Bar Q and A #29

1.) Priscilla purchased a condominium unit in Makati City from the Citiland Corporation for a price of P10 Million, payable P3 Million down and the balance with interest thereon at 14% per annum payable in sixty (60) equal monthly installments of P198,333.33. They executed a Deed of Conditional Sale in which it is stipulated that should the vendee fail to pay three (3) successive installments, the sale shall be deemed automatically rescinded without the necessity of judicial action and all payments made by the vendee shall be forfeited in favor of the vendor by way of rental for the use and occupancy of the unit and as liquidated damages. For 46 months, Priscilla paid the monthly installments religiously, but on the 47th and 48th months, she failed to pay. On the 49th month, she tried to pay the installments due but the vendor refused to receive the payments tendered by her. The following month, the vendor sent her a notice that it was rescinding the Deed of Conditional Sale pursuant to the stipulation for automatic rescission, and demanded that she vacate the premises. She replied that the contract cannot be rescinded without judicial demand or notarial act pursuant to Article 1592 of the Civil Code. a) Is Article 1592 applicable? b) Can the vendor rescind the contract?

a) Article 1592 of the Civil Code does not apply to a conditional sale. In Valarao v. CA, 304 SCRA 155, the Supreme Court held that Article 1592 applies only to a contract of sale and not to a Deed of Conditional Sale where the seller has reserved title to the property until full payment of the purchase price. The law applicable is the Maceda Law.

b) No, the vendor cannot rescind the contract under the circumstances. Under the Maceda Law, which is the law applicable, the seller on installment may not rescind the contract till after the lapse of the mandatory grace period of 30 days for every one year of installment payments, and only after 30 days from notice of cancellation or demand for rescission by a notarial act. In this case, the refusal of the seller to accept payment from the buyer on the 49th month was not justified because the buyer was entitled to 60 days grace period and the payment was tendered within that period. Moreover, the notice of rescission served by the seller on the buyer was not effective because the notice was not by a notarial act. Besides, the seller may still pay within 30 days from such notarial notice before rescission may be effected. All these requirements for a valid rescission were not complied with by the seller. Hence, the rescission is invalid.

2.) X sold a parcel of land to Y on 01 January 2002, payment and delivery to be made on 01 February 2002. It was stipulated that if payment were not to be made by Y on 01 February 2002, the sale between the parties would automatically be rescinded. Y failed to pay on 01 February 2002, but offered to pay three days later, which payment X refused to accept, claiming that their contract of sale had already been rescinded. Is X’s contention correct? Why?

No, X is not correct. In the sale of immovable property, even though it may have been stipulated, as in this case, that upon failure to pay the price at the time agreed upon the rescission of the contract shall of right take place, the vendee may 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 a notarial act (Art.1592). Since no demand for rescission was made on Y, either judicially or by a notarial act, X cannot refuse to accept the payment offered by Y three (3) days after the expiration of the period.

3.) Peter and Paul entered into a Contract to Sell whereby Peter, the lot owner, agreed to sell to Paul his lot on November 6, 2016 for the price of P1,000,000.00 to be paid at the residence of Peter in Makati City at 1 :00 p.m. If the full price is paid in cash at the specified time and place, then Peter will execute a Deed of Absolute Sale and deliver the title to Paul. On November 6, 2016, Paul did not show up and was not heard of from that date on. In view of the nonperformance by Paul of his obligation, Peter sent a letter to Paul that he is expressly and extra-judicially declaring the Contract to Sell rescinded and of no legal and binding effect. Peter further stated that failure on the part of Paul to contest the rescission within thirty (30) days from receipt of said letter shall mean that the latter agreed to the rescission. Paul did not reply to this letter for five (5) years. Thus, Peter decided to sell his lot to Henry in 2021. After hearing that Henry bought the lot, Paul now questions the sale of the lot to Henry and files a complaint for nullification of the sale. 1. Is the exercise by Peter of his power to rescind extra-judicially the Contract to Sell the proper and legal way of rescinding said contract? Explain. 2. In case Paul made a down payment pursuant to a stipulation in the Contract to Sell, what is the legal remedy of Peter?

1. Yes, Peter validly rescinded the contract to sell his lot to Paul for the latter’s failure to comply with the prestation to pay P1,000,000 on November 6, 2016 at 1:00pm at the residence of Peter so that Peter will execute the Deed of Absolute Sale. The recission is actually the resolution of the reciprocal obligation.

