale. In Cheng v. Genato,66 the Court stated the circumstances which must concur in order to determine the applicability
of Article 1544, none of which are obtaining in this case, viz.:

(a) The two (or more) sales transactions in issue must pertain to exactly the same subject matter, and must be valid sales
transactions;

(b) The two (or more) buyers at odds over the rightful ownership of the subject matter must each represent conflicting
interests; and

(c) The two (or more) buyers at odds over the rightful ownership of the subject matter must each have bought from the
same seller.

Finally, regarding Sps. Roque’s claims of acquisitive prescription and reimbursement for the value of the improvements
they have introduced on the subject property,67 it is keenly observed that none of the arguments therefor were raised
before the trial court or the CA.68 Accordingly, the Court applies the well-settled rule that litigants cannot raise an issue for
the first time on appeal as this would contravene the basic rules of fair play and justice. In any event, such claims appear
to involve questions of fact which are generally prohibited under a Rule 45 petition. 69

With the conclusions herein reached, the Court need not belabor on the other points raised by the parties, and ultimately
finds it proper to proceed with the denial of the petition.

WHEREFORE, the petition is DENIED. The Decision dated May 12, 2010 and the Resolution dated September 15, 2010
of the Court of Appeals in CAG.R. CV No. 92113 are hereby AFFIRMED.

SO ORDERED.

Republic of the Philippines


SUPREME COURT
Manila
Page | 64
SECOND DIVISION

G.R. No. 195975, September 05, 2016

TAINA MANIGQUE-STONE, Petitioner, v. CATTLEYA LAND, INC., AND SPOUSES TROADIO B. TECSON AND
ASUNCION ORTALIZ-TECSON, Respondents.

DECISION

DEL CASTILLO, J.:

The sale of Philippine land to an alien or foreigner, even if titled in the name of his Filipino spouse, violates the
Constitution and is thus, void.

Assailed in this Petition for Review on Certiorari1 are the August 16, 2010 Decision2 of the Court of Appeals (CA) which
dismissed the appeal by Taina Manigque-Stone (Taina) in CA-G.R. CV No. 02352, and its February 22, 2011
Resolution,3 which denied Taina's motion for reconsideration4 thereon.

Factual Antecedents

Sometime in July 1992, Cattleya Land, Inc. (Cattleya) sent its legal counsel, Atty. Federico C. Cabilao, Jr. (Atty. Cabilao,
Jr.), to Tagbilaran City to investigate at the Office of the Register of Deeds in that city the status of the properties of
spouses Col. Troadio B. Tecson (Col. Tecson) and Asuncion Tecson (collectively, Tecson spouses), which Cattleya
wanted to purchase. One of these properties, an 8,805-square meter parcel of land located at Doljo, Panglao, Bohol, is
registered in the name of the Tecson spouses, and covered by Transfer Certificate of Title (TCT) No. 17655 (henceforth,
the subject property). Atty. Cabilao, Jr. found that no encumbrances or liens on the subject property had been annotated
on the TCT thereof, except for an attachment issued in connection with Civil Case No. 3399 entitled "Tantrade
Corporation vs. Bohol Resort Hotel, Inc., et al."5

On November 6, 1992, Cattleya entered into a Contract of Conditional Sale with the Tecson spouses covering nine
parcels of land, including the subject property. In this transaction the Tecson spouses were represented by Atty. Salvador
S. Pizarras (Atty. Pizarras). The Contract of Conditional Sale was entered in the Primary Book of the Office of the Register
of Deeds of Bohol that same day, per Entry No. 83422. On August 30, 1993, the parties executed a Deed of Absolute
Sale covering the subject property. This Deed of Absolute Sale was also entered in the Primary Book on October 4, 1993,
per Entry No. 87549. However, neither the Contract of Conditional Sale nor the Deed of Absolute Sale could be annotated
on the certificate of title covering the subject property because the then Register of Deeds of Bohol, Atty. Narciso S. De la
Serna (Atty. De la Serna) refused to annotate both deeds. According to Atty. De la Serna it was improper to do so
because of the writ of attachment that was annotated on the certificate of title of the subject property, in connection with
the said Civil Case No. 3399.6

On December 1, 1993, Atty. Cabilao, Jr. and Atty. Pizarras, in representation of their respective clients, again requested
Atty. De la Serna to annotate the Deed of Absolute Sale and all other pertinent documents on the original certificate of title
covering the subject property. But Atty. De la Serna refused anew – this time saying that he would accede to the request
only if he was presented with a court order to that effect. Atty. De la Serna still refused the request to annotate, even after
Atty. Cabilao, Jr. had told him that all that he (Atty. Cabilao, Jr.) was asking was for the Deed of Absolute Sale to be
annotated on the original certificate of title, and not for Atty. De la Serna to issue a new transfer of title to the subject
property.7

The writ of attachment on the certificate of title to the subject property was, however, lifted, after the parties in Civil Case
No. 3399 reached an amicable settlement or compromise agreement. Even then, however, Cattleya did not still succeed
in having the aforementioned Deed of Absolute Sale registered, and in having title to the subject property transferred to its
name, because it could not surrender the owner's copy of TCT No. 17655, which was in possession of the Tecson
spouses. According to Cattleya, the Tecson spouses could not deliver TCT No. 17655 to it, because according to the
Tecson spouses this certificate of title had been destroyed in a fire which broke out in Sierra Bullones, Bohol. 8

This claim by the Tecson spouses turned out to be false, however, because Atty. Cabilao, Jr. came to know, while
following up the registration of the August 30, 1993 Deed of Absolute Sale at the Office of the Register of Deeds of Bohol,
that the owner's copy of TCT No. 17655 had in fact been presented by Taina at the Office of the Register of Deeds of
Bohol, along with the Deed of Sale that was executed by the Tecson spouses, in favor of Taina covering the subject
property.9

It appears that when Taina's then common-law husband, Michael (Mike) Stone, visited Bohol sometime in December
1985, he fell in love with the place and decided to buy a portion of the beach lot in Doljo, Panglao, Bohol. They met with
Col. Tecson, and the latter agreed to sell them a portion of the beach lot for US$8,805.00. Mike and Taina made an initial
downpayment of US$1,750.00 (or equivalent P35,000.00 at that time) for a portion of a beach lot, but did not ask for a
receipt for this initial downpayment. On June 1, 1987, a Deed of Absolute Sale covering the subject portion was executed
by Col. Tecson in Taina's favor. Subsequent payments were made by Mike totalling P40,000.00, as of August 29, 1986,
although another payment of P5,000.00 was made sometime in August 1987. The last payment in the amount of
P32,000.00, was made in September 1987.10 In 1990, Troadio Tecson, Jr., the son of Col. Tecson and Taina's brother-in-
law, delivered to Taina the owner's copy of TCT No. 17655.11

In the meantime, in October 1986, Taina and Mike got married.


