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Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 92989 July 8, 1991
PERFECTO DY, JR. petitioner,
vs.
COURT OF APPEALS, GELAC TRADING INC., and ANTONIO V. GONZALES, respondents.
Zosa & Quijano Law Offices for petitioner.
Expedito P. Bugarin for respondent GELAC Trading, Inc.
GUTIERREZ, JR., J.:p
This is a petition for review on certiorari seeking the reversal of the March 23, 1990 decision of
the Court of Appeals which ruled that the petitioner's purchase of a farm tractor was not validly
consummated and ordered a complaint for its recovery dismissed.
The facts as established by the records are as follows:
The petitioner, Perfecto Dy and Wilfredo Dy are brothers. Sometime in 1979, Wilfredo Dy
purchased a truck and a farm tractor through financing extended by Libra Finance and
Investment Corporation (Libra). Both truck and tractor were mortgaged to Libra as security for
the loan.
The petitioner wanted to buy the tractor from his brother so on August 20, 1979, he wrote a
letter to Libra requesting that he be allowed to purchase from Wilfredo Dy the said tractor and
assume the mortgage debt of the latter.
In a letter dated August 27, 1979, Libra thru its manager, Cipriano Ares approved the
petitioner's request.
Thus, on September 4, 1979, Wilfredo Dy executed a deed of absolute sale in favor of the
petitioner over the tractor in question.
At this time, the subject tractor was in the possession of Libra Finance due to Wilfredo Dy's
failure to pay the amortizations.
Despite the offer of full payment by the petitioner to Libra for the tractor, the immediate
release could not be effected because Wilfredo Dy had obtained financing not only for said
tractor but also for a truck and Libra insisted on full payment for both.

1
The petitioner was able to convince his sister, Carol Dy-Seno, to purchase the truck so that full
payment could be made for both. On November 22, 1979, a PNB check was issued in the
amount of P22,000.00 in favor of Libra, thus settling in full the indebtedness of Wilfredo Dy
with the financing firm. Payment having been effected through an out-of-town check, Libra
insisted that it be cleared first before Libra could release the chattels in question.
Meanwhile, Civil Case No. R-16646 entitled "Gelac Trading, Inc. v. Wilfredo Dy", a collection
case to recover the sum of P12,269.80 was pending in another court in Cebu.
On the strength of an alias writ of execution issued on December 27, 1979, the provincial sheriff
was able to seize and levy on the tractor which was in the premises of Libra in Carmen, Cebu.
The tractor was subsequently sold at public auction where Gelac Trading was the lone bidder.
Later, Gelac sold the tractor to one of its stockholders, Antonio Gonzales.
It was only when the check was cleared on January 17, 1980 that the petitioner learned about
GELAC having already taken custody of the subject tractor. Consequently, the petitioner filed an
action to recover the subject tractor against GELAC Trading with the Regional Trial Court of
Cebu City.
On April 8, 1988, the RTC rendered judgment in favor of the petitioner. The dispositive portion
of the decision reads as follows:
WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the defendant,
pronouncing that the plaintiff is the owner of the tractor, subject matter of this case, and
directing the defendants Gelac Trading Corporation and Antonio Gonzales to return the same
to the plaintiff herein; directing the defendants jointly and severally to pay to the plaintiff the
amount of P1,541.00 as expenses for hiring a tractor; P50,000 for moral damages; P50,000 for
exemplary damages; and to pay the cost. (Rollo, pp. 35-36)
On appeal, the Court of Appeals reversed the decision of the RTC and dismissed the complaint
with costs against the petitioner. The Court of Appeals held that the tractor in question still
belonged to Wilfredo Dy when it was seized and levied by the sheriff by virtue of the alias writ
of execution issued in Civil Case No. R-16646.
The petitioner now comes to the Court raising the following questions:
A.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS MISAPPREHENDED THE FACTS AND
ERRED IN NOT AFFIRMING THE TRIAL COURT'S FINDING THAT OWNERSHIP OF THE FARM
TRACTOR HAD ALREADY PASSED TO HEREIN PETITIONER WHEN SAID TRACTOR WAS LEVIED ON
BY THE SHERIFF PURSUANT TO AN ALIAS WRIT OF EXECUTION ISSUED IN ANOTHER CASE IN
FAVOR OF RESPONDENT GELAC TRADING INC.
B.

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WHETHER OR NOT THE HONORABLE COURT OF APPEALS EMBARKED ON MERE CONJECTURE
AND SURMISE IN HOLDING THAT THE SALE OF THE AFORESAID TRACTOR TO PETITIONER WAS
DONE IN FRAUD OF WILFREDO DY'S CREDITORS, THERE BEING NO EVIDENCE OF SUCH FRAUD
AS FOUND BY THE TRIAL COURT.
C.
WHETHER OR NOT THE HONORABLE COURT OF APPEALS MISAPPREHENDED THE FACTS AND
ERRED IN NOT SUSTAINING THE FINDING OF THE TRIAL COURT THAT THE SALE OF THE
TRACTOR BY RESPONDENT GELAC TRADING TO ITS CO-RESPONDENT ANTONIO V. GONZALES
ON AUGUST 2, 1980 AT WHICH TIME BOTH RESPONDENTS ALREADY KNEW OF THE FILING OF
THE INSTANT CASE WAS VIOLATIVE OF THE HUMAN RELATIONS PROVISIONS OF THE CIVIL
CODE AND RENDERED THEM LIABLE FOR THE MORAL AND EXEMPLARY DAMAGES SLAPPED
AGAINST THEM BY THE TRIAL COURT. (Rollo, p. 13)
The respondents claim that at the time of the execution of the deed of sale, no constructive
delivery was effected since the consummation of the sale depended upon the clearance and
encashment of the check which was issued in payment of the subject tractor.
In the case of Servicewide Specialists Inc. v. Intermediate Appellate Court. (174 SCRA 80
[1989]), we stated that:
xxx xxx xxx
The rule is settled that the chattel mortgagor continues to be the owner of the property, and
therefore, has the power to alienate the same; however, he is obliged under pain of penal
liability, to secure the written consent of the mortgagee. (Francisco, Vicente, Jr., Revised Rules
of Court in the Philippines, (1972), Volume IV-B Part 1, p. 525). Thus, the instruments of
mortgage are binding, while they subsist, not only upon the parties executing them but also
upon those who later, by purchase or otherwise, acquire the properties referred to therein.
The absence of the written consent of the mortgagee to the sale of the mortgaged property in
favor of a third person, therefore, affects not the validity of the sale but only the penal liability
of the mortgagor under the Revised Penal Code and the binding effect of such sale on the
mortgagee under the Deed of Chattel Mortgage.
xxx xxx xxx
The mortgagor who gave the property as security under a chattel mortgage did not part with
the ownership over the same. He had the right to sell it although he was under the obligation to
secure the written consent of the mortgagee or he lays himself open to criminal prosecution
under the provision of Article 319 par. 2 of the Revised Penal Code. And even if no consent was
obtained from the mortgagee, the validity of the sale would still not be affected.
Thus, we see no reason why Wilfredo Dy, as the chattel mortgagor can not sell the subject
tractor. There is no dispute that the consent of Libra Finance was obtained in the instant case.
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In a letter dated August 27, 1979, Libra allowed the petitioner to purchase the tractor and
assume the mortgage debt of his brother. The sale between the brothers was therefore valid
and binding as between them and to the mortgagee, as well.
Article 1496 of the Civil Code states that the ownership of the thing sold is acquired by the
vendee from the moment it is delivered to him in any of the ways specified in Articles 1497 to
1501 or in any other manner signing an agreement that the possession is transferred from the
vendor to the vendee. We agree with the petitioner that Articles 1498 and 1499 are applicable
in the case at bar.

Article 1498 states:


Art. 1498. When the sale is made through a public instrument, the execution thereof shall
be equivalent to the delivery of the thing which is the object of the contract, if from the deed
the contrary does not appear or cannot clearly be inferred.
xxx xxx xxx
Article 1499 provides:
Article 1499. The delivery of movable property may likewise be made by the mere consent or
agreement of the contracting parties, if the thing sold cannot be transferred to the possession
of the vendee at the time of the sale, or if the latter already had it in his possession for any
other reason. (1463a)
In the instant case, actual delivery of the subject tractor could not be made. However, there
was constructive delivery already upon the execution of the public instrument pursuant to
Article 1498 and upon the consent or agreement of the parties when the thing sold cannot be
immediately transferred to the possession of the vendee. (Art. 1499)
The respondent court avers that the vendor must first have control and possession of the thing
before he could transfer ownership by constructive delivery. Here, it was Libra Finance which
was in possession of the subject tractor due to Wilfredo's failure to pay the amortization as a
preliminary step to foreclosure. As mortgagee, he has the right of foreclosure upon default by
the mortgagor in the performance of the conditions mentioned in the contract of mortgage.
The law implies that the mortgagee is entitled to possess the mortgaged property because
possession is necessary in order to enable him to have the property sold.
While it is true that Wilfredo Dy was not in actual possession and control of the subject tractor,
his right of ownership was not divested from him upon his default. Neither could it be said that
Libra was the owner of the subject tractor because the mortgagee can not become the owner
of or convert and appropriate to himself the property mortgaged. (Article 2088, Civil Code) Said
property continues to belong to the mortgagor. The only remedy given to the mortgagee is to
have said property sold at public auction and the proceeds of the sale applied to the payment
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of the obligation secured by the mortgagee. (See Martinez v. PNB, 93 Phil. 765, 767 [1953])
There is no showing that Libra Finance has already foreclosed the mortgage and that it was the
new owner of the subject tractor. Undeniably, Libra gave its consent to the sale of the subject
tractor to the petitioner. It was aware of the transfer of rights to the petitioner.
Where a third person purchases the mortgaged property, he automatically steps into the shoes
of the original mortgagor. (See Industrial Finance Corp. v. Apostol, 177 SCRA 521 [1989]). His
right of ownership shall be subject to the mortgage of the thing sold to him. In the case at bar,
the petitioner was fully aware of the existing mortgage of the subject tractor to Libra. In fact,
when he was obtaining Libra's consent to the sale, he volunteered to assume the remaining
balance of the mortgage debt of Wilfredo Dy which Libra undeniably agreed to.
The payment of the check was actually intended to extinguish the mortgage obligation so that
the tractor could be released to the petitioner. It was never intended nor could it be considered
as payment of the purchase price because the relationship between Libra and the petitioner is
not one of sale but still a mortgage. The clearing or encashment of the check which produced
the effect of payment determined the full payment of the money obligation and the release of
the chattel mortgage. It was not determinative of the consummation of the sale. The
transaction between the brothers is distinct and apart from the transaction between Libra and
the petitioner. The contention, therefore, that the consummation of the sale depended upon
the encashment of the check is untenable.
The sale of the subject tractor was consummated upon the execution of the public instrument
on September 4, 1979. At this time constructive delivery was already effected. Hence, the
subject tractor was no longer owned by Wilfredo Dy when it was levied upon by the sheriff in
December, 1979. Well settled is the rule that only properties unquestionably owned by the
judgment debtor and which are not exempt by law from execution should be levied upon or
sought to be levied upon. For the power of the court in the execution of its judgment extends
only over properties belonging to the judgment debtor. (Consolidated Bank and Trust Corp. v.
Court of Appeals, G.R. No. 78771, January 23, 1991).
The respondents further claim that at that time the sheriff levied on the tractor and took legal
custody thereof no one ever protested or filed a third party claim.
It is inconsequential whether a third party claim has been filed or not by the petitioner during
the time the sheriff levied on the subject tractor. A person other than the judgment debtor who
claims ownership or right over levied properties is not precluded, however, from taking other
legal remedies to prosecute his claim. (Consolidated Bank and Trust Corp. v. Court of Appeals,
supra) This is precisely what the petitioner did when he filed the action for replevin with the
RTC.
Anent the second and third issues raised, the Court accords great respect and weight to the
findings of fact of the trial court. There is no sufficient evidence to show that the sale of the
tractor was in fraud of Wilfredo and creditors. While it is true that Wilfredo and Perfecto are
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brothers, this fact alone does not give rise to the presumption that the sale was fraudulent.
Relationship is not a badge of fraud (Goquiolay v. Sycip, 9 SCRA 663 [1963]). Moreover, fraud
can not be presumed; it must be established by clear convincing evidence.
We agree with the trial court's findings that the actuations of GELAC Trading were indeed
violative of the provisions on human relations. As found by the trial court, GELAC knew very
well of the transfer of the property to the petitioners on July 14, 1980 when it received
summons based on the complaint for replevin filed with the RTC by the petitioner.
Notwithstanding said summons, it continued to sell the subject tractor to one of its
stockholders on August 2, 1980.
WHEREFORE, the petition is hereby GRANTED. The decision of the Court of Appeals
promulgated on March 23, 1990 is SET ASIDE and the decision of the Regional Trial Court dated
April 8, 1988 is REINSTATED.
SO ORDERED.

