Case Summary (G.R. No. 188064)
Key Dates
December 20, 1988: Petitioner mortgages property to FSL Bank for P2 million.
November 15, 1990: Outstanding mortgage reaches P2,278,078.13.
November 26, 1990: Execution of “Deed of Conditional Sale of Real Properties with Assumption of Mortgage.”
September 10, 1992: Petitioner files complaint for rescission with damages (Civil Case No. 3945-V-92).
February 22, 2006: RTC renders decision allowing a grace period to respondent.
February 13, 2009: CA affirms with modification.
June 1, 2011: Supreme Court denies petition for review.
Applicable Law
– 1987 Philippine Constitution
– Civil Code of the Philippines:
• Article 1458 (contract of sale)
• Article 1479 (contract to sell)
• Article 1191 (rescission for breach)
Factual Background
Petitioner owned and operated a drugstore-cum-residence on the ground floor of RBJ Building and leased remaining spaces. Respondent began leasing a pawnshop space in December 1989 for P4,000 monthly. Respondent later invested in petitioner’s lending business. Facing an increased mortgage balance, petitioner sought to sell the property for P6.5 million; respondent offered P4.2 million, payable in installments without interest, plus assumption of the FSL Bank loan.
Contractual Terms and Obligations
Under the Deed of Conditional Sale (November 26, 1990):
- Title remains with petitioner until full payment of purchase price and mortgage assumption.
- Respondent binds to pay P1.2 million in three lump-sum installments by December 31, 1991, without interest.
- Respondent assumes the P2 million mortgage obligation.
- Side agreements (unwritten): right to occupy at no rent until full payment; 15-year lease at P8,000/month after full payment; insurance renewal obligation; conditional cancellation if a higher offer materializes within three months.
Procedural History
Petitioner sued for rescission and damages in 1992, alleging respondent’s default on the P1.2 million balance, failure to honor side agreements, unjust enrichment from rental collections, and neglect to renew fire insurance. RTC classified the deed as a contract to sell, found no fundamental breach, and granted respondent a 30-day grace period to pay P805,000 with 2% monthly interest. CA affirmed as modified, deleting automatic rescission and ordering payment of P805,000 plus 6% per annum from September 11, 1992.
Issue on Contract Classification
Whether the Deed of Conditional Sale is a contract of sale or a contract to sell, determining respondent’s obligation and petitioner’s remedy.
Contract to Sell vs. Contract of Sale
The Supreme Court held that:
– A contract of sale immediately transfers ownership upon delivery (Art. 1458).
– A contract to sell reserves title in the seller pending full payment, making payment a positive suspensive condition (Art. 1479).
– Here, title remained with petitioner until full payment of the purchase price and mortgage—characteristic of a contract to sell—not a contract of sale.
Availability of Rescission
Rescission under Article 1191 requires a breach of an existing obligation. Failure to fulfill a suspensive condition (full payment) does not create an obligation to convey title; thus respondent’s non-payment is not a breach entitling petitioner to rescind. Even if rescission were available, the breach was slight, given respondent had paid approximately P3.4 million of the P4.2 million total price.
Interest and Damages
– Installments expressly bore “no interest.”
– The CA correctly imposed interest at 6% per annum from the complaint’s filing
Case Syllabus (G.R. No. 188064)
Facts of the Case
- Petitioner owned a 1,274 sqm residential/commercial lot in Karuhatan, Valenzuela City (TCT No. V-4130) with a three-storey RBJ commercial building and an adjoining apartment.
- Since December 1989, respondent leased ground-floor space for a pawnshop at ₱4,000/month; friendship led respondent to invest in petitioner’s lending business (Feb–May 1990) at 6% monthly interest.
- On June 20, 1988, petitioner mortgaged the property to Farmers Savings and Loan Bank (FSL Bank) for ₱2 million; by November 15, 1990, the outstanding balance reached ₱2,278,078.13.
- Respondent verbally offered to buy the mortgaged properties for ₱4.2 million, assume the bank loan, and grant side concessions:
• Conditional cancellation if petitioner found a higher bidder within 3 months (with full refund plus 6% monthly interest on amounts paid)
• Rent-free occupancy of petitioner’s drugstore space during installment payments
• A 15-year lease at ₱8,000/month after full payment
• Renewal/payment of fire insurance policies until purchase price is fully paid - Parties and FSL Bank executed a Deed of Conditional Sale with Assumption of Mortgage on Nov. 26, 1990: respondent to pay petitioner ₱1.2 million (₱200k by Jan 31, 1991; ₱200k by June 30, 1991; ₱800k by Dec 31, 1991) and assume the ₱2 million mortgage.
- Respondent defaulted on lump-sum payments, instead making partial payments totaling ₱395,000 by Aug. 31, 1992; unpaid principal was ₱805,000 plus accrued interest ₱466,893.25.
- Petitioner secured a prospective buyer within the agreed 3-month period; respondent refused to cancel and sought full ownership, planning further commercial development.
- On Mar. 19, 1992, fire gutted the residential building; respondent failed to renew insurance, causing loss of ₱8,000/month in rental income.
- Since Dec. 1990, respondent collected all rental proceeds from tenants/vendors without sharing with petitioner.
- On Sept. 2, 1992, respondent offered ₱751,000 as full payment and demanded execution of a deed of absolute sale.
Procedural History
- Sept. 10, 1992: Petitioner filed an action for rescission of contract with damages (RTC, Branch 172, Valenzuela City; Civil Case No. 3945-V-92).
- Feb. 22, 2006 (RTC Decision): Classified the instrument as a contract to sell; allowed respondent 30