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Republic of the Philippines

SUPREME COURTManila

FIRST DIVISION

G.R. No. 97442 June 30, 1994

PILAR T. OCAMPO,petitioner,

vs.COURT OF APPEALS and MAGDALENA S. VILLARUZ, respondents.

Esteban C. Manuel for petitioner.

Nery D. Duremdes for private respondent.

BELLOSILLO, J.:

Two (2) documents, an "Agreement to Sell Real Property" and a "Contract to Sell," covering the same

parcel of land were executed by a seller in favor of two (2) different buyers. Both buyers now assertagainst each other a better title to the property.

In dispute is an 18,260-square meter lot in the Poblacion of Tigbauan, Iloilo, described in Plan Psu-

223696, L.R.C. Case No. N-675, L.R.C. Record No. N-38846, and registered under Original Certificateof Title No. 0-7743 in the name of seller Severino Tolosa. On 20 August 1974, Tolosa mortgaged the land

to the Philippine Veterans Bank and had the encumbrance annotated on his certificate of title under EntryNo. 238353.

On 17 March 1975, Tolosa and Pilar T. Ocampo, the latter being then represented by Teresa T.Borres,

1entered into a contract whereby Tolosa undertook to sell the same parcel of land to Ocampo not

later than 15 May 1975 for P22,000.00, P1,000.00 of which was paid upon execution thereof.2

On 21 April 1975, the parties entered into an "Agreement to Sell Real Property"3whereby Tolosa "sells,

cedes and transfers" the land to Ocampo in consideration of P25,000.00, P12,500.00 of which was paidupon signing of the deed and the balance to be due within six (6) months thereafter. Paragraph 4 of thecontract provides that "immediately upon complete payment of the purchase price . . . by the VENDEE,the VENDOR . . . agrees to execute and deliver unto the VENDEE whatever pertinent document or

documents necessary to implement this sale and to transfer title to the VENDEE."

Before the six-month period to complete the payment of the purchase price expired, Ocampo paid butonly the total of P16,700.00. 4Nevertheless Tolosa accepted her subsequent late payments amounting to

P3,900.00. 5Meanwhile, the subject property was involved in a boundary dispute. 6

On 6 June 1976, upon learning of the mortgage lien, Ocampo caused her adverse claim to be annotated onTolosas certificate of title as Entry No. 279936.


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In his letter to Ocampo dated 15 March 1977, Tolosa sought the cancellation of Ocampos adverse claimand presented her with two options, namely, a refund of payments made, or a share from the net proceeds

if sold to a third party.7On even date, Ocampo through counsel wrote Tolosa expressing her readiness to

pay the balance of the purchase price, which was P5,400.00, should Tolosa be ready to deliver to her thedeed of absolute sale and the owners duplicate of OCT No. 0-7743 for purposes of registration. 8

On 3 June 1977, Tolosa and Magdalena S. Villaruz executed a "Contract to Sell" 9whereby Tolosa "sells,cedes, transfers, and conveys" to Villaruz the same land in consideration of P94,300.00. The amount of

P15,000.00 was to be paid upon execution and the balance upon cancellation of all liens andencumbrances from the certificate of title. The contract stipulated the immediate conveyance of the

physical possession of the land to Villaruz, although no deed of definite sale would be delivered to her

unless the price was fully paid. The contract noted the supposed judicial termination of the boundarydispute over the land.

On 19 July 1977, Tolosa wrote Ocampo offering to reimburse her what she paid provided she would sign

a document canceling her adverse claim.10

Failing to convince Ocampo, Tolosa filed a petition in theCourt of First Instance of Iloilo to cancel the adverse claim of Ocampo. On 30 July 1977, Judge RicardoM. Ilarde denied the petition. 11On 4 August 1977, another adverse claim was caused to be annotated by

Ocampo on OCT No. 0-7743 under Entry No. 302257. 12

On 7 October 1977, Tolosa filed an action for "Breach of Contract, Damages and Quieting of Title"against Teresa Borres. 13Borres claimed in her answer that she was merely the agent of Ocampo who was

the real party in interest. Borres however died so that the trial court, on 2 July 1979, ordered hersubstitution by defendant Ocampo. Magdalena S. Villaruz, then claiming to have already bought the land,

intervened in the case.

On 9 October 1979, during the pendency of Civil Case No. 12163, Tolosa succeeded in securing fromanother branch of the court the cancellation of the adverse claims of Ocampo without notice to her. 14This

paved the way for the registration on 23 November 1979 of the contract of sale of Villaruz dated 8 August

1979 and the subsequent issuance of Transfer Certificate of Title No. T-100021 in her name whichcanceled the Original Certificate of Title No. 0-7743 of Tolosa.

On 13 October 1981, Ocampo filed a third-party complaint against Villaruz.15

On 7 January 1988, Judge Julian Y. Ereo of the Regional Trial Court of Iloilo, Branch 27, rendered a

decision in Civil Case No. 12163 dismissing the complaint of Tolosa as well as the complaint inintervention of Villaruz

1. Declaring the contract to sell executed between plaintiff Severino Tolosa and third-

party defendant Magdalena Villaruz as null and void as well as the Transfer of Certificateof Title issued in connection therewith, if any;

2. Ordering plaintiff Tolosa to execute the corresponding deed of sale in favor of third-

party plaintiff Pilar T. Ocampo over the lot in litigation upon the latters payment of thebalance of P4,400.00;

3. Ordering plaintiff Tolosa to vacate and deliver possession of the lot in question to PilarT. Ocampo;


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4. Ordering plaintiff to pay Pilar T. Ocampo P10,000.00 as attorneys fees, P30,000.00 asmoral damages, P2,000.00 as litigation expenses, and costs.

Her motion for reconsideration having been denied on 26 March 1988, Villaruz appealed to the Court of

Appeals. On 11 October 1990, the 16th Division of the Court of Appeals, 16in CA-G.R. No. 18428,reversed and set aside the trial courts decision

1. Declaring Magdalena S. Villaruz the absolute owner of the parcel of land covered by

TCT No. T-100021 of the Register of Deeds of Iloilo;

2. Ordering the Register of Deeds of Iloilo to annotate at the back of TCT No. T-100021the adverse claims filed by Pilar Ocampo under Entry No. 279936 and 302257 found in

OCT No. 0-7743; and

3. Ordering the parties to pay proportionate costs.

The appellate court upheld the sale in favor of Villaruz on the theory that the 21 April 1975 agreement of

Tolosa and Ocampo was merely a contract to sell. It claimed that in the absence of a deed of absolute salein favor of Ocampo, in relation to par. 4 of the contract, Tolosa retained ownership over the land andvalidly conveyed the same to Villaruz.

The agreement between Tolosa and Ocampo dated 21 April 1975 although titled "Agreement to Sell Real

Property" was a perfected contract of absolute sale wherein Tolosa forthwith sold, ceded and transferredthe land to Ocampo. It provided "[T]hat for and in consideration of the sum of TWENTY-FIVETHOUSAND PESOS (P25,000.00), Philippine Currency, to be paid by the VENDEE unto the VENDOR,

the latter hereby SELLS, CEDES and TRANSFERS in favor of the former her heirs and assigns, theabove-described parcel of land, free from all liens and encumbrances."

InDignos v. CA, 17we laid down the criteria that:

. . . a deed of sale is absolute in nature although denominated as a "Deed of Conditional

Sale" where nowhere in the contract in question is a proviso or stipulation to the effectthat title to the property sold is reserved in the vendor until full payment of the purchase

price, nor is there a stipulation giving the vendor the right to unilaterally rescind thecontract the moment the vendee fails to pay within a fixed period (Taguba v. Vda. deLeon, 132 SCRA 722; Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 86

SCRA 305).