6
FIRST DIVISION

SPOUSES AVELINO and EXALTACION SALERA, G.R. No. 135900


Petitioners,

Present:

PUNO, C.J., Chairperson,


-versus- SANDOVAL-GUTIERREZ,
CORONA,
AZCUNA, and
GARCIA, JJ.

SPOUSES CELEDONIO and POLICRONIA RODAJE,


Respondents. Promulgated:

August 17, 2007


x-----------------------------------------------------------------------------------------x

DECISION

SANDOVAL-GUTIERREZ, J.:

7
Challenged in this Petition for Review on Certiorari is the Decision dated October 9,
1998 of the Court of Appeals (Seventeenth Division) in CA-G.R. CV No. 51480, entitled Spouses
Avelino Salera and Exaltacion Salera, plaintiffs-appellees, v. Spouses Celedonio Rodaje and
Policronia Rodaje, defendants-appellants.
On May 7, 1993, spouses Avelino and Exaltacion Salera, now petitioners, filed with
the Regional Trial Court (RTC), Branch 11, Calubian, Leyte, a complaint for quieting of title,
docketed as Civil Case No. CN-27, against spouses Celedonio and Policronia Rodaje, herein
respondents. Petitioners alleged that they are the absolute owners of a parcel of land situated
at Basud, San Isidro, Leyte with an area of 448.98 square meters, more or less. They acquired
the property from the heirs of Brigido Tonacao as shown by a Deed of Absolute Sale executed
on June 23, 1986. They had the document registered in the Registry of Deeds of Iloilo on July 1,
1986. When they asked the Provincial Assessor to declare the property under their names for
taxation purposes, they found that Tax Declaration No. 2994 (R-5) in the name of Brigido was
already cancelled and another one, Tax Declaration No. 2408, was issued in the names of
respondents. Petitioners further alleged that they have been in possession of the property and
the house they built thereon because they had paid the purchase price even before the
execution of the deed of sale.
In their answer to the complaint, respondents claimed that they are the absolute
owners of the same property. They acquired it from Catalino Tonacao, the father of Brigido, in a
Deed of Absolute Sale dated June 6, 1986. The sale was registered in the Registry of Deeds of
Leyte on June 10, 1986 and Tax Declaration No. 2408 was issued in their names. Prior thereto,
or on January 11, 1984, they had a verbal contract of sale with Catalino. They paid him
P1,000.00 as downpayment. They agreed that the balance of P4,000.00 shall be paid upon
execution of the deed of sale. Since then, they have been exercising their right of ownership
over the property and the building constructed thereon peacefully, publicly, adversely and
continuously. Apart from being the first registrants, they are buyers in good faith.
On July 17, 1995, the RTC rendered a Decision declaring petitioners the rightful and
legal owners of the property, thus:
In view of all the foregoing, judgment is hereby rendered in favor of the plaintiffs and
against the defendants, declaring the plaintiffs the rightful and legal owners
of the property described in paragraph 3 of the complaint; declaring as null
and void the sale (Exhibits 1 and 2) made by Catalino Tonacao to herein
defendants for lack of capacity to sell; and ordering the cancellation of Tax
Declaration No. 2408 issued in favor of Sps. Celedonio Rodaje and Policronia
Rodaje by the Provincial Assessor of Leyte and directing defendants to pay
the costs.

8
In declaring null and void the Deed of Absolute Sale between Catalino and herein
respondents and ordering the cancellation of Tax Declaration No. 2408 issued in the latters
names, the RTC ratiocinated as follows:
Assessing the validity of the sale in favor of plaintiffs by the heirs
of Brigido Tonacao vis--vis the sale by Catalino Tonacao, father of Brigido
Tonacao, to the defendants of the property, the Court believes that the
former must survive over the latter.

To begin with, defendants admit that Brigido Tonacao was the


declared owner of the land in question before defendants purchased such
land from Catalino Tonacao. Defendants also admit that the wife and
children of Brigido Tonacao indeed partitioned the land in question
extrajudicially among themselves and that such wife and children of Brigido
Tonacao sold the land to plaintiffs although defendants question the
capacity of some children to sell the property for being minors.

These admissions tend to establish ownership of the land in


question by Brigido Tonacao. Upon his death, therefore, the property
subject of the case at bar would by operation of law on succession, pass to
the heirs of Brigido Tonacao, namely: to the surviving spouse and his
children.

Catalino Tonacao, the father of the deceased Brigido Tonacao, is


excluded by operation of law by the presence of the compulsory heirs who
are the children of Brigido Tonacao. Whatever sale Catalino Tonacao may
have executed in favor of the defendants is a sale by one who has no legal
personality or authority to do so. Thus, the sale by Catalino Tonacao to
defendants is invalidated by his lack of personality to execute such sale,
which conferred no rights to the defendants nor did it impair the right of
Brigido Tonacaos heirs to dispose of their inheritance in favor of the
plaintiffs.

9
On appeal, the Court of Appeals, in a Decision dated October 9, 1998, reversed and
set aside the trial courts Decision, declaring respondents the true and lawful owners of the
property in dispute, thus:
WHEREFORE, the decision, dated July 17, 1995, of the Regional Trial Court (Branch 11)
in Calubian, Leyte is hereby REVERSED AND SET ASIDE. Therewithal, another
judgment is rendered declaring the order of the trial court null and void,
hereby: declaring the defendants-appellants to have the superior right to
the property in question and to be the true and lawful owners thereof;
directing the Register of Deeds of Leyte to cancel the Deed of Absolute Sale,
dated June 23, 1986, in favor of the plaintiffs-appellees and to reinstate the
Deed of Absolute Sale in favor of the defendants-appellants and Tax
Declaration No. 2408 be issued in favor of spouses Celedonio Rodaje and
Policronia Rodaje; and directing the plaintiffs-appellees and other persons
claiming rights under them, and residing in the premises of the land in
question, to immediately vacate the same and to remove whatever
improvements they had placed in the premises. No pronouncement as to
costs.

Hence, this petition.

The issue before us is which of the two contracts of sale is valid.


Petitioners contend that the sale between Catalino and respondents is void because
the former was not the owner of the lot, hence had no legal capacity to sue. The true owner
was Brigido as shown by Tax Declaration No. 2994 (R-5) in his name. Thus, his spouse and
children, being his successors-in-interest, could validly sell the property to them (petitioners).
On the other hand, respondents insist that they are buyers in good faith. They bought
the property, had the deed of sale registered, and took possession thereof ahead of petitioners.
They also constructed a house thereon which they used as a store. They paid the real estate
taxes corresponding to the period from 1974 up to 1993.
The Court of Appeals, in upholding the validity of the sale in favor of respondents,
10
relied on Article 1544 of the Civil Code on double sale, thus:
As between two purchasers, the one who registered the sale in his favor has a
preferred right over the other who has not registered his title, even if the
latter is in actual possession of the immovable property (Taedo v. Court of
Appeals, 252 SCRA 80). A fortiori the defendants-appellants have a superior
right over the contested property inasmuch as they have both actual
possession and prior registration of the conveyance (Exhibit 2; page 6, TSN,
August 9, 1994; page 5, TSN, August 23, 1994). Dominium a possessione
cepisse dicitur. Right is said to have its beginning from possession.

The applicable provision of the New Civil Code provides:

Art. 1544. If the same thing should


have been sold to different vendees, the
ownership shall be transferred to the person
who may have taken possession thereof in
good faith, if it should be movable property.

Should it be immovable property,


the ownership shall belong to the person
acquiring it who in good faith first recorded it
in the Registry of Property.

Should there be no inscription, the


ownership shall pertain to the person who in
good faith was first in the possession; and, in
11
the absence thereof, to the person who
presents the oldest title, provided there is
good faith.

xxx

Since the controversy involves two deeds of sale over the same
property, Article 1544 properly applies thereto (Vda. De Alcantara v. Court
of Appeals, 252 SCRA 457). Following the above-quoted provision, the court
a quo was not justified in according preferential rights to the plaintiffs-
appellees, who had registered the sale in their favor later, as against the
defendants-appellants.

The Court of Appeals is wrong. Article 1544 of the Civil Code contemplates a case of
double sale 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. It cannot be
invoked where the two different contracts of sale are made by two different persons, one of
them not being the owner of the property sold. In the instant case, the property was sold by
two different vendors to different purchasers. The first sale was between Catalino and herein
respondents, while the second was between Brigidos heirs and herein petitioners.
Settled is the principle that this Court is not a trier of facts. In Gabriel v. Mabanta, we
said that (t)his rule, however, is not an iron-clad rule. One of the recognized exceptions is when
the findings of fact of the Court of Appeals are contrary to those of the trial court, as in this
case.
Here, the trial court which had the opportunity to observe the demeanor of the
parties and first to consider the evidence submitted by them, concluded that respondents are
not purchasers in good faith, thus:
The court finds no merit in the claim of good faith by the

12
defendants in purchasing the land in question. Exhibit 14, which is Tax
Declaration No. 2408, shows that such declaration is a transfer from Tax
Declaration No. 2994 (R-5) in the name of Brigido Tonacao. Defendants,
therefore, knew when they bought the property that they were buying the
property from Catalino who is not the registered owner. The Deed of Sale
(Exh. 2) showcases defendants bad faith in that they purchased the
property from Catalino Tonacao and Lourdes Tonacao and not from the
declared owner, Brigido Tonacao.

In reversing the trial courts findings, the appellate court found, thus:
Since the plaintiffs-appellees had prior knowledge of the sale of
the questioned property to the defendants-appellantsand even recognized
and respected the latters possession thereofthey acted with gross and
evident bad faith in perfecting a contract of sale in their favor. Accordingly,
since it has been proven that the defendants-appellants were the anterior
possessors in good faith, ownership of the questioned property vested in
them by sheer force of law. Besides, the defendants-appellants
subsequently registered the deed of sale in their favor on June 10, 1986. For
all intents and purposes, they were the first to register the deed of
conveyance. Irrefragably, since they were the first vendees, their
registration enjoyed the presumption of good faith.

Good faith is something internal. Actually, it is a question of intention. In ascertaining


ones intention, this Court must rely on the evidence of ones conduct and outward acts. Good
faith, or want of it, is capable of being ascertained only from the acts of one claiming its
presence, for it is a condition of the mind which can be judged by actual or fancied tokens or
signs. Good faith consists in the possessors belief that the person from whom he received the
thing was the owner of the same and could convey his title. Good faith, while it is always to be
presumed in the absence of proof to the contrary, requires a well founded belief that the
person from whom title was received was himself the owner of the land, with the right to
convey it. There is good faith where there is an honest intention to abstain from taking any
unconscientious advantage of another.
Contrastingly, in Magat, Jr. v. Court of Appeals, the Court explained that [b]ad faith
does not simply connote bad judgment or negligence. It imports a dishonest purpose or some
13
moral obliquity and conscious doing of wrong. It means a breach of a known duty through some
motive or interest or ill will that partakes of the nature of fraud. In Arenas v. Court of Appeals,
the Court held that the determination of whether one acted in bad faith is evidentiary in
nature. Thus, [s]uch acts (of bad faith) must be substantiated by evidence. Indeed, the
unbroken jurisprudence is that [b]ad faith under the law cannot be presumed; it must be
established by clear and convincing evidence.
Evidence submitted to the court, oral and documentary, established that respondents
knew beforehand that the property was declared in the name of Brigido Tonacao for taxation
purposes. Respondent Celedonio Rodaje testified as follows:
Q: Mr. Celedonio Rodaje, you said the property you bought in this case was bought
from Catalino Tonacao?

