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#53 Romero vs. CA, Ongsiong

(Tom)

Facts:
Being interested in building a warehouse in the Metro Manila area, Romero entered into a Deed
of Conditional Sale with Ongsiong on June 9 1988 over a parcel of land located in Paranaque, Rizal.
Being the owner of the land, Ongsiang was to be paid P50,000 as downpayment for the property, the said
amount to be used for the filing of an ejectment suit against the squatters occupying the said land.
Ongsiang was to evict the squatters from the property within 60 days from the signing of the Deed of
Conditional Sale or she must reimburse the P50,000 downpayment. Romero, on the other hand, shall pay
the P1,511,600 balance of the land purchase price within 45 days from the clearance of the land, failure
to do so would result in the forfeiture of the P50,000 amount.

The ejection case was filed by Ongsiong against the squatters in the MTC of Paranaque, which
then ordered the squatters to vacate the premises on February 21 1989, several months outside the 60-
day period agreed upon in the contract. The writ of execution was issued on March 30 1989. On April 7
1989, Ongsiong sought to return the P50,000 DP to Romero, stating that she failed to remove the
squatters from the land, to which Romero demanded that the sale push through and that the costs of
ejection would be chargeable to the purchase price of the land. On April 21 1989 the MTC suspended the
enforcement of the writ of execution in order to give time for the squatters to relocate.

On June 19 1989, Ongsiongs counsel informed Romeros counsel of the termination of the Deed
of Conditional Sale due to the failure to evict the squatters from the property in question, to which
Romeros counsel replied that Ongsiong doesnt have the right to rescind the contract and that such right
belongs to Romero, and also that Romeros demanding that the sale push through.

Hence, on June 27 1989 Ongsiong filed with the RTC of Makati a complaint for rescission of deed
of conditional sale, damages, and consignation of the P50,000 DP. On the other hand, the MTC issued
an alias writ of execution in the ejectment case but the squatters cannot be uprooted from the property in
question.

Finally, the RTC dismissed the case, stating that Ongsiong has no right to rescind the contract
and that such right belongs to Romero. RTC also ordered Ongsiong to evict the squatters from the
property and to push through with the sale of the property.

Ongsiong appealed to the CA, which then reversed the trial courts decision, stating that the
contract in question has a resolutory condition (i.e. eviction of squatters from land), that Ongsiong has
substantially complied with her obligation to do so, and that it was Romero who failed to pay the balance
of the purchase price of the land.

Issue: W/N Ongsiong the vendor has no right to rescind the contract due to her failure to fulfill her
obligations as stated under the contract;

Held:
Yes. A perfected contract of sale may either be absolute or conditional depending on whether the
agreement is devoid of, or subject to, any condition imposed on the passing of title of the thing to be
conveyed or on the obligation of a party thereto. When ownership is retained until the fulfillment of a
positive condition the breach of the condition will simply prevent the duty to convey title from acquiring an
obligatory force. If the condition is imposed on an obligation of a party which is not complied with, the
other party may either refuse to proceed or waive said condition (Art. 1545, Civil Code). Where, of course,
the condition is imposed upon the perfection of the contract itself, the failure of such condition would
prevent the juridical relation itself from coming into existence.

The term "condition" in the context of a perfected contract of sale pertains to the compliance by
one party of an undertaking the fulfillment of which would signal the demandability of the reciprocal
prestation of the other party. The reciprocal obligations referred to would normally be, in the case of

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vendee, the payment of the agreed purchase price and, in the case of the vendor, the fulfillment of certain
obligations.

The sale in question is a duly perfected contract. A sale is at once perfected when the seller
obligates himself, for a price certain, to deliver and to transfer ownership of a specified thing or right to the
buyer over which the latter agrees. In this case, the ejectment of the squatters is a condition the operative
act of which sets into motion the period of compliance by petitioner of his own obligation, i.e., to pay the
balance of the purchase price. Ongsiongs failure to remove the squatters from the property within the
stipulated period gives Romero the right to either refuse to proceed with the agreement or waive that
condition in consonance with Article 1545 of the Civil Code. This option clearly belongs to petitioner and
not to private respondent.

In contracts of sale Article 1545 allows the obligee to choose between proceeding with the
agreement or waiving the performance of the condition. It is this provision which is the pertinent rule in the
case at bench. Here, evidently, Romero has waived the performance of the condition imposed on
Ongsiong to free the property from squatters.

In any case, Ongsiong's action for rescission is not warranted. She is not the injured party. The
right of resolution of a party to an obligation under Article 1191 of the Civil Code is predicated on a breach
of faith by the other party that violates the reciprocity between them. It is Ongsiong who has failed in her
obligation under the contract. Romero did not breach the agreement.

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#54 Engineering & Machinery Corporation v. Court of Appeals

(Tommy)

Topic: Contract of Piece of Work v. Contract of Sale

Facts:

Engineering & Machinery Corporation entered into an agreement to fabricate, furnish and install the air
conditioning unit of Ponciano Almedas building along Buendia Avenue, Makati City. A year later, after
the completion of the project, Almeda sold the building to National Investment and Development
Corporation (NIDC). When NIDC failed to comply with the conditions of the sale, Almeda was able to
obtain a judicial rescission of the sale and thereafter took possession of the building.

Almeda, later on found out from the employees of the NIDC that the air-conditioning system could not
keep the building cool. On the basis of the information, Almeda commissioned Engr. David Sapico to
render a technical evaluation. Engr. Sapico made a report informing Almeda that there are defects on the
system and that it was not capable of maintaining the desired room temperature of 76F.

Almeda thereafter filed an action for damages against Engineering & Machinery for its failure to comply
with the agreed plans and specifications. Engingeering moved to dismiss on the ground that an action
for hidden defects under Art. 1566 and 1567 in relation to Art. 1571 of the NCC prescrives in six months.
Almeda countered, arguing that the contract was not a contract of sale but a contract of piece of work
hence prescribing in 10 years.

TC denied Motion to Dismiss. In the answer of Engineering, they claim that the air-conditioning unit was
subject to very rigid inspection prior to the payment of it full price and factors such as normal wear and
tear and poor maintenance could have caused the defect. Engineering & Machinery interposed a
compulsory counterclaim alleging that the basis of the action was the judgment in favor of Engineering &
Machinery for the unpaid contract price in another building.

TC held that Engineering & Machinery failed to install certain parts and accessories called for by the
contract and deviated from the original plans forcing Engineering & Machinery install 35 window type
units. TC also held that the action was filed within the 10 year period being a contract of piece of work.

CA affirmed.

Issue: WON the contract is contract of piece of work or a contract of sale

Held: Contract for Piece of Work

Article 1713 of the Civil Code defines a contract for a piece of work thus:

By the contract for a piece of work the contractor binds himself to execute a piece of work
for the employer, in consideration of a certain price or compensation. The contractor may
either employ only his labor or skill, or also furnish the material.

A contract for a piece of work, labor and materials may be distinguished from a contract of sale by the
inquiry as to whether the thing transferred is one not in existence and which would never have existed but
for the order, of the person desiring it. In such case, the contract is one for a piece of work, not a sale. On
the other hand, if the thing subject of the contract would have existed and been the subject of a sale to
some other person even if the order had not been given, then the contract is one of sale.

Thus, Mr. Justice Vitug explains that

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A contract for the delivery at a certain price of an article which the vendor in the ordinary
course of his business manufactures or procures for the general market, whether the
same is on hand at the time or not is a contract of sale, but if the goods are to be
manufactured specially for the customer and upon his special order, and not for the
general market, it is a contract for a piece of work (Art. 1467, Civil Code). The mere fact
alone that certain articles are made upon previous orders of customers will not argue
against the imposition of the sales tax if such articles are ordinarily manufactured by the
taxpayer for sale to the public (Celestino Co. vs. Collector, 99 Phil. 841).

To Tolentino, the distinction between the two contracts depends on the intention of the parties. Thus, if
the parties intended that at some future date an object has to be delivered, without considering the work
or labor of the party bound to deliver, the contract is one of sale. But if one of the parties accepts the
undertaking on the basis of some plan, taking into account the work he will employ personally or through
another, there is a contract for a piece of work.

Clearly, the contract in question is one for a piece of work. It is not petitioner's line of business to
manufacture air-conditioning systems to be sold "off-the-shelf." Its business and particular field of
expertise is the fabrication and installation of such systems as ordered by customers and in accordance
with the particular plans and specifications provided by the customers. Naturally, the price or
compensation for the system manufactured and installed will depend greatly on the particular plans and
specifications agreed upon with the customers.