The conditions mentioned in Dignos, reiterating Taguba and Luzon Brokerage Co., Inc., were not foundin the subject contract to indicate that it was indeed a mere contract to sell or a deed of conditional sale.

Contrary to the interpretation of the appellate court, we find nothing significant about par. 4 of the

contract which provides that

. . . immediately upon complete payment of the purchase price herein by the VENDEE,

the VENDOR hereby agrees to execute and deliver unto the VENDEE whatever pertinentdocument or documents necessary to implement this sale and to transfer title to theVENDEE.

Paragraph 4 pertains to the undertaking of the seller to execute and deliver to the buyer any document

deemed necessary by law to implement the sale and transfer title since the parties were unsure of what


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documents were pertinent. If the intent was for the seller to retain ownership and possession of the landthrough non-delivery of certain documents unless the price be fully paid, par. 4 alone should be inutile; it

should have been complemented with aproviso that the sale would not be implemented nor the titleconsidered transferred unless another document specifically for said purpose be first executed anddelivered to the buyer. In this regard, no right to retain ownership and possession of the land pending full

payment of the price can be inferred from the fact that no delivery was made to Ocampo. 18

The failure of the buyer to pay the price in full within a fixed period does not, by itself, bar the transfer of

the ownership or possession, 19much less dissolve the contract of sale. We held in De la Cruz v.Legaspi: 20

. . . they err in the assertion that as plaintiff failed to pay the price after the execution ofthe document of sale as agreed previously, the contract became null and void for lack of

consideration. It cannot be denied that when the document was signed the cause orconsideration existed: P450. The document specifically said so; and such was

undoubtedly the agreement. Subsequent non-payment of the price at the time agreed upondid not convert the contract into one without cause or consideration: a nudum

pactum (Levy vs. Johnson, 4 Phil. 650; Puato vs. Mendoza, 64 Phil. 457). The situation

was rather one in which there is failure to pay the consideration, with its resultantconsequences. In other words, when after the notarization of the contract, plaintiff failed

to hand the money to defendants, as he previously promised, there was default on his partat most, and defendants right was to demand interest legal interest for the delay,

pursuant to article 1501 (3) of the Civil Code21

(Villaruel vs. Tan King, 43 Phil. 251), orto demand rescission in court. (Escueta vs. Pardo, 42 Off. Gaz. 2759; Cortes vs. Bibao,41 Phil. 298.) Such failure, however, did not ipso factoresolve the contract, no

stipulation to that effect having been alleged (Cf. Warner Barnes & Co. vs. Inza, 43 Phil.505). Neither was there any agreement nor allegation that payment on time was essential

(Cf. Abella vs. Francisco, 55 Phil. 477; Berg vs. Magdalena Estate, 92 Phil. 110).

Under Art. 1592 of the Civil Code, the failure of Ocampo to complete her payment of the purchase price

within the stipulated period merely accorded Tolosa the option to rescind the contract of sale uponjudicial or notarial demand.

22

However, the letter of 2 August 1977 claimed to have been sent by Tolosa to Ocampo rescinding the

contract of sale23

was defective because it was not notarized24

and, more importantly, it was not provento have been received by Ocampo.

25

Likewise, Civil Case No. 12163 could not be considered a judicial demand under Art. 1592 of the Civil

Code because it did not pray for the rescission of the contract. Although the complaint sought thecancellation of Ocampos adverse claim on Tolosas OCT and for the refund of the payments made, these

could not be equivalent to a rescission. In other words, seeking discharge from contractual obligations andan offer for restitution is not the same as abrogation of the contract. To rescind is "[t]o declare a contractvoid in its inception and to put an end to it as though it never were." 26It is "[n]ot merely to terminate it

and release parties from further obligations to each other but to abrogate it from the beginning and restoreparties to relative positions which they would have occupied had no contract ever been made."

27

Even assuming arguendo that Civil Case No. 12163 was a valid judicial demand, rescission is not granted

as a matter of course. Before Civil Case No. 12163 was filed on 7 October 1977, Ocampo not only paidTolosa a total of P20,600.00 but also discharged Tolosas mortgage debt in the amount of P4,453.41. Had


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not Tolosa ordered the Philippine Veterans Bank to return the mortgage debt payment by Ocampo, 28thepurchase price would have been deemed fully paid.

If only to accentuate her intention to make good her contractual obligations, Ocampo offered to pay the

balance of the purchase price in her letter of 15 March 1977 or more than four months before Tolosaallegedly wrote his letter of rescission on 2 August 1977, and more than six months before the filing of

Civil Case No. 12163 on 7 October 1977. This offer to pay prior to the demand for rescission is sufficientto defeat Tolosas prerogative under Art. 1592 of the Civil Code.

Tolosa, on the other hand, is now precluded from raising the issue of late payments. His unqualified

acceptance of payments after the six-month period expired constitutes waiver of the period and, hence, ofthe ground to rescind under Art. 1592.

In any case, however, the breach on the part of Ocampo was only slight if not outweighed by the bad faithof Tolosa in reneging in his own prestations, hence, judicial rescission of the contract cannot be

justified.Angeles v. Calasanz29

is apropos

The right to rescind the contract for non-performance of one of its stipulations . . . is notabsolute. InUniversal Food Corp. v. Court of Appeals(33 SCRA 1) the Court stated: Thegeneral rule is that rescission of a contract will not be permitted for a slight or casual

breach, but only for such substantial and fundamental breach as would defeat the very

object of the parties in making the agreement (Song Fo & Co. v. Hawaiian-PhilippineCo., 47 Phil., 821, 827). The question of whether a breach of a contract is substantialdepends upon the attendant circumstances (Corpus v. Hon. Alikpala, et al., L-23707 & L-23720, Jan. 17, 1968) . . .

The defendants-appellants state that the plaintiffs-appellees violated Section two of thecontract to sell . . . because they failed to pay the August installment, despite demand, formore than four (4) months.

The breach of the contract adverted to by the defendants-appellants is so slight and casualwhen we consider that apart from the initial downpayment of P392.00 the plaintiffs-appellees had already paid the monthly installments for a period of almost nine (9) years.In other words, in only a short time, the entire obligation would have been paid.Furthermore, although the principal obligation was only P3920.00 excluding the 7

percent interest, the plaintiffs-appellees had already paid an aggregate amount ofP4,533.38. To sanction the rescission made by the defendants-appellants will workinjustice to the plaintiffs-appellees (See J.M. Tuazon and Co., Inc. v. Javier, 31 SCRA829). It would unjustly enrich the defendants-appellants.

Article 1234 of the Civil Code which provides that "[I]f the obligation has been

substantially performed in good faith, the obligator may recover as though there had beena strict and complete fulfillment, less damages suffered by the obligee," also militatesagainst the unilateral act of the defendants-appellants in canceling the contract.

. . . We agree with the plaintiffs-appellees that when the defendants-appellants, instead ofavailing of their right to rescind, have accepted and received delayed payments ofinstallments, though the plaintiffs-appellees have been in arrears beyond the grace period

mentioned in paragraph 6 of the contract, the defendants-appellants have waived and arenow estopped from exercising their alleged right of rescission. In De Guzman v.


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Guieb (48 SCRA 68), we held . . . But defendants do not deny that in spite of the longarrearages, neither they nor their predecessor . . . even took steps to cancel the option or

to eject the appellees from the home-lot in question. On the contrary, it is admitted thatthe delayed payments were received without protest or qualification. . . . Under thesecircumstances, We cannot but agree with the lower court that at the time appelleesexercised their option, appellants had already forfeited their right to invoke the above-

quoted provision regarding the nullifying effect of the non-payment of six-months rentalsby appellees by their having accepted without qualification on July 21, 1964 the fullpayment by appellees of all their arrearages.