A: It was from Catalino Tonacao.

Q: And the Deed of Absolute Sale was executed in the year 1986?
A: Yes.
Q: It was likewise Catalino Tonacao who signed and executed the Deed of Absolute Sale?
A: Yes, including his wife.
Q: Before you purchased this property, did you find for yourself the ownership of the property
you were supposed to buy?
A: Yes, I did.
Q: Did Catalino Tonacao presented to you a document showing that he really owns the
property?
A: The Tax Declaration of his son Brigido Tonacao signed by Catalino Tonacao.
Q: It was presented to you, the Tax Declaration declared in the name of Brigido Tonacao?
A: It was presented to me

Respondents claim that they have been in possession of the lot even before the
execution of the Deed of Absolute Sale on June 6, 1986. Catalino allowed them to take
possession after they made an initial payment on January 11, 1984. They constructed a house
thereon which they use as a store. They are the ones paying the electric bills and realty taxes.
However, a perusal of the records of the case shows that petitioners are the ones in
prior possession of the property. After they purchased it from the heirs of Brigido in 1981, they
started building a house thereon. The construction was completed in 1984. The house was
declared in the name of their daughter Aida Salera under Tax Declaration No. 4403 issued on
October 11, 1984. She occupied the house and used it as a sari-sari store until 1985 when she
had to close it because business was bad. Even the electrical connection of the house was
registered in her name In fact, respondent Celedonio Rodaje testified that the electric bills are
14
in the name of Aida Salera thus:
Q: Aida Salera testified that she is the owner of the house, plaintiffs daughter in this case. She
presented the electric bills in her name, what can you say to that?
A: The electric bills are in her name, but I was the one paying.

Q: How did it come that the electric bills are in her name?
A: It was a time when the house was newly constructed where she lived for a while.

Q: You said you were the one paying her electric bills, do you have any evidence to prove your
allegation?
A: I have.

Q: What is your proof?


A: A certification from the electric bill collector that I have paid the electric bills from the
beginning.

The certification referred to by respondent Celedonio states that Mr. Celedonio C.


Rodaje, Jr. is the one paying the electric bills of Aida Salera whose dwelling unit is situated in
barangay Basud, San Isidro, Leyte since 1986. The certification clearly shows that the house is
owned by Aida Salera and that respondents started paying the electric bills only in 1986
Respondent Celedonio Rodaje likewise testified that he paid the realty taxes for the
lot from 1974 to 1984 up to the present. However, it appears from his Realty Tax Clearance that
he paid only in 1984 and that the payment was in lump sum.
As stated earlier, respondents knew, prior to the sale to them, that the lot was
declared for taxation purposes under the name of Brigido. Thus, respondents should have been
wary in buying the property. Any lot buyer is expected to be vigilant, exercising utmost care in
determining whether the seller is the true owner of the property and whether there are other
claimants. There is no indication from the record that respondents first determined the status
of the lot.
While tax declarations are not conclusive proofs of ownership, however, they are
good indicia of possession in the concept of owner, for no one in his right mind would be paying
taxes for a property that is not in his actual or at least constructive possession. Hence, as
between Brigido and Catalino, the former had better right to the property. In other words,
Catalino, not being the owner or possessor, could not validly sell the lot to respondents.
The Court is convinced that respondents had knowledge that the disputed property
was previously sold to petitioners by Brigidos heirs. Obviously, aware that the sale to
petitioners was not registered, they purchased the property and have the sale registered ahead
15
of petitioners, who although in possession, failed to have their contract of sale registered
immediately in the Registry of Deeds.
WHEREFORE, the petition is GRANTED. The assailed Decision of the Court of Appeals in CA-G.R.
CV No. 51480 is REVERSED and the Decision of the trial court is REINSTATED.
SO ORDERED.

16
THIRD DIVISION
[G.R. No. 115158. September 5, 1997]

EMILIA M. URACA, CONCORDIA D. CHING and ONG SENG, represented by ENEDINO H.


FERRER, petitioners, vs. COURT OF APPEALS, JACINTO VELEZ, JR., CARMEN VELEZ TING,
AVENUE MERCHANDISING, INC., FELIX TING AND ALFREDO GO, respondents.
DECISION
PANGANIBAN, J.:
Novation is never presumed; it must be sufficiently established that a valid new agreement or
obligation has extinguished or changed an existing one. The registration of a later sale must be
done in good faith to entitle the registrant to priority in ownership over the vendee in an earlier
sale.
Statement of the Case
These doctrines are stressed by this Court as it resolves the instant petition challenging the
December 28, 1993 Decision[1] of Respondent Court of Appeals[2] in CA-G.R. SP No. 33307,
which reversed and set aside the judgment of the Regional Trial Court of Cebu City, Branch 19,
and entered a new one dismissing the petitioners complaint. The dispositive portion of the RTC
decision reads:[3]
WHEREFORE, judgment is hereby rendered:
1) declaring as null and void the three (3) deeds of sale executed by the Velezes to Felix C. Ting,
Manuel Ting and Alfredo Go;
2) ordering Carmen Velez Ting and Jacinto M. Velez, Jr. to execute a deed of absolute sale in
favor of Concordia D. Ching and Emilia M. Uraca for the properties in question for
P1,400,000.00, which sum must be delivered by the plaintiffs to the Velezes immediately after
the execution of said contract;
3) ordering Carmen Velez Ting and Jacinto M. Velez, Jr. to reimburse Felix C. Ting, Manuel C.
Ting and Alfredo Go whatever amount the latter had paid to the former;
4) ordering Felix C. Ting, Manuel C. Ting and Alfredo Go to deliver the properties in question to
the plaintiffs within fifteen (15) days from receipt of a copy of this decision;
5) ordering all the defendants to pay, jointly and severally, the plaintiffs the sum of P20,000.00
as attorneys fees.
SO ORDERED.

17
The Antecedent Facts
The facts narrated by the Court of Appeals are as follows:[4]
The Velezes (herein private respondents) were the owners of the lot and commercial building in
question located at Progreso and M.C. Briones Streets in Cebu City.
Herein (petitioners) were the lessees of said commercial building.[5]
On July 8, 1985, the Velezes through Carmen Velez Ting wrote a letter to herein (petitioners)
offering to sell the subject property for P1,050,000.00 and at the same time requesting (herein
petitioners) to reply in three days.
On July 10, 1985, (herein petitioners) through Atty. Escolastico Daitol sent a reply-letter to the
Velezes accepting the aforesaid offer to sell.
On July 11, 1985, (herein petitioner) Emilia Uraca went to see Carmen Ting about the offer to
sell but she was told by the latter that the price was P1,400,000.00 in cash or managers check
and not P1,050,000.00 as erroneously stated in their letter-offer after some haggling. Emilia
Uraca agreed to the price of P1,400,000.00 but counter-proposed that payment be paid in
installments with a down payment of P1,000,000.00 and the balance of P400,000 to be paid in
30 days. Carmen Velez Ting did not accept the said counter-offer of Emilia Uraca although this
fact is disputed by Uraca.
No payment was made by (herein petitioners) to the Velezes on July 12, 1985 and July 13, 1985.
On July 13, 1985, the Velezes sold the subject lot and commercial building to the Avenue Group
(Private Respondent Avenue Merchandising Inc.) for P1,050,000.00 net of taxes, registration
fees, and expenses of the sale.
At the time the Avenue Group purchased the subject property on July 13, 1985 from the
Velezes, the certificate of title of the said property was clean and free of any annotation of
adverse claims or lis pendens.
On July 31, 1985 as aforestated, herein (petitioners) filed the instant complaint against the
Velezes.
On August 1, 1985, (herein petitioners) registered a notice of lis pendens over the property in
question with the Office of the Register of Deeds.[6]
On October 30, 1985, the Avenue Group filed an ejectment case against (herein petitioners)
ordering the latter to vacate the commercial building standing on the lot in question.
Thereafter, herein (petitioners) filed an amended complaint impleading the Avenue Group as
new defendants (after about 4 years after the filing of the original complaint).

18
The trial court found two perfected contracts of sale between the Velezes and the petitioners,
involving the real property in question. The first sale was for P1,050,000.00 and the second was
for P1,400,000.00. In respect to the first sale, the trial court held that [d]ue to the unqualified
acceptance by the plaintiffs within the period set by the Velezes, there consequently came
about a meeting of the minds of the parties not only as to the object certain but also as to the
definite consideration or cause of the contract.[7] And even assuming arguendo that the
second sale was not perfected, the trial court ruled that the same still constituted a mere
modificatory novation which did not extinguish the first sale. Hence, the trial court held that
the Velezes were not free to sell the properties to the Avenue Group.[8] It also found that the
Avenue Group purchased the property in bad faith.[9]
Private respondents appealed to the Court of Appeals. As noted earlier, the CA found the
appeal meritorious. Like the trial court, the public respondent held that there was a perfected
contract of sale of the property for P1,050,000.00 between the Velezes and herein petitioners.
It added, however, that such perfected contract of sale was subsequently novated. Thus, it
ruled: Evidence shows that that was the original contract. However, the same was mutually
withdrawn, cancelled and rescinded by novation, and was therefore abandoned by the parties
when Carmen Velez Ting raised the consideration of the contract [by] P350,000.00, thus making
the price P1,400,000.00 instead of the original price of P1,050,000.00. Since there was no
agreement as to the second price offered, there was likewise no meeting of minds between the
parties, hence, no contract of sale was perfected.[10] The Court of Appeals added that,
assuming there was agreement as to the price and a second contract was perfected, the later
contract would be unenforceable under the Statute of Frauds. It further held that such second
agreement, if there was one, constituted a mere promise to sell which was not binding for lack
of acceptance or a separate consideration.[11]
The Issues
Petitioners allege the following errors in the Decision of Respondent Court:
I
Since it ruled in its decision that there was no meeting of the minds on the second price offered
(P1,400,000.00), hence no contract of sale was perfected, the Court of Appeals erred in not
holding that the original written contract to buy and sell for P1,050,000.00 the Velezes property
continued to be valid and enforceable pursuant to Art. 1279 in relation with Art. 1479, first
paragraph, and Art. 1403, subparagraph 2 (e) of the Civil Code.
II
The Court of Appeals erred in not ruling that petitioners have better rights to buy and own the
Velezes property for registering their notice of lis pendens ahead of the Avenue Groups
registration of their deeds of sale taking into account Art. 1544, 2nd paragraph, of the Civil
Code.[12]
19
The Courts Ruling
The petition is meritorious.
First Issue: No Extinctive Novation
The lynchpin of the assailed Decision is the public respondents conclusion that the sale of the
real property in controversy, by the Velezes to petitioners for P1,050,000.00, was extinguished
by novation after the said parties negotiated to increase the price to P1,400,000.00. Since there
was no agreement on the sale at the increased price, then there was no perfected contract to
enforce. We disagree.
The Court notes that the petitioners accepted in writing and without qualification the Velezes
written offer to sell at P1,050,000.00 within the three-day period stipulated therein. Hence,
from the moment of acceptance on July 10, 1985, a contract of sale was perfected since
undisputedly the contractual elements of consent, object certain and cause concurred.[13]
Thus, this question is posed for our resolution: Was there a novation of this perfected contract?
Article 1600 of the Civil Code provides that (s)ales are extinguished by the same causes as all
other obligations, x x x. Article 1231 of the same Code states that novation is one of the ways to
wipe out an obligation. Extinctive novation requires: (1) the existence of a previous valid
obligation; (2) the agreement of all the parties to the new contract; (3) the extinguishment of
the old obligation or contract; and (4) the validity of the new one.[14] The foregoing clearly
show that novation is effected only when a new contract has extinguished an earlier contract
between the same parties. In this light, novation is never presumed; it must be proven as a fact
either by express stipulation of the parties or by implication derived from an irreconcilable
incompatibility between old and new obligations or contracts.[15] After a thorough review of
the records, we find this element lacking in the case at bar.
As aptly found by the Court of Appeals, the petitioners and the Velezes did not reach an
agreement on the new price of P1,400,000.00 demanded by the latter. In this case, the
petitioners and the Velezes clearly did not perfect a new contract because the essential
requisite of consent was absent, the parties having failed to agree on the terms of the payment.
True, petitioners made a qualified acceptance of this offer by proposing that the payment of
this higher sale price be made by installment, with P1,000,000.00 as down payment and the
balance of P400,000.00 payable thirty days thereafter. Under Article 1319 of the Civil Code,[16]
such qualified acceptance constitutes a counter-offer and has the ineludible effect of rejecting
the Velezes offer.[17] Indeed, petitioners counter-offer was not accepted by the Velezes. It is
well-settled that (a)n offer must be clear and definite, while an acceptance must be
unconditional and unbounded, in order that their concurrence can give rise to a perfected
contract.[18] In line with this basic postulate of contract law, a definite agreement on the
manner of payment of the price is an essential element in the formation of a binding and
enforceable contract of sale.[19] Since the parties failed to enter into a new contract that could
have extinguished their previously perfected contract of sale, there can be no novation of the
20
latter. Consequently, the first sale of the property in controversy, by the Velezes to petitioners
for P1,050,000.00, remained valid and existing.
In view of the validity and subsistence of their original contract of sale as previously discussed,
it is unnecessary to discuss public respondents theses that the second agreement is
unenforceable under the Statute of Frauds and that the agreement constitutes a mere promise
to sell.
Second Issue: Double Sale of an Immovable
The foregoing holding would have been simple and straightforward. But Respondent Velezes
complicated the matter by selling the same property to the other private respondents who
were referred to in the assailed Decision as the Avenue Group.
Before us therefore is a classic case of a double sale -- first, to the petitioner; second, to the
Avenue Group. Thus, the Court is now called upon to determine which of the two groups of
buyers has a better right to said property.
Article 1544 of the Civil Code provides the statutory solution:
xxx xxx xxx
Should it be immovable property, the ownership shall belong to the person acquiring it who in
good faith first recorded it in the Registry of Property.
Should there be no inscription, the ownership shall pertain to the person who in good faith was
first in the possession; and, in the absence thereof, to the person who presents the oldest title,
provided there is good faith.
Under the foregoing, the prior registration of the disputed property by the second buyer does
not by itself confer ownership or a better right over the property. Article 1544 requires that
such registration must be coupled with good faith. Jurisprudence teaches us that (t)he
governing principle is primus tempore, potior jure (first in time, stronger in right). Knowledge
gained by the first buyer of the second sale cannot defeat the first buyers rights except where
the second buyer registers in good faith the second sale ahead of the first, as provided by the
Civil Code. Such knowledge of the first buyer does not bar her from availing of her rights under
the law, among them, to register first her purchase as against the second buyer. But in
converso knowledge gained by the second buyer of the first sale defeats his rights even if he is
first to register the second sale, since such knowledge taints his prior registration with bad faith
This is the price exacted by Article 1544 of the Civil Code for the second buyer being able to
displace the first buyer; 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.[20] (Emphasis supplied)