The obligations of a contractor for a piece of work are set forth in Articles 1714 and 1715 of the Civil
Code, which provide:

Art. 1714. If the contractor agrees to produce the work from material furnished by him, he
shall deliver the thing produced to the employer and transfer dominion over the thing.
This contract shall be governed by the following articles as well as by the pertinent
provisions on warranty of title and against hidden defects and the payment of price in a
contract of sale.

Art. 1715. The contractor shall execute the work in such a manner that it has the qualities
agreed upon and has no defects which destroy or lessen its value or fitness for its
ordinary or stipulated use. Should the work be not of such quality, the employer may
require that the contractor remove the defect or execute another work. If the contractor
fails or refuses to comply with this obligation, the employer may have the defect removed
or another work executed, at the contractor's cost.

The provisions on warranty against hidden defects, referred to in Art. 1714 above-quoted, are found
in Articles 1561 and 1566, which read as follows:

Art. 1561. The vendor shall be responsible for warranty against the hidden defects which
the thing sold may have, should they render it unfit for the use for which it is intended, or
should they diminish its fitness for such use to such an extent that, had the vendee been
aware thereof, he would not have acquired it or would have given a lower price for it; but
said vendor shall not be answerable for patent defects or those which may be visible, or
for those which are not visible if the vendee is an expert who, by reason of his trade or
profession, should have known them.

xxx xxx xxx

Art. 1566. The vendor is responsible to the vendee for any hidden faults or defects in the
thing sold, even though he was not aware thereof.

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This provision shall not apply if the contrary has been stipulated, and the vendor was not
aware of the hidden faults or defects in the thing sold.

The remedy against violations of the warranty against hidden defects is either to withdraw from the
contract (redhibitory action) or to demand a proportionate reduction of the price (accion quanti manoris),
with damages in either case.

Side Issue: WON the action has prescribed

Held: NO!

In Villostas vs. Court of Appeals, we held that, "while it is true that Article 1571 of the Civil Code provides
for a prescriptive period of six months for a redhibitory action, a cursory reading of the ten preceding
articles to which it refers will reveal that said rule may be applied only in case of implied warranties"; and
where there is an express warranty in the contract, as in the case at bench, the prescriptive period is the
one specified in the express warranty, and in the absence of such period, "the general rule on rescission
of contract, which is four years (Article 1389, Civil Code) shall apply".

Consistent with the above discussion, it would appear that this suit is barred by prescription because the
complaint was filed more than four years after the execution of the contract and the completion of the air-
conditioning system.

However, a close scrutiny of the complaint filed in the trial court reveals that the original action is not
really for enforcement of the warranties against hidden defects, but one for breach of the contract
itself.

*** pasensha na mahaba, but you have to read all to understand

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#55 VICENTE GOMEZ, as successor-in-interest of awardee LUISA GOMEZ vs.

COURT OF APPEALS, City of MANILA acting thru the City Tenants Security Committee now the
Urban Settlement Office, Register of Deeds of Manila
(barney)

Facts:

Facts:

Pursuant to the Land for the Landless Program of the City of Manila, Luisa Gomez and the City of Manila
entered into a Contract to Sell concerning a particular lot in Tondo. In the contract, there are terms and
conditions that the awardee (Gomez) must comply with, as these are integral part of the contract to sell.

Some of the terms are the following:

1. The vendee shall be a Filipino citizen and must occupy and use the lot exclusively for his/her
residential purpose.
2. The vendee hereby warrants and declares under oath that he/she is a bona fide and actual
occupant and tenant of the lot and that he/she fully understands that any false statement or
misrepresentation hereof shall be sufficient cause for the automatic cancellation of his/her rights
under this agreement as well as ground for criminal prosecution.
3. Until complete payment of the purchase price and compliance with all the vendee's obligations
herein, title to the lot remains in the name of the owner. During the effectivity of this agreement,
however, the owner may transfer its title or assign its rights and interest under this agreement to
any person, corporation, bank or financial institution.
4. Title shall pass to the vendee upon execution of a final deed of sale in his/her favor.
5. In order not to defeat the purpose of this social land reform program of the City of Manila and to
prevent real estate speculations within twenty years from complete payment of the purchase price
and execution of the final deed of sale, the lot and residential house or improvement thereon shall
not be sold, transferred, mortgaged, leased or otherwise alienated or encumbered without the
written consent of the City Mayor.
6. During the effectivity of this agreement, the residential house or improvement thereon shall not be
leased, sold, transferred or otherwise alienated by the vendee without the written consent of the
owner.
7. In the event that the vendee dies before full payment of the purchase price of the lot, his/her
surviving spouse, children heirs and/or successors-in-interest shall succeed in all his/her
rights and interest, as well as assume all/his/her obligations under this agreement.\

On 18 January 1980, Luisa Gomez finally paid in full the P3,556.00 purchase price of the lot. Despite the
full payment, Luisa still paid in installment an amount of P8,244.00, in excess of the purchase price,
which the City of Manila, through the CTSC, accepted. In 1982, Luisa, together with her spouse Daniel,
left again for the United States of America where she died on 09 January 1983. She is survived by her
husband and four children. The children donated the land to their Uncle, Vicente Gomez.

Subsequently, the Urban Settlements Officer conducted an investigation regarding reported violations of
the terms and conditions of the award committed by the lot awardees. Gomez was found to be in violation
of the terms. The place was found actually occupied by Mrs. Erlinda Perez and her family together with
Mr. Mignony Lorghas and family, who are paying monthly rentals of P210.00 each to Vicente Gomez,
brother of awardee. Daniel Gomez is now presently residing in the United States of America and only
returns for vacation once in a while as a Balikbayan. Thus it was ordered to cancel the lot award, and
further declaring the forfeiture of payments made by said awardees as reasonable compensation for the
use of the homelots.

Issue: Can the sale be cancelled considering that the full purchase price has been paid already?

Held: YES.

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A thorough scrutiny of the records and an even more exhaustive perusal of the evidence, both
documentary and testimonial, would lead to the inevitable conclusion that the fact of cancellation of the
award covering Lot 4, Block 1, by the City of Manila, acting through the CTSC, was properly exercised
within the bounds of law and contractual stipulation between the parties.
Viewed broadly, petitioner anchors his case on the premise, albeit erroneous, that upon full payment of
the purchase price of the lot in January 1980, Luisa Gomez, actual awardee, already acquired a vested
right over the real property subject of the present controversy. Thus, according to petitioner, upon the
death of Luisa Gomez, the alleged vested right was transmitted by operation of law to her lawful heirs.

Primarily, it must be stressed that the contract entered into between the City of Manila and awardee Luisa
Gomez was not one of sale but a contract to sell, which, under both statutory and case law, has
its own attributes, peculiarities and effects.

In a contract of sale, the title passes to the vendee upon the delivery of the thing sold; whereas in a
contract to sell, by agreement, the ownership is reserved in the vendor and is not to pass until the full
payment of the price. In a contract of sale, the vendor has lost and cannot recover ownership until and
unless the contract is resolved or rescinded; whereas in a contract to sell, title is retained by the vendor
until the full payment of the purchase price, such payment being a positive suspensive condition and
failure of which is not a breach but an event that prevents the obligation of the vendor to convey title from
being effective. Thus, a deed of sale is considered absolute in nature where there is neither a stipulation
in the deed that title to the property sold is reserved in the seller until the full payment of the price, nor one
giving the vendor the right to unilaterally resolve the contract the moment the buyer fails to pay within a
fixed period. To our mind, however, this pronouncement should not curtail the right of the parties in a
contract to sell to provide additional stipulations, nor bar them from imposing conditions relative to the
transfer of ownership. To be sure, a contract of sale may either be absolute or conditional. One form of
conditional sales is what is now popularly termed as a "Contract to Sell", where ownership or title is
retained until the fulfillment of a positive suspensive condition normally the payment of the purchase price
in the manner agreed upon.

The contracting parties are accorded the liberality and freedom to establish such stipulations, clauses,
terms and conditions as they may deem convenient, provided the same are not contrary to law, morals,
good custom, public order or public policy. In the law on contracts, such fundamental principle is known
as the autonomy of contracts. Under the present circumstances, we see no hindrance that prohibits the
parties from stipulating other lawful conditions, aside from full payment of the purchase price, which they
pledge to bind themselves and upon which transfer of ownership depends.

It is clearly stipulated that the lot cannot be leased and that the actual occupant should be the awardee.
By violating its terms, breach thereof would result to the automatic cancellation of the vendee's rights and
all payments made by him/her shall be forfeited and considered as rentals for the use of the lot.