While the contract dated 3 June 1977 in favor of Villaruz is also a contract of sale, that of Ocampo dated

21 April 1975 should prevail pursuant to Art. 1544 of the Civil code on double sales.30

While Villaruzmay have registered his contract or came into possession ahead of Ocampo, Villaruz was never in good

faith.

Since Ocampo had her adverse claim annotated on Tolosas OCT on 6 June 1976, Villaruz could notprofess innocence thereof when she signed her contract on 3 June 1977; in fact, her full payment of thepurchase price was made dependent, among others, on the cancelation of this claim. Moreover, Villaruz

admitted having been informed by Tolosa of the first sale to Ocampo while still negotiating to buy theland. 31Knowledge of the foregoing should have impelled Villaruz to investigate the circumstances of the

annotation since this is equivalent to registration of Ocampos contract of sale as against Villaruz. In sum,Ocampo having the older title in good faith and considering that personal knowledge thereof by Villaruzconstitutes registration as against the latter, Ocampo should be considered the preferred buyer.

Incidentally, the stipulation in the contract of Villaruz conveying the land in her favor bows to Tolosasadmission at the witness stand on 15 May 1980 that he never actually delivered the possession of the

property to anyone. 32

From the foregoing, although the decision of the trial court ordering Tolosa to execute another deed of

sale in favor of Ocampo already became final as against him for failing to appeal therefrom, there is nomore need for it. For practical purposes, it is enough that we order Villaruz to reconvey the property to

Ocampo.

WHEREFORE, the decision of the Court of Appeals is REVERSED and SET ASIDE and the decisiondated 7 January 1988 of the Regional Trial Court of Iloilo, Branch 27, in Civil Case No. 12163 is

REINSTATED, with the modification that respondent Magdalena S. Villaruz is directed to reconvey thesubject land now covered by TCT No. T-100021 in her name to petitioner Pilar T. Ocampo, without

prejudice to Severino Tolosa collecting from petitioner Pilar T. Ocampo the balance of the purchase price

of P4,400.00 which nevertheless may be deducted from the monetary awards made by the trial court infavor of petitioner Ocampo.

SO ORDERED.


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THIRD DIVISION

[G.R. No. 108346. July 11, 2001]

Spouses MARIANO Z. VELARDE and AVELINA D. VELARDE, petitioners, vs. COURT OF

APPEALS, DAVID A. RAYMUNDO and GEORGE RAYMUNDO,respondents.

D E C I S I O N

PANGANIBAN, J.:

A substantial breach of a reciprocal obligation, like failure to pay the price in the manner prescribed

by the contract, entitles the injured party to rescind the obligation. Rescission abrogates the contract fromits inception and requires a mutual restitution of benefits received.

The Case

Before us is a Petition for Review on Certiorari[1]

questioning the Decision[2]

of the Court of Appeals(CA) in CA-GR CV No. 32991 dated October 9, 1992, as well as its Resolution

[3]dated December 29,

1992 denying petitioners motion for reconsideration.[4]

The dispositive portion of the assailed Decision reads:

WHEREFORE, the Order dated May 15, 1991 is hereby ANNULLED and SET ASIDE and theDecision dated November 14, 1990 dismissing the [C]omplaint is REINSTATED. The bonds posted by

plaintiffs-appellees and defendants-appellants are hereby RELEASED.[5]

The Facts

The factual antecedents of the case, as found by the CA, are as follows:

x x x. David Raymundo [herein private respondent] is the absolute and registered owner of a parcel ofland, together with the house and other improvements thereon, located at 1918 Kamias St., Dasmarias

Village, Makati and covered by TCT No. 142177. Defendant George Raymundo [herein privaterespondent] is Davids father who negotiated with plaintiffs Avelina and Mariano Velarde [herein

petitioners] for the sale of said property, which was, however, under lease (Exh. 6, p. 232, Record ofCivil Case No. 15952).

On August 8, 1986, a Deed of Sale with Assumption of Mortgage (Exh. A; Exh. 1, pp. 11 -12,

Record) was executed by defendant David Raymundo, as vendor, in favor of plaintiff Avelina Velarde, asvendee, with the following terms and conditions:

x x x x x x x x x
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That for and in consideration of the amount of EIGHT HUNDRED THOUSAND PESOS (P800,000.00),Philippine currency, receipt of which in full is hereby acknowledged by the VENDOR from

the VENDEE, to his entire and complete satisfaction, by these presents the VENDOR hereby SELLS,CEDES, TRANSFERS, CONVEYS AND DELIVERS, freely and voluntarily, with full warranty of alegal and valid title as provided by law, unto the VENDEE, her heirs, successors and assigns, the parcel ofland mentioned and described above, together with the house and other improvements thereon.

That the aforesaid parcel of land, together with the house and other improvements thereon, were

mortgaged by the VENDOR to the BANK OF THE PHILIPPINE ISLANDS, Makati, Metro Manila, tosecure the payment of a loan of ONE MILLION EIGHT HUNDRED THOUSAND PESOS(P1,800,000.00), Philippine currency, as evidenced by a Real Estate Mortgage signed and executed by the

VENDOR in favor of the said Bank of the Philippine Islands, on______ and which Real Estate Mortgagewas ratified before Notary Public for Makati, _______, as Doc. No. ____, Page No. ___, Book No. ___,

Series of 1986 of his Notarial Register.

That as part of the consideration of this sale, the VENDEE hereby assumes to pay the mortgageobligations on the property herein sold in the amount of ONE MILLION EIGHT HUNDREDTHOUSAND PESOS (P1,800,000.00), Philippine currency, in favor of Bank of the Philippine Islands, in

the name of the VENDOR, and further agrees to strictly and faithfully comply with all the terms andconditions appearing in the Real Estate Mortgage signed and executed by the VENDOR in favor of BPI,

including interests and other charges for late payment levied by the Bank, as if the same were originallysigned and executed by the VENDEE.

It is further agreed and understood by the parties herein that the capital gains tax and documentary

stamps on the sale shall be for the account of the VENDOR; whereas, the registration fees and transfer taxthereon shall be for the account of the VENDEE. (Exh. A, pp. 11-12, Record).

On the same date, and as part of the above-document, plaintiff Avelina Velarde, with the consent of herhusband, Mariano, executed an Undertaking (Exh. C, pp. 13-14, Record), the pertinent portions of

which read, as follows:

x x x x x x x x x

Whereas, as per Deed of Sale with Assumption of Mortgage, I paid Mr. David A. Raymundo the sum ofEIGHT HUNDRED THOUSAND PESOS (P800,000.00), Philippine currency, and assume the mortgage

obligations on the property with the Bank of the Philippine Islands in the amount of ONE MILLIONEIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, in accordance with theterms and conditions of the Deed of Real Estate Mortgage dated _________, signed and executed by Mr.David A. Raymundo with the said Bank, acknowledged before Notary Public for Makati, _____, as Doc.

No. ___, Page No. ___, Book No. __, Series of 1986 of his Notarial Register.

WHEREAS, while my application for the assumption of the mortgage obligations on the property is notyet approved by the mortgagee Bank, I have agreed to pay the mortgage obligations on the property withthe Bank in the name of Mr. David A. Raymundo, in accordance with the terms and conditions of the said

Deed of Real Estate Mortgage, including all interests and other charges for late payment.

WHEREAS, this undertaking is being executed in favor of Mr. David A. Raymundo, for purposes ofattesting and confirming our private understanding concerning the said mortgage obligations to be

assumed.