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On April 25, 1994, Taina filed a Notice of Adverse Claim covering the subject portion, after she learned that Col. Tecson
and his lawyer had filed a petition for the issuance of a second owner's copy over TCT No. 17655. 12

On February 8, 1995, Taina sought to have her Deed of Absolute Sale registered with the Office of the Register of Deeds
of Bohol, and on that occasion presented the owner's copy of TCT No. 17655. Taina also caused a Memorandum of
Encumbrance to be annotated on this certificate of title. The result was that on February 10, 1995, a new certificate of title,
TCT No. 21771, was issued in the name of Taina, in lieu of TCT No. 17655, in the name of the Tecson spouses. 13 The
subject property is described in TCT No. 21771 as follows:

A parcel of Land (Lot 5 of the consolidation-subdivision plan Pcs-07-000907, being a portion of lots I-A and I-B, Psd-07-
02-12550, LRC. Rec. No. ___), situated in the Barrio of Doljo, Municipality of Panglao, Province of Bohol, Island of Bohol.
Bounded on the North, along lines 15-16-1 by Bohol Strait; on the East and Southeast, along line 1-2 by Lot 4 of the
consolidation-subdividion plan; along line 3-4 by Primitivo Hora; and along line 4-5 by Lot 6 of the consolidation-
subdivision plan; on the South and Southwest, along line 5-6-7-8 by Andres Guimalan; along line 8-9 by [Bienvenido]
Biosino; along lines 9-10-11-12-13-14 by Angel Hora; and on the West, along lines 14-15 by Lot 7 of the consolidation-
subdivision plan. Beginning at a point marked "1" on plan, being S. 83 deg. 08'E., 1045.79 m. from triangulation point TIP,
USCGS, 1908, Doljo, Panglao, Bohol; containing an area of EIGHT THOUSAND EIGHT HUNDRED AND FIVE (8,805)
SQUARE METERS, more or less.14

Whereupon, Cattleya instituted against Taina a civil action for quieting of title and/or recovery of ownership and
cancellation of title with damages.15 Docketed as Civil Case No. 5782 of the Regional Trial Court (RTC) of Bohol at
Tagbilaran City, Cattleya therein initially impleaded Atty. De la Serna as party defendant; but as the latter had already
retired as Register of Deeds of Bohol, both parties agreed to drop his name from the case. 16

Taina likewise filed a motion for leave to admit a third-party complaint against the Tecson spouses; this motion was
granted by the RTC.17

After due proceedings, the RTC of Bohol gave judgment18 for Cattleya, thus:

WHEREFORE, in view of all the foregoing, judgment is hereby rendered in favor of the plaintiff and against the defendant
in the main case as follows:

1. Quieting the title or ownership of the plaintiff in Lot 5 by declaring the sale in its favor as valid and enforceable by virtue
of a prior registration of the sale in accordance with the provisions of Presidential Decree No. 1529 otherwise known as
the Property Registration Decree;

2. Ordering the cancellation of Transfer Certificate of Title No. 21771 in the name of defendant TAINA MANIGQUE-
STONE and the issuance of a new title in favor of the plaintiff after payment of the required fees; and

3. Ordering the defendant to desist from claiming ownership and possession thereof. Without pronouncement as to costs.

As to defendant's third[-]party complaint against spouses x x x Tecson[,] x x x judgment is hereby rendered as follows:

1. Ordering the return of the total amount of Seventy-seven Thousand (P77,000.00) Pesos to the third[-]party plaintiff with
legal rate of interest from the time of the filing of the third[-]party complaint on June 28, 2004 until the time the same shall
have been fully satisfied; and

2. Ordering the payment of P50,000.00 by way of moral and exemplary damages and x x x of attorney's fees in the
amount of P30,000.00 and to pay the costs.

SO ORDERED.19

In finding for Cattleya, the RTC held that the sale entered by the Tecson spouses with Cattleya and with Taina involving
one and the same property was a double sale, and that Cattleya had a superior right to the lot covered thereby, because
Cattleya was the first to register the sale in its favor in good faith; that although at the time of the sale the TCT covering
the subject property could not yet be issued, and the deed of sale could not be annotated thereon due to a pending case
between the vendors-spouses (Tecson spouses) and Tantrade, Inc., the evidence convincingly showed nonetheless that
it was Cattleya that was the first to register the sale in its favor with the Office of the Provincial Registry of Deeds of Bohol
on October 4, [1993] as shown in Entry No. 87549.20 Furthermore, the RTC found that Cattleya had no notice, nor was it
aware, of Taina's claim to the subject property, and that the only impediment it (Cattleya) was aware of was the pending
case (Civil Case No. 3399) between Tantrade Corporation and Bohol Resort Hotel, Inc. 21

On the other hand, the RTC found Taina's position untenable because: First, the June 1, 1987 sale between Col. Tecson
and Mike, Taina's then common-law husband, was a patent nullity, an absolutely null and void sale, because under the
Philippine Constitution a foreigner or alien cannot acquire real property in the Philippines. Second, at the time of the sale,
Taina was only Mike's dummy, and their subsequent marriage did not validate or legitimize the constitutionally proscribed
sale earlier made in Mike's favor. And third, no less than Taina herself admitted that at the time she caused the sale to be
registered and title thereto issued to her, she knew or was otherwise aware that the very same lot had already been sold
to Cattleya, or at least claimed by the latter – and this is a state of affairs constitutive of bad faith on her part. 22

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The RTC likewise held that neither parties in the main case was entitled to damages, because they failed to substantiate
their respective claims thereto.23

As regards Taina's third-party complaint against the Tecson spouses, the RTC ordered the return or restitution to her of
the sum of P77,000.00, plus legal interest. Likewise awarded by the RTC in Taina's favor were moral and exemplary
damages in the amount of P50,000.00 and attorney's fees in the amount of P30,000.00 plus costs. 24

Dissatisfied with this judgment, Taina appealed to the CA.

Ruling of the Court of Appeals

On August 16, 2010, the CA handed down the assailed Decision, 25cralawred which contained the following decretal
portion:

WHEREFORE, the challenged Decision of the Regional Trial Court dated [August 10, 2007] is hereby AFFIRMED with
MODIFICATIONS; to wit:

1. Quieting the title of ownership of the plaintiff-appellee, CATTLEYA LAND, INC. in the above-described property by
declaring the sale in its favor as valid and enforceable;

2. Ordering the cancellation of Transfer Certificate of Title No. 21771 in the name of defendant-appellant TAINA
MANIGQUE-STONE;

3. Ordering the registration of the Deed of Absolute Sale involving the subject property executed in favor of CATTLEYA
LAND, INC. and the issuance x x x of a new title in favor of the plaintiff-appellee CATTLEYA LAND, INC. ate payment of
the required fees; and

4. Ordering the defendant-appellant, TAINA MANIGQUE-STONE to desist from claiming ownership and possession
thereof. Without pronouncement as to cost.

As to the third-party defendants-appellees, the spouses Troadio B. Tecson and Asuncion Ortaliz Tecson, judgment is
hereby rendered as follows:

1. Ordering third-party defendants-appellees, spouses TROADIO B. TECSON and ASUNCION ORTALIZ TECSON, [to]
return x x x the total amount of Seventy-seven Thousand (P77,000.00) Pesos to the defendant-appellant, TAINA
MANIGQUE-STONE, with legal rate of interest from the time of filing of the third[-]party complaint on June 28, 2004 until
the time the same shall have been fully satisfied; and

2. Ordering third-party defendants-appellees, spouses TROADIO B. TECSON and ASUNCION ORTALIZ TECSON [to
pay] P50,000.00 to the defendant-appellant, TAINA MANIGQUE-STONE by way of moral and exemplary damages and
[to pay] attorney's fees in the amount of P30,000.00 x x x.