Nonetheless, we ought to stress that in the present case, forfeiture of the installments paid as rentals,
only applies to the purchase price of P3,556.00 and not to the overpayment of the amount of P8,244.00.

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#56 Central Bank vs. Bichara

(Bea)
Facts:

Spouses Bichara sold two properties to the Central Bank. The Deed of Sale stipulated that the total
purchase price is P405,500; and such payment is to be effected only after the Deed of Sale shall have
been duly registered and a clean title issued in the name of the vendee, Central Bank; Bichara is likewise
to undertake at their expense to fill the parcels of land with an escombro free from waste materials.

The two annotations (adverse claim and notice of lis pendens) on the vendors Certificate of Title were
cancelled and Spouses Bichara were issued a TCT. Despite these Central Bank failed to pay. On its
part, Bichara did not fill up the lot with escombro despite several demands made by Central Bank.
Central Bank was then constrained to undertake the filling up of the said lots by contracting the services
of BGV construction. Yet Central Bank still did not pay Spouses Bichara.

Spouses Bichara filed an action for rescission or specific performance with damages. They allege that
Central Bank failed to pay the purchase price despite demand. Central Bank tendered payment to the
vendors but the Spouses Bichara refused the tender, in view of their complaint for rescission.

Trial Court It ordered the vendors to accept the deposited amount of P360, 500, considering that the
Central Bank expended in filling up the lots.

Court of Appeals reversed the decision of the trial court. It ordered the rescission of the contract of
sale and the reconveyance of the properties to the vendors. It also ordered the reimbursement to the
Central Bank of the cost of filling up the lot with escombro. The noon-payment of the purchase price
constitutes a very good reason to rescind a sale, for it violates the very essence of the contact of sale.
Central Banks deliberate refusal to pay the purchase price for 9 long years cannot be regarded as a
casual, but substantial and fundamental breach of obligation which defeats the object of the parties.

Issue: Whether Spouses Bichara is entitled to the rescission of the contract of sale.

Held:
No. Central Banks obligation to pay arose as soon as the deed of sale was registered and a clean title
was issued. Only a substantial breach of the terms and conditions will warrant rescission. Whether
breach is substantial is largely determined by the circumstances. Spouses Bichara were guilty of non-
performance of the stipulation that Central Bank was not obliged to pay until the vendors compact the lots
with escombro fee from waste material. The deed of sale expressly stipulated that the vendors were to
undertake, at their expense the filling up of the lots with escombro.
Spouses Bichara should not be allowed to rescind the contract where they themselves did not perform
their essential obligation. It should be emphasized that a contract of sale involves reciprocity
between parties. Since, the vendors were in bad faith, they may not seek for rescission of the
agreement they themselfes breached.

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#57 Tuazon v. CA (2000)

(Benjie)

Topic: Equitable Mortgage/Absolute Sale

Facts:

The case originated from a contract of mortgage constituted on the conjugal lot owned by spouses Tomas
and Natividad Tuazon. Tomas mortgaged the subject lot to the Philippine Bank of Commerce (PBCom),
to secure a loan. When the mortgagors failed to pay the mortgage debt, the mortgaged property was
foreclosed and sold at public auction, with PBCom itself as the highest bidder. Petitioner then tendered to
PBCom the redemption amount of One Million (P1,000,000.00) Pesos and the bank issued a Certificate
of Redemption. To keep the creditors, suppliers and laborers of Tuazons company from levying on
subject property, petitioner decided to transfer the title thereof to John Siy Lim for the assumed
consideration of P380,000.00. By virtue of the said deed, the TCT in the name of the Tuazons was
cancelled and in lieu thereof another TCT was issued in the name of Lim. The Tuazons brought a
Complaint for Reformation of Contract, Quieting of Title with Damages against Lim on the ground that the
real intention of the parties was to enter into a loan accommodation only. The new title was to serve as
security for the loan. The Deed of Absolute Sale, prepared by the Tuazons lawyer, was executed by
petitioner and signed by the spouses.

The RTC decided for the private respondent. On MR, the court reconsidered its previous decision and
declared that the Deed of Absolute Sale as an equitable mortgage. Lim elevated the case to the CA.
Petitioner invites attention and places reliance on the alleged inadequacy of the purchase price and his
having remained in possession of subject land.

Issue: Whether the transaction between the petitioner and the private respondent was one of absolute
sale and not equitable mortgage.

Held:
It was an absolute sale. Article 1602 of the Civil Code provides that a contact shall be presumed to be an
equitable mortgage by the presence of any of the following:
(1) When the price of a sale with right to repurchase is unusually inadequate;
(2) When the vendor remains in possession 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.

Under Article 1604 of the New Civil Code, the provisions of Article 1602 shall also apply to a contract
purporting to be an absolute sale. And for these provisions of law to apply, two requisites must concur:
that the parties entered into a contract denominated as a contract of sale and that their intention was to
secure an existing debt by way of mortgage. While the existence of any of the circumstances in Article
1602, not a concurrence nor an overwhelming number thereof, suffices to give rise to the presumption
that the contract is an equitable mortgage; the present case is entirely different. Records on hand and the
documentary evidence introduced by the parties indubitably show no room for construction, Article 1365
of the New Civil Code on reformation of contracts applies only if there is evidence, clear and convincing,
that the parties did agree upon a mortgage of subject property. Here, everything appears to be clear and
unambiguous and nothing is doubtful, within the contemplation of Article 1602. When the words of the
contract are clear and readily understandable, there is no room for construction. The contract is the law
between the parties.

For an action for reformation of an instrument as provided for in Article 1359 to prosper, the following

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requisites must concur, to wit: (1) there must have been a meeting of the minds of the parties to the
contract; (2) the instrument does not express the true intention of the parties; and (3) the failure of the
instrument to express the true intention of the parties is due to mistake, fraud, inequitable conduct or
accident. Here, petitioner has not shown or established the presence of the aforestated requirements for
the reformation of the deed in question. XXX. What is more, any doubt as to the real meaning of the
contract must be resolved against the person who drafted the instrument and is responsible for the
ambiguity thereof. Prepared by the lawyer of the herein petitioner, Tomas See Tuazon, subject Deed of
Absolute Sale executed on July 15, 1987 is couched in clear terms and conditions. John Siy Lim had no
hand in its preparation. Besides, the voluntary, written and unconditional acceptance of contractual
commitments negate the theory of equitable mortgage.

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#58 Consolidated Rural Bank (Cagayan Valley), Inc., Petitioner, Vs. The Honorable Court Of
Appeals And Heirs Of Teodoro Dela Cruz, Respondents.
G.R. No. 132161, January 17, 2005
(Farrah)

FACTS:

Rizal, Anselmo, Gregorio, Filomeno and Domingo, all surnamed Madrid were the registered owners of Lot
No. 7036-A situated in San Mateo, Isabela per TCT No. T-8121 issued by the Register of Deeds of
Isabela in September 1956.

In 1956, Lot No. 7036-A was subdivided into several lots. One of the resulting subdivision lots was Lot
No. 7036-A-7 with an area of Five Thousand Nine Hundred Fifty-Eight (5,958) square meters

On August 1957, Rizal Madrid sold part of his share identified as Lot No. 7036-A-7, to Aleja Gamiao and
Felisa Dayag by virtue of a Deed of Sale to which his brothers Anselmo, Gregorio, Filomeno and
Domingo offered no objection as evidenced by their Joint Affidavit dated 14 August 1957. The deed of
sale was not registered with the Register of Deeds (RD) of Isabela. However, Gamiao and Dayag
declared the property for taxation purposes in their names on under Tax Declaration No. 7981

On May 28, 1964, Gamiao and Dayag sold the southern half of Lot No. 7036-A-7, to Teodoro dela Cruz
and the northern half to Restituto Hernandez who both took possession and cultivated the portions of the
property respectively sold to them. Later, on 28 December 1986, Restituto Hernandez donated the
northern half to his daughter, Evangeline Hernandez-del Rosario while the children of Teodoro dela Cruz
continued possession of the southern half after their fathers death on 7 June 1970.

Thereafter, on June 15, 1976, In a Deed of Sale, the Madrid brothers conveyed all their rights and
interests over Lot No. 7036-A-7 to Pacifico Marquez. The deed of sale was registered with the Office of
the Register of Deeds of Isabela on 2 March 1982.