2. If Paul made a downpayment, Peter may still cancel the contract because in a contract to sell, the seller does not yet agree to transfer ownership to the buyer. The non-payment of the price in a contract to sell is not a breach for which the remedy of rescission may be availed of, but rather it is considered as a failure to comply with a positive suspensive condition which will prevent the obligation of the seller to convey title from acquiring obligatory force. (Ursal v. Court of Appeals, GR No. 142411, October 14, 2005)

4.) What are the so-called "Maceda" and "Recto" laws in connection with sales on installments? Give the most important features of each law.

The MACEDA LAW (RA 6552) is applicable to sales of immovable property on installments. The most important features are (Rillo v. CA, G.R. No. 125347, June 19, 1997):

1. After having paid installments for at least two years, the buyer is entitled to a mandatory grace period of one month for every year of installment payments made, to pay the unpaid installments without interest. If the contract is cancelled, the seller shall refund to the buyer the cash surrender value equivalent to fifty percent (50%) of the total payments made, and after five years of installments, an additional five percent (5%) every year but not to exceed ninety percent (90%) of the total payments made.

2. In case the installments paid were less than 2 years, the seller shall give the buyer a grace period of not less than 60 days. If the buyer fails to pay the installments due at the expiration of the grace period, the seller may cancel the contract after 30 days from receipt by the buyer of the notice of cancellation or demand for rescission by notarialact.

The RECTO LAW (Art. 1484) refers to sale of movables payable in installments and limiting the right of seller, in case of default by the buyer, to oneof three remedies:

1. Exact fulfillment;
2. Cancel the sale if two or more installments have not beenpaid;
3. Foreclose the chattel mortgage on the things sold, also in case of default of two or more installments, with no further action against the purchaser.

5.) Sonny Inc., (SI) purchased several heavy machineries from Single Equipment Philippines, Inc. (SEP) for PhP 10 million, payable in 36 monthly installments. A chattel mortgage was constituted on the same machineries as security for the amount. As additional security, the President of SI, Stan Smith, mortgaged his personal house and lot. SI failed to pay the 16th and succeeding monthly installments. SEP then commenced a collection suit against SI, and in the course of the proceedings, a writ of attachment was issued against SI’s properties, including the mortgaged machineries. The attached properties were subsequently sold at public action, but the proceeds thereof were insufficient to satisfy the judgment credit. a. Can SEP legally recover the deficiency? b. Instead of collecting the deficiency, can SEP commence extrajudicial proceedings to foreclose the mortgage on Stan’s house and lot in order to recover the deficiency?

a. Yes, SEP can legally recover the deficiency. The prohibition against further collection under Article 1484 of the Civil Code, or the Recto Law, only applies if the seller chooses to foreclose the chattel mortgage and not when the seller opts to exact the fulfillment of the obligation (Tajanlangit v. Southern Motors, G.R. 10789, May 28, 1957). SEP chose to exact the fulfillment of the obligation by commencing a collection suit against SI. SEP did not opt to foreclose the chattel mortgage over the equipment. The machineries were sold in an execution sale and not in a foreclosure sale; hence, the prohibition against further collection does not apply.

b. Yes, SEP can commence extrajudicial proceedings to foreclose the mortgage. SEP may choose to foreclose the mortgage on Stan’s house and lot. What SEP is prohibited to do, based on the case of Cruz v. Filipinas Investment & Finance Corporation (G.R. No. L-24772, May 27, 1968), is to extrajudicially foreclose the mortgage after it has extrajudicially foreclosed the chattel mortgage on the machineries sold on installment because if such is allowed, the protection given by Article 1484 would be indirectly subverted, and public policy overturned. In this case, SEP has not foreclosed the chattel mortgage over the machineries.

6.) On March 13, 2008, Ariel entered into a Deed of Absolute Sale (DAS) with Noel where the former sold his titled lot in Quezon City with an area of three hundred (300) square meters to the latter for the price of P300,000.00. The prevailing market value of the lot was P3,000.00 per square meter. On March 20, 2008, they executed another "Agreement To Buy Back/Redeem Property" where Ariel was given an option to repurchase the property on or before March 20, 2010 for the same price. Ariel, however, remained in actual possession of the lot. Since Noel did not pay the taxes, Ariel paid the real property taxes to avoid a delinquency sale. On March 21, 2010, Ariel sent a letter to Noel, attaching thereto a manager's check for P300,000.00 manifesting that he is redeeming the property. Noel rejected the redemption claiming that the DAS was a true and valid sale representing the true intent of the parties. Ariel filed a suit for the nullification of the DAS or the reformation of said agreement to that of a Loan with Real Estate Mortgage. He claims the DAS and the redemption agreement constitute an equitable mortgage. Noel however claims it is a valid sale with pacto de retro and Ariel clearly failed to redeem the property. As the RTC judge, decide the case with reasons.