No pronouncement as to cost.

SO ORDERED.26

In support of its Decision, the CA ratiocinated —

Article 1498 of the Civil Code provides that, as a rule, the execution of a notarized deed of sale is equivalent to the
delivery of a thing sold. In this case, the notarization of the deed of sale of TAINA is defective. TAINA testified that the
deed of sale was executed and signed by Col. Troadio Tecson in Bohol but was notarized in Manila without the vendors
appearing personally before the notary public.

Additionally, Article 1477 of the Civil Code provides that the ownership of the thing sold is transferred upon the actual or
constructive delivery thereof; however, the delivery of the owner's copy of TCT 17655 to TAINA is dubious. It was not the
owner, Col. Troadio Tecson, himself who delivered the same but his son who also happens to be TAINA's brother-in-law.
Hence, the foregoing circumstances negate the fact that there was indeed an absolute delivery or transfer of ownership.

Anent the issue on validity of the sale to Taina Manigque-Stone, the fundamental law is perspicuous in its prohibition
against aliens from holding title or acquiring private lands, except only by way of legal succession or if the acquisition was
made by a former natural-born citizen.

A scrutiny of the records would show that the trial court aptly held that the defendant-appellant was only a dummy for Mike
Stone who is a foreigner. Even if the Deed of Absolute Sale is in the name of Taina Manigque-Stone that does not change
the fact that the real buyer was Mike Stone, a foreigner. The appellant herself had admitted in court that the buyer was
Mike Stone and at the time of the negotiation she was not yet legally married to Mike Stone. They cannot do indirectly
what is prohibited directly by the law.

To further militate against her stand, the appellant herself testified during the cross examination:

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Q: Now, the Deed of Sale states that the buyer is Taina Manigque-Stone?

A: Yes.

Q: And not Mike Stone who according to you was the one who paid the entire consideration and was the one who
negotiated with Colonel Tecson. Will you kindly tell the Court how come it was your name who placed [sic] in the
Deed of Sale?

A: Because an American, foreign national cannot buy land here.

Q: Yes because an American national, foreigner cannot own land here.

A: Yes.

Q: And so the Deed of Sale was placed in your name, correct?

A: Yes.

The above testimony is a clear admission against interest. An admission against interest is the best evidence which
affords the greatest certainty of the facts in dispute. The rationale for the rule is based on the presumption that no man
would declare anything against himself unless such declaration is true. Accordingly, it is rational to presume that the
testimony corresponds with the truth, and she bears the burden if it does not.

Moreover, TAINA asserts in the brief that 'ownership of the lot covered by TCT 21771 is held by her, a Filipino. As long as
the lot is registered in the name of a Filipino, the trial court is barred from inquiring [into] its legality.' Such assertion is
bereft of merit.

The Honorable Supreme Court, in identifying the true ownership of a property registered in the name of a Filipina who was
married to a foreign national, pronounced in Borromeo vs. Descallar that:

'It is settled that registration is not a mode of acquiring ownership. It is only a means of confirming the fact of its existence
with notice to the world at large. Certificates of title are not a source of right. The mere possession of a title does not make
one the true owner of the property. Thus, the mere fact that respondent has the titles of the disputed properties in her
name does not necessarily, conclusively and absolutely make her the owner [thereof]. The rule on indefeasibility of title
likewise does not apply to respondent. A certificate of title implies that the title is quiet, and that it is perfect, absolute and
indefeasible. However, there are well-defined exceptions to this rule, as when the transferee is not a holder in good faith
and did not acquire the subject properties for a valuable consideration. This is the situation in the instant case.
Respondent did not contribute a single centavo in the acquisition of the properties. She had no income of her own at that
time, nor did she have any savings. x x x'27

Taina moved for reconsideration28 of the CA's Decision, but the CA thumbed down this motion in its February 22, 2011
Resolution.29 Hence, the present Petition.

Issues

Before this Court, petitioner puts forward the following questions of law for resolution:

1. Whether the assailed Decision is legally correct in holding that petitioner is a mere dummy of Mike.

2. Whether the assailed Decision is legally correct in considering that the verbal contract of sale between spouses Tecson
and Mike transferred ownership to a foreigner, which falls within the constitutional ban on sales of land to foreigners.

3. Whether the assailed Decision is legally correct in not considering that, assuming that the sale of land to Mike violated
the Constitution, the same has been cured by the subsequent marriage of petitioner to Mike and by the registration of the
land in the name of petitioner, a Filipino citizen.

4. Whether the assailed Decision is legally correct in not applying the rules on double sale, which clearly favor petitioner
Taina.30

In amplification thereof, petitioner advances these arguments:

The trial court and the Court of Appeals departed from the clear provisions of the law and established jurisprudence when
it failed to consider that the Filipino wife of Mike Stone, petitioner Taina Manigque-Stone[,] has the legal capacity and the
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conjugal partnership interests to enter into a contract of deed of absolute sale with respondent Sps. Troadio B. Tecson
and Asuncion Ortaliz Tecson.

II

The trial court and the Court of Appeals departed from the provisions of the law and established jurisprudence when it
failed to consider that the verbal contract of sale of land to Mike Stone was unenforceable and did not transfer ownership
to him, to fall within the constitutional ban on foreigners owning lands in the Philippines.

III

The trial court and the Court of Appeals departed from established jurisprudence, when it failed to consider that,
assuming arguendo that the sale of land to Mike Stone violated the Constitutional ban on foreign ownership of lands, the
same has been cured by the subsequent marriage of petitioner and Mike Stone, and [the subsequent issuance of title] in
the name of petitioner.

IV

The Court of Appeals gravely erred and departed from established rules of evidence when it ruled that the delivery of the
owner's copy of TCT 17655 to petitioner Taina is dubious.

The trial court and the Court of Appeals gravely erred when it departed from provisions of the law and established
jurisprudence when it did not apply the rules on double sale which clearly favor petitioner Taina. 31

The fundamental issue for resolution in the case at bench is whether the sale of land by the Tecson spouses to Michael
Stone a.k.a. Mike, a foreigner or alien, although ostensibly made in Taina's name, was valid, despite the constitutional
prohibition against the sale of lands in the Philippines to foreigners or aliens. A collateral or secondary issue is whether
Article 1544 of the Civil Code, the article which governs double sales, controls this case.