Subsequently, Marquez subdivided Lot No. 7036-A-7 into eight (8) lots, namely: Lot Nos. 7036-A-7-A to
7036-A-7-H, for which TCT Nos. T-149375 to T-149382 were issued to him on 29 March 1984. On the
same date, Marquez and his spouse, Mercedita Mariana, mortgaged Lots Nos. 7036-A-7-A to 7036-A-7-D
to the Consolidated Rural Bank, Inc. of Cagayan Valley (hereafter, CRB) to secure a loan of One
Hundred Thousand Pesos (P100,000.00) which was registered with the RD. Then on February 6, 1985,
Marquez mortgaged Lot No. 7036-A-7-E likewise to the Rural Bank of Cauayan (RBC) to secure a loan of
Ten Thousand Pesos (P10,000.00).

As Marquez defaulted in the payment of his loan, CRB caused the foreclosure of the mortgages in its
favor and the lots were sold to it as the highest bidder. On October 31, 1985, Marquez sold Lot No. 7036-
A-7-G to Romeo Calixto (Calixto).

Heirs-now respondents herein-represented by Edronel dela Cruz, filed a case for reconveyance and
damages the southern portion of Lot No. 7036-A against Marquez, Calixto, RBC and CRB in December
1986. On the other hand, Evangeline del Rosario, the successor-in-interest of Restituto Hernandez, filed
with leave of court a Complaint in Intervention wherein she claimed the northern portion of Lot No. 7036-
A-7.

Marquez as defendant alleged in his Answer to the Amended Complaint, that apart from being the first
registrant, he was a buyer in good faith and for value; That the sale executed by Rizal Madrid to Gamiao
and Dayag was not binding upon him, it being unregistered. Calixto, manifested that he had no interest in
the subject property as he ceased to be the owner thereof, the same having been reacquired by
defendant Marquez while CRB, as defendant, and co-defendant RBC insisted that they were mortgagees

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in good faith and that they had the right to rely on the titles of Marquez which were free from any lien or
encumbrance.

RTC Ruling: ruled in favor of the defendants, dismissing the amended complaint and the complaint in
intervention; declaring Pacifico V. Marquez the lawful owner of the lot in controversy (Lot No. 7036-A-7);
declaring the mortgage of Lots in favor of the defendant Consolidated Rural Bank and Rural Bank of
Cauayan by Pacifico V. Marquez valid; dismissing the counterclaim of Pacifico V. Marquez;

CA Ruling: Reversed and set aside the decision of the RTC. It declared that the heirs of Teodoro dela
Cruz the lawful owners of the southern half portion and Evangeline Hernandez-del Rosario the northern
half portion of Lot No. 7036-A-7, declared null and void the deed of sale between Pacifico V. Marquez
and the Madrid brothers; null and void the mortgage made by defendant Pacifico V. Marquez in favor of
the defendant Consolidated Rural and Rural Bank of Cauayan; and ordered Pacifico V. Marquez to
reconvey Lot 7036-A-7 to the heirs of Teodoro dela Cruz and Evangeline Hernandez-del Rosario.

MR was then filed CRB.CA then modified its decision Hence, this the instant petition by CRB. However,
both Marquez and RBC elected not to challenge the Decision of the appellate court.

ISSUE:

(1) Whether or not the Court of Appeals erred in ruling that the heirs of Teodora dela Cruz were the lawful
owner of subject property

(2) Whether or not the Court of Appeal erred in holding the mortgage made by defendant Pacifico
Marquez in favor of CRB and RBC null and void.

(3) Whether or not the Court of Appeals erred in awarding the subject property to the Heirs absent proof
of good faith in their possession of the subject property and without any showing of possession thereof by
Gamiao and Dayag.

HELD:

(1) NO. The petition is devoid of merit. However, the dismissal of the petition is justified by reasons
different from those employed by the Court of Appeals. Like the lower court, the appellate court resolved
the present controversy by applying the rule on double sale provided in Article 1544 of the Civil Code.
They, however, arrived at different conclusions. The RTC made CRB and the other defendants win, while
the Court of Appeals decided the case in favor of the Heirs.

Article 1544 regarding double sale is not applicable in the present case. This provision contemplates a
case of double or multiple sales by a single vendor. More specifically, it covers a situation where a single
vendor sold one and the same immovable property to two or more buyers. In the case at bar, the subject
property was not transferred to several purchasers by a single vendor. In the first deed of sale, the
vendors were Gamiao and Dayag whose right to the subject property originated from their acquisition
thereof from Rizal Madrid with the conformity of all the other Madrid brothers in 1957, followed by their
declaration of the property in its entirety for taxation purposes in their names. On the other hand, the
vendors in the other or later deed were the Madrid brothers but at that time they were no longer the
owners since they had long before disposed of the property in favor of Gamiao and Dayag.

Article 1544 of the Civil Code presupposes the right of the vendor to dispose of the thing sold, and does
not limit or alter in this respect the provisions of the Mortgage Law in force, which upholds the principle
that registration does not validate acts or contracts which are void, and that although acts and contracts
executed by persons who, in the Registry, appear to be entitled to do so are not invalidated once

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recorded, even if afterwards the right of such vendor is annulled or resolved by virtue of a previous
unrecorded title, nevertheless this refers only to third parties.

In a situation where not all the requisites are present which would warrant the application of Art. 1544,
the principle of prior tempore, potior jure or simply "he who is first in time is preferred in right," should
apply.The only essential requisite of this rule is priority in time; in other words, the only one who
can invoke this is the first vendee. Undisputedly, he is a purchaser in good faith because at the time he
bought the real property, there was still no sale to a second vendee. In the instant case, the sale to the
Heirs by Gamiao and Dayag, who first bought it from Rizal Madrid, was anterior to the sale by the Madrid
brothers to Marquez. The Heirs also had possessed the subject property first in time. Thus, applying the
principle, the Heirs, without a doubt, have a superior right to the subject property.

In any event, assuming arguendo that Article 1544 applies to the present case, the claim of Marquez still
cannot prevail over the right of the Heirs since according to the evidence he was not a purchaser and
registrant in good faith.

Following Article 1544, in the double sale of an immovable, the rules of preference are:

(a) the first registrant in good faith;

(b) should there be no entry, the first in possession in good faith; and
(c) in the absence thereof, the buyer who presents the oldest title in good faith. 54

Prior registration of the subject property does not by itself confer ownership or a better right over the
property. Article 1544 requires that before the second buyer can obtain priority over the first, he must
show that he acted in good faith throughout (i.e., in ignorance of the first sale and of the first buyers
rights) from the time of acquisition until the title is transferred to him by registration or failing registration,
by delivery of possession

In the instant case, the actions of Marquez have not satisfied the requirement of good faith from the time
of the purchase of the subject property to the time of registration. As found by the Court of Appeals,
Marquez knew at the time of the sale that the subject property was being claimed or "taken" by the Heirs.

One who purchases real property which is in actual possession of others should, at least, make some
inquiry concerning the rights of those in possession. The actual possession by people other than the
vendor should, at least, put the purchaser upon inquiry. He can scarcely, in the absence of such inquiry,
be regarded as a bona fide purchaser as against such possessions. The rule of caveat emptor requires
the purchaser to be aware of the supposed title of the vendor and one who buys without checking the
vendors title takes all the risks and losses consequent to such failure.

It is further perplexing that Marquez did not fight for the possession of the property if it were true that he
had a better right to it. In our opinion, there were circumstances at the time of the sale, and even at the
time of registration, which would reasonably require a purchaser of real property to investigate to
determine whether defects existed in his vendors title. Instead, Marquez willfully closed his eyes to the
possibility of the existence of these flaws. For failure to exercise the measure of precaution which may be
required of a prudent man in a like situation, he cannot be called a purchaser in good faith.

As ruled in the case of Spouses Mathay v. Court of Appeals, While, it is a recognized principle that a
person dealing on a registered land need not go beyond its certificate of title, it is also a firmly settled rule
that where there are circumstances which would put a party on guard and prompt him to investigate or
inspect the property being sold to him, such as the presence of occupants/tenants thereon, it is, of
course, expected from the purchaser of a valued piece of land to inquire first into the status or nature of
possession of the occupants, i.e., whether or not the occupants possess the land in concept of owner.
This rule equally applies to mortgagees of real property as held in the case of Crisostomo v. Court of
Appeals

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Banks, their business being impressed with public interest, are expected to exercise more care and
prudence than private individuals in their dealings, even those involving registered lands. Hence, for
merely relying on the certificates of title and for its failure to ascertain the status of the mortgaged
properties as is the standard procedure in its operations, we agree with the Court of Appeals that CRB is
a mortgagee in bad faith.