21
After a thorough scrutiny of the records of the instant case, the Court finds that bad faith
tainted the Avenue Groups purchase on July 13, 1985 of the Velezes real property subject of
this case, and the subsequent registration thereof on August 1, 1995. The Avenue Group had
actual knowledge of the Velezes prior sale of the same property to the petitioners, a fact
antithetical to good faith. For a second buyer like the Avenue Group to successfully invoke the
second paragraph, Article 1544 of the Civil Code, it must possess good faith from the time of
the sale in its favor until the registration of the same. This requirement of good faith the
Avenue Group sorely failed to meet. That it had knowledge of the prior sale, a fact undisputed
by the Court of Appeals, is explained by the trial court thus:
The Avenue Group, whose store is close to the properties in question, had known the plaintiffs
to be the lessee-occupants thereof for quite a time. Felix Ting admitted to have a talk with Ong
Seng in 1983 or 1984 about the properties. In the cross-examination, Manuel Ting also
admitted that about a month after Ester Borromeo allegedly offered the sale of the properties
Felix Ting went to see Ong Seng again. If these were so, it can be safely assumed that Ong Seng
had consequently told Felix about plaintiffs offer on January 11, 1985 to buy the properties for
P1,000,000.00 and of their timely acceptance on July 10, 1985 to buy the same at
P1,050,000.00.
The two aforesaid admissions by the Tings, considered together with Uracas positive assertion
that Felix Ting met with her on July 11th and who was told by her that the plaintiffs had
transmitted already to the Velezes their decision to buy the properties at P1,050,000.00,
clinches the proof that the Avenue Group had prior knowledge of plaintiffs interest. Hence, the
Avenue Group defendants, earlier forewarned of the plaintiffs prior contract with the Velezes,
were guilty of bad faith when they proceeded to buy the properties to the prejudice of the
plaintiffs.[21]
The testimony of Petitioner Emilia Uraca supports this finding of the trial court. The salient
portions of her testimony follow:
BY ATTY. BORROMEO: (To witness)
Q According to Manuel Ting in his testimony, even if they know, referring to the Avenue Group,
that you were tenants of the property in question and they were neighbors to you, he did not
inquire from you whether you were interested in buying the property, what can you say about
that?
A It was Felix Ting who approached me and asked whether I will buy the property, both the
house and the land and that was on July 10, 1985.
ATTY BORROMEO: (To witness)
Q What was your reply, if any?

22
A Yes, sir, I said we are going to buy this property because we have stayed for a long time there
already and we have a letter from Carmen Ting asking us whether we are going to buy the
property and we have already given our answer that we are willing to buy.
COURT: (To witness)
Q What do you mean by that, you mean you told Felix Ting and you showed him that letter of
Carmen Ting?
WITNESS:
A We have a letter of Carmen Ting where she offered to us for sale the house and lot and I told
him that I have already agreed with Concordia Ching, Ong Seng and my self that we buy the
land. We want to buy the land and the building.[22]
We see no reason to disturb the factual finding of the trial court that the Avenue Group, prior
to the registration of the property in the Registry of Property, already knew of the first sale to
petitioners. It is hornbook doctrine that findings of facts of the trial court, particularly when
affirmed by the Court of Appeals, are binding upon this Court[23] save for exceptional
circumstances[24] which we do not find in the factual milieu of the present case. True, this
doctrine does not apply where there is a variance in the factual findings of the trial court and
the Court of Appeals. In the present case, the Court of Appeals did not explicitly sustain this
particular holding of the trial court, but neither did it controvert the same. Therefore, because
the registration by the Avenue Group was in bad faith, it amounted to no inscription at all.
Hence, the third and not the second paragraph of Article 1544 should be applied to this case.
Under this provision, petitioners are entitled to the ownership of the property because they
were first in actual possession, having been the propertys lessees and possessors for decades
prior to the sale.
Having already ruled that petitioners actual knowledge of the first sale tainted their
registration, we find no more reason to pass upon the issue of whether the annotation of lis
pendens automatically negated good faith in such registration.
WHEREFORE, the petition is GRANTED. The assailed Decision of the Court of Appeals is hereby
SET ASIDE and the dispositive portion of the trial courts decision dated October 19, 1990 is
REVIVED with the following MODIFICATION -- the consideration to be paid under par. 2 of the
disposition is P1,050,000.00 and not P1,400,000.00. No Costs.
SO ORDERED.

23
Republic of the Philippines
SUPREME COURT
Manila

THIRD DIVISION
G.R. No. L-55665 February 8, 1989
DELTA MOTOR CORPORATION, petitioner,
vs.
EDUARDA SAMSON GENUINO, JACINTO S. GENUINO, Jr., VICTOR S. GENUINO, HECTOR S.
GENUINO, EVELYN S. GENUINO, and The COURT OF APPEALS, respondents.
Alcasid, Villanueva & Associates for petitioner.
Luna, Puruganan, Sison & Ongkiko for respondents.

CORTES, J.:
Petitioner, through this petition for review by certiorari, appeals from the decision of
respondent appellate court in CA-G.R. No. 59848-R entitled "Eduarda Samson Genuino, et al. v.
Delta Motor Corporation" promulgated on October 27, 1980.
The facts are as follows:
Petitioner Delta Motor Corporation (hereinafter referred to as Delta) is a corporation duly
organized and existing under Philippine laws.
On the other hand, private respondents are the owners of an iceplant and cold storage located
at 1879 E. Rodriguez Sr. Avenue, Quezon City doing business under the name "España Extension
Iceplant and Cold Storage."
In July 1972, two letter-quotations were submitted by Delta to Hector Genuino offering to sell
black iron pipes. T
The letter dated July 3, 1972 quoted Delta's selling price for 1,200 length of black iron pipes
schedule 40, 2" x 20' including delivery at P66,000.00 with the following terms of payment:
a. 20% of the net contract price or P13,200.00 will be due and payable upon signing of the
contract papers.

24
b. 20% of the net contract price or P13,200.00 will be due and payable before commencement
of delivery.
c. The balance of 60% of the net contract price or P39,600.00 with 8% financing charge per
annum will be covered by a Promissory Note bearing interest at the rate of 14% per annum and
payable in TWELVE (12) equal monthly installment (sic), the first of which will become due
thirty (30) days after the completion of delivery. Additional 14% will be charged for all delayed
payments. [Exh. "A"; Exh. 1.]

The second letter-quotation dated July 18, 1972 provides for the selling price of 150 lengths of
black iron pipes schedule 40, 1 1/4" x 20' including delivery at P5,400.00 with the following
terms of payment:
a. 50% of the net contract price or P 2,700.00 will be due and payable upon signing of the
contract papers.
b. 50% of the net contract price or P 2,700.00 will be due and payable before commencement
of delivery. [Exh. "C"; Exh. "2".]
Both letter-quotations also contain the following stipulations as to delivery and price offer:
DELIVERY
Ex-stock subject to prior sales.
xxx xxx xxx
Our price offer indicated herein shall remain firm within a period of thirty (30) days from the
date hereof. Any order placed after said period will be subject to our review and confirmation.
[Exh. "A" and "C"; Exhs. "l" and "2".]
Hector Genuino was agreeable to the offers of Delta hence, he manifested his conformity
thereto by signing his name in the space provided on July 17, 1972 and July 24, 1972 for the
first and second letter-quotations, respectively.
It is undisputed that private respondents made initial payments on both contracts — for the
first contract, P13,200.00 and, for the second, P2,700.00 — for a total sum of P15,900.00 on
July 28, 1972 (Exhs. "B" and "D"].
Likewise unquestionable are the following. the non-delivery of the iron pipes by Delta; the non-
payment of the subsequent installments by the Genuinos; and the non-execution by the
Genuinos of the promissory note called for by the first contract.