Petitioner's Arguments

In praying that the CA Decision be overturned Taina posits that while Mike's legal capacity (to own or acquire real property
in the Philippines) was not entirely unassailable, there was nevertheless no actual violation of the constitutional prohibition
against the acquisition or purchase by aliens or foreigners of lands in the Philippines, because in this case no real transfer
of ownership had been effected in favor of Mike, from Col. Tecson;32 that all payments made by Mike to Col. Tecson must
be presumed to have come from the community property he had with Taina, because Mike had been her (Taina's)
common-law-husband from 1982 up to the day they were married, in 1986; hence, in this context, she (Taina) was not
exactly Mike's dummy at all, but his active partner; 33 that it is of no consequence that she (Taina) had knowledge that
Cattleya had likewise purchased or acquired the subject lot because the deed of sale in favor of Cattleya was executed
subsequent to the deed of sale that she and Mike had entered into with the Tecson spouses, thus, she was the first to
acquire ownership of the subject lot in good faith; 34 that assuming for argument's sake that neither she nor Cattleya was a
purchaser in good faith, still she was the first one to acquire constructive possession of the subject lot pursuant to Article
1544 3rd paragraph of the Civil Code, and for this reason she had acquired lawful title thereto. 35

Respondent Cattleya Land's arguments

Cattleya counters that there could not have been a double sale in the instant case because the earlier sale between Col.
Tecson and Mike was absolutely null and void, as this was a flagrant violation of the constitutional provision barring or
prohibiting aliens or foreigners from acquiring or purchasing land in the Philippines; hence, there was only one valid sale
in this case, and that was the sale between Col. Tecson and Cattleya. 36

Court's Resolution with respect to Respondents-Spouses Tecson

This Court's Resolution dated June 20, 2012 noted, amongst others, the Manifestation filed by Cattleya, which inter
alia stated: (1) that Col. Tecson died on December 7, 2004; (2) that Taina instituted a third-party complaint against the
Tecson spouses; (3) that in this third-party complaint the Tecson spouses were declared in default by the trial court; (4)
that this default order was not appealed by the Tecson spouses; (5) that the present appeal by Taina from the CA
Decision will in no way affect or prejudice the Tecson spouses, given the fact that these spouses did not appeal from the
default order, and (6) that the instant Petition be submitted for resolution without the Comment of the Tecson
spouses.37 In the Resolution of February 26, 2014, this Court noted that since Asuncion Tecson had failed to submit to
this Court the name of the legal representative of her deceased husband Col. Tecson within the period which expired on
October 3, 2013, this Court was dispensing with the Comment of the Tecson spouses in the instant Petition. 38

Our Ruling

This Petition is bereft of merit.

Section 7, Article XII of the 1987 Constitution states that:

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Save in cases of hereditary succession, no private lands shall be transferred or conveyed except to individuals,
corporations, or associations qualified to acquire or hold lands of the public domain.

Given the plain and explicit language of this constitutional mandate, it has been held that "[a]liens, whether individuals or
corporations, are disqualified from acquiring lands of the public domain. Hence, they are also disqualified from
acquiring private lands. The primary purpose of the constitutional provision is the conservation of the national
patrimony."39

In the case at bench, Taina herself admitted that it was really Mike who paid with his own funds the subject lot; hence,
Mike was its real purchaser or buyer. More than that, it bears stressing that if the deed of sale at all proclaimed that she
(Taina) was the purchaser or buyer of the subject property and this subject property was placed under her name, it was
simply because she and Mike wanted to skirt or circumvent the constitutional prohibition barring or outlawing foreigners or
aliens from acquiring or purchasing lands in the Philippines. Indeed, both the CA and the RTC exposed and laid bare
Taina's posturing and pretense for what these really are: that in the transaction in question, she was a mere dummy, a
spurious stand-in, for her erstwhile common-law husband, who was not a Filipino then, and never attempted to become a
naturalized Filipino citizen thereafter. The CA put things in correct perspective, thus —

A scrutiny of the records would show that the trial court aptly held that the defendant-appellant was only a dummy for Mike
Stone who is a foreigner. Even if the Deed of Absolute Sale is in the name of Taina Manigque-Stone that
does not change the fact that the real buyer was Mike Stone, a foreigner. The appellant herself had admitted in court that
the buyer was Mike Stone and at the time of the negotiation she was not yet legally married to Mike Stone. They cannot
do indirectly what is prohibited directly by the law.40 (Emphasis supplied)

Citing the RTC's proceedings of December 7, 2004, the CA adverted to the following testimony by the petitioner during
her cross-examination thus –

(Atty. Monteclar)

Q: Now, the Deed of Sale states that the buyer is Taina Manigque-Stone?

A: Yes.

Q: And not Mike Stone who according to you was the one who paid the entire consideration and was the one who
negotiated with Colonel Tecson. Will you kindly tell the Court how come it was your name who placed [sic] in the
Deed of Sale?

A: Because an American, foreign national cannot buy land here.

Q: Yes because an American national, foreigner cannot own land here.

A: Yes.

Q: And so the Deed of Sale was placed in your name, correct?

A: Yes.41 (Emphasis supplied)

It is axiomatic, of course, that this Court is not a trier of facts. Subject to well-known exceptions, none of which obtains in
the instant case, this Court is bound by the factual findings of the CA, especially where such factual findings, as in this
case, accorded in the main with the RTC's own findings.42

Given the fact that the sale by the Tecson spouses to Taina as Mike's dummy was totally abhorrent and repugnant to the
Philippine Constitution, and is thus, void ab initio, it stands to reason that there can be no double sale to speak of here. In
the case of Fudot v. Cattleya Land, Inc.,43 which fortuitously also involved the Tecson spouses and Cattleya, we held thus

The petition is bereft of merit.

Petitioner's arguments, which rest on the assumption that there was a double sale, must fail.

In the first place, there is no double sale to speak of. Art. 1544 of the Civil Code, which provides the rule on double sale,
applies only to a situation where the same property is validly sold to different vendees. In this case, there is only one sale
to advert to, that between the spouses Tecson and respondent.

In Remalante v. Tibe, this Court ruled that the Civil Law provision on double sale is not applicable where there is only one
valid sale, the previous sale having been found to be fraudulent. Likewise, in Espiritu and Apostol v. Valerio, where the

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same parcel of land was purportedly sold to two different parties, the Court held that despite the fact that one deed of sale
was registered ahead of the other, Art. 1544 of the Civil Code will not apply where said deed is found to be a forgery, the
result of this being that the right of the other vendee should prevail.

The trial court declared that the sale between the spouses Tecson and petitioner is invalid, as it bears the forged
signature of Asuncion. x x x44 (Citations omitted; Emphasis supplied)

In view of the fact that the sale in the case at bench is worse off (because it is constitutionally infirm) than the sale in
the Fudot case, which merely involves a violation of the pertinent provisions of the Civil Code, this Court must affirm, as it
hereby affirms the CA's ruling that, "there is only one sale to reckon with, that is, the sale to Cattleya. 45

Again, our holding in Muller v. Muller,46 which is almost on all fours with the case at bench, can only strengthen and
reinforce our present stance. In Muller, it appears that German national Helmut Muller (Helmut), alien or foreigner
husband of the Filipina Elena Buenaventura Muller (Elena), bought with his capital funds a parcel of land in Antipolo City
and also paid for the construction of a house thereon. This Antipolo property was registered under the name of Elena
under TCT No. 219438. Subsequently, Helmut instituted a petition for separation of properties with the RTC of Quezon
City. After due proceedings, the RTC of Quezon City rendered judgment terminating the regime of absolute community of
property between Helmut and Elena. The RTC also decreed the separation of properties between the spouses. With
respect to the Antipolo property, the RTC held that although it was acquired with the use of Helmut's capital funds,
nevertheless the latter could not recover his investment because the property was purchased in violation of Section 7,
Article XII of the Constitution. Dissatisfied with the RTC's judgment, Helmut appealed to the CA which upheld his appeal.
The CA ruled that: (1) Helmut merely prayed for reimbursement of the purchase price of the Antipolo property, and not
that he be declared the owner thereof; (2) Elena's ownership over this property was considered as ownership-in-trust for
Helmut; (3) there is nothing in the Constitution which prohibits Helmut from acquiring ownership of the house.