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NOW, THEREFORE, for and in consideration of the foregoing premises, and the assumption of themortgage obligations of ONE MILLION EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00),

Philippine currency, with the Bank of the Philippine islands, I, Mrs. Avelina D. Velarde, with the consentof my husband, Mariano Z. Velarde, do hereby bind and obligate myself, my heirs, successors andassigns, to strictly and faithfully comply with the following terms and conditions:

1. That until such time as my assumption of the mortgage obligations on the property purchased isapproved by the mortgagee bank, the Bank of the Philippine Islands, I shall continue to pay the said loan

in accordance with the terms and conditions of the Deed of Real Estate Mortgage in the name of Mr.David A. Raymundo, the original Mortgagor.

2. That, in the event I violate any of the terms and conditions of the said Deed of Real Estate Mortgage,I hereby agree that my downpayment of P800,000.00, plus all payments made with the Bank of the

Philippine Islands on the mortgage loan, shall be forfeited in favor of Mr. David A. Raymundo, as and byway of liquidated damages, without necessity of notice or any judicial declaration to that effect, and Mr.

David A Raymundo shall resume total and complete ownership and possession of the property sold byway of Deed of Sale with Assumption of Mortgage, and the same shall be deemed automaticallycancelled and be of no further force or effect, in the same manner as if (the) same had never been

executed or entered into.

3. That I am executing this Undertaking for purposes of binding myself, my heirs, successors andassigns, to strictly and faithfully comply with the terms and conditions of the mortgage obligations with

the Bank of the Philippine Islands, and the covenants, stipulations and provisions of this Undertaking.

That, David A. Raymundo, the vendor of the property mentioned and identified above, [does] herebyconfirm and agree to the undertakings of the Vendee pertinent to the assumption of the mortgage

obligations by the Vendee with the Bank of the Philippine Islands. (Exh. C, pp. 13-14, Record).

This undertaking was signed by Avelina and Mariano Velarde and David Raymundo.

It appears that the negotiated terms for the payment of the balance ofP1.8 million was from the proceedsof a loan that plaintiffs were to secure from a bank with defendants help. Defendants had a standingapproved credit line with the Bank of the Philippine Islands (BPI). The parties agreed to avail of this,subject to BPIs approval of an application for assumption of mortgage by plaintiffs. Pending BPIsapproval o[f] the application, plaintiffs were to continue paying the monthly interests of the loan secured

by a real estate mortgage.

Pursuant to said agreements, plaintiffs paid BPI the monthly interest on the loan secured by theaforementioned mortgage for three (3) months as follows: September 19, 1986 at P27,225.00; October 20,

1986 at P23,000.00; and November 19, 1986 at P23,925.00 (Exh. E, H & J, pp. 15, 17 and 18,Record).

On December 15, 1986, plaintiffs were advised that the Application for Assumption of Mortgag e with

BPI was not approved (Exh. J, p. 133, Record). This prompted plaintiffs not to make any furtherpayment.

On January 5, 1987, defendants, thru counsel, wrote plaintiffs informing the latter that their non-paymentto the mortgage bank constitute[d] non-performance of their obligation (Exh. 3, p. 220, Record).

In a Letter dated January 7, 1987, plaintiffs, thru counsel, responded, as follows:


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This is to advise you, therefore, that our client is willing to pay the balance in cash not later than January21, 1987 provided: (a) you deliver actual possession of the property to her not later than January 15, 1987

for her immediate occupancy; (b) you cause the release of title and mortgage from the Bank of P.I. andmake the title available and free from any liens and encumbrances; and (c) you execute an absolute deedof sale in her favor free from any liens or encumbrances not later than January 21, 1987. (Exhs. K, 4,

p. 223, Record).

On January 8, 1987, defendants sent plaintiffs a notarial noticeof cancellation/rescission of the intended

sale of the subject property allegedly due to the latters failure to comply with the terms and conditions ofthe Deed of Sale with Assumption of Mortgage and the Undertaking (Exh. 5, pp. 225-226, Record).[6]

Consequently, petitioners filed on February 9, 1987 a Complaint against private respondents forspecific performance, nullity of cancellation, writ of possession and damages. This was docketed as Civil

Case No. 15952 at the Regional Trial Court of Makati, Branch 149. The case was tried and heard by thenJudge Consuelo Ynares-Santiago (now an associate justice of this Court), who dismissed the Complaint in

a Decision dated November 14, 1990.[7]Thereafter, petitioners filed a Motion for Reconsideration.[8]

Meanwhile, then Judge Ynares-Santiago was promoted to the Court of Appeals and Judge Salvador

S. A. Abad Santos was assigned to the sala she vacated. In an Order dated May 15, 1991,[9]

Judge AbadSantos granted petitioners Motion for Reconsideration and directed the parties to proceed with thesale. He instructed petitioners to pay the balance of P1.8 million to private respondents who, in turn, were

ordered to execute a deed of absolute sale and to surrender possession of the disputed property topetitioners.

Private respondents appealed to the CA.

Ruling of the Court of Appeals

The CA set aside the Order of Judge Abad Santos and reinstated then Judge Ynares-Santiagos

earlier Decision dismissing petitioners Complaint. Upholding the validity of the rescission made byprivate respondents, the CA explained its ruling in this wise:

In the Deed of Sale with Assumption of Mortgage, it was stipulated that as part of the consideration ofthis sale, the VENDEE (Velarde) would assume to pay the mortgage obligation on the subject propertyin the amount of P1.8 million in favor of BPI in the name of the Vendor (Raymundo). Since the price to

be paid by the Vendee Velarde includes the downpayment of P800,000.00 and the balance ofP1.8 million,

and the balance of P1.8 million cannot be paid in cash, Vendee Velarde, as part of the consideration of thesale, had to assume the mortgage obligation on the subject property. In other words, the assumption ofthe mortgage obligation is part of the obligation of Velarde, as vendee, under the contract. Velarde

further agreed to strictly and faithfully comply with all the terms and conditions appearing in the RealEstate Mortgage signed and executed by the VENDOR in favor of BPI x x x as if the same were

originally signed and executed by the Vendee. (p.2, thereof, p.12, Record). This was reiterated byVelarde in the document entitled Undertaking wherein the latter agreed to continue paying said loan in

accordance with the terms and conditions of the Deed of Real Estate Mortgage in the name ofRaymundo. Moreover, it was stipulated that in the event of violation by Velarde of any terms andconditions of said deed of real estate mortgage, the downpayment of P800,000.00 plus all payments made

with BPI or the mortgage loan would be forfeited and the [D]eed of [S]ale with [A]ssumption of[M]ortgage would thereby be cancelled automatically and of no force and effect (pars. 2 & 3, thereof, pp.

13-14, Record).
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From these 2 documents, it is therefore clear that part of the consideration of the sale was the assumptionby Velarde of the mortgage obligation of Raymundo in the amount of P1.8 million. This would mean that

Velarde had to make payments to BPI under the [D]eed of [R]eal [E]state [M]ortgage in the name ofRaymundo. The application with BPI for the approval of the assumption of mortgage would mean that, incase of approval, payment of the mortgage obligation will now be in the name of Velarde. And in theevent said application is disapproved, Velarde had to pay in full. This is alleged and admitted in

Paragraph 5 of the Complaint. Mariano Velarde likewise admitted this fact during the hearing onSeptember 15, 1997 (p. 47, t.s.n., September 15, 1987; see also pp. 16-26, t.s.n., October 8, 1989). This

being the case, the non-payment of the mortgage obligation would result in a violation of thecontract. And, upon Velardes failure to pay the agreed price, the[n] Raymundo may choose either of two(2) actions - (1) demand fulfillment of the contract, or (2) demand its rescission (Article 1191, CivilCode).