While certificates of title are indefeasible, unassailable and binding against the whole world, they merely
confirm or record title already existing and vested. They cannot be used to protect a usurper from the true
owner, nor can they be used for the perpetration of fraud; neither do they permit one to enrich himself at
the expense of others.

(2) No. it is an established principle that no one can give what one does not have. Accordingly, one can
sell only what one owns or is authorized to sell, and the buyer can acquire no more than what the seller
can transfer legally. In this case, since the Madrid brothers were no longer the owners of the subject
property at the time of the sale to Marquez, the latter did not acquire any right to it. Hence the mortgages
made by Marquez to CRB and RBC were null and void.

(3) No. The requirement of good faith in the possession of the property finds no application in cases
where there is no second sale. In the case at bar, Teodoro dela Cruz took possession of the property in
1964 long before the sale to Marquez transpired in 1976 and a considerable length of time eighteen (18)
years in fact before the Heirs had knowledge of the registration of said sale in 1982. Thus, there was no
need for the appellate court to consider the issue of good faith or bad faith with regard to Teodoro dela
Cruzs possession of the subject property.

Likewise, we are of the opinion that it is not necessary that there should be any finding of possession by
Gamiao and Dayag of the subject property. It should be recalled that the regularity of the sale to Gamiao
and Dayag was never contested by Marquez. In fact the RTC upheld the validity of this sale, holding that
the Madrid brothers are bound by the sale by virtue of their confirmation thereof in the Joint Affidavit
dated 14 August 1957. That this was executed a day ahead of the actual sale on 15 August 1957 does
not diminish its integrity as it was made before there was even any shadow of controversy regarding the
ownership of the subject property.

Moreover, tax declarations "are good indicia of possession in the concept of an owner, for no one in his
71
right mind would be paying taxes for a property that is not in his actual or constructive possession."

WHEREFORE, the Petition is DENIED. The dispositive portion of the Court of Appeals Decision, as
modified by its Resolution dated 5 January 1998, is AFFIRMED. Costs against petitioner.

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#59 Alvaro vs. Ternida

(Inah)

Facts:

Respondent spouses Osmundo Ternida and Julita Returban are owners of the contested property. In
1986, respondent Julita mortgaged the land to spouses Salvador and Juanita for P28,000. She was
made to sign a deed of pacto de retro sale which was explained to her as a mortgage document. As
worded, the document provided that Julita had 3 years from date of execution of the document to
repurchase the land. After a year (1987), Salvador executed a Deed of Transfer of Mortgage in favor of
spouses Calpito and Valelo for a consideration of P32,000. Thereafter, Julita requested from the latter an
additional amount of P3,000, at which point, she was asked to sign a deed of sale with right to
repurchase. In 1990, Julita again asked for an additional amount of P1,000 but she was informed that
Calpito and Valelo have transferred the mortgage to herein petitioners, spouses Tito Alvaro and Maria
Valelo. Petitioner spouses gave her an additional amount of P1000. Julita now claims that petitioners
asked her to sign a document that she believed was a mortgage document, but later on turned out to be a
Deed of Absolute Sale over the contested property. When Julita tried to redeem the property, the
petitioners refused claiming they had purchased the property and were in fact issued Tax Declaration No.
2747. Julita then filed a complaint for annulment of deed of sale. Trial court dismissed the complaint for
lack of cause of action, and its MR was likewise denied. On appeal to CA, RTC decision was reversed.
Hence, this petition for review.

Issue: Whether the CA erred in declaring the transaction between the parties as an equitable mortgage
instead of an absolute sale

Held: Petition denied.

An equitable mortgage is defined as one which although lacking in some formality, or form or words or
other requisites demanded by statute, nevertheless reveals the intention of the parties to charge real
property as security for a debt, and contains nothing impossible or contrary to law. For the presumption
of an equitable mortgage to arise, two requisites must concur: (1) that the parties entered into a contract
denominated as sale; (2) that their intention was to secure an existing debt by way of a mortgage.
Consequently, the nonpayment of the debt when due gives the mortgagee the right to foreclose the
mortgage, sell the property and apply the proceeds of the sale to the satisfaction of the laon obligation.
We find no merit in petitioners contention that in the deed of absolute sale executed between them and
Julita, the latter totally conveyed her ownership over the disputed property. We have consistently
decreed that nomenclature used by the contracting parties to describe a contract does not determine its
nature. The decisive factor is the intention of the parties to the contract as shown by their conduct,
words, actions and deeds prior to, during and after executing the agreement. The Civil Code
enumerates several instances when a contract is clothed with the presumption that it is an equitable
mortgage. Applying the foregoing considerations in the instant case, we find that the true intention of the
parties in the execution of the deed of absolute sale was never to convey the ownership of the disputed
property but merely to secure the loan obtained by Julita.

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#60 Leonides C. Dio Vs. Lina Jardines

(Karl)

Facts:

Leonides C. Dio (petitioner) filed a Petition for Consolidation of Ownership with the RTC-Baguio (RTC).
She alleged that Lina Jardines (respondent) executed in her favor a Deed of Sale with Pacto de Retro
over a parcel of land with improvements thereon, covered by a Tax Declaration, for the amount of P165k.
The stipulated redemption period was 6 months; which expired without redemption having been made. As
such, ownership was consolidated in favor of petitioner. In her amended complaint, she prayed for
damages and that she be declared the absolute owner of the property in question (as respondent
contested certain aspects of the loan, which will be discussed hereafter). Respondent countered by
saying that the Deed of Sale with Pacto de Retro did not embody the real intention of the parties for what
they entered into was one of simple loan with the sale over the land as security. Further, the amount
borrowed by respondent was only P50k with 9% monthly interest to be paid within a period of 6 months.
Since the initial amount was insufficient to buy construction materials for the house she was then building,
she again borrowed an additional amount of P30k.

Respondent also stated that it was never her intention to sell her property to petitioner for the value of the
house and lot is around P1.5M. Thus, it was unthinkable for her to sell her land for only P165k.
Respondent has even paid a total of P55k and is willing to settle the unpaid amount. However, petitioner
insisted on appropriating the property of respondent which she put up as collateral for the loan. Lastly,
respondent has been the one paying for the realty taxes on the subject property; and due to the malicious
suit filed by petitioner, respondent suffered moral damages. The RTC ruled in favor of the petitioner,
holding that the contract entered into was one of deed of sale with right to repurchase or pacto de retro
sale. The RTC also held that the petitioner has acquired whatever rights respondent has over the parcel
of land involved as the latter has to Torrens Title over the land, and as such, is the owner of the house
and the other improvements. The court RTC ordered the consolidation of ownership in favor of petitioner.
The tax declaration of respondent was also ordered cancelled apart from the order of payment of
damages in favor of petitioner. The CA reversed the RTC.

The CA held that the true nature of the contract between the parties is one of equitable mortgage, as
shown by the fact that (a) respondent is still in actual physical possession of the property; (b) respondent
is the one paying the real property taxes on the property; and (c) the amount of the supposed sale price
of P165k earns monthly interest. The CA thus ordered the defendant to pay the amount of P165k with
interest until fully paid. MR was denied. Petitioner went to the SC.

Issue: Was the true nature of the contract one of sale with pacto de retro or one of equitable mortgage?

Held:

The CA was correct in holding that the sale was one of equitable mortgage. This ruling was based on
documentary evidence and on admissions and stipulation of facts made by the parties. Article 1602 of
the CC enumerates the instances when a purported pacto de retro sale may be considered an
equitable mortgage. They are: (1) When the price of a sale with right to repurchase is unusually
inadequate; (2) When the vendor remains in possession 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.

The presence of even one of the above-mentioned circumstances is sufficient basis to declare a
contract of sale with right to repurchase as one of equitable mortgage. For, in practically all of the

Page 16 of 27
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so-called contracts of sale with right of repurchase, the real intention of the parties is that the
pretended purchase price is money loaned and in order to secure the payment of the loan, a
contract purporting to be a sale with pacto de retro is drawn up. Further, Article 1603 of the 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.

Here, paragraphs (2) and (5) of Article 1602 are present. Moreover, the fact that petitioner herself
demands payment of interests on the purported purchase price of the subject property clearly shows
that the intention of the parties was merely for the property to stand as security for a loan. The
transaction between herein parties was then correctly construed by the CA as an equitable mortgage.

Spill: The deletion of damages was meritorious. The Court is clothed with ample authority to review
matters, even if they are not assigned as errors in the appeal, if it finds that their consideration is
necessary in arriving at a just decision of the case. Here, the award for actual damages of the RTC is
error because no evidence supports the same (a witness testimony is not competent proof). The CA was
also correct in ordering respondent to pay "legal interest" on the amount of P165k.