I will decide in favor of Ariel and allow the reformation of the agreement. The DAS and the redemption agreement constitute an equitable mortgage and Ariel may ask for the reformation of the agreement to that of a Loan with Real Estate Mortgage as allowed by Article 1605 of the Civil Code.
The circumstances clearly show that the agreement is an equitable mortgage, such as the:

a) price of the lot was inadequate since it was only sold at P300, 000 when the prevailing market value of such was P900, 000;

b) the vendor, Ariel, remained in the actual possession of the property after the purported sale; and c) Ariel was the one who paid the real property taxes. Under the circumstances, a presumption arises under Art. 1602, CC that what was really executed was an equitable mortgage. Moreover, Art. 1603, CC provides that in case of doubt, a contract purporting to be a sale with right to repurchase shall be construed as an equitable mortgage.

7.) On 20 December 1970, Juliet, a widow, borrowed from Romeo P4,000.00 and, as security therefore, she executed a deed of mortgage over one of her two (2) registered lots which has a market value of P15,000.00. The document and the certificate of title of the property were delivered to Romeo. On 2 June 1971, Juliet obtained an additional sum of P3,000.00 from Romeo. On this date, however, Romeo caused the preparation of a deed of absolute sale of the above property, to which Juliet affixed her signature without first reading the document. The consideration indicated is P7,000.00 She thought that this document was similar to the first she signed. When she reached home, her son X, after reading the duplicate copy of teh deed, informed her that what she signed was not a mortgage but a deed of absolute sale. On the following day, 3 June 1971, Juliet accompanied by X, went back to Romeo and demanded the reformation. Romeo prepared and signed a document wherein, as vendee in the deed of sale abovementioned, he obligated and bound himself to resell the land to Juliet or her heirs and successors for the same consideration as reflected in the deed of sale (P7,000.00) within a period of two (2) years, or until 3 June 1973. It is further stated therein that should the Vendor (Juliet) fail to exercise her right to redeem within the said period, the conveyance shall be deemed absolute and irrevocable. Romeo did not take possession of the property. He did not pay the taxes thereon. Juliet died in January 1973 without having repurchased the property. Her only surviving heir, her son X, failed to repurchase the property on or before 3 June 1973. In 1975, Romeo sold the property to Y for P50,000.00. Upon learning of the sale, X filed an action for the nullification of the sale and for the recovery of the property on the ground that the so-called deed of absolute sale executed by his mother was merely an equitable mortgage, taking into account the inadequacy of the price and the failure of Romeo to take possession of the property and to pay the taxes thereon. Romeo and Y maintain that there was a valid absolute sale and that the document signed by the former on 3 June 1973 was merely a promise to sell. a) If you were the Judge, would you uphold the theory of X? b) If you decide in favor of Romeo and Y, would you uphold the validity of the promise to sell?

a) I will not uphold the theory of X for the nullification of the sale and for the recovery of the property on the ground that the so- called sale was only an equitable mortgage. An equitable mortgage may arise only if, in truth, the sale was one with the right of repurchase. The facts of the case state that the right to repurchase was granted after the absolute deed of sale was executed. Following the rule in Cruzo v. Carriaga (174 SCRA 330), a deed of repurchase executed independently of the deed of sale where the two stipulations are found in two instruments instead of one document, the right of repurchase would amount only to one option granted by the buyer to the seller. Since the contract cannot be upheld as a contract of sale with the right to repurchase, Art. 1602 of the Civil Code on equitable mortgage will not apply. The rule could have been different if both deeds were executed on the same occasion or date, in which case, under the ruling in spouses Claravall v. CA (190 SCRA 439), the contract may still be sustained as an equitable mortgage, given the circumstances expressed in Art. 1602. The reserved right to repurchase is then deemed an original intention.

b) If I were to decide in favor of Romeo and Y, I would not uphold the validity of the promise to sell, so as to enforce it by an action for specific performance. The promise to sell would only amount to a mere offer and, therefore, it is not enforceable unless it was sought to be exercised before a withdrawal or denial thereof.