The disapproval by BPI of the application for assumption of mortgage cannot be used as an excuse forVelardes non-payment of the balance of the purchase price. As borne out by the evidence, Velarde hadto pay in full in case of BPIs disapproval of the application for assumption of mortgage. What Velarde

should have done was to pay the balance of P1.8 million. Instead, Velarde sent Raymundo a letter datedJanuary 7, 1987 (Exh. K, 4) which was strongly given weight by the lower court in reversing the

decision rendered by then Judge Ynares-Santiago. In said letter, Velarde registered their willingness topay the balance in cash but enumerated 3 new conditions which, to the mind of this Court, wouldconstitute a new undertaking or new agreement which is subject to the consent or approval of

Raymundo. These 3 conditions were not among those previously agreed upon by Velarde andRaymundo. These are mere offers or, at most, an attempt to novate. But then again, there can be no

novation because there was no agreement of all the parties to the new contract (Garcia, Jr. vs. Court ofAppeals, 191 SCRA 493).

It was likewise agreed that in case of violation of the mortgage obligation, the Deed of Sale with

Assumption of Mortgage would be deemed automatically cancelled and of no further force and effect, asif the same had never been executed or entered into. While it is true that even if the contract expressly

provided for automatic rescission upon failure to pay the price, the vendee may still pay, he may do so

only for as long as no demand for rescission of the contract has been made upon him either judicially orby a notarial act (Article 1592, Civil Code). In the case at bar, Raymundo sent Velarde a notarial notice

dated January 8, 1987 of cancellation/rescission of the contract due to the latters failure to comply withtheir obligation. The rescission was justified in view of Velardes failure to pay the price (balance) whichis substantial and fundamental as to defeat the object of the parties in making the agreement. As adverted

to above, the agreement of the parties involved a reciprocal obligation wherein the obligation of one is aresolutory condition of the obligation of the other, the non-fulfillment of which entitles the other party to

rescind the contract (Songcuan vs. IAC, 191 SCRA 28). Thus, the non-payment of the mortgageobligation by appellees Velarde would create a right to demand payment or to rescind the contract, or tocriminal prosecution (Edca Publishing & Distribution Corporation vs. Santos, 184 SCRA 614). Upon

appellees failure, therefore, to pay the balance, the contract was properly rescinded (Ruiz vs. IAC, 184SCRA 720). Consequently, appellees Velarde having violated the contract, they have lost their right to its

enforcement and hence, cannot avail of the action for specific performance (Voysaw vs. InterphilPromotions, Inc., 148 SCRA 635).

[10]

Hence, this appeal.[11]

The Issues
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Petitioners, in their Memorandum,[12]interpose the following assignment of errors:

I.

The Court of Appeals erred in holding that the non-payment of the mortgage obligation resulted in abreach of the contract.

II.

The Court of Appeals erred in holding that the rescission (resolution) of the contract by privaterespondents was justified.

III.

The Court of Appeals erred in holding that petitioners January 7, 1987 letter gave three newconditions constituting mere offers or an attempt to novate necessitating a new agreement betweenthe parties.

The Courts Ruling

The Petition is partially meritorious.

First Issue:

Breach of Contract

Petitioners aver that their nonpayment of private respondents mortgage obligation did not constitute

a breach of contract, considering that their request to assume the obligation had been disapproved by themortgagee bank. Accordingly, payment of the monthly amortizations ceased to be their obligation and,instead, it devolved upon private respondents again.

However, petitioners did not merely stop paying the mortgage obligations; they also failed to pay thebalance of the purchase price. As admitted by both parties, their agreement mandated that petitioners

should pay the purchase price balance of P1.8 million to private respondents in case the request to assumethe mortgage would be disapproved. Thus, on December 15, 1986, when petitioners received notice ofthe banks disapproval of their application to assume respondents mortgage, they should have paid the

balance of the P1.8 million loan.

Instead of doing so, petitioners sent a letter to private respondents offering to make such paymentonly upon the fulfillment of certain conditions not originally agreed upon in the contract of sale. Such

conditional offer to pay cannot take the place of actual payment as would discharge the obligation of abuyer under a contract of sale.

In a contract of sale, the seller obligates itself to transfer the ownership of and deliver a determinatething, and the buyer to pay therefor a price certain in money or its equivalent .[13]Private respondents hadalready performed their obligation through the execution of the Deed of Sale, which effectivelytransferred ownership of the property to petitioner through constructive delivery. Prior physical delivery

or possession is not legally required, and the execution of the Deed of Sale is deemed equivalent todelivery.

[14]
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Petitioners, on the other hand, did not perform their correlative obligation of paying the contractprice in the manner agreed upon. Worse, they wanted private respondents to perform obligations beyond

those stipulated in the contract before fulfilling their own obligation to pay the full purchase price.

Second Issue

Vali dity of the Rescission

Petitioners likewise claim that the rescission of the contract by private respondents was not justified,inasmuch as the former had signified their willingness to pay the balance of the purchase price only a

little over a month from the time they were notified of the disapproval of their application for assumptionof mortgage. Petitioners also aver that the breach of the contract was not substantial as would warrant a

rescission. They cite several cases[15]

in which this Court declared that rescission of a contract would notbe permitted for a slight or casual breach. Finally, they argue that they have substantially performed theirobligation in good faith, considering that they have already made the initial payment of P800,000 andthree (3) monthly mortgage payments.

As pointed out earlier, the breach committed by petitioners was not so much their nonpayment of themortgage obligations, as their nonperformance of their reciprocal obligation to pay the purchase priceunder the contract of sale. Private respondents right to rescind the contract finds basis in Article 1191 of

the Civil Code, which explicitly provides as follows:

Art. 1191. -- The power to rescind obligations is implied in reciprocal ones, in case one of the obligorsshould not comply with what is incumbent upon him.

The injured party may choose between fulfillment and the rescission of the obligation, with the paymentof damages in either case. He may also seek rescission even after he has chosen fulfillment, if the latter

should become impossible.

The right of rescission of a party to an obligation under Article 1191 of the Civil Code is predicatedon a breach of faith by the other party who violates the reciprocity between them.[16]The breach

contemplated in the said provision is the obligors failure to comply with an existing obligation.[17]Whenthe obligor cannot comply with what is incumbent upon it, the obligee may seek rescission and, in theabsence of any just cause for the court to determine the period of compliance, the court shall decree therescission.[18]

In the present case, private respondents validly exercised their right to rescind the contract, because

of the failure of petitioners to comply with their obligation to pay the balance of the purchaseprice. Indubitably, the latter violated the very essence of reciprocity in the contract of sale, a violation thatconsequently gave rise to private respondents right to rescind the same in accordance with law.

True, petitioners expressed their willingness to pay the balance of the purchase price one month after

it became due; however, this was not equivalent to actual payment as would constitute a faithfulcompliance of their reciprocal obligation. Moreover, the offer to pay was conditioned on the performance

by private respondents of additional burdens that had not been agreed upon in the original contract. Thus,

it cannot be said that the breach committed by petitioners was merely slight or casual as would precludethe exercise of the right to rescind.

Misplaced is petitioners reliance on the cases[19]

they cited because the factual circumstances inthose cases are not analogous to those in the present one. In Song Fothere was, on the part of the buyer,only a delay of twenty (20) days to pay for the goods delivered. Moreover, the buyers offer to pay was
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unconditional and was accepted by the seller. InZepeda, the breach involved a mere one-week delay inpaying the balance of P1,000, which was actually paid. In Tan, the alleged breach was private

respondents delay of only a few days, which was for the purpose of clearing the title to the property;there was no reference whatsoever to the nonpayment of the contract price.

