Evangelista, Ma. Clara G.

Sales and Lease

2-C

SALE OF MOVABLES ON INSTALLMENT (1484-1486)

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 vendees failure to pay cover two or more installments;
(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the
vendees 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.
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.
1486: In the case referred to in two preceding articles, a stipulation that the installments or rents paid
shall not be returned to the vendee or lessee shall be valid insofar as the same may not be
unconscionable under the circumstances.
REMEDIES OF AN UNPAID SELLER:
1. Exact fulfillment should the buyer fail to pay [Specific Performance]
2. Cancel the sale if buyer fails to pay two (2) or more installments [Rescission]
3. Foreclose on chattel mortgage if buyer fails to pay two (2) or more installments
APPLICABILITY:

The remedies apply only to sales of personal property in installments.

Sale on Installment is defined as payment by several partial payments in smaller amounts.

Sales of personal property in straight terms, where after the payment of an initial sum, the
entirely of the balance paid is at the specific time.

NATURE:

The three (3) remedies are ALTERNATIVE, not CUMULATIVE nor SIMULTANEOUSLY pursued.

The election of one remedy is a waiver of the right to resort to the other remedies.

If the remedy first chosen was not completed or not fully exercised as when there was voluntary
desistance, the vendor may avail himself of another remedy.

RECTO LAW (ACT NO. 4122)

Article 1484 of the Civil Code provides for the remedies of a seller in contracts of sale of
personal property by installments, and incorporates the provisions of Act No. 4122, known as
the Installment Sales Law or the Recto Law, which then amended Article 1454-A of the Civil
Code of 1889.

unpaid balance owing to unpaid balance of the price

PURPOSE:

To remedy the abuses committed in connection with the foreclosure of chattel mortgages and
to prevent the mortgagees from seizing the mortgage property, buying it at a foreclosure sale
for a low price and then bringing a suit for a deficiency judgment against the mortgagor.

SPECIFIC PERFORMANCE
GR: When the seller has chosen specific performance, he can no longer seek for rescission nor
foreclosure of the chattel mortgage constituted on the thing sold.
X Article 1191 xxx He may also seek rescission, even after he has chosen fulfillment, if the latter should
become impossible. Xxx
EFFECTS:

Vendor is barred from choosing either rescission or foreclosure (X 1191)

One may have recovery of deficiency (Industrial Finance Corp. vs Ramirez)

A judgment in an action for specific performance may be executed on all personal and real
properties of the buyer which are not exempt from execution and which are sufficient to satisfy
such judgment.

RESCISSION:
GR: When the remedy of rescission is chose, there is correlative obligation on the part of the vendor to
restitute the vendee for whatever amount the latter has paid.
X When there is a stipulation that installments paid are forfeited. Such stipulation is valid as long as the
same may not be unconscionable under the circumstances [1486]
a) Notice of Rescission was sent
b) Takes possession of the subject matter of sale

c) Files action for rescission

There must be an unequivocal desire on the part of the seller to rescind the contract (Vda. De
Quaimbao vs Manila Motor C., Inc., 3 SCRA 445)

EFFECTS:
a) Article 1484 provides that the barring effect on the recovery of balance is applicable only when
the remedy of foreclosure is chosen, the same implicit from the nature of the remedy which is
mutual restitution (Nonato vs IAC, 140 SCRA 255)
b) Rescission seeks to cancel the contract and to waive further claim on the purchase price.
c) The vendor may recover damages for breach of contract.
d) Mutual Restitution
Article 1385. Rescission creates the obligation to return the things which were the object of the
contract, together with their fruits, and the price with its interest; consequently, it can be carried out
only when he who demands rescission can return whatever he may be obliged to restore.
Neither shall rescission take place when the things which are the object of the contract are legally in
the possession of third persons who did not act in bad faith.
In this case, indemnity for damages may be demanded from the person causing the loss.
FORECLOSURE:

At the time of the actual sale of the subject property at the public auction pursuant to the
foreclosure proceedings (Manila Motor Co., Inc., vs Fernandez, 99 Phil 782)

Prior to the actual foreclosure of and the actual sale of the mortgaged chattel, the seller has
every right to receive payments on the unpaid balance of the price from the buyer (Northern
Motors, Inc vs Sapinoso, 33 SCRA 356)