However, on a Petition for Review on Certiorari, this Court reversed the CA and reinstated the RTC's ruling. In sustaining
the RTC, this Court once again stressed the absolute character of the constitutional prohibition against ownership of
lands in this country by foreigners or aliens:

The Court of Appeals erred in holding that an implied trust was created and resulted by operation of law in view of
petitioner's marriage to respondent. Save for the exception provided in cases of hereditary succession, respondent's
disqualification from owning lands in the Philippines is absolute. Not even an ownership in trust is allowed. Besides,
where the purchase is made in violation of an existing statute and in evasion of its express provision, no trust can result in
favor of the party who is guilty of the fraud. To hold otherwise would allow circumvention of the constitutional
prohibition.47 (Citation omitted; Emphasis supplied)

The same absolute constitutional proscription was reiterated anew in the comparatively recent case of Matthews v.
Taylor,48 erroneously invoked by Taina. Taina claims that this case supports her position in the case at bench allegedly
because, like her case, the alien or foreigner husband in the Matthews case (Benjamin A. Taylor, a British subject)
likewise provided the funds for the purchase of real property by his Filipino wife (Joselyn C. Taylor) and this Court
allegedly sustained said wife's ownership over the property. 49 That Taina's claim is a clear misapprehension of the thrust
and purport of the ruling enunciated in the Matthews case is put to rest by what this Court said there —

In light of the foregoing jurisprudence, we find and so hold that Benjamin has no right to nullify the Agreement of Lease
between Joselyn and petitioner. Benjamin, being an alien, is absolutely prohibited from acquiring private and public
lands in the Philippines. Considering that Joselyn appeared to be the designated 'vendee' in the Deed of Sale of said
property, she acquired sole ownership there[of]. This is true even if we sustain Benjamin's claim that he provided the
funds for such acquisition. By entering into such contract knowing that it was illegal, no implied trust was
created in his favor; no reimbursement for his expenses can be allowed; and no declaration can be made that the
subject property was part of the conjugal/community property of the spouses. In any event, he had and has no
capacity or personality to question the subsequent lease of the Boracay property by his wife on the theory that in so doing,
he was merely exercising the prerogative of a husband in respect [to] conjugal property. To sustain such a theory would
countenance indirect controversion of the constitutional prohibition. If the property were to be declared conjugal,
this would accord the alien husband a substantial interest and right over the land, as he would then have a
decisive vote as to its transfer or disposition. This is a right that the Constitution does not permit him to
have.(Citation omitted; emphasis and underscoring supplied)50

The other points raised by petitioner in the present Petition for Review are collateral or side issues and need not detain
this Court any further. Suffice it to say that the chief or main constitutional issue that has been addressed and resolved in
the present Petition has effectively subsumed or relegated to inconsequence the other collateral or side issues raised
herein.

WHEREFORE, the Petition is DENIED. The Decision of the Court of Appeals dated August 16, 2010 and its Resolution
dated February 22, 2011 in CA-G.R. CV No. 02352 being in conformity with the law and with this Court's jurisprudential
teachings, are hereby AFFIRMED in toto.

SO ORDERED.

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Page | 72
Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. 142618 July 12, 2007

PCI LEASING AND FINANCE, INC., Petitioner,


vs.
GIRAFFE-X CREATIVE IMAGING, INC., Respondent.

DECISION

GARCIA, J.:

On a pure question of law involving the application of Republic Act (R.A.) No. 5980, as amended by R.A. No. 8556¸ in
relation to Articles 1484 and 1485 of the Civil Code, petitioner PCI Leasing and Finance, Inc. (PCI LEASING, for short)
has directly come to this Court via this petition for review under Rule 45 of the Rules of Court to nullify and set aside the
Decision and Resolution dated December 28, 1998 and February 15, 2000, respectively, of the Regional Trial Court
(RTC) of Quezon City, Branch 227, in its Civil Case No. Q-98-34266, a suit for a sum of money and/or personal property
with prayer for a writ of replevin, thereat instituted by the petitioner against the herein respondent, Giraffe-X Creative
Imaging, Inc. (GIRAFFE, for brevity).

The facts:

On December 4, 1996, petitioner PCI LEASING and respondent GIRAFFE entered into a Lease Agreement, 1whereby the
former leased out to the latter one (1) set of Silicon High Impact Graphics and accessories worth ₱3,900,00.00 and one
(1) unit of Oxberry Cinescan 6400-10 worth ₱6,500,000.00. In connection with this agreement, the parties subsequently
signed two (2) separate documents, each denominated as Lease Schedule. 2Likewise forming parts of the basic lease
agreement were two (2) separate documents denominated Disclosure Statements of Loan/Credit Transaction (Single
Payment or Installment Plan)3 that GIRAFFE also executed for each of the leased equipment. These disclosure
statements inter alia described GIRAFFE, vis-à-vis the two aforementioned equipment, as the "borrower" who
acknowledged the "net proceeds of the loan," the "net amount to be financed," the "financial charges," the "total
installment payments" that it must pay monthly for thirty-six (36) months, exclusive of the 36% per annum "late payment
charges." Thus, for the Silicon High Impact Graphics, GIRAFFE agreed to pay ₱116,878.21 monthly, and for Oxberry
Cinescan, ₱181.362.00 monthly. Hence, the total amount GIRAFFE has to pay PCI LEASING for 36 months of the lease,
exclusive of monetary penalties imposable, if proper, is as indicated below:

P116,878.21 @ month (for the Silicon High


Impact Graphics) x 36 months = P 4,207,615.56

-- PLUS--

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P181,362.00 @ month (for the Oxberry
Cinescan) x 36 months = P 6,529,032.00

Total Amount to be paid by GIRAFFE


(or the NET CONTRACT AMOUNT) P 10,736,647.56

By the terms, too, of the Lease Agreement, GIRAFFE undertook to remit the amount of ₱3,120,000.00 by way of
"guaranty deposit," a sort of performance and compliance bond for the two equipment. Furthermore, the same agreement
embodied a standard acceleration clause, operative in the event GIRAFFE fails to pay any rental and/or other accounts
due.

A year into the life of the Lease Agreement, GIRAFFE defaulted in its monthly rental-payment obligations. And following a
three-month default, PCI LEASING, through one Atty. Florecita R. Gonzales, addressed a formal pay-or-surrender-
equipment type of demand letter4 dated February 24, 1998 to GIRAFFE.

The demand went unheeded.

Hence, on May 4, 1998, in the RTC of Quezon City, PCI LEASING instituted the instant case against GIRAFFE. In its
complaint,5 docketed in said court as Civil Case No. 98-34266 and raffled to Branch 2276 thereof, PCI LEASING prayed
for the issuance of a writ of replevin for the recovery of the leased property, in addition to the following relief:

2. After trial, judgment be rendered in favor of plaintiff [PCI LEASING] and against the defendant [GIRAFFE], as follows:

a. Declaring the plaintiff entitled to the possession of the subject properties;

b. Ordering the defendant to pay the balance of rental/obligation in the total amount of ₱8,248,657.47 inclusive of interest
and charges thereon;

c. Ordering defendant to pay plaintiff the expenses of litigation and cost of suit…. (Words in bracket added.)