WHEREFORE, the petition is hereby DENIED. The Decision of the Court of Appeals dated June 9, 2000
is AFFIRMED with the MODIFICATION that the legal interest rate to be paid by respondent on the
principal amount of P165,000.00 is twelve (12%) percent per annum from March 29, 1989 until fully paid.
SO ORDERED.

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#61 OCCENA vs. ESPONILLA (2004)

(Liz)

Facts: Spouses Irene and Nicolas Tordesillas owns a 1,198 sq.m lot in Antique. After their death, the lot
was inherited by their children Harod and Angela, and grandchildren Arnold and Lilia. The heirs executed
a Deed of Pacto de Retro Sale in favor of Alberta Morales covering the southwestern portion of the lot
with an area of 748 square meters. 3 years later, Arnold and Lilia executed a Deed of Definite Sale of
Shares, Rights, Interests and Participations over the same 748-lot in favor of Alberta Morales. The
notarized deed attested that the lot sold by vendors to Alberta were their share in the estate of their
deceased parents.

Alberta possessed the lot as owner, constructed a house on it and appointed a caretaker to oversee her
property. Thereafter, vendor Arnold borrowed the OCT from Alberta covering the lot. He executed an
Affidavit acknowledging receipt of the OCT in trust and undertook to return said OCT free from changes,
modifications or cancellations.

In 1966, Arnold and Angela, nephew and daughter respectively of the Tordesillas spouses, without the
knowledge of Alberta, executed a Deed of Extrajudicial Settlement declaring the two of them as the only
co-owners of the undivided 1,198 sq. m. lot no. 265, without acknowledging their previous sale of 748 sq.
m. to Alberta. A number of times, thereafter, Alberta and her nieces asked Arnold for the OCT of the land
but Arnold just kept on promising to return it.

In 1983, Arnold executed an Affidavit of Settlement of the Estate of Angela who died in 1978 without
issue, declaring himself as the sole heir of Angela and thus consolidating the title of the entire lot in his
name. In 1985, vendee Alberta Morales died. Her nieces-heirs, Lydia, Elsa and Dafrosa, succeeded in
the ownership of the lot. Months later, as the heirs were about to leave for US, they asked Arnold to
deliver to them the OCT so they can register it in their name. But Arnold did not deliver.

In 1986, after Albertas heirs left for the US, Arnold used the OCT he borrowed from Alberta, and
subdivided the entire lot into 3 sublots, and registered them all under his name. He then paid the real
estate taxes on the property. He sold lot nos. 265-B & C to spouses Tomas and Sylvina Occea, which
included the 748 sq. m. portion previously sold to Alberta Morales. A Deed of Absolute Sale over said lots
was executed to the Occea spouses and titles were transferred to their names.

In 1993, after the death of Arnold, the 3 nieces-heirs of Alberta Morales learned about the second sale of
their lot to the Occea spouses when they were notified by caretaker Abas that they were being ejected
so the heirs filed a case for annulment of sale and cancellation of titles, with damages, against the second
vendees Occea spouses. In their complaint, they alleged that the Occeas purchased the land in bad
faith as they were aware that the lots sold to them had already been previously sold to Alberta Morales.
That when Tomas Occea conducted an ocular inspection of the lots, Morito Abas, the caretaker, warned
them not to push through with the sale as the land was no longer owned by vendor Arnold.

Issue/s: Whether or not the Occenas are in BF

Held: Yes, the Occenas are in BF. This is a case of double sale of an immovable property. Article 1544
of the NCC provides that in case an immovable property is sold to different vendees, the ownership shall
belong:
(1) to the person acquiring it who in good faith first recorded it in the Registry of Property;
(2) should there be no inscription, the ownership shall pertain to the person who in good faith was first
in possession; and,
(3) in the absence thereof, to the person who presents the oldest title, provided there is good faith. What
is material is whether the second buyer first registers the second sale in good faith, i.e., without
10
knowledge of any defect in the title of the property sold. The defense of indefeasibility of a Torrens title

Page 18 of 27
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does not extend to a transferee who takes the certificate of title in bad faith, with notice of a flaw.
Occenas failed to prove good faith in their purchase and registration of the land. A purchaser in good
faith and for value is one who buys property without notice that some other person has a right to or
interest in such property and pays its fair price before he has notice of the adverse claims and interest of
another person in the same property. It is the "honesty of intention" which constitutes good faith implies a
freedom from knowledge of circumstances which ought to put a person on inquiry.

At the trial, Tomas Occea admitted that he found houses built on the land during its ocular inspection
prior to his purchase. He relied on the representation of vendor Arnold that these houses were owned by
squatters and that he was merely tolerating their presence on the land. Tomas should have verified from
the occupants of the land the nature and authority of their possession instead of merely relying on the
representation of the vendor that they were squatters, having seen for himself that the land was occupied
by persons other than the vendor who was not in possession of the land at that time.

The settled rule is that a buyer of real property in the possession of persons other than the seller must be
wary and should investigate the rights of those in possession. Without such inquiry, the buyer can hardly
be regarded as a buyer in good faith and cannot have any right over the property. A purchaser cannot
simply close his eyes to facts which should put a reasonable man on his guard and then claim that he
acted in good faith under the belief that there was no defect in the title of his vendor. His mere refusal to
believe that such defect exists or his willful closing of his eyes to the possibility of the existence of a
defect in his vendors title will not make him an innocent purchaser for value if it later develops that the
title was in fact defective, and it appears that he would have notice of the defect had he acted with that
measure of precaution which may reasonably be required of a prudent man in a similar situation.

The general rule is that one who deals with property registered under the Torrens system need not go
beyond the same, but only has to rely on the title. He is charged with notice only of such burdens and
claims as are annotated on the title. However, this principle does not apply when the party has actual
knowledge of facts and circumstances that would impel a reasonably cautious man to make such inquiry
or when the purchaser has knowledge of a defect or the lack of title in his vendor or of sufficient facts to
induce a reasonably prudent man to inquire into the status of the title of the property in litigation. One who
falls within the exception can neither be denominated an innocent purchaser for value nor a purchaser in
good faith.

SPILL: (On laches) the action to annul title filed by respondents-heirs is not barred by laches and
prescription. Laches is a creation of equity and cannot be used to defeat justice or perpetuate fraud and
injustice. Neither should its application be used to prevent the rightful owners of a property from
recovering what has been fraudulently registered in the name of another. Prescription does not apply
when the person seeking annulment of title or reconveyance is in possession of the lot because the
action partakes of a suit to quiet title which is imprescriptible. In this case, Morales had actual possession
of the land when she had a house built thereon and had appointed a caretaker to oversee her property.
Her undisturbed possession of the land for a period of fifty (50) long years gave her and her heirs a
continuing right to seek the aid of a court of equity to determine the nature of the claim of ownership of
petitioner-spouses.

Morales caretaker became aware of the second sale to petitioner-spouses only in 1991 when he
received from the latter a notice to vacate the land. Respondents-heirs did not sleep on their rights for in
1994, they filed their action to annul petitioners title over the land. When vendor Arnold reacquired title to
the subject property by means of fraud and concealment after he has sold it to Alberta Morales, a
constructive trust was created in favor of Morales and her heirs. As the defrauded parties who were in
actual possession of the property, an action of the respondents-heirs to enforce the trust and recover the
property cannot prescribe. They may vindicate their right over the property regardless of the lapse of
time.Hence, the rule that registration of the property has the effect of constructive notice to the whole
world cannot be availed of by petitioners and the defense of prescription cannot be successfully raised
against respondents.

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In sum, the general rule is that registration under the Torrens system is the operative act which gives
validity to the transfer of title on the land. However, it does not create or vest title especially where a party
has actual knowledge of the claimants actual, open and notorious possession of the property at the time
of his registration. A buyer in bad faith has no right over the land. As petitioner-spouses failed to register
the subject land in good faith, ownership of the land pertains to respondent-heirs who first possessed it in
good faith.

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#62 EQUATORIAL REALTY DEVELOPMENT, INC. vs. MAYFAIR THEATER, INC.

(Maj)

Facts:

Carmelo owned a parcel of land, together with two 2-storey buildings constructed thereon located at
Recto, Manila, and covered by TCT issued in its name by the Register of Deeds of Manila. Carmelo
entered into a contract of lease with Mayfair for use by Mayfair as a motion picture theater and for a term
of 20 years. Mayfair then constructed on the leased property a movie house known as "Maxim Theatre."
Two years later, Mayfair entered into a second contract of lease with Carmelo for the lease of another
portion of latters property for similar use and term. Mayfair again put up another movie house known as
"Miramar Theatre" on this leased property. Paragraph 8 of both contracts of lease provide:

That if the LESSOR should desire to sell the leased premises, the LESSEE shall be given 30-days
exclusive option to purchase the same.