25
The evidence presented in the trial court also showed that sometime in July 1972 Delta offered
to deliver the iron pipes but the Genuinos did not accept the offer because the construction of
the ice plant building where the pipes were to be installed was not yet finished.
Almost three years later, on April 15, 1975, Hector Genuino, in behalf of España Extension Ice
Plant and Cold Storage, asked Delta to deliver the iron pipes within thirty (30) days from its
receipt of the request. At the same time private respondents manifested their preparedness to
pay the second installment on both contracts upon notice of Delta's readiness to deliver.
Delta countered that the black iron pipes cannot be delivered on the prices quoted as of July
1972. The company called the attention of the Genuinos to the stipulation in their two (2)
contracts that the quoted prices were good only within thirty (30) days from date of offer.
Whereupon Delta sent new price quotations to the Genuinos based on its current price of black
iron pipes, as follows:
P241,800.00 for 1,200 lengths of black iron pjpes schedule 40, 2" x 20' [Exh. "G-1".]
P17,550.00 for 150 lengths of black iron pipes schedule 40, 1 1/4" x 20' [Exh. "G-2".]
The Genuinos rejected the new quoted prices and instead filed a complaint for specific
performance with damages seeking to compel Delta to deliver the pipes. Delta, in its answer
prayed for rescission of the contracts pursuant to Art. 1191 of the New Civil Code. The case was
docketed as Civil Case No. Q-20120 of the then Court of First Instance of Rizal, Branch XVIII,
Quezon City.
After trial the Court of First Instance ruled in favor of Delta,the dispositive portion of its
decision reading as follows:
WHEREFORE, premises considered, judgment is rendered:
1. Declaring the contracts, Annexes "A" and "C" of the complaint rescinded;
2. Ordering defendant to refund to plaintiffs the sum of P15,900.00 delivered by the latter as
downpayments on the aforesaid contracts;
3. Ordering plaintiffs to pay defendant the sum of P10,000.00 as attorney's fees; and,
4. To pay the costs of suit. [CFI Decision, pp. 13-14; Rollo, pp. 53-54.]
On appeal, the Court of Appeals reversed and ordered private respondents to make the
payments specified in "Terms of Payment — (b)" of the contracts and to execute the
promissory note required in the first contract and thereafter, Delta should immediately
commence delivery of the black iron pipes.* [CA Decision, p. 20; Rollo, p. 75.]
The Court of Appeals cited two main reasons why it reversed the trial court, namely:

26
1. As Delta was the one who prepared the contracts and admittedly, it had knowledge of
the fact that the black iron pipes would be used by the Genuinos in their cold storage plant
which was then undergoing construction and therefore, would require sometime before the
Genuinos would require delivery, Delta should have included in said contracts a deadline for
delivery but it did not. As a matter of fact neither did it insist on delivery when the Genuinos
refused to accept its offer of delivery. [CA Decision, pp. 16-17; Rollo, pp. 71-72.]
2. Delta's refusal to make delivery in 1975 unless the Genuinos pay a price very much
higher than the prices it previously quoted would mean an amendment of the contracts. It
would be too unfair for the plaintiffs if they will be made to bear the increase in prices of the
black iron pipes when they had already paid quite an amount for said items and defendant had
made use of the advance payments. That would be unjust enrichment on the part of the
defendant at the expense of the plaintiffs and is considered an abominable business practice.
[CA Decision, pp. 18-19; Rollo, pp. 73-74.]
Respondent court denied Delta's motion for reconsideration hence this petition for review
praying for the reversal of the Court of Appeals decision and affirmance of that of the trial
court.
Petitioner argues that its obligation to deliver the goods under both contracts is subject to
conditions required of private respondents as vendees. These conditions are: payment of 20%
of the net contract price or P13,200.00 and execution of a promissory note called for by the
first contract; and payment of 50% of the net contract price or P2,700.00 under the second
contract. These, Delta posits, are suspensive conditions and only upon their performance or
compliance would its obligation to deliver the pipes arise [Petition, pp. 9-12; Rollo, pp. 1720.]
Thus, when private respondents did not perform their obligations; when they refused to accept
petitioner's offer to deliver the goods; and, when it took them three (3) long years before they
demanded delivery of the iron pipes that in the meantime, great and sudden fluctuation in
market prices have occurred; Delta is entitled to rescind the two (2) contracts.
Delta relies on the following provision of law on rescission:
Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the
obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the obligation, with
the payment of damages in either case. He may also seek rescission, even after he has chosen
fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the fixing
of a period.
This is understood to be without prejudice to the rights of third persons who have acquired the
thing, in accordance with articles 1385 and 1388 and the Mortgage Law.

27
In construing Art. 1191, the Supreme Court has stated that, "[r]escission will be ordered only
where the breach complained of is substantial as to defeat the object of the parties in entering
into the agreement. It will not be granted where the breach is slight or casual." [Phil.
Amusement Enterprises, Inc. v. Natividad, G.R. No. L-21876, September 29, 1967, 21 SCRA 284,
290.] Further, "[t]he question of whether a breach of a contract is substantial depends upon the
attendant circumstances." [Universal Food Corporation v. Court of Appeals, G. R. No. L-29155,
May 13,1970,33 SCRA 1, 18].
In the case at bar, the conduct of Delta indicates that the Genuinos' non-performance of its
obligations was not a substantial breach, let alone a breach of contract, as would warrant
rescission.
Firstly, it is undisputed that a month after the execution of the two (2) contracts, Delta's offer
to deliver the black iron pipes was rejected by the Genuinos who were "not ready to accept
delivery because the cold storage rooms have not been constructed yet. Plaintiffs (private
respondents herein) were short-funded, and did not have the space to accommodate the pipes
they ordered" [CFI Decision, p. 9; Rollo, p. 49].
Given this answer to its offer, Delta did not do anything. As testified by Crispin Villanueva,
manager of the Technical Service department of petitioner:
Q You stated that you sent a certain Evangelista to the España Extension and Cold Storage
to offer the delivery subject matter of the contract and then you said that Mr. Evangelista
reported (sic) to you that plaintiff would not accept delivery, is that correct, as a summary of
your statement?
A A Yes, sir.
Q Now, what did you do in the premises (sic)?
A Yes, well, we take the word of Mr. Evangelista. We could not deliver the said black iron pipes,
because as per information the Ice Plant is not yet finished.
Q Did you not report that fact to ... any other defendant-officials of the Delta Motor
Corporation?
A No.
Q And you did not do anything after that?
A Because taking the word of my Engineer we did not do anything. [TSN, December 8, 1975, pp.
18-19.]
xxx xxx xxx

28
And secondly, three (3) years later when the Genuinos offered to make payment Delta did not
raise any argument but merely demanded that the quoted prices be increased. Thus, in its
answer to private respondents' request for delivery of the pipes, Delta countered:
Thank you for your letter dated April 15, 1975, requesting for delivery of Black Iron pipes;.
We regret to say, however, that we cannot base our price on our proposals dated July 3 and
July 18, 1972 as per the following paragraph quoted on said proposal:
Our price offer indicated herein shall remain firm within a period of thirty (30) days from the
date hereof. Any order placed after said period will be subject to our review and confirmation.
We are, therefore, enclosing our re-quoted proposal based on our current price. [Exh. "G".]
Moreover, the power to rescind under Art. 1191 is not absolute. "[T]he act of a party in treating
a contract as cancelled or resolved on account of infractions by the other contracting party
must be made known to the other and is always provisional, being ever subject to scrutiny and
review by the proper court." [University of the Phils. v. De los Angeles, G. R. No. L-28602,
September 29, 1970, 35 SCRA 102, 107; Emphasis supplied.]
In the instant case, Delta made no manifestation whatsoever that it had opted to rescind its
contracts with f-he Genuinos. It only raised rescission as a defense when it was sued for specific
performance by private respondents.
Further, it would be highly inequitable for petitioner Delta to rescind the two (2) contracts
considering the fact that not only does it have in its possession and ownership the black iron
pipes, but also the P15,900.00 down payments private respondents have paid. And if petitioner
Delta claims the right to rescission, at the very least, it should have offered to return the
P15,900.00 down payments [See Art. 1385, Civil Code and Hodges v. Granada, 59 Phil. 429
(1934)].
It is for these same reasons that while there is merit in Delta's claim that the sale is subject to
suspensive conditions, the Court finds that it has, nevertheless, waived performance of these
conditions and opted to go on with the contracts although at a much higher price. Art. 1545 of
the Civil Code provides:
Art. 1545. Where the obligation of either party to a contract of sale is subject to any condition
which is not performed, such party may refuse to proceed with the contract or he may waived
performance of the condition. . . . [Emphasis supplied.]
Finally, Delta cannot ask for increased prices based on the price offer stipulation in the
contracts and in the increase in the cost of goods. Reliance by Delta on the price offer
stipulation is misplaced. Said stipulation makes reference to Delta's price offer as remaining
firm for thirty (30) days and thereafter, will be subject to its review and confirmation. The offers
of Delta, however, were accepted by the private respondents within the thirty (30)-day period.

29
And as stipulated in the two (2) letter-quotations, acceptance of the offer gives rise to a
contract between the parties:
In the event that this proposal is acceptable to you, please indicate your conformity by signing
the space provided herein below which also serves as a contract of this proposal. [Exhs. "A" and
"C"; Exhs. "1" and "2".]
And as further provided by the Civil Code:
Art. 1319. Consent is manifested by the meeting of the offer and the acceptance upon the thing
and the cause which are to constitute the contract.
Art. 1475. The contract of sale is perfected at the moment there is a meeting of minds upon
thing which is the object of the contract and upon the price.
Thus, the moment private respondents accepted the offer of Delta, the contract of sale
between them was perfected and neither party could change the terms thereof.
Neither could petitioner Delta rely on the fluctuation in the market price of goods to support its
claim for rescission. As testified to by petitioner's Vice-President of Marketing for the
Electronics, Airconditioning and Refrigeration division, Marcelino Caja, the stipulation in the
two (2) contracts as to delivery, ex-stock subject to prior sales, means that "the goods have not
been delivered and that there are no prior commitments other than the sale covered by the
contracts.. . once the offer is accepted, the company has no more option to change the price."
[CFI Decision, p. 5; Rollo, p. 45; Emphasis supplied.] Thus, petitioner cannot claim for higher
prices for the black iron pipes due to the increase in the cost of goods. Based on the foregoing,
petitioner Delta and private respondents Genuinos should comply with the original terms of
their contracts.

WHEREFORE, the decision of the Court of Appeals is hereby AFFIRMED.

SO ORDERED.

Fernan, C.J., Gutierrez, Jr., Feliciano and Bidin, JJ., concur.

30
FIRST DIVISION
PCI LEASING AND FINANCE, INC.,
Petitioner,
- versus -
GIRAFFE-X CREATIVE IMAGING, INC.,
Respondent.
G.R. No. 142618
Present:

PUNO, C.J., Chairperson,


*SANDOVAL-GUTIERREZ,
CORONA,
AZCUNA, and
GARCIA, JJ.

Promulgated:

July 12, 2007


x------------------------------------------------------------------------------------x

DECISION
GARCIA, J.:

On a pure question of law involving the application of Republic Act (R.A.) No. 5980, as amended
by R.A. No. 8556 in relation to Articles 1484 and 1485 of the Civil Code, petitioner PCI Leasing
and Finance, Inc. (PCI LEASING, for short) has directly come to this Court via this petition for
review under Rule 45 of the Rules of Court to nullify and set aside the Decision and Resolution
dated December 28, 1998 and February 15, 2000, respectively, of the Regional Trial Court (RTC)
of Quezon City, Branch 227, in its Civil Case No. Q-98-34266, a suit for a sum of money and/or
31
personal property with prayer for a writ of replevin, thereat instituted by the petitioner against
the herein respondent, Giraffe-X Creative Imaging, Inc. (GIRAFFE, for brevity).
The facts:
On December 4, 1996, petitioner PCI LEASING and respondent GIRAFFE entered into a Lease
Agreement,[1] whereby the former leased out to the latter one (1) set of Silicon High Impact
Graphics and accessories worth P3,900,00.00 and one (1) unit of Oxberry Cinescan 6400-10
worth P6,500,000.00. In connection with this agreement, the parties subsequently signed two
(2) separate documents, each denominated as Lease Schedule.[2] Likewise forming parts of the
basic lease agreement were two (2) separate documents denominated Disclosure Statements
of Loan/Credit Transaction (Single Payment or Installment Plan)[3] that GIRAFFE also executed
for each of the leased equipment. These disclosure statements inter alia described GIRAFFE, vis-
-vis the two aforementioned equipment, as the borrower who acknowledged the net proceeds
of the loan, the net amount to be financed, the financial charges, the total installment
payments that it must pay monthly for thirty-six (36) months, exclusive of the 36% per annum
late payment charges. Thus, for the Silicon High Impact Graphics, GIRAFFE agreed to pay
P116,878.21 monthly, and for Oxberry Cinescan, P181.362.00 monthly. Hence, the total
amount GIRAFFE has to pay PCI LEASING for 36 months of the lease, exclusive of monetary
penalties imposable, if proper, is as indicated below:

P116,878.21 @ month (for the Silicon High


Impact Graphics) x 36 months = P 4,207,615.56
-- PLUS--
P181,362.00 @ month (for the Oxberry
Cinescan) x 36 months = P 6,529,032.00
Total Amount to be paid by GIRAFFE
(or the NET CONTRACT AMOUNT) P 10,736,647.56
By the terms, too, of the Lease Agreement, GIRAFFE undertook to remit the amount of
P3,120,000.00 by way of guaranty deposit, a sort of performance and compliance bond for the
two equipment. Furthermore, the same agreement embodied a standard acceleration clause,
operative in the event GIRAFFE fails to pay any rental and/or other accounts due.
A year into the life of the Lease Agreement, GIRAFFE defaulted in its monthly rental-payment
obligations. And following a three-month default, PCI LEASING, through one Atty. Florecita R.
Gonzales, addressed a formal pay-or-surrender-equipment type of demand letter[4] dated
February 24, 1998 to GIRAFFE.