Upon PCI LEASING’s posting of a replevin bond, the trial court issued a writ of replevin, paving the way for PCI LEASING
to secure the seizure and delivery of the equipment covered by the basic lease agreement.

Instead of an answer, GIRAFFE, as defendant a quo, filed a Motion to Dismiss, therein arguing that the seizure of the two
(2) leased equipment stripped PCI LEASING of its cause of action. Expounding on the point, GIRAFFE argues that,
pursuant to Article 1484 of the Civil Code on installment sales of personal property, PCI LEASING is barred from further
pursuing any claim arising from the lease agreement and the companion contract documents, adding that the agreement
between the parties is in reality a lease of movables with option to buy. The given situation, GIRAFFE continues, squarely
brings into applicable play Articles 1484 and 1485 of the Civil Code, commonly referred to as the Recto Law. The cited
articles respectively provide:

ART. 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor may
exercise any of the following remedies:

(1) Exact fulfillment of the obligation, should the vendee fail to pay;

(2) Cancel the sale, should the vendee's failure to pay cover two or more installments;

(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's failure to pay cover
two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance
of the price. Any agreement to the contrary shall be void. (Emphasis added.)

ART. 1485. The preceding article shall be applied to contracts purporting to be leases of personal property with option to
buy, when the lessor has deprived the lessee of the possession or enjoyment of the thing.

It is thus GIRAFFE’s posture that the aforequoted Article 1484 of the Civil Code applies to its contractual relation with PCI
LEASING because the lease agreement in question, as supplemented by the schedules documents, is really a lease with
option to buy under the companion article, Article 1485. Consequently, so GIRAFFE argues, upon the seizure of the
leased equipment pursuant to the writ of replevin, which seizure is equivalent to foreclosure, PCI LEASING has no further
recourse against it. In brief, GIRAFFE asserts in its Motion to Dismiss that the civil complaint filed by PCI LEASING is
proscribed by the application to the case of Articles 1484 and 1485, supra, of the Civil Code.

In its Opposition to the motion to dismiss, PCI LEASING maintains that its contract with GIRAFFE is a straight lease
without an option to buy. Prescinding therefrom, PCI LEASING rejects the applicability to the suit of Article 1484 in relation
to Article 1485 of the Civil Code, claiming that, under the terms and conditions of the basic agreement, the relationship
between the parties is one between an ordinary lessor and an ordinary lessee.

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In a decision7 dated December 28, 1998, the trial court granted GIRAFFE’s motion to dismiss mainly on the interplay of
the following premises: 1) the lease agreement package, as memorialized in the contract documents, is akin to the
contract contemplated in Article 1485 of the Civil Code, and 2) GIRAFFE’s loss of possession of the leased equipment
consequent to the enforcement of the writ of replevin is "akin to foreclosure, … the condition precedent for application of
Articles 1484 and 1485 [of the Civil Code]." Accordingly, the trial court dismissed Civil Case No. Q-98-34266, disposing as
follows:

WHEREFORE, premises considered, the defendant [GIRAFFE] having relinquished any claim to the personal properties
subject of replevin which are now in the possession of the plaintiff [PCI LEASING], plaintiff is DEEMED fully satisfied
pursuant to the provisions of Articles 1484 and 1485 of the New Civil Code. By virtue of said provisions, plaintiff is
DEEMED estopped from further action against the defendant, the plaintiff having recovered thru (replevin) the personal
property sought to be payable/leased on installments, defendants being under protection of said RECTO LAW. In view
thereof, this case is hereby DISMISSED.

With its motion for reconsideration having been denied by the trial court in its resolution of February 15, 2000, 8petitioner
has directly come to this Court via this petition for review raising the sole legal issue of whether or not the underlying
Lease Agreement, Lease Schedules and the Disclosure Statements that embody the financial leasing arrangement
between the parties are covered by and subject to the consequences of Articles 1484 and 1485 of the New Civil Code.

As in the court below, petitioner contends that the financial leasing arrangement it concluded with the respondent
represents a straight lease covered by R.A. No. 5980, the Financing Company Act, as last amended by R.A. No. 8556,
otherwise known as Financing Company Act of 1998, and is outside the application and coverage of the Recto Law. To
the petitioner, R.A. No. 5980 defines and authorizes its existence and business.

The recourse is without merit.

R.A. No. 5980, in its original shape and as amended, partakes of a supervisory or regulatory legislation, merely providing
a regulatory framework for the organization, registration, and regulation of the operations of financing companies. As
couched, it does not specifically define the rights and obligations of parties to a financial leasing arrangement. In fact, it
does not go beyond defining commercial or transactional financial leasing and other financial leasing concepts. Thus, the
relevancy of Article 18 of the Civil Code which reads:

Article 18. - In matters which are governed by … special laws, their deficiency shall be supplied by the provisions of this
[Civil] Code.

Petitioner foists the argument that the Recto Law, i.e., the Civil Code provisions on installment sales of movable property,
does not apply to a financial leasing agreement because such agreement, by definition, does not confer on the lessee the
option to buy the property subject of the financial lease. To the petitioner, the absence of an option-to-buy stipulation in a
financial leasing agreement, as understood under R.A. No. 8556, prevents the application thereto of Articles 1484 and
1485 of the Civil Code.

We are not persuaded.

The Court can allow that the underlying lease agreement has the earmarks or made to appear as a financial leasing,9 a
term defined in Section 3(d) of R.A. No. 8556 as -

a mode of extending credit through a non-cancelable lease contract under which the lessor purchases or acquires, at the
instance of the lessee, machinery, equipment, … office machines, and other movable or immovable property in
consideration of the periodic payment by the lessee of a fixed amount of money sufficient to amortize at least seventy
(70%) of the purchase price or acquisition cost, including any incidental expenses and a margin of profit over an obligatory
period of not less than two (2) years during which the lessee has the right to hold and use the leased property … but with
no obligation or option on his part to purchase the leased property from the owner-lessor at the end of the lease contract.

In its previous holdings, however, the Court, taking into account the following mix: the imperatives of equity, the
contractual stipulations in question and the actuations of parties vis-à-vis their contract, treated disguised transactions
technically tagged as financing lease, like here, as creating a different contractual relationship. Notable among the Court’s
decisions because of its parallelism with this case is BA Finance Corporation v. Court of Appeals 10 which involved a motor
vehicle. Thereat, the Court has treated a purported financial lease as actually a sale of a movable property on installments
and prevented recovery beyond the buyer’s arrearages. Wrote the Court in BA Finance:

The transaction involved … is one of a "financial lease" or "financial leasing," where a financing company would, in effect,
initially purchase a mobile equipment and turn around to lease it to a client who gets, in addition, an option to purchase
the property at the expiry of the lease period. xxx.

xxx xxx xxx

The pertinent provisions of [RA] 5980, thus implemented, read:

"'Financing companies,' … are primarily organized for the purpose of extending credit facilities to consumers … either by
… leasing of motor vehicles, … and office machines and equipment, … and other movable property."