In the instant case, the breach committed did not merely consist of a slight delay in payment or an

irregularity; such breach would not normally defeat the intention of the parties to the contract. Here,petitioners not only failed to pay the P1.8 million balance, but they also imposed upon private

respondents new obligations as preconditions to the performance of their own obligation. In effect, thequalified offer to pay was a repudiation of an existing obligation, which was legally due and demandableunder the contract of sale. Hence, private respondents were left with the legal option of seekingrescission to protect their own interest.

Mu tual Restitution

Requir ed in Rescission

As discussed earlier, the breach committed by petitioners was the nonperformance of a reciprocalobligation, not a violation of the terms and conditions of the mortgage contract. Therefore, the automaticrescission and forfeiture of payment clauses stipulated in the contract does not apply. Instead, Civil Code

provisions shall govern and regulate the resolution of this controversy.

Considering that the rescission of the contract is based on Article 1191 of the Civil Code, mutualrestitution is required to bring back the parties to their original situation prior to the inception of the

contract. Accordingly, the initial payment of P800,000 and the corresponding mortgage payments in theamounts of P27,225, P23,000 and P23,925 (totaling P874,150.00) advanced by petitioners should be

returned by private respondents, lest the latter unjustly enrich themselves at the expense of the former.

Rescission creates the obligation to return the object of the contract. It can be carried out only whenthe one who demands rescission can return whatever he may be obliged to restore.

[20]To rescind is to

declare a contract void at its inception and to put an end to it as though it never was. It is not merely toterminate it and release the parties from further obligations to each other, but to abrogate it from the

beginning and restore the parties to their relative positions as if no contract has been made.[21]

Third Issue

Attempt to Novate

In view of the foregoing discussion, the Court finds it no longer necessary to discuss the third issueraised by petitioners. Suffice it to say that the three conditions appearing on the January 7, 1987 letter of

petitioners to private respondents were not part of the original contract. By that time, it was already

incumbent upon the former to pay the balance of the sale price. They had no right to demandpreconditions to the fulfillment of their obligation, which had become due.

WHEREFORE, the assailed Decision is herebyAFFIRMEDwith theMODIFICATIONthat privaterespondents are ordered to return to petitioners the amount of P874,150, which the latter paid as a

consequence of the rescinded contract, with legal interest thereon from January 8, 1987, the date ofrescission. No pronouncement as to costs.

SO ORDERED.
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Republic of the Philippines

SUPREME COURTManila

FIRST DIVISION

G.R. No. 126083 July 12, 2006

ANTONIO R. CORTES (in his capacity as Administrator of the estate of Claro S.Cortes),petitioner,vs.

HON. COURT OF APPEALS and VILLA ESPERANZA DEVELOPMENT

CORPORATION,respondents.

D E C I S I O N

YNARES-SANTIAGO, J.:

The instant petition for review seeks the reversal of the June 13, 1996 Decision 1of the Court of Appealsin CA-G.R. CV No. 47856, setting aside the June 24, 1993 Decision2of the Regional Trial Court of

Makati, Branch 138, which rescinded the contract of sale entered into by petitioner Antonio Cortes(Cortes) and private respondent Villa Esperanza Development Corporation (Corporation).

The antecedents show that for the purchase price of P3,700,000.00, the Corporation as buyer, and Cortes

as seller, entered into a contract of sale over the lots covered by Transfer Certificate of Title (TCT) No.31113-A, TCT No. 31913-A and TCT No. 32013-A, located at Baclaran, Paraaque, Metro Manila. Onvarious dates in 1983, the Corporation advanced to Cortes the total sum of P1,213,000.00. Sometime in

September 1983, the parties executed a deed of absolute sale containing the following terms:3

1. Upon execution of this instrument, the Vendee shall pay unto the Vendor sum of TWOMILLION AND TWO HUNDRED THOUSAND (P2,200,000.00) PESOS, Philippine Currency,

less all advances paid by the Vendee to the Vendor in connection with the sale;

2. The balance of ONE MILLION AND FIVE HUNDRED THOUSAND [P1,500,000.00]PESOS, Phil. Currency shall be payable within ONE (1) YEAR from date of execution of this

instrument, payment of which shall be secured by an irrevocable standby letter of credit to beissued by any reputable local banking institution acceptable to the Vendor.

x x x x

4. All expense for the registration of this document with the Register of Deeds concerned,

including the transfer tax, shall be divided equally between the Vendor and the Vendee. Paymentof the capital gains shall be exclusively for the account of the Vendor; 5% commission ofMarcosa Sanchez to be deducted upon signing of sale.4

Said Deed was retained by Cortes for notarization.

On January 14, 1985, the Corporation filed the instant case5for specific performance seeking to compel

Cortes to deliver the TCTs and the original copy of the Deed of Absolute Sale. According to the
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Corporation, despite its readiness and ability to pay the purchase price, Cortes refused delivery of thesought documents. It thus prayed for the award of damages, attorney's fees and litigation expenses arising

from Cortes' refusal to deliver the same documents.

In his Answer with counterclaim,6Cortes claimed that the owner's duplicate copy of the three TCTs weresurrendered to the Corporation and it is the latter which refused to pay in full the agreed down payment.

He added that portion of the subject property is occupied by his lessee who agreed to vacate the premisesupon payment of disturbance fee. However, due to the Corporation's failure to pay in full the sum of

P2,200,000.00, he in turn failed to fully pay the disturbance fee of the lessee who now refused to paymonthly rentals. He thus prayed that the Corporation be ordered to pay the outstanding balance plusinterest and in the alternative, to cancel the sale and forfeit the P1,213,000.00 partial down payment, with

damages in either case.

On June 24, 1993, the trial court rendered a decision rescinding the sale and directed Cortes to return tothe Corporation the amount of P1,213,000.00, plus interest. It ruled that pursuant to the contract of the

parties, the Corporation should have fully paid the amount of P2,200,000.00 upon the execution of thecontract. It stressed that such is the law between the parties because the Corporation failed to presentevidence that there was another agreement that modified the terms of payment as stated in the contract.

And, having failed to pay in full the amount of P2,200,000.00 despite Cortes' delivery of the Deed ofAbsolute Sale and the TCTs, rescission of the contract is proper.

In its motion for reconsideration, the Corporation contended that the trial court failed to consider their

agreement that it would pay the balance of the down payment when Cortes delivers the TCTs. The motionwas, however, denied by the trial court holding that the rescission should stand because the Corporation

did not act on the offer of Cortes' counsel to deliver the TCTs upon payment of the balance of the downpayment. Thus:

The Court finds no merit in the [Corporation's] Motion for Reconsideration. As stated in thedecision sought to be reconsidered, [Cortes'] counsel at the pre-trial of this case, proposed that if

[the Corporation] completes the down payment agreed upon and make arrangement for thepayment of the balances of the purchase price, [Cortes] would sign the Deed of Sale and turn over

the certificate of title to the [Corporation]. [The Corporation] did nothing to comply with itsundertaking under the agreement between the parties.

WHEREFORE, in view of the foregoing considerations, the Motion for Reconsideration is hereby

DENIED.