EFFECTS:
a) Cannot recover unpaid balance; X Mortgagor refuses to deliver property to effect foreclosure,
recover also expenses incurred in attorneys fees, etc (Bordon vs Servicewide Specialist, Inc., GR
No. 106418)
b) Securities given by third party persons or the payment of the price; If the guarantor should be
compelled to pay the balance of the purchase price, he will in turn be entitled to recover what
she has paid from the debtor-vendee (Cruz vs Filipinas Investment, 23 SCRA 791)
c) Other Securities via Extrajudicial Action

d) Whether the seller-mortgagee forecloses the chattel mortgage before enforcement of the
additional mortgages or seeks the enforcement of the additional mortgages prior to the
foreclosure of the chattel mortgage, the seller must be held to have lost by waiver of non-choice
of his lien on the chattel mortgage of the personal property sold by and mortgaged back to him.
(Borbon vs Servicewide Specialist, Inc.)
UNPAID BALANCE:
This is the deficiency judgment to which the mortgagee may be entitled where, after the mortgaged
chattel is sold at a public auction, the proceeds obtained therefrom are insufficient to cover the full
amount of the secured obligation which in the case at bar shown by the note and by the mortgage deed,
include interest on the principal, attorneys fees, expenses of collection and cost (Macondray & Co., vs
Eustaquio, 64 Phil 466)
LEASE WITH OPTION TO BUY:
Rescission: The lessor-seller may be able to collect damages as may be warranted by the circumstances.
Foreclosure: The seller-lessor may forfeit in his favor all rentals previously paid, if such has been
stipulated, he can no longer collect any further amounts against the buyer-lessee, even damages.
PURPOSE:

These contracts may really be sales of personal property in installments. Without 1485, 1484
may easily be circumvented by scheming sellers of personal property in installments who may
resort to leases of personal property with option to buy instead of chattel mortgages.

In which, the vendor, by retaining ownership over the property in the guise of being the lessor,
retains, likewise, the right to repossess the property, without going through the process of
foreclosure (Filinvest Credit vs CA)

FINANCING INSTITUTIONS:

The provisions of Recto Law are applicable to financing transactions derived or arising from
sales of movables on installments, even if the underlying contract at issue is a loan because the
promissory note has been assigned or negotiated by the original seller.

Article 1484 applies to a person or entity which has finance the purchase on installments of a
movable, where the seller subsequently assigns the load documents to the financing person or
entity (Zayas vs Luneta Motor, 77 SCRA 152)

MACEDA LAW (RA 6552)

This provides for certain protection to particular buyers of real estate payable on installments.

Maceda Law does not cover all sales of realty on installments, but primarily residential real
estate. This includes the sale or financing of real estate on installment payments, including
residential condominium apartments.

Contract of Sale; Contract to Sell; Financing Transactions

RIGHTS GRANTED TO THE BUYER:

A. If the buyer has paid at least two (2) years of installments:
1. To pay, without additional interest, the unpaid installments due within the total grace period
earned by him.

Grace period is fixed at the rate of one (1) month for every one (1) year of installment payments
to be exercised only once in every five (5) years of the life of the contract and its extensions;
down payments, deposits or options on the contract shall be included in the computation of the
total number of installments made.

2. If the contract is cancelled, the seller shall refund to the buyer the cash surrender value of the
payments on the property equivalent to 50% of the total payments made and, after five (5)
years of installments, an additional 5% every year but not to exceed 90% of the total payments
made.

Actual cancellation shall take place after 30 days from receipt by the buyer of the notice of
cancellation or demand for rescission by a notarial act and upon full payment of the cash
surrender value to buyer.

3. The right to sell his rights or assign the same to another person or to reinstate the contract by
updating the account during the grace period and before actual cancellation of the contract.
4. The right to pay in advance any installment or full unpaid balance of the purchase price any time
without interest and to have such full payment of the purchase price annotated in the certificate
of title covering the property.
B. If the buyer has paid less than two (2) years of installments:
1. Buyers shall be entitled to a grace period of sixty (60) days from the date the installment
became due. If the buyer fails to pay the grace period, the seller may cancel the contract after
thirty (30) days from receipt by the buyer of the notice of cancellation of the demand for
rescission of the contract by notarial act.
2. The right to sell his rights or assign the same to another person or to reisntate the contract by
updating the account during the grace period and before actual cancellation of the contract.
3. The right to pay in advance any installment or full unpaid balance of the purchase price anytime
without interest and to have such full payment of the purchase price annotated in the certificate of
title covering the property.