32
The demand went unheeded.
Hence, on May 4, 1998, in the RTC of Quezon City, PCI LEASING instituted the instant case
against GIRAFFE. In its complaint,[5] docketed in said court as Civil Case No. 98-34266 and
raffled to Branch 227[6] thereof, PCI LEASING prayed for the issuance of a writ of replevin for
the recovery of the leased property, in addition to the following relief:
2. After trial, judgment be rendered in favor of plaintiff [PCI LEASING] and against the
defendant [GIRAFFE], as follows:
a. Declaring the plaintiff entitled to the possession of the subject properties;
b. Ordering the defendant to pay the balance of rental/obligation in the total amount of
P8,248,657.47 inclusive of interest and charges thereon;
c. Ordering defendant to pay plaintiff the expenses of litigation and cost of suit. (Words in
bracket added.)
Upon PCI LEASINGs posting of a replevin bond, the trial court issued a writ of replevin, paving
the way for PCI LEASING to secure the seizure and delivery of the equipment covered by the
basic lease agreement.
Instead of an answer, GIRAFFE, as defendant a quo, filed a Motion to Dismiss, therein arguing
that the seizure of the two (2) leased equipment stripped PCI LEASING of its cause of action.
Expounding on the point, GIRAFFE argues that, pursuant to Article 1484 of the Civil Code on
installment sales of personal property, PCI LEASING is barred from further pursuing any claim
arising from the lease agreement and the companion contract documents, adding that the
agreement between the parties is in reality a lease of movables with option to buy. The given
situation, GIRAFFE continues, squarely brings into applicable play Articles 1484 and 1485 of the
Civil Code, commonly referred to as the Recto Law. The cited articles respectively provide:

ART. 1484. In a contract of sale of personal property the price of which is payable in
installments, the vendor may exercise any of the following remedies:
(1) Exact fulfillment of the obligation, should the vendee fail to pay;
(2) Cancel the sale, should the vendee's failure to pay cover two or more installments;
(3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the
vendee's failure to pay cover two or more installments. In this case, he shall have no further
action against the purchaser to recover any unpaid balance of the price. Any agreement to the
contrary shall be void. (Emphasis added.)

33
ART. 1485. The preceding article shall be applied to contracts purporting to be leases of
personal property with option to buy, when the lessor has deprived the lessee of the
possession or enjoyment of the thing.
It is thus GIRAFFEs posture that the aforequoted Article 1484 of the Civil Code applies to its
contractual relation with PCI LEASING because the lease agreement in question, as
supplemented by the schedules documents, is really a lease with option to buy under the
companion article, Article 1485. Consequently, so GIRAFFE argues, upon the seizure of the
leased equipment pursuant to the writ of replevin, which seizure is equivalent to foreclosure,
PCI LEASING has no further recourse against it. In brief, GIRAFFE asserts in its Motion to Dismiss
that the civil complaint filed by PCI LEASING is proscribed by the application to the case of
Articles 1484 and 1485, supra, of the Civil Code.
In its Opposition to the motion to dismiss, PCI LEASING maintains that its contract with GIRAFFE
is a straight lease without an option to buy. Prescinding therefrom, PCI LEASING rejects the
applicability to the suit of Article 1484 in relation to Article 1485 of the Civil Code, claiming that,
under the terms and conditions of the basic agreement, the relationship between the parties is
one between an ordinary lessor and an ordinary lessee.
In a decision[7] dated December 28, 1998, the trial court granted GIRAFFEs motion to dismiss
mainly on the interplay of the following premises: 1) the lease agreement package, as
memorialized in the contract documents, is akin to the contract contemplated in Article 1485 of
the Civil Code, and 2) GIRAFFEs loss of possession of the leased equipment consequent to the
enforcement of the writ of replevin is akin to foreclosure, the condition precedent for
application of Articles 1484 and 1485 [of the Civil Code]. Accordingly, the trial court dismissed
Civil Case No. Q-98-34266, disposing as follows:
WHEREFORE, premises considered, the defendant [GIRAFFE] having relinquished any claim to
the personal properties subject of replevin which are now in the possession of the plaintiff [PCI
LEASING], plaintiff is DEEMED fully satisfied pursuant to the provisions of Articles 1484 and
1485 of the New Civil Code. By virtue of said provisions, plaintiff is DEEMED estopped from
further action against the defendant, the plaintiff having recovered thru (replevin) the personal
property sought to be payable/leased on installments, defendants being under protection of
said RECTO LAW. In view thereof, this case is hereby DISMISSED.
With its motion for reconsideration having been denied by the trial court in its resolution of
February 15, 2000,[8] petitioner has directly come to this Court via this petition for review
raising the sole legal issue of whether or not the underlying Lease Agreement, Lease Schedules
and the Disclosure Statements that embody the financial leasing arrangement between the
parties are covered by and subject to the consequences of Articles 1484 and 1485 of the New
Civil Code.

34
As in the court below, petitioner contends that the financial leasing arrangement it concluded
with the respondent represents a straight lease covered by R.A. No. 5980, the Financing
Company Act, as last amended by R.A. No. 8556, otherwise known as Financing Company Act of
1998, and is outside the application and coverage of the Recto Law. To the petitioner, R.A. No.
5980 defines and authorizes its existence and business.
The recourse is without merit.
R.A. No. 5980, in its original shape and as amended, partakes of a supervisory or regulatory
legislation, merely providing a regulatory framework for the organization, registration, and
regulation of the operations of financing companies. As couched, it does not specifically define
the rights and obligations of parties to a financial leasing arrangement. In fact, it does not go
beyond defining commercial or transactional financial leasing and other financial leasing
concepts. Thus, the relevancy of Article 18 of the Civil Code which reads:
Article 18. - In matters which are governed by special laws, their deficiency shall be supplied by
the provisions of this [Civil] Code.
Petitioner foists the argument that the Recto Law, i.e., the Civil Code provisions on installment
sales of movable property, does not apply to a financial leasing agreement because such
agreement, by definition, does not confer on the lessee the option to buy the property subject
of the financial lease. To the petitioner, the absence of an option-to-buy stipulation in a
financial leasing agreement, as understood under R.A. No. 8556, prevents the application
thereto of Articles 1484 and 1485 of the Civil Code.
We are not persuaded.
The Court can allow that the underlying lease agreement has the earmarks or made to appear
as a financial leasing,[9] a term defined in Section 3(d) of R.A. No. 8556 as -
a mode of extending credit through a non-cancelable lease contract under which the lessor
purchases or acquires, at the instance of the lessee, machinery, equipment, office machines,
and other movable or immovable property in consideration of the periodic payment by the
lessee of a fixed amount of money sufficient to amortize at least seventy (70%) of the purchase
price or acquisition cost, including any incidental expenses and a margin of profit over an
obligatory period of not less than two (2) years during which the lessee has the right to hold
and use the leased property but with no obligation or option on his part to purchase the leased
property from the owner-lessor at the end of the lease contract.
In its previous holdings, however, the Court, taking into account the following mix: the
imperatives of equity, the contractual stipulations in question and the actuations of parties vis--
vis their contract, treated disguised transactions technically tagged as financing lease, like here,
as creating a different contractual relationship. Notable among the Courts decisions because of
its parallelism with this case is BA Finance Corporation v. Court of Appeals[10] which involved a
motor vehicle. Thereat, the Court has treated a purported financial lease as actually a sale of a
35
movable property on installments and prevented recovery beyond the buyers arrearages.
Wrote the Court in BA Finance:
The transaction involved is one of a "financial lease" or "financial leasing," where a financing
company would, in effect, initially purchase a mobile equipment and turn around to lease it to a
client who gets, in addition, an option to purchase the property at the expiry of the lease
period. xxx.
xxx xxx xxx
The pertinent provisions of [RA] 5980, thus implemented, read:
"'Financing companies,' are primarily organized for the purpose of extending credit facilities to
consumers either by leasing of motor vehicles, and office machines and equipment, and other
movable property."
"'Credit' shall mean any loan, any contract to sell, or sale or contract of sale of property or
service, under which part or all of the price is payable subsequent to the making of such sale or
contract; any rental-purchase contract; .;"
The foregoing provisions indicate no less than a mere financing scheme extended by a financing
company to a client in acquiring a motor vehicle and allowing the latter to obtain the
immediate possession and use thereof pending full payment of the financial accommodation
that is given.
In the case at bench, xxx. [T]he term of the contract [over a motor vehicle] was for thirty six (36)
months at a "monthly rental" (P1,689.40), or for a total amount of P60,821.28. The contract
also contained [a] clause [requiring the Lessee to give a guaranty deposit in the amount of
P20,800.00] xxx
After the private respondent had paid the sum of P41,670.59, excluding the guaranty deposit of
P20,800.00, he stopped further payments. Putting the two sums together, the financing
company had in its hands the amount of P62,470.59 as against the total agreed "rentals" of
P60,821.28 or an excess of P1,649.31.
The respondent appellate court considered it only just and equitable for the guaranty deposit
made by the private respondent to be applied to his arrearages and thereafter to hold the
contract terminated. Adopting the ratiocination of the court a quo, the appellate court said:
xxx In view thereof, the guaranty deposit of P20,800.00 made by the defendant should and
must be credited in his favor, in the interest of fairness, justice and equity. The plaintiff should
not be allowed to unduly enrich itself at the expense of the defendant. xxx This is even more
compelling in this case where although the transaction, on its face, appear ostensibly, to be a
contract of lease, it is actually a financing agreement, with the plaintiff financing the purchase
of defendant's automobile . The Court is constrained, in the interest of truth and justice, to go
into this aspect of the transaction between the plaintiff and the defendant with all the facts and
36
circumstances existing in this case, and which the court must consider in deciding the case, if it
is to decide the case according to all the facts. xxx.
xxx xxx xxx
Considering the factual findings of both the court a quo and the appellate court, the only logical
conclusion is that the private respondent did opt, as he has claimed, to acquire the motor
vehicle, justifying then the application of the guarantee deposit to the balance still due and
obligating the petitioner to recognize it as an exercise of the option by the private respondent.
The result would thereby entitle said respondent to the ownership and possession of the
vehicle as the buyer thereof. We, therefore, see no reversible error in the ultimate judgment of
the appellate court.[11] (Italics in the original; underscoring supplied and words in bracket
added.)

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

In the present case, petitioner acquired the office equipment in question for their subsequent
lease to the respondent, with the latter undertaking to pay a monthly fixed rental therefor in
the total amount of P292,531.00, or a total of P10,531,116.00 for the whole 36 months. As a
measure of good faith, respondent made an up-front guarantee deposit in the amount of
P3,120,000.00. The basic agreement provides that in the event the respondent fails to pay any
rental due or is in a default situation, then the petitioner shall have cumulative remedies, such
as, but not limited to, the following:[13]

1. Obtain possession of the property/equipment;

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

3. Recover all accrued and unpaid rentals;

37
4. Recover all rentals for the remaining term of the lease had it not been cancelled, as
additional penalty;

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

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

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

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

At bottom, respondent had paid the equivalent of about a years lease rentals, or a total of
P3,510,372.00, more or less. Throw in the guaranty deposit (P3,120,000.00) and the respondent
had made a total cash outlay of P6,630,372.00 in favor of the petitioner. The replevin-seized
leased equipment had, as alleged in the complaint, an estimated residual value of
P6,900.000.00 at the time Civil Case No. Q-98-34266 was instituted on May 4, 1998. Adding all
cash advances thus made to the residual value of the equipment, the total value which the
petitioner had actually obtained by virtue of its lease agreement with the respondent amounts
to P13,530,372.00 (P3,510,372.00 + P3,120,000.00 + P6,900.000.00 = P13,530,372.00).