SO ORDERED.7

On appeal, the Court of Appeals reversed the decision of the trial court and directed Cortes to execute aDeed of Absolute Sale conveying the properties and to deliver the same to the Corporation together with

the TCTs, simultaneous with the Corporation's payment of the balance of the purchase price ofP2,487,000.00. It found that the parties agreed that the Corporation will fully pay the balance of the downpayment upon Cortes' delivery of the three TCTs to the Corporation. The records show that no such

delivery was made, hence, the Corporation was not remiss in the performance of its obligation andtherefore justified in not paying the balance. The decretal portion thereof, provides:

WHEREFORE, premises considered, [the Corporation's] appeal is GRANTED. The decision

appealed from is hereby REVERSED and SET ASIDE and a new judgment rendered ordering[Cortes] to execute a deed of absolute sale conveying to [the Corporation] the parcels of land
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subject of and described in the deed of absolute sale, Exhibit D. Simultaneously with theexecution of the deed of absolute sale and the delivery of the corresponding owner's duplicate

copies of TCT Nos. 31113-A, 31931-A and 32013-A of the Registry of Deeds for the Province ofRizal, Metro Manila, District IV, [the Corporation] shall pay [Cortes] the balance of the purchase

price of P2,487,000.00. As agreed upon in paragraph 4 of the Deed of Absolute Sale, Exhibit D,under terms and conditions, "All expenses for the registration of this document (the deed of sale)

with the Register of Deeds concerned, including the transfer tax, shall be divided equally between[Cortes and the Corporation]. Payment of the capital gains shall be exclusively for the account ofthe Vendor; 5% commission of Marcosa Sanchez to be deducted upon signing of sale." There isno pronouncement as to costs.

SO ORDERED.8

Cortes filed the instant petition praying that the decision of the trial court rescinding the sale be reinstated.

There is no doubt that the contract of sale in question gave rise to a reciprocal obligation of the parties.Reciprocal obligations are those which arise from the same cause, and which each party is a debtor and a

creditor of the other, such that the obligation of one is dependent upon the obligation of the other. Theyare to be performed simultaneously, so that the performance of one is conditioned upon the simultaneous

fulfillment of the other.9

Article 1191 of the Civil Code, states:

ART. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of theobligors should not comply with what is incumbent upon him.

x x x x

As to when said failure or delay in performance arise, Article 1169 of the same Code provides that

ART. 1169

x x x x

In reciprocal obligations, neither party incurs in delay if the other does not comply or is not ready

to comply in a proper manner with what is incumbent upon him. From the moment one of theparties fulfills his obligation, delay by the other begins. (Emphasis supplied)

The issue therefore is whether there is delay in the performance of the parties' obligation that would

justify the rescission of the contract of sale. To resolve this issue, we must first determine the trueagreement of the parties.

The settled rule is that the decisive factor in evaluating an agreement is the intention of the parties, as

shown not necessarily by the terminology used in the contract but by their conduct, words, actions anddeeds prior to, during and immediately after executing the agreement. As such, therefore, documentaryand parol evidence may be submitted and admitted to prove such intention.10

In the case at bar, the stipulation in the Deed of Absolute Sale was that the Corporation shall pay in fullthe P2,200,000.00 down payment upon execution of the contract. However, as correctly noted by the
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Court of Appeals, the transcript of stenographic notes reveal Cortes' admission that he agreed that theCorporation's full payment of the sum of P2,200,000.00 would depend upon his delivery of the TCTs of

the three lots. In fact, his main defense in the Answer is that, he performed what is incumbent upon himby delivering to the Corporation the TCTs and the carbon duplicate of the Deed of Absolute Sale, but thelatter refused to pay in full the down payment.11Pertinent portion of the transcript, reads:

[Q] Now, why did you deliver these three titles to the plaintiff despite the fact that it has not beenpaid in full the agreed down payment?

A Well, the broker told me that the down payment will be given if I surrender the titles.

Q Do you mean to say that the plaintiff agreed to pay in full the down payment of P2,200,000.00

provided you surrender or entrust to the plaintiff the titles?

A Yes, sir.12

What further confirmed the agreement to deliver the TCTs is the testimony of Cortes that the title of the

lots will be transferred in the name of the Corporation upon full payment of the P2,200,000.00 downpayment. Thus

ATTY. ANTARAN

Q Of course, you have it transferred in the name of the plaintiff, the title?

A Upon full payment.

x x x x

ATTY. SARTE

Q When you said upon full payment, are you referring to the agreed down payment ofP2,200,000.00?

A Yes, sir.13

By agreeing to transfer title upon full payment of P2,200,000.00, Cortes' impliedly agreed to deliver theTCTs to the Corporation in order to effect said transfer. Hence, the phrase "execution of thisinstrument"14as appearing in the Deed of Absolute Sale, and which event would give rise to the

Corporation's obligation to pay in full the amount of P2,200,000.00, can not be construed as referringsolely to the signing of the deed. The meaning of "execution" in the instant case is not limited to the

signing of a contract but includes as well the performance or implementation or accomplishment of the

parties' agreement.15With the transfer of titles as the corresponding reciprocal obligation of payment,Cortes' obligation is not only to affix his signature in the Deed, but to set into motion the process thatwould facilitate the transfer of title of the lots, i.e., to have the Deed notarized and to surrender theoriginal copy thereof to the Corporation together with the TCTs.

Having established the true agreement of the parties, the Court must now determine whether Cortesdelivered the TCTs and the original Deed to the Corporation. The Court of Appeals found that Cortesnever surrendered said documents to the Corporation. Cortes testified that he delivered the same to
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Manny Sanchez, the son of the broker, and that Manny told him that her mother, Marcosa Sanchez,delivered the same to the Corporation.

Q Do you have any proof to show that you have indeed surrendered these titles to the plaintiff?

A Yes, sir.

Q I am showing to you a receipt dated October 29, 1983, what relation has this receipt with thatreceipt that you have mentioned?

A That is the receipt of the real estate broker when she received the titles.

Q On top of the printed name is Manny Sanchez, there is a signature, do you know who is that

Manny Sanchez?

A That is the son of the broker.

x x x x

Q May we know the full name of the real estate broker?

A Marcosa Sanchez

x x x x

Q Do you know if the broker or Marcosa Sanchez indeed delivered the titles to the plaintiff?

A That is what [s]he told me. She gave them to the plaintiff.

x x x x.16

ATTY. ANTARAN

Q Are you really sure that the title is in the hands of the plaintiff?

x x x x

Q It is in the hands of the broker but there is no showing that it is in the hands of the plaintiff?

A Yes, sir.

COURT

Q How do you know that it was delivered to the plaintiff by the son of the broker?

A The broker told me that she delivered the title to the plaintiff.

ATTY. ANTARAN
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Q Did she not show you any receipt that she delivered to [Mr.] Dragon17the title without anyreceipt?

A I have not seen any receipt.

Q So, therefore, you are not sure whether the title has been delivered to the plaintiff or not. It isonly upon the allegation of the broker?

A Yes, sir.18

However, Marcosa Sanchez's unrebutted testimony is that, she did not receive the TCTs. She also denied

knowledge of delivery thereof to her son, Manny, thus:

Q The defendant, Antonio Cortes testified during the hearing on March 11, 1986 that he allegedlygave you the title to the property in question, is it true?

A I did not receive the title.

Q He likewise said that the title was delivered to your son, do you know about that?

A I do not know anything about that.19

What further strengthened the findings of the Court of Appeals that Cortes did not surrender the subject

documents was the offer of Cortes' counsel at the pre-trial to deliver the TCTs and the Deed of AbsoluteSale if the Corporation will pay the balance of the down payment. Indeed, if the said documents were

already in the hands of the Corporation, there was no need for Cortes' counsel to make such offer.

