G.R. No. 189609 - Racelis vs. Spouses Javier

Pedro Nacu, Sr. appointed his daughter Victoria N. Racelis as administrator of his estate, which included a residential house and lot in Marikina City.
Nacu instructed his heirs to sell the Marikina property; Racelis advertised it for sale immediately.

In August 2001, Spouses Germil and Rebecca Javier, unable to pay the ₱3,500,000 sale price, proposed a month-to-month lease at ₱10,000 (later ₱11,000) per month, using the property for residence and a tutorial center.
In July 2002, the Spouses Javier committed to buy and agreed to pay ₱100,000 as “initial payment or goodwill money”; they tendered ₱65,000 on July 26, 2002 and, by end of 2003, had delivered a total of ₱78,000 in sporadic installments.
The Spouses Javier continued to pay rent until February 2004, then fell behind. Racelis, doubting their intent to purchase, terminated the lease effective May 30, 2004, declared the ₱78,000 forfeitable as earnest money (waiving its return only upon resale), and demanded vacation.
The Spouses Javier refused to vacate (citing ongoing tutorial operations), insisted the ₱78,000 was advanced rent, and proposed applying it to unpaid rentals; barangay conciliation failed.
On May 12, 2004, Racelis caused electrical service to be disconnected; the Spouses Javier sued for damages, but the Metropolitan Trial Court (MTC) absolved her of liability.

Racelis filed ejectment and rent collection case (MTC Civil Case No. 04-7710), claiming unpaid rent of ₱84,000 (March–September 2004 and ₱7,000 balance for February), moral and exemplary damages, and attorney’s fees. The Spouses Javier countered that they never agreed to purchase and that the ₱78,000 was advanced rent.
On August 19, 2005, MTC dismissed the complaint: held the Spouses Javier could suspend rent under Civil Code art. 1658 due to service disconnection; deemed the ₱78,000 earnest money (not advanced rent) waived and ordered its return.
On appeal, the Regional Trial Court (RTC) reversed on January 15, 2007: held the Spouses Javier unjustified in suspending rent; characterized the ₱78,000 as earnest money under a contract to sell; ordered payment of accrued rent and allowed separate recovery of the ₱78,000; on reconsideration (April 24, 2007) reduced rent liability by an advanced deposit, fixing it at ₱54,000.
On January 13, 2009, the Court of Appeals (CA) held the Spouses Javier justified in suspending rent but still liable for accrued rent; found Racelis waived the ₱78,000 and, by compensation, ordered her to reimburse ₱24,000. The CA denied reconsideration on September 17, 2009.
Racelis filed a Petition for Review before the Supreme Court, raising errors in applying art. 1658 and in treating the ₱78,000 initial payment.

Whether the Spouses Javier can invoke their right to suspend payment of rent under Civil Code Article 1658.

Whether the ₱78,000 initial payment (earnest money) can be used to offset the Spouses Javier’s accrued rent.