The acquisition cost for both the Silicon High Impact Graphics equipment and the Oxberry
Cinescan was, as stated in no less than the petitioners letter to the respondent dated
November 11, 1996[14] approving in the latters favor a lease facility, was P8,100,000.00.
Subtracting the acquisition cost of P8,100,000.00 from the total amount, i.e., P13,530,372.00,
creditable to the respondent, it would clearly appear that petitioner realized a gross income of
P5,430,372.00 from its lease transaction with the respondent. The amount of P5,430,372.00 is
not yet a final figure as it does not include the rentals in arrears, penalties thereon, and interest
earned by the guaranty deposit.

38
As may be noted, petitioners demand letter[15] fixed the amount of P8,248,657.47 as
representing the respondents rental balance which became due and demandable consequent
to the application of the acceleration and other clauses of the lease agreement. Assuming,
then, that the respondent may be compelled to pay P8,248,657.47, then it would end up paying
a total of P21,779,029.47 (P13,530,372.00 + P8,248,657.47 = P21,779,029.47) for its use - for a
year and two months at the most - of the equipment. All in all, for an investment of
P8,100,000.00, the petitioner stands to make in a years time, out of the transaction, a total of
P21,779,029.47, or a net of P13,679,029.47, if we are to believe its outlandish legal submission
that the PCI LEASING-GIRAFFE Lease Agreement was an honest-to-goodness straight lease.

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

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

There is more. In the adverted February 24, 1998 demand letter[17] sent to the respondent,
petitioner fashioned its claim in the alternative: payment of the full amount of P8,248,657.47,
representing the unpaid balance for the entire 36-month lease period or the surrender of the
financed asset under pain of legal action. To quote the letter:

39
Demand is hereby made upon you to pay in full your outstanding balance in the amount of
P8,248,657.47 on or before March 04, 1998 OR to surrender to us the one (1) set Silicon High
Impact Graphics and one (1) unit Oxberry Cinescan 6400-10

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

Evidently, the letter did not make a demand for the payment of the P8,248,657.47 AND the
return of the equipment; only either one of the two was required. The demand letter was
prepared and signed by Atty. Florecita R. Gonzales, presumably petitioners counsel. As such,
the use of or instead of and in the letter could hardly be treated as a simple typographical error,
bearing in mind the nature of the demand, the amount involved, and the fact that it was made
by a lawyer. Certainly Atty. Gonzales would have known that a world of difference exists
between and and or in the manner that the word was employed in the letter.

A rule in statutory construction is that the word "or" is a disjunctive term signifying dissociation
and independence of one thing from other things enumerated unless the context requires a
different interpretation.[18]

In its elementary sense, "or", as used in a statute, is a disjunctive article indicating an


alternative. It often connects a series of words or propositions indicating a choice of either.
When "or" is used, the various members of the enumeration are to be taken separately.[19]

The word "or" is a disjunctive term signifying disassociation and independence of one thing
from each of the other things enumerated.[20]

The demand could only be that the respondent need not return the equipment if it paid the
P8,248,657.47 outstanding balance, ineluctably suggesting that the respondent can keep
possession of the equipment if it exercises its option to acquire the same by paying the unpaid
balance of the purchase price. Stated otherwise, if the respondent was not minded to exercise
its option of acquiring the equipment by returning them, then it need not pay the outstanding
balance. This is the logical import of the letter: that the transaction in this case is a lease in
name only. The so-called monthly rentals are in truth monthly amortizations of the price of the
leased office equipment.
40
On the whole, then, we rule, as did the trial court, that the PCI LEASING- GIRAFFE lease
agreement is in reality a lease with an option to purchase the equipment. This has been made
manifest by the actions of the petitioner itself, foremost of which is the declarations made in its
demand letter to the respondent. There could be no other explanation than that if the
respondent paid the balance, then it could keep the equipment for its own; if not, then it
should return them. This is clearly an option to purchase given to the respondent. Being so,
Article 1485 of the Civil Code should apply.

The present case reflects a situation where the financing company can withhold and conceal -
up to the last moment - its intention to sell the property subject of the finance lease, in order
that the provisions of the Recto Law may be circumvented. It may be, as petitioner pointed out,
that the basic lease agreement does not contain a purchase option clause. The absence,
however, does not necessarily argue against the idea that what the parties are into is not a
straight lease, but a lease with option to purchase. This Court has, to be sure, long been aware
of the practice of vendors of personal property of denominating a contract of sale on
installment as one of lease to prevent the ownership of the object of the sale from passing to
the vendee until and unless the price is fully paid. As this Court noted in Vda. de Jose v.
Barrueco:[21]
Sellers desirous of making conditional sales of their goods, but who do not wish openly to make
a bargain in that form, for one reason or another, have frequently resorted to the device of
making contracts in the form of leases either with options to the buyer to purchase for a small
consideration at the end of term, provided the so-called rent has been duly paid, or with
stipulations that if the rent throughout the term is paid, title shall thereupon vest in the lessee.
It is obvious that such transactions are leases only in name. The so-called rent must necessarily
be regarded as payment of the price in installments since the due payment of the agreed
amount results, by the terms of the bargain, in the transfer of title to the lessee.

In another old but still relevant case of U.S. Commercial v. Halili,[22] a lease agreement was
declared to be in fact a sale of personal property by installments. Said the Court:

. . . There can hardly be any question that the so-called contracts of lease on which the present
action is based were veritable leases of personal property with option to purchase, and as such
come within the purview of the above article [Art. 1454-A of the old Civil Code on sale of
personal property by installment]. xxx
41
Being leases of personal property with option to purchase as contemplated in the above article,
the contracts in question are subject to the provision that when the lessor in such case has
chosen to deprive the lessee of the enjoyment of such personal property, he shall have no
further action against the lessee for the recovery of any unpaid balance owing by the latter,
agreement to the contrary being null and void.

In choosing, through replevin, to deprive the respondent of possession of the leased


equipment, the petitioner waived its right to bring an action to recover unpaid rentals on the
said leased items. Paragraph (3), Article 1484 in relation to Article 1485 of the Civil Code, which
we are hereunder re-reproducing, cannot be any clearer.

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

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

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

As we articulated in Elisco Tool Manufacturing Corp. v. Court of Appeals,[23] the remedies


provided for in Article 1484 of the Civil Code are alternative, not cumulative. The exercise of
one bars the exercise of the others. This limitation applies to contracts purporting to be leases
of personal property with option to buy by virtue of the same Article 1485. The condition that
the lessor has deprived the lessee of possession or enjoyment of the thing for the purpose of
42
applying Article 1485 was fulfilled in this case by the filing by petitioner of the complaint for a
sum of money with prayer for replevin to recover possession of the office equipment.[24] By
virtue of the writ of seizure issued by the trial court, the petitioner has effectively deprived
respondent of their use, a situation which, by force of the Recto Law, in turn precludes the
former from maintaining an action for recovery of accrued rentals or the recovery of the
balance of the purchase price plus interest. [25]

The imperatives of honest dealings given prominence in the Civil Code under the heading:
Human Relations, provide another reason why we must hold the petitioner to its word as
embodied in its demand letter. Else, we would witness a situation where even if the respondent
surrendered the equipment voluntarily, the petitioner can still sue upon its claim. This would be
most unfair for the respondent. We cannot allow the petitioner to renege on its word. Yet more
than that, the very word or as used in the letter conveys distinctly its intention not to claim
both the unpaid balance and the equipment. It is not difficult to discern why: if we add up the
amounts paid by the respondent, the residual value of the property recovered, and the amount
claimed by the petitioner as sued upon herein (for a total of P21,779,029.47), then it would end
up making an instant killing out of the transaction at the expense of its client, the respondent.
The Recto Law was precisely enacted to prevent this kind of aberration. Moreover, due to
considerations of equity, public policy and justice, we cannot allow this to

happen. Not only to the respondent, but those similarly situated who may fall prey to a similar
scheme.

WHEREFORE, the instant petition is DENIED and the trial courts decision is AFFIRMED.

Costs against petitioner.

SO ORDERED.

43
Republic of the Philippines
SUPREME COURT
Manila

SECOND DIVISION

G.R. No. 202358 November 27, 2013

GATCHALIAN REALTY, INC., Petitioner,


vs.
EVELYN M. ANGELES, Respondent.

DECISION

CARPIO, J.:

The Case G.R. No. 202358 is a petition for review1 assailing the Decision2 promulgated on 11
November 2011 as well as the Resolution3 promulgated on 19 June 2012 by the Court of
Appeals (CA) in CA-G.R. SP No. 105964. The CA reversed and set aside the 8 October 2008
Order4 of Branch 197 of the Regional Trial Court of Las Piñas City (RTC) in Civil Case No. LP-07-
0143. The CA also dismissed the unlawful detainer case filed by Gatchalian Realty, Inc. GRI)
against Evelyn M. Angeles (Angeles).

The Metropolitan Trial Court (MeTC) rendered on 28 February 2006 a decision5 in Civil Case No.
6809 in favor of GRI and against Angeles. In its decision6 dated 13 February 2008, the RTC set
aside the decision of the MeTC and dismissed the ejectment case filed by GRI against Angeles.
The RTC reversed itself in an Order7 dated 17 June 2008, and affirmed with modification the
decision of the MeTC. The RTC denied Angeles’ Motion for Reconsideration in an Order dated 8
October 2008.

44
The Facts

The CA recited the facts as follows:

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

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

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

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

45
(Php 112,304.42) which she was required to settle within fifteen (15) days from receipt of the
letter.

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

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

The MeTC’s Ruling

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

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

46
contract by giving her the notice of notarial rescission of the contracts. The notarial rescission
of the contracts was executed on September 26, 2003 and served upon [Angeles].9

Although the MeTC agreed with Angeles that her total payment is already more than the
contracted amount, the MeTC found that Angeles did not pay the monthly amortizations in
accordance with the terms of the contract. Interests and penalties accumulated and increased
the amount due. Furthermore, the MeTC found the monthly rentals imposed by GRI reasonable
and within the range of the prevailing rental rates in the vicinity. Compensation between GRI
and Angeles legally took effect in accordance with Article 129010 of the Civil Code. The MeTC
ruled that GRI is entitled to P1,060,896.39 by way of reasonable rental fee less P574,148.40 as
of May 2005, thus leaving a balance of P486,747.99 plus the amount accruing until Angeles
finally vacates the subject premises.

The dispositive portion of the MeTC’s Decision reads:

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

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

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

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

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

47
5. Costs of suit.