In the event, however, that the leased premises is sold to someone other than the LESSEE, the LESSOR
is bound and obligated, as it hereby binds and obligates itself, to stipulate in the Deed of Sale hereof that
the purchaser shall recognize this lease and be bound by all the terms and conditions thereof.

After sometime, Henry Yang, President of Mayfair was informed by Pascal of Carmelo, that the latter
wants to sell the entire property - Jose Araneta was offering to buy the whole property for $ 1.2M. Mr.
Yang was also asked if he was willing to buy the property for Php 6-7M. Mr. Yang replied that he would
let Mr. Pascal know of his decision later tru a letter but Carmelo did not reply to said letter. Mayfair sent
another letter to Carmelo saying that it will acquire the entire building and other improvements if the price
nd
is reasonable. But, both Carmelo and Equatorial questioned the authenticity of the 2 letter. 4 years
after, the entire property was sold, including the leased premises housing the "Maxim" and "Miramar"
theatres to Equatorial. Mayfair instituted the action a quo for specific performance and annulment of the
sale of the leased premises to Equatorial. RTC dismissed the complaint and ruled in favor of Carmelo. It
adjudged paragraph 8 in the lease contracts as an option clause which however cannot be deemed to be
binding on Carmelo because of lack of distinct consideration therefor. On appeal, CA reversed said
decision and differentiated between Article 1324 and Article 1479 of the Civil Code and concluded that
since paragraph 8 of the two lease contracts does not state a fixed price for the purchase of the leased
premises, which is an essential element for a contract of sale to be perfected, what paragraph 8 is, must
be a right of first refusal and not an option contract. Hence, the instant petition.

Issues:

1) WON paragraph 8 is a contract of right of first refusal.

2) WON the contract of sale was rescissible.

Held:

1) YES.

We agree with the CA that the aforecited contractual stipulation provides for a right of first refusal in favor
of Mayfair. It is not an option clause or an option contract. It is a contract of a right of first refusal.

An agreement in writing to give a person the option to purchase lands within a given time at a named
price is neither a sale nor an agreement to sell. It is simply a contract by which the owner of property
agrees with another person that he shall have the right to buy his property at a fixed price within a certain
time. He does not sell his land; he does not then agree to sell it; but he does sell something; that is, the
right or privilege to buy at the election or option of the other party. The second party gets in praesenti, not
lands, nor an agreement that he shall have lands, but he does get something of value; that is, the right to

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call for and receive lands if he elects. The owner parts with his right to sell his lands, except to the second
party, for a limited period. The second party receives this right, or, rather, from his point of view, he
receives the right to elect to buy. This refers to the contract of option, or, what amounts to the same
thing, to the case where there was cause or consideration for the obligation, the subject of the agreement
made by the parties.

The rule so early established in this jurisdiction is that the deed of option or the option clause in a
contract, in order to be valid and enforceable, must, among other things, indicate the definite
price at which the person granting the option, is willing to sell.

As elucidated in the case of Ang Yu Asuncion vs. Court of Appeals: In sales, the contract is perfected
when a person, called the seller, obligates himself, for a price certain, to deliver and to transfer
ownership of a thing or right to another, called the buyer, over which the latter agrees. Article 1458
of the Civil Code provides:

Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the
ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in money or
its equivalent.

A contract of sale may be absolute or conditional.

An option is a contract granting a privilege to buy or sell within an agreed time and at a determined price.
It is a separate and distinct contract from that which the parties may enter into upon the consummation of
the option. It must be supported by consideration. In the instant case, the right of first refusal is an integral
part of the contracts of lease. The consideration is built into the reciprocal obligations of the parties.

To rule that a contractual stipulation such as that found in paragraph 8 of the contracts is
governed by Article 1324 on withdrawal of the offer or Article 1479 on promise to buy and sell
would render in effectual or "inutile" the provisions on right of first refusal so commonly inserted in
leases of real estate nowadays. The Court of Appeals is correct in stating that Paragraph 8 was
incorporated into the contracts of lease for the benefit of Mayfair which wanted to be assured that
it shall be given the first crack or the first option to buy the property at the price which Carmelo is
willing to accept. It is not also correct to say that there is no consideration in an agreement of right
of first refusal. The stipulation is part and parcel of the entire contract of lease. The consideration
for the lease includes the consideration for the right of first refusal. Thus, Mayfair is in effect
stating that it consents to lease the premises and to pay the price agreed upon provided the
lessor also consents that, should it sell the leased property, then, Mayfair shall be given the right
to match the offered purchase price and to buy the property at that price.

2) YES.

Finding that paragraph 8 is that of a contractual grant of the right of first refusal to Mayfair, the
consequential rights, obligations and liabilities of Carmelo, Mayfair and Equatorial are as follows:

Since Equatorial is a buyer in bad faith, this finding renders the sale to it of the property in question
rescissible. We agree with respondent Appellate Court that the records bear out the fact that Equatorial
was aware of the lease contracts because its lawyers had, prior to the sale, studied the said contracts. As
such, Equatorial cannot tenably claim to be a purchaser in good faith, and, therefore, rescission lies.

Rescission is a remedy granted by law to the contracting parties and even to third persons, to secure
reparation for damages caused to them by a contract, even if this should be valid, by means of the
restoration of things to their condition at the moment prior to the celebration of said contract. It is a relief
allowed for the protection of one of the contracting parties and even third persons from all injury and
damage the contract may cause, or to protect some incompatible and preferent right created by the

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contract. Rescission implies a contract which, even if initially valid, produces a lesion or pecuniary
damage to someone that justifies its invalidation for reasons of equity.

Petitioners assert the alleged impossibility of performance because the entire property is indivisible
property. It was petitioner Carmelo which fixed the limits of the property it was leasing out. Common
sense and fairness dictate that instead of nullifying the agreement on that basis, the stipulation should be
given effect by including the indivisible appurtenances in the sale of the dominant portion under the right
of first refusal. A valid and legal contract where the ascendant or the more important of the two parties is
the landowner should be given effect, if possible, instead of being nullified on a selfish pretext posited by
the owner. Following the arguments of petitioners and the participation of the owner in the attempt to strip
Mayfair of its rights, the right of first refusal should include not only the property specified in the contracts
of lease but also the appurtenant portions sold to Equatorial which are claimed by petitioners to be
indivisible. Carmelo acted in bad faith when it sold the entire property to Equatorial without informing
Mayfair, a clear violation of Mayfair's rights. While there was a series of exchanges of letters evidencing
the offer and counter-offers between the parties, Carmelo abandoned the negotiations without giving
Mayfair full opportunity to negotiate within the 30-day period.

Since Mayfair has a right of first refusal, it can exercise the right only if the fraudulent sale is first set aside
or rescinded. All of these matters are now before us and so there should be no piecemeal determination
of this case and leave festering sores to deteriorate into endless litigation. The facts of the case and
considerations of justice and equity require that we order rescission here and now. Rescission is a relief
allowed for the protection of one of the contracting parties and even third persons from all injury
and damage the contract may cause or to protect some incompatible and preferred right by the
contract. The sale of the subject real property by Carmelo to Equatorial should now be rescinded
considering that Mayfair, which had substantial interest over the subject property, was prejudiced by the
sale of the subject property to Equatorial without Carmelo conferring to Mayfair every opportunity to
negotiate within the 30-day stipulated period.

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#63San Miguel Properties (SMP) v. Huang

(March)

Facts:

San Miguel Properties owns two parcels of land totalling 1, 738 square meters at the corner of
Meralco Avenue and General Capinpin Street, Barrio Oranbo, Pasig City. These properties were offered
for sale for P52,140,000.00 in cash. The offer was made to Atty. Helena M. Dauz who was acting for
spouses Huang. Atty. Dauz signified her clients interest in purchasing the properties for the amount for
which they were offered by SMP, under the following terms: the sum of P500,000.00 would be given as
earnest money and the balance would be paid in eight equal monthly installments from May to December,
1994. However, SMPrefused the counter-offer. Another letter was sent this time offering the sum of
P1,000,000.00 representing earnest-deposit money subject to the conditions:

1. We will be given the exclusive option to purchase the property within the 30 days from
date of your acceptance of this offer.
2. During said period, we will negotiate on the terms and conditions of the purchase;
SMPPI will secure the necessary Management and Board approvals; and we initiate the
documentation if there is mutual agreement between us.
3. In the event that we do not come to an agreement on this transaction, the said amount
of P1,000,000.00 shall be refundable to us in full upon demand. . . .

