Civil Law

Olivarez v. Castillo, G.R. No. 196251, July 9, 2014 Sale, Contract to sell, Conditional Sale, Rescission of Contract [J. LEONEN]

FACTS:

Benjamin Castillo was the registered owner of a 346,918-sqm lot, covered by TCT No. T-19972. The Philippine Tourism Authority (PTA) allegedly claimed ownership of the same based on TCT No. T-18493. 

On April 5, 2000, Castillo and Olivarez Realty Corp., represented by Dr. Olivarez, entered into a contract of conditional sale, wherein Castillo agreed to sell his property to Olivarez Realty for ₱19,080,490.00, with a down payment of ₱5,000,000.00.

As to the balance of ₱14,080,490.00, Olivarez Realty agreed to pay in 30 equal monthly installments every eighth day of the month beginning in the month that the parties would receive a decision voiding the PTA’s title to the property. 

Under the deed of conditional sale, Olivarez Realty shall file the action against the PTA “with the full assistance of [Castillo],” and that, should the action against the PTA be denied, Castillo agreed to reimburse all the amounts paid by Olivarez Realty. 

The parties agreed that Olivarez Realty may immediately occupy the property upon signing of the deed of conditional sale. 

Should the contract be cancelled, Olivarez Realty agreed to return the property’s possession to Castillo and forfeit all the improvements it may have introduced on the property. 

On September 2, 2004, Castillo filed a complaint against Olivarez Realty Corporation and Dr. Olivarez, arguing that Olivarez Realty committed substantial breach of the contract of conditional sale and that the deed of conditional sale was a contract of adhesion, since Dr. Olivarez solely prepared the deed.  

Castillo prayed for rescission of contract under Article 1191 of the Civil Code. He alleged that Olivarez Realty immediately took possession of the property, having paid only  2,500,000.00 of the purchase price. Contrary to the agreement, the corporation did not file any action against the PTA, and also refused to fully pay the purchase price.

In their answer, Olivarez Realty and Dr. Olivarez admitted that the corporation only paid ₱2,500,000.00 of the purchase price.

Castillo filed a motion for summary judgment and/or judgment on the pleadings.

The trial court found that Olivarez Realty and Dr. Olivarez’s answer “substantially [admitted the material allegations of Castillo’s] complaint and [did] not . . . raise any genuine issue [as to any material fact].”

Defendants admitted that Castillo owned the parcel of land covered by Transfer Certificate of Title No. T-19972. They likewise admitted the genuineness of the deed of conditional sale and that the corporation only paid ₱2,500,000.00 of the agreed purchase price.

In its decision, the trial court ordered the deed of conditional sale rescinded and the ₱2,500,000.00 forfeited in favor of Castillo “as damages under Article 1191 of the Civil Code.”

On appeal, the CA affirmed in toto the trial court’s decision.

The CA denied petitioner’s MR.

Hence, this petition.

ISSUE:

Whether the contract entered into by the parties is a conditional sale or contract to sell. 

Whether or not rescission under Art. 1191 is the proper remedy for the breach of the contract.

RULING:

Castillo is entitled to cancel the contract of conditional sale since Olivarez Realty illegally withheld payments of the purchase price, Castillo is entitled to cancel his contract with petitioner corporation. However, we properly characterize the parties’ contract as a contract to sell, not a contract of conditional sale.

In both contracts to sell and contracts of conditional sale, title to the property remains with the seller until the buyer fully pays the purchase price. Both contracts are subject to the positive suspensive condition of the buyer’s full payment of the purchase price.

In a contract of conditional sale, the buyer automatically acquires title to the property upon full payment of the purchase price. This transfer of title is “by operation of law without any further act having to be performed by the seller.” In a contract to sell, transfer of title to the prospective buyer is not automatic. “The prospective seller [must] convey title to the property [through] a deed of conditional sale.”

The distinction is important to determine the applicable laws and remedies in case a party does not fulfill his or her obligations under the contract. In contracts of conditional sale, our laws on sales under the Civil Code apply. On the other hand, contracts to sell are not governed by our law on sales but by the Civil Code provisions on conditional obligations.

Specifically, Article 1191 of the Civil Code on the right to rescind reciprocal obligations does not apply to contracts to sell. As this court explained in Ong v. CA, failure to fully pay the purchase price in contracts to sell is not the breach of contract under Article 1191. Failure to fully pay the purchase price is “merely an event which prevents the [seller’s] obligation to convey title from acquiring binding force.” This is because “there can be no rescission of an obligation that is still nonexistent, the suspensive condition not having [happened].”

In this case, Castillo reserved his title to the property and undertook to execute a deed of absolute sale upon Olivarez Realty Corporation’s full payment of the purchase price.  Since Castillo still has to execute a deed of absolute sale to Olivarez Realty upon full payment of the purchase price, the transfer of title is not automatic. The contract in this case is a contract to sell.

As this case involves a contract to sell, Article 1191 does not apply. The contract to sell is instead cancelled, and the parties shall stand as if the obligation to sell never existed.

Olivarez Realty Corporation shall return the possession of the property to Castillo. Any improvement that Olivarez Realty Corporation may have introduced on the property shall be forfeited in favor of Castillo.

In this case, however, Castillo delivered the possession of the property to Olivarez Realty prior to the transfer of title. We cannot order the reimbursement of the installments paid.

In Gomez v. CA, the City of Manila and Luisa Gomez entered into a contract to sell over a parcel of land. The city delivered the property’s possession to Gomez. She fully paid the purchase price for the property but violated the terms of the contract to sell by renting out the property to other persons. This court set aside the contract to sell for her violation of the terms of the contract to sell. It ordered the installments paid forfeited in favor of the City of Manila “as reasonable compensation for [Gomez’s] use of the [property]” for eight years.

In this case, Olivarez Realty failed to fully pay the purchase price for the property. It only paid ₱2,500,000.00 out of the ₱19,080,490.00 agreed purchase price. Worse, petitioner corporation has been in possession of Castillo’s property for 14 years since May 5, 2000 and has not paid for its use of the property.

Similar to the ruling in Gomez, we order the ₱2,500,000.00 forfeited in favor of Castillo as reasonable compensation for Olivarez Realty Corporation’s use of the property.

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