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"'Credit' shall mean any loan, … any contract to sell, or sale or contract of sale of property or service, … under which part
or all of the price is payable subsequent to the making of such sale or contract; any rental-purchase contract; ….;"

The foregoing provisions indicate no less than a mere financing scheme extended by a financing company to a client in
acquiring a motor vehicle and allowing the latter to obtain the immediate possession and use thereof pending full payment
of the financial accommodation that is given.

In the case at bench, xxx. [T]he term of the contract [over a motor vehicle] was for thirty six (36) months at a "monthly
rental" … (P1,689.40), or for a total amount of P60,821.28. The contract also contained [a] clause [requiring the Lessee to
give a guaranty deposit in the amount of P20,800.00] xxx

After the private respondent had paid the sum of P41,670.59, excluding the guaranty deposit of P20,800.00, he stopped
further payments. Putting the two sums together, the financing company had in its hands the amount of P62,470.59 as
against the total agreed "rentals" of P60,821.28 or an excess of P1,649.31.

The respondent appellate court considered it only just and equitable for the guaranty deposit made by the private
respondent to be applied to his arrearages and thereafter to hold the contract terminated. Adopting the ratiocination of the
court a quo, the appellate court said:

xxx In view thereof, the guaranty deposit of P20,800.00 made by the defendant should and must be credited in his favor,
in the interest of fairness, justice and equity. The plaintiff should not be allowed to unduly enrich itself at the expense of
the defendant. xxx This is even more compelling in this case where although the transaction, on its face, appear
ostensibly, to be a contract of lease, it is actually a financing agreement, with the plaintiff financing the purchase of
defendant's automobile …. The Court is constrained, in the interest of truth and justice, to go into this aspect of the
transaction between the plaintiff and the defendant … with all the facts and circumstances existing in this case, and which
the court must consider in deciding the case, if it is to decide the case according to all the facts. xxx.

xxx xxx xxx

Considering the factual findings of both the court a quo and the appellate court, the only logical conclusion is that the
private respondent did opt, as he has claimed, to acquire the motor vehicle, justifying then the application of the guarantee
deposit to the balance still due and obligating the petitioner to recognize it as an exercise of the option by the private
respondent. The result would thereby entitle said respondent to the ownership and possession of the vehicle as the buyer
thereof. We, therefore, see no reversible error in the ultimate judgment of the appellate court. 11(Italics in the original;
underscoring supplied and words in bracket added.)

In Cebu Contractors Consortium Co. v. Court of Appeals,12 the Court viewed and thus declared a financial lease
agreement as having been simulated to disguise a simple loan with security, it appearing that the financing company
purchased equipment already owned by a capital-strapped client, with the intention of leasing it back to the latter.

In the present case, petitioner acquired the office equipment in question for their subsequent lease to the respondent, with
the latter undertaking to pay a monthly fixed rental therefor in the total amount of ₱292,531.00, or a total of
₱10,531,116.00 for the whole 36 months. As a measure of good faith, respondent made an up-front guarantee deposit in
the amount of ₱3,120,000.00. The basic agreement provides that in the event the respondent fails to pay any rental due
or is in a default situation, then the petitioner shall have cumulative remedies, such as, but not limited to, the following: 13

1. Obtain possession of the property/equipment;

2. Retain all amounts paid to it. In addition, the guaranty deposit may be applied towards the payment of "liquidated
damages";

3. Recover all accrued and unpaid rentals;

4. Recover all rentals for the remaining term of the lease had it not been cancelled, as additional penalty;

5. Recovery of any and all amounts advanced by PCI LEASING for GIRAFFE’s account xxx;

6. Recover all expenses incurred in repossessing, removing, repairing and storing the property; and,

7. Recover all damages suffered by PCI LEASING by reason of the default.

In addition, Sec. 6.1 of the Lease Agreement states that the guaranty deposit shall be forfeited in the event the
respondent, for any reason, returns the equipment before the expiration of the lease.

At bottom, respondent had paid the equivalent of about a year’s lease rentals, or a total of ₱3,510,372.00, more or less.
Throw in the guaranty deposit (₱3,120,000.00) and the respondent had made a total cash outlay of ₱6,630,372.00 in
favor of the petitioner. The replevin-seized leased equipment had, as alleged in the complaint, an estimated residual value
of ₱6,900.000.00 at the time Civil Case No. Q-98-34266 was instituted on May 4, 1998. Adding all cash advances thus
made to the residual value of the equipment, the total value which the petitioner had actually obtained by virtue of its lease
agreement with the respondent amounts to ₱13,530,372.00 (₱3,510,372.00 + ₱3,120,000.00 + ₱6,900.000.00 =
₱13,530,372.00).
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The acquisition cost for both the Silicon High Impact Graphics equipment and the Oxberry Cinescan was, as stated in no
less than the petitioner’s letter to the respondent dated November 11, 199614 approving in the latter’s favor a lease facility,
was ₱8,100,000.00. Subtracting the acquisition cost of ₱8,100,000.00 from the total amount, i.e., ₱13,530,372.00,
creditable to the respondent, it would clearly appear that petitioner realized a gross income of ₱5,430,372.00 from its
lease transaction with the respondent. The amount of ₱5,430,372.00 is not yet a final figure as it does not include the
rentals in arrears, penalties thereon, and interest earned by the guaranty deposit.

As may be noted, petitioner’s demand letter15 fixed the amount of ₱8,248,657.47 as representing the respondent’s "rental"
balance which became due and demandable consequent to the application of the acceleration and other clauses of the
lease agreement. Assuming, then, that the respondent may be compelled to pay ₱8,248,657.47, then it would end up
paying a total of ₱21,779,029.47 (₱13,530,372.00 + ₱8,248,657.47 = ₱21,779,029.47) for its use - for a year and two
months at the most - of the equipment. All in all, for an investment of ₱8,100,000.00, the petitioner stands to make in a
year’s time, out of the transaction, a total of ₱21,779,029.47, or a net of ₱13,679,029.47, if we are to believe its outlandish
legal submission that the PCI LEASING-GIRAFFE Lease Agreement was an honest-to-goodness straight lease.

A financing arrangement has a purpose which is at once practical and salutary. R.A. No. 8556 was, in fact, precisely
enacted to regulate financing companies’ operations with the end in view of strengthening their critical role in providing
credit and services to small and medium enterprises and to curtail acts and practices prejudicial to the public interest, in
general, and to their clienteles, in particular.16 As a regulated activity, financing arrangements are not meant to quench
only the thirst for profit. They serve a higher purpose, and R.A. No. 8556 has made that abundantly clear.

We stress, however, that there is nothing in R.A. No. 8556 which defines the rights and obligations, as between each
other, of the financial lessor and the lessee. In determining the respective responsibilities of the parties to the agreement,
courts, therefore, must train a keen eye on the attendant facts and circumstances of the case in order to ascertain the
intention of the parties, in relation to the law and the written agreement. Likewise, the public interest and policy involved
should be considered. It may not be amiss to state that, normally, financing contracts come in a standard prepared form,
unilaterally thought up and written by the financing companies requiring only the personal circumstances and signature of
the borrower or lessee; the rates and other important covenants in these agreements are still largely imposed unilaterally
by the financing companies. In other words, these agreements are usually one-sided in favor of such companies. A
perusal of the lease agreement in question exposes the many remedies available to the petitioner, while there are only the
standard contractual prohibitions against the respondent. This is characteristic of standard printed form contracts.