SMP offered a 90 day period w/in w/c to pay, Atty Dauz countered for 6 months. This however
was not acted upon, prompting Atty Dauz to propose a 4 month period of amortization. Atty then asked
for 45 days w/in w/c to exercise their option to buy. Despite the lapse of the period Atty Diaz failed to
communicate their decision prompting SMP to return the 1M. Atty now files for a specific performance for
SMP to sell the property to Huang. RTC dismissed the case. CA reversed saying that there was a
perfected contract of sale and that the 1M being an earnest money is considered as part of the sale price.
That the fact the parties had not agreed on the mode of payment did not affect the contract as such is not
an essential element for its validity.

Issue: WON there is a perfected contract of sale.

Held:
None

The Court holds that Sps Huang did not give the P1 million as "earnest money" as provided by
Art. 1482 of the Civil Code. They presented the amount merely as a deposit of what would eventually
become the earnest money or down payment should a contract of sale be made by them. The amount
was thus given not as a part of the purchase price and as proof of the perfection of the contract of sale
but only as a guarantee that Sps Huang would not back out of the sale.

The P1 million "earnest-deposit" could not have been given as earnest money as contemplated in
Art. 1482 because, at the time when SMP accepted the terms of Sps Huang offer of March 29, 1994,
their contract had not yet been perfected. This is evident from the following conditions attached by Sps
Huang to their letter, to wit: (1) that they be given the exclusive option to purchase the property within 30
days from acceptance of the offer; (2) that during the option period, the parties would negotiate the terms
and conditions of the purchase; and (3) SMP would secure the necessary approvals while Sps Huang
would handle the documentation.

The first condition for an option period of 30 days sufficiently shows that a sale was never
perfected. As SMP correctly points out, acceptance of this condition did not give rise to a perfected sale
but merely to an option or an accepted unilateral promise on the part of Sps Huang to buy the subject
properties within 30 days from the date of acceptance of the offer. Such option giving Sps Huang the
exclusive right to buy the properties within the period agreed upon is separate and distinct from the
contract of sale which the parties may enter. All that Sps Huang had was just the option to buy the

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properties which privilege was not, however, exercised by them because there was a failure to agree on
the terms of payment. No contract of sale may thus be enforced by Huang.

Furthermore, even the option secured by Sps. Huang from SMP was fatally defective. Under the
second paragraph of Art. 1479, an accepted unilateral promise to buy or sell a determinate thing for a
price certain is binding upon the promisor only if the promise is supported by a distinct consideration.
Consideration in an option contract may be anything of value, unlike in sale where it must be the price
certain in money or its equivalent. There is no showing here of any consideration for the option. Lacking
any proof of such consideration, the option is unenforceable.

Equally compelling as proof of the absence of a perfected sale is the second condition that,
during the option period, the parties would negotiate the terms and conditions of the purchase. The
stages of a contract of sale are as follows: (1) negotiation, covering the period 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 which are the
meeting of the minds of the parties as to the object of the contract and upon the price; and (3)
consummation, which begins when the parties perform their respective undertakings under the contract of
sale, culminating in the extinguishment thereof. In the present case, the parties never got past the
negotiation stage. The alleged "indubitable evidence" of a perfected sale cited by the appellate court was
nothing more than offers and counter-offers which did not amount to any final arrangement containing the
essential elements of a contract of sale. While the parties already agreed on the real properties which
were the objects of the sale and on the purchase price, the fact remains that they failed to arrive at
mutually acceptable terms of payment, despite the 45-day extension given by SMP.

The appellate court opined that the failure to agree on the terms of payment was no bar to the
perfection of the sale because Art. 1475 only requires agreement by the parties as to the price of the
object. This is error. In Navarro v. Sugar Producers Cooperative Marketing Association, Inc., we laid down
the rule that the manner of payment of the purchase price is an essential element before a valid and
binding contract of sale can exist. Although the Civil Code does not expressly state that the minds of the
parties must also meet on the terms or manner of payment of the price, the same is needed, otherwise
there is no sale. As held in Toyota Shaw, Inc. v. Court of Appeals, agreement on the manner of payment
goes into the price such that a disagreement on the manner of payment is tantamount to a failure to
agree on the price.

Thus, it is not the giving of earnest money, but the proof of the concurrence of all the essential
elements of the contract of sale which establishes the existence of a perfected sale.

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#64 Ramos V. Sarao

(Marcus)

Facts:

Spouses Ramos executed a contract over their conjugal house and lot in favor of Sarao for and in
consideration of P1,310,430. Entitled DEED OF SALE UNDER PACTO DE RETRO, the contract,
granted the Ramos spouses the option to repurchase the property within 6 months from February 21,
1991, for P1,310,430 plus an interest of 4.5% a month. It was further agreed that should the spouses fail
to pay the monthly interest or to exercise the right to repurchase within the stipulated period, the
conveyance would be deemed an absolute sale.

On July 30, 1991, Ramos tendered to Sarao the amount of P1,633,034.20 in the form of two managers
checks, which the latter refused to accept for being allegedly insufficient. Ramos filed a Complaint for the
redemption of the property and deposited with the RTC two checks that Sarao refused to accept. Sarao
filed against the Ramos spouses a Petition for consolidation of ownership in pacto de retro sale. The
RTC dismissed the Complaint and granted the prayer of Sarao to consolidate the title of the property in
her favor. The CA sustained the RTCs finding that the disputed contract was a bonafide pacto de retro
sale, not a mortgage to secure a loan.

Issue:

WON the parties intended the contract to be a bona fide pacto de retro sale or an equitable mortgage.

Held: Equitable Mortgage

In a pacto de retro, ownership of the property sold is immediately transferred to the vendee a retro,
subject only to the repurchase by the vendor a retro within the stipulated period. The vendor a retros
failure to exercise the right of repurchase within the agreed time vests upon the vendee a retro, by
operation of law, absolute title to the property. Such title is not impaired even if the vendee a retro fails to
consolidate title under Article 1607 of the Civil Code.

On the other hand, an equitable mortgage is a contract that although lacking the formality, the form or
words, or other requisites demanded by a statute nevertheless reveals the intention of the parties to
burden a piece or pieces of real property as security for a debt. The essential requisites of such a contract
are as follows: (1) the parties enter into what appears to be a contract of sale, but (2) their intention is to
secure an existing debt by way of a mortgage. The nonpayment of the debt when due gives the
mortgagee the right to foreclose the mortgage, sell the property, and apply the proceeds of the sale to the
satisfaction of the loan obligation.

Furthermore, a contract purporting to be a pacto de retro is construed as an equitable mortgage when the
terms of the document and the surrounding circumstances so require. The law discourages the use of a
pacto de retro, because this scheme is frequently used to circumvent a contract known as a pactum
commissorium. The Court has frequently noted that a pacto de retro is used to conceal a contract of loan
secured by a mortgage. Such construction is consistent with the doctrine that the law favors the least
transmission of rights.

Contrary to Saraos bare assertions, a meticulous review of the evidence reveals that the alleged contract
was executed merely as security for a loan.

The loan obligation was clear from Saraos evidence as found by the trial court, which we quote:
x x x [Sarao] also testified that Myrna did not tender payment of the correct and sufficient price for said
real property within the 6-month period as stipulated in the contract, despite her having been shown the
computation of the loan obligation, inclusive of capital gains tax, real estate tax, transfer tax and other
expenses. She admitted though that Myrna has tendered payment amounting to P1,633,034.20 in the
form of two managers checks, but these were refused acceptance for being insufficient. She also

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claimed that several letters (Exhs. 2, 4 and 5) were sent to Myrna and her lawyer, informing them of the
computation of the loan obligation inclusive of said expenses. x x x.

Respondent herself stressed that the pacto de retro had been entered into on the very same day that the
property was to be foreclosed by a commercial bank. Such circumstance proves that the spouses direly
needed funds to avert a foreclosure sale. Had they intended to sell the property just to realize some
profit, as Sarao suggests, they would not have retained possession of the house and continued to live
there. Clearly, the spouses had entered into the alleged pacto de retro sale to secure a loan obligation,
not to transfer ownership of the property.

Inasmuch as the contract between the parties was an equitable mortgage, Respondent Saraos remedy
was to recover the loan amount from petitioner by filing an action for the amount due or by foreclosing the
property.

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