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

SO ORDERED.11

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

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

GRI, on the other hand, filed a Motion for Execution Pending Appeal. A Writ of Execution
Pending Appeal was issued in favor of GRI on 25 August 2006, and the properties were turned
over to GRI on 10 October 2006.14

The RTC’s Ruling

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

The RTC pointed out that Republic Act No. 6552 (R.A. 6552) provides that the non-payment by
the buyer of an installment prevents the obligation of the seller to convey title from acquiring
binding force. Moreover, cancellation of the contract to sell may be done outside the court
when the buyer agrees to the cancellation. In the present case, Angeles denied knowledge of
GRI’s notice of cancellation. Cancellation of the contract must be done in accordance with
48
Section 3 of R.A. 6552, which requires a notarial act of rescission and refund to the buyer of the
cash surrender value of the payments on the properties. Thus, GRI cannot insist on compliance
with Section 3(b) of R.A. 6552 by applying Angeles’ cash surrender value to the rentals of the
properties after Angeles failed to pay the installments due. Contrary to the MeTC’s ruling, there
was no legal compensation between GRI and Angeles. The RTC ruled:

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

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

SO ORDERED.15

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

Applying the above Pilar ruling in the present case, the cash surrender value of the payments
made by [Angeles] shall be applied to the rentals that accrued on the property occupied by
[Angeles], which rental is fixed by this Court in the amount of seven thousand pesos per month
(P7,000.00). The total rental payment due to Gatchalian Realty Inc. is six hundred twenty three
thousand (P623,000.00) counted from June 1999 to October 2006. According to R.A. 6552, the
cash surrender value, which in this case is equivalent to fifty percent (50%) of the total payment
made by [Angeles], should be returned to her by [GRI] upon cancellation of the contract to sell
on September 11, 2003. Admittedly no such return was ever made by [GRI]. Thus, the cash
surrender value, which in this case is equivalent to P182,094.48 for Contract to Sell No. 2271
and P392,053.92 for Contract to Sell No. 2272 or a total cash surrender value of P574,148.40
should be deducted from the rental payment or award owing to [Angeles].

49
WHEREFORE, premises considered, the Motion for Reconsideration is hereby GRANTED. The
earlier decision dated February 13, 2008 is SET ASIDE and the decision of the court a quo is
MODIFIED to wit:

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

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

3. Ordering defendant, Evelyn M. Angeles, to pay plaintiff, Gatchalian Realty Inc., the
outstanding rental amount of forty eight thousand eight hundred fifty one pesos and sixty
centavos (P48,851.60) and legal interest of six percent (6%) per annum, until the above amount
is paid;

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

5. Costs of suit.

SO ORDERED.17

The Court of Appeals’ Ruling

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

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

50
The Issues

GRI assigned the following errors of the CA:

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

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

The Court’s Ruling

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

Validity of GRI’s
Cancellation of the Contracts

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

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

51
(a) To pay, without additional interest, the unpaid installments due within the total grace
period earned by him which is hereby fixed at the rate of one month grace period for every one
year of installment payments made: Provided, That this right shall be exercised by the buyer
only once in every five years of the life of the contract and its extensions, if any.

(b) If the contract is cancelled, the seller shall refund to the buyer the cash surrender value of
the payments on the property equivalent to fifty per cent of the total payments made, and,
after five years of installments, an additional five per cent every year but not to exceed ninety
per cent of the total payments made: Provided, That the actual cancellation of the contract
shall take place after thirty days from receipt by the buyer of the notice of cancellation or the
demand for rescission of the contract by a notarial act and upon full payment of the cash
surrender value to the buyer.

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

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

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

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

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

52
VENDEE/S of the notice of cancellation or the demand for rescission of the contract by a
notarial act upon full payment of the cash surrender value to the VENDEE/S; where, however,
the VENDEE/S has/have paid less than two (2) years of installments, the VENDOR shall give the
VENDEE/S [a] grace period of sixty (60) days from the date the installment became due; and if
the VENDEE/S fail/s to pay the installment due after the expiration of the grace period, the
VENDOR may cancel the contract after thirty (30) days from receipt by the VENDEE/S of the
notice of cancellation or the demand for rescission of the contract by a notarial act; and in case
of cancellation and/or rescission of this contract, all improvements on the lot/s above-
described shall be forfeited in favor of the VENDOR, and in this connection, the VENDEE/S
obligate/s himself/herself/themselves to peacefully vacate the premises mentioned above
without necessity of notice or demand by the VENDOR.20

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

Grace Period

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

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

Section 3(a) of R.A. 6552 provides that the total grace period corresponds to one month for
every one year of installment payments made, provided that the buyer may exercise this right
only once in every five years of the life of the contract and its extensions. The buyer’s failure to
pay the installments due at the expiration of the grace period allows the seller to cancel the
contract after 30 days from the buyer’s receipt of the notice of cancellation or demand for
rescission of the contract by a notarial act. Paragraph 6(a) of the contract gave Angeles the
same rights.
53
Both the RTC and the CA found that GRI gave Angeles an accumulated grace period of 51
months.22 This extension went beyond what was provided in R.A. 6552 and in their contracts.

Receipt of the Notice of Notarial Rescission

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

Amount of the Cash Surrender Value

GRI claims that it gave Angeles a refund of the cash surrender value of both the house and the
lot in the total amount of P574,148.40 when it deducted the amount of the cash surrender
value from the amount of rentals due.

For paying more than two years of installments on the lot, Angeles was entitled to receive cash
surrender value of her payments on the lot equivalent to fifty per cent of the total payments
made. This right is provided by Section 3(b) of R.A. 6552, as well as paragraph 6(b) of the
contract. Out of the contract price of P450,000, Angeles paid GRI a total of P364,188.96
consisting of P135,000 as downpayment and P229,188.96 as installments and penalties.27 The
cash surrender value of Angeles’ payments on the lot amounted to P182,094.48.28

For the same reasons, Angeles was also entitled to receive cash surrender value of the
payments on the house equivalent to fifty per cent of the total payments made. Out of the
contract price of P750,000, Angeles paid GRI a total of P784,107.84 consisting of P165,000 as
downpayment and P619,107.84 as installments and penalties.29 The cash surrender value of
Angeles’ payments on the house amounted to P392,053.92.30

54
Actual Cancellation of the Contracts

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

Cancellation of the contracts for the house and lot was contained in a notice of notarial
rescission dated 11 September 2003.31 The registry return receipts show that Angeles received
this notice on 19 September 2003.32 GRI’s demand for rentals on the properties, where GRI
offset Angeles’ accrued rentals by the refundable cash surrender value, was contained in
another letter dated 26 September 2003.33 The registry return receipts show that Angeles
received this letter on 29 September 2003.34 GRI filed a complaint for unlawful detainer
against Angeles on 11 November 2003, 61 days after the date of its notice of notarial rescission,
and 46 days after the date of its demand for rentals. For her part, Angeles sent GRI postal
money orders in the total amount of P120,000.35

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

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

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

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

(3) That the two debts are due;

55
(4) That they be liquidated and demandable;

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

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

PERIOD COVERED NO. OF


MONTHS RENTALS
PER MONTH AMOUNT DUE
June to December 1999 7 11,000.00 77,000.00
January to December 2000 12 12,100.00 145,200.00
January to December 2001 12 13,310.00 159,720.00
January to December 2002 12 14,641.00 175,692.02 [sic]
January to August 2003 8 16,105.10 128,840.80
TOTAL AMOUNT DUE:P 686,452.82 [sic]36
We cannot subscribe to GRI’s view that it merely followed our ruling in Pilar Development
Corporation v. Spouses Villar37 (Pilar) when it deducted the cash surrender value from the
rentals due. In Pilar, the developer also failed to refund the cash surrender value to the
defaulting buyer when it cancelled the Contract to Sell through a Notice of Cancellation. It was
this Court, and not the developer, that deducted the amount of the cash surrender value from
the accrued rentals. Moreover, the developer in Pilar did not unilaterally impose rentals. It was
the MeTC that decreed the amount of monthly rent. Neither did the developer unilaterally
reduce the accrued rentals by the refundable cash surrender value. The cancellation of the
contract took effect only by virtue of this Court’s judgment because of the developer’s failure to
return the cash surrender value.

This was how we ruled in Pilar:

56
According to R.A. 6552, the cash surrender value, which in this case is equivalent to fifty
percent (50%) of the total payment made by the respondent spouses, should be returned to
them by the petitioner upon the cancellation of the contract to sell on August 31, 1998 for the
cancellation to take effect. Admittedly, no such return was ever made by petitioner. Thus, the
said cash surrender value is hereby ordered deducted from the award owing to the petitioner
based on the MeTC judgment, and cancellation takes effect by virtue of this judgment.

Finally, as regards the award of P7,000.00/month as rental payment decreed by the MeTC for
the use of the property in question from the time the respondent spouses obtained possession
thereof up to the time that its actual possession is surrendered or restored to the petitioner,
the Court finds the same just and equitable to prevent the respondent spouses, who breached
their contract to sell, from unjustly enriching themselves at the expense of the petitioner which,
for all legal intents and purposes, never ceased to be the owner of the same property because
of the respondents’ non-fulfillment of the indispensable condition of full payment of the
purchase price, as embodied in the parties’ contract to sell. However, as earlier explained, this
sum is to be reduced by the cash surrender value of the payments so far made by the spouses,
and the resulting net amount still owing as accrued rentals shall be subject to legal interest
from finality of this Decision up to the time of actual payment thereof.38

Mandatory Twin Requirements:


Notarized Notice of Cancellation and
Refund of Cash Surrender Value

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

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

x x x The actual cancellation of the contract can only be deemed to take place upon the expiry
of a 30-day period following the receipt by the buyer of the notice of cancellation or demand
for rescission by a notarial act and the full payment of the cash surrender value.
57
In Pagtalunan v. Dela Cruz Vda. De Manzano,40 we ruled that there is no valid cancellation of
the Contract to Sell in the absence of a refund of the cash surrender value. We stated that:

x x x Sec. 3 (b) of R.A. No. 6552 requires refund of the cash surrender value of the payments on
the property to the buyer before cancellation of the contract. The provision does not provide a
different requirement for contracts to sell which allow possession of the property by the buyer
upon execution of the contract like the instant case. Hence, petitioner cannot insist on
compliance with the requirement by assuming that the cash surrender value payable to the
buyer had been applied to rentals of the property after respondent failed to pay the
installments due. (Emphasis supplied)

Remedies of the Buyer


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

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

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

In Pagtalunan, this Court dismissed the complaint for unlawful detainer. We also ordered the
defaulting buyer to pay the developer the balance of the purchase price plus interest at 6% per
annum from the date of filing of the complaint up to the finality of judgment, and thereafter, at
the rate of 12% per annum. Upon payment, the developer shall issue a Deed of Absolute Sale of

58
the subject property and deliver the corresponding certificate of title in favor of the defaulting
buyer. If the defaulting buyer fails to pay the full amount within 60 days from finality of the
decision, then the defaulting buyer should vacate the subject property without need of demand
and all payments will be charged as rentals to the property. No costs were charged to the
parties.

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

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

We observe that this case has, from the institution of the complaint, been pending with the
courts for 10 years. As both parties prayed for the issuance of reliefs that are just and equitable
under the premises, and in the exercise of our discretion, we resolve to dispose of this case in
an equitable manner. Considering that GRI did not validly rescind Contracts to Sell Nos. 2271
and 2272, Angeles has two options:
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1. The option to pay, within 60 days from the MeTC’s determination of the proper amounts, the
unpaid balance of the full value of the purchase price of the subject properties plus interest at
6% per annum from 11 November 2003, the date of filing of the complaint, up to the finality of
this Decision, and thereafter, at the rate of 6% per annum.43 Upon payment of the full amount,
GRI shall immediately execute Deeds of Absolute Sale over the subject properties and deliver
the corresponding transfer certificate of title to Angeles.

In the event that the subject properties are no longer available, GRI should offer substitute
properties of equal value.1âwphi1 Acceptance of the suitability of the substitute properties is
Angeles’ sole prerogative. Should Angeles refuse the substitute properties, GRI shall refund to
Angeles the actual value of the subject properties with 6% interest per annum44 computed
from 11 November 2003, the date of the filing of the complaint, until fully paid; and

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

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

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

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

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

In the event that the subject properties are no longer available, GRI should offer substitute
properties of equal value. Should Angeles refuse the substitute properties, GRI shall refund to
Angeles the actual value of the subject properties with 6 interest per annum computed from
November 2003, the date of the filing of the complaint, until fully paid. Should Evelyn M.
Angeles choose to accept payment of the cash surrender value, she shall receive from GRI
P574,148.40 with interest at 6 per annum computed from November 2003, the date of the
filing of the complaint, until fully paid. Contracts to Sell Nos. 2271 and 2272 shall be deemed
cancelled 30 days after Angeles' receipt of GRI's full payment of the cash surrender value. No
rent is further charged upon Evelyn M. Angeles.

No costs.

SO ORDERED.

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