There is more. In the adverted February 24, 1998 demand letter 17 sent to the respondent, petitioner fashioned its claim in
the alternative: payment of the full amount of ₱8,248,657.47, representing the unpaid balance for the entire 36-month
lease period or the surrender of the financed asset under pain of legal action. To quote the letter:

Demand is hereby made upon you to pay in full your outstanding balance in the amount of P8,248,657.47 on or before
March 04, 1998 OR to surrender to us the one (1) set Silicon High Impact Graphics and one (1) unit Oxberry Cinescan
6400-10…

We trust you will give this matter your serious and preferential attention. (Emphasis added).

Evidently, the letter did not make a demand for the payment of the ₱8,248,657.47 AND the return of the equipment; only
either one of the two was required. The demand letter was prepared and signed by Atty. Florecita R. Gonzales,
presumably petitioner’s counsel. As such, the use of "or" instead of "and" in the letter could hardly be treated as a simple
typographical error, bearing in mind the nature of the demand, the amount involved, and the fact that it was made by a
lawyer. Certainly Atty. Gonzales would have known that a world of difference exists between "and" and "or" in the manner
that the word was employed in the letter.

A rule in statutory construction is that the word "or" is a disjunctive term signifying dissociation and independence of one
thing from other things enumerated unless the context requires a different interpretation. 18

In its elementary sense, "or", as used in a statute, is a disjunctive article indicating an alternative. It often connects a
series of words or propositions indicating a choice of either. When "or" is used, the various members of the enumeration
are to be taken separately.19

The word "or" is a disjunctive term signifying disassociation and independence of one thing from each of the other things
enumerated.20

The demand could only be that the respondent need not return the equipment if it paid the ₱8,248,657.47 outstanding
balance, ineluctably suggesting that the respondent can keep possession of the equipment if it exercises its option to
acquire the same by paying the unpaid balance of the purchase price. Stated otherwise, if the respondent was not minded
to exercise its option of acquiring the equipment by returning them, then it need not pay the outstanding balance. This is
the logical import of the letter: that the transaction in this case is a lease in name only. The so-called monthly rentals are
in truth monthly amortizations of the price of the leased office equipment.

On the whole, then, we rule, as did the trial court, that the PCI LEASING- GIRAFFE lease agreement is in reality a lease
with an option to purchase the equipment. This has been made manifest by the actions of the petitioner itself, foremost of
which is the declarations made in its demand letter to the respondent. There could be no other explanation than that if the
respondent paid the balance, then it could keep the equipment for its own; if not, then it should return them. This is clearly
an option to purchase given to the respondent. Being so, Article 1485 of the Civil Code should apply.

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The present case reflects a situation where the financing company can withhold and conceal - up to the last moment - its
intention to sell the property subject of the finance lease, in order that the provisions of the Recto Law may be
circumvented. It may be, as petitioner pointed out, that the basic "lease agreement" does not contain a "purchase option"
clause. The absence, however, does not necessarily argue against the idea that what the parties are into is not a straight
lease, but a lease with option to purchase. This Court has, to be sure, long been aware of the practice of vendors of
personal property of denominating a contract of sale on installment as one of lease to prevent the ownership of the object
of the sale from passing to the vendee until and unless the price is fully paid. As this Court noted in Vda. de Jose v.
Barrueco:21

Sellers desirous of making conditional sales of their goods, but who do not wish openly to make a bargain in that form, for
one reason or another, have frequently resorted to the device of making contracts in the form of leases either with options
to the buyer to purchase for a small consideration at the end of term, provided the so-called rent has been duly paid, or
with stipulations that if the rent throughout the term is paid, title shall thereupon vest in the lessee. It is obvious that such
transactions are leases only in name. The so-called rent must necessarily be regarded as payment of the price in
installments since the due payment of the agreed amount results, by the terms of the bargain, in the transfer of title to the
lessee.

In another old but still relevant case of U.S. Commercial v. Halili, 22 a lease agreement was declared to be in fact a sale of
personal property by installments. Said the Court:

. . . There can hardly be any question that the so-called contracts of lease on which the present action is based were
veritable leases of personal property with option to purchase, and as such come within the purview of the above article
[Art. 1454-A of the old Civil Code on sale of personal property by installment]. xxx

Being leases of personal property with option to purchase as contemplated in the above article, the contracts in question
are subject to the provision that when the lessor in such case "has chosen to deprive the lessee of the enjoyment of such
personal property," "he shall have no further action" against the lessee "for the recovery of any unpaid balance" owing by
the latter, "agreement to the contrary being null and void."

In choosing, through replevin, to deprive the respondent of possession of the leased equipment, the petitioner waived its
right to bring an action to recover unpaid rentals on the said leased items. Paragraph (3), Article 1484 in relation to Article
1485 of the Civil Code, which we are hereunder re-reproducing, cannot be any clearer.

ART. 1484. In a contract of sale of personal property the price of which is payable in installments, the vendor may
exercise any of the following remedies:

xxx xxx xxx

(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee's failure to pay cover
two or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance
of the price. Any agreement to the contrary shall be void.

ART. 1485. The preceding article shall be applied to contracts purporting to be leases of personal property with option to
buy, when the lessor has deprived the lessee of the possession or enjoyment of the thing.

As we articulated in Elisco Tool Manufacturing Corp. v. Court of Appeals, 23 the remedies provided for in Article 1484 of the
Civil Code are alternative, not cumulative. The exercise of one bars the exercise of the others. This limitation applies to
contracts purporting to be leases of personal property with option to buy by virtue of the same Article 1485. The condition
that the lessor has deprived the lessee of possession or enjoyment of the thing for the purpose of applying Article 1485
was fulfilled in this case by the filing by petitioner of the complaint for a sum of money with prayer for replevin to recover
possession of the office equipment.24 By virtue of the writ of seizure issued by the trial court, the petitioner has effectively
deprived respondent of their use, a situation which, by force of the Recto Law, in turn precludes the former from
maintaining an action for recovery of "accrued rentals" or the recovery of the balance of the purchase price plus
interest. 25

The imperatives of honest dealings given prominence in the Civil Code under the heading: Human Relations, provide
another reason why we must hold the petitioner to its word as embodied in its demand letter. Else, we would witness a
situation where even if the respondent surrendered the equipment voluntarily, the petitioner can still sue upon its claim.
This would be most unfair for the respondent. We cannot allow the petitioner to renege on its word. Yet more than that,
the very word "or" as used in the letter conveys distinctly its intention not to claim both the unpaid balance and the
equipment. It is not difficult to discern why: if we add up the amounts paid by the respondent, the residual value of the
property recovered, and the amount claimed by the petitioner as sued upon herein (for a total of ₱21,779,029.47), then it
would end up making an instant killing out of the transaction at the expense of its client, the respondent. The Recto Law
was precisely enacted to prevent this kind of aberration. Moreover, due to considerations of equity, public policy and
justice, we cannot allow this to happen.1avvphil.zw+ Not only to the respondent, but those similarly situated who may fall
prey to a similar scheme.

WHEREFORE, the instant petition is DENIED and the trial court’s decision is AFFIRMED.

Costs against petitioner.

SO ORDERED.
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