Even assuming the facts given at the end of the case there would have been no separate consideration for such promise to sell. The contract would at most amount to an option which again may not be the basis for an action for specific performance.

8.) of Absolute Sale, alleging that the transaction covered by the deed was an equitable mortgage. In his verified answer to the complaint, Juan alleged that the property was sold to him under the Deed of Absolute Sale, and interposed counterclaims to recover possession of the property and to compel Pedro to turn over to him the owner's duplicate of title. Resolve the case with reasons.

An equitable mortgage arises from a transaction, regardless of its form, which results into a security, or an offer or attempt to pledge land as security for a debt or liability. Its essence is the intent of the parties to create a mortgage, lien or charge on the property sufficiently described or identified to secure an obligation, which intent must be clearly established in order that such a mortgage may exist.

Defendant’s defense that he acquired the land through an Absolute Deed of Sale and not through pacto de retro is untenable. The presumption of equitable mortgage under Art. 1602 of the Civil Code, equally applies to a contract purporting to be an absolute sale. (Art. 1604, NCC) The facts and circumstances that Pedro retained possession of the Owner’s

Duplicate Copy of the Certificate of Title; that he remained in possession of the land as lessee; that he bound himself to pay the realty taxes during the period of lease, are matters collectively and strongly indicating that the Deed of Absolute Sale is an equitable mortgage. In case of doubt, the Deed of Absolute Sale should be considered as a loan with mortgage, because this juridical relation involves a lesser transmission of rights and interests.

If the transaction is proven to be an equitable mortgage, Pedro’s prayer for reformation of the instrument should be granted in accordance with Art. 1605 of the Civil Code. Thus, in case of non-payment, he may foreclose the mortgage and consolidate his ownership of the land. In that event, Juan’s counterclaim to recover possession of the land and to compel Pedro to surrender the Owner’s Duplicate Copy of the title becomes a consequential right.

9.) On January 2, 1980, A and B entered into a contract whereby A sold to B a parcel of land for and in consideration of P10,000.00, A reserving to himself the right to repurchase the same. Because they were friends, no period was agreed upon for the repurchase of the property. 1) Until when must A exercise his right of repurchase? 2) If A fails to redeem the property within the allowable period, what would you advise B to do for his better protection?

1) A can exercise his right of repurchase within four (4) years from the date of the contract. (Art. 1606, Civil Code)

2) I would advise B to file an action for consolidation of title and obtain a judicial order of consolidation which must be recorded in the Registry of Property. (Art. 1607, Civil Code)

10.) Sancho and Pacifico are co-owners of a parcel of land. Sancho sold the property to Bart. Pacifico sued Sancho and Bart for annulment of the sale and reconveyance of the property based on the fact that the sale included his one-half pro-indiviso share. Pacifico had a notice of lis pendens annotated on the title covering the property and ordered the cancellation of the notice of lis pendens. The notice of lis pendens could not be cancelled immediately because the title over the property was with a bank to which the property had been mortgaged by Bart. Pacifico appealed the case. While the appeal was pending and with the notice of lis pendens still uncancelled, Bart sold the property to Carlos, who immediately caused the cancellation of the notice of lis pendens, as well as the issuance of a new title in his name.Is Carlos (a) a purchaser in good faith, or (b) a transferee pendente lite?

Carlos is a buyer in bad faith. The notice of lis pendens was still annotated at the back of the title at the time he bought the land from Bart. The uncancelled notice of lis pendens operates as constructive notice of its contents as well as interests, legal or equitable, included therein. All persons are charged with the knowledge of what it contains. In an earlier case, it was held that a notice of an adverse claim remains effective and binding notwithstanding the lapse of the 30 days from its inscription in the registry. This ruling is even more applicable in a lis pendens. Carlos is a transferee pendente lite insofar as Sancho’s share in the co-ownership in the land is concerned because the land was transferred to him during the pendency of the appeal.

If your answer is (a), how can the right of Pacifico as co-owner be protected? Explain.

Pacifico can protect his right as a co- owner by pursuing his appeal; asking the Court of Appeals to order the re-annotation of the lis pendens on the title of Carlos; and by invoking his right of redemption of Bart’s share under Art. 1620.