Since Cortes did not perform his obligation to have the Deed notarized and to surrender the same togetherwith the TCTs, the trial court erred in concluding that he performed his part in the contract of sale and

that it is the Corporation alone that was remiss in the performance of its obligation. Actually, both partieswere in delay. Considering that their obligation was reciprocal, performance thereof must besimultaneous. The mutual inaction of Cortes and the Corporation therefore gave rise to a compensation

morae or default on the part of both parties because neither has completed their part in their reciprocalobligation.20Cortes is yet to deliver the original copy of the notarized Deed and the TCTs, while theCorporation is yet to pay in full the agreed down payment of P2,200,000.00. This mutual delay of the

parties cancels out the effects of default,21

such that it is as if no one is guilty of delay.22

We find no merit in Cortes' contention that the failure of the Corporation to act on the proposedsettlement at the pre-trial must be construed against the latter. Cortes argued that with his counsel's offer

to surrender the original Deed and the TCTs, the Corporation should have consigned the balance of thedown payment. This argument would have been correct if Cortes actually surrendered the Deed and the

TCTs to the Corporation. With such delivery, the Corporation would have been placed in default if itchose not to pay in full the required down payment. Under Article 1169 of the Civil Code, from themoment one of the parties fulfills his obligation, delay by the other begins. Since Cortes did not perform

his part, the provision of the contract requiring the Corporation to pay in full the down payment neveracquired obligatory force. Moreover, the Corporation could not be faulted for not automatically heedingto the offer of Cortes. For one, its complaint has a prayer for damages which it may not want to waive byagreeing to the offer of Cortes' counsel. For another, the previous representation of Cortes that the TCTswere already delivered to the Corporation when no such delivery was in fact made, is enough reason for

the Corporation to be more cautious in dealing with him.
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The Court of Appeals therefore correctly ordered the parties to perform their respective obligation in thecontract of sale, i.e.,for Cortes to, among others, deliver the necessary documents to the Corporation and

for the latter to pay in full, not only the down payment, but the entire purchase price. And since theCorporation did not question the Court of Appeal's decision and even prayed for its affirmance, its

payment should rightfully consist not only of the amount of P987,000.00, representing the balance of theP2,200,000.00 down payment, but the total amount of P2,487,000.00, the remaining balance in the

P3,700,000.00 purchase price.

WHEREFORE, the petition is DENIEDand the June 13, 1996 Decision of the Court of Appeals in CA-G.R. CV No. 47856, is AFFIRMED.

SO ORDERED.


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FIRST DIVISION

JOHANNES RIESENBECK,P e t i t i o n e r,

-versus -

SPOUSES SILVINO G. MACEREN, JR.

and PATRICIA A. MACEREN,R e s p o n d e n t s.

G.R. No. 158608

Present:

PANGANIBAN, C.J.Chairperson,

YNARES-SANTIAGO,AUSTRIA-MARTINEZ,CALLEJO, SR., and

CHICO-NAZARIO,JJ.

Promulgated:

January 27, 2006x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

D E C I S I O N

CHICO-NAZARIO,J.:

Impugned in this petition for review is the Decision [1]dated 02 September 2002 of the Court of

Appeals, which dismissed the appeal filed by petitioner from the Order[2]

of the Regional Trial Court

(RTC) of Lapu-Lapu City, Branch 54, in Civil Case No. 4307-L for annulment of Contract of Lease on

the ground that the case has been rendered moot. Assailed likewise is the Resolutio n

[3]

of the Court ofAppeals denying the motion for reconsideration still on mootness and forum shopping.

We recount the facts paving the way to this petition:

Respondents Atty. Silvino G. Maceren, Jr., and his wife Patricia A. Maceren are the registered

owners of a beach resort, known as the Golden Views Resort, situated at Buot, Punta Engao, Lapu-

Lapu City.

On 25 March 1988, Juergen Maile, a German national, and respondents Atty. Silvino G. Maceren,

Jr., and his wife Patricia A. Maceren, entered into a Contract of Lease.[4] Petitioner Johannes Riesenbeck,

a Dutch national, was the substitute lessee. Linda Villariasa,[5]Filipino wife of Riesenbeck, also

appended her signature in the contract.[6]Excerpts of the lease contract provide:

That the ORIGINAL LESSEE rented and leased the above-mentioned premisesand facilities and in fact as part of the contract, he has introduced the restaurant ofindigenous materials along the beach;
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That the ORIGINAL LESSEE has manifested his desire to relinquishthe CONTRACT OF LEASE covering the aforementioned beach resort and the facilities

therein in favor of the SUBSTITUTE LESSEE who is interested to go on with the leaseunder the terms and conditions stipulated herein;

That the herein LESSOR is willing to grant in lease the aforementioned beach

resort and all its improvements in favor of the SUBSTITUTE LESSEE.

x x x x

5. IMPROVEMENTS The SUBSTITUTE LESSEE undertakes to introducewithin the leased premises within a period of SEVEN AND A HALF (7 & ) years from

the signing of this contract, permanent improvements worth not less than FIVEHUNDRED THOUSAND PESOS (P500,000)provided that before any improvement

is introduced, the LESSOR shall be first advised as to its location. In no case will theLESSEE destroy the tennis court and introduce improvements thereon, nor shall the

LESSEE destroy any existing improvements without first getting the written permissionof the LESSOR;

x x x x

8. OWNERSHIP AND POSSESSION That at the end of the term of the leaseor termination of the same for violations of its terms, all improvements introduced by theSUBSTITUTE LESSEE in the leased premises shall belong to the LESSOR without need

of reimbursement of its costs; That upon termination of this contract the LESSEE shallreturn the peaceful possession of the properties herein leased together with any and all

improvements they may have introduced to the LESSORS without need of demand;

9. RESERVATION OF PRIVILEGE The LESSOR TOGETHER WITH

THEIR GUESTS and lot buyers shall have free access to the beach and to enjoy bathing

in the area, but in no case shall they crowd the leased premises and hamper the businessof the SUBSTITUTE LESSEE. Neither can they make use of the hotel rooms andrestaurant without paying the proper fees and charges, subject however to any specialdiscount and privileges which the SUBSTITUTE LESSEE(s) may grant in their

discretion. The LESSOR and his guests retain the privilege to use the tennis court whichshall be maintained by the SUBSTITUTE LESSEE.

10. SUB-LEASE - THE SUBSTITUTE LESSEE cannot sublease the leasedpremises to any party without first securing the written prior consent of the LESSOR,

otherwise the sublease shall not be respected by the latter;

11. FIRST PRIORITY OPTION TO BUY In case the LESSOR(s) decide to

sell the property herein leased, they shall give the SUBSTITUTE LESSEE the firstpriority to equal the price offered by an interested buyer and should the LESSEE fail toexercise this option within 15 days from notice, the LESSOR shall have the right to sellthe property herein leased to said buyer;

x x x x

13. VIOLATION AND DAMAGES In case of violation of any terms andconditions contained herein will be a ground for the offended party to terminate the


25/75

contract even before the end of its term and in case the LESSEE violates the same theLESSOR have the option to terminate the contract without prejudice to his rights to

collect whatever rentals due for the remaining years of the contract plus damages;

14. TERM OF LEASE AND PARTIES BOUND This CONTRACT OFLEASE shall be commenced immediately upon the signing hereof and shall remain valid

and binding between the parties and their heirs for a period of FIFTEEN (15) YEARSfrom January, 1988 and to end on December 2003, unless earlier terminated for violationof terms hereof.

15. TAXES - The SUBSTITUTE LESSEE shall contribute for the payment ofthe taxes and leased premises at no less than FIVE THOUSAND PESOS (P5,000.00)

each year, however, for their additional improvements, all taxes thereon during the termof the lease shall be paid by the SUBSTITUTE LESSEE. (Emphases supplied)

On 23 July 1990, petitioner Johannes Riesenbeck filed Civil Case No. 2296-L for Declaratory

Relief.[7] The Complaint alleged, inter alia, that he had spent a sizeable sum of money for the

improvement and upkeep of the leased property. Sometime in April 1990, petitioner learned that the

actual amount of realty taxes due annually is onlyP2,495.00, which is less than the P5,000.00 that was

stipulated in the contract. Too, the Complaint averred that petitioner got wind of an impending sale of the

leased property in favor of a third party. He alleged that judicial declaration is necessary to delineate the

rights of the petitioner from those of the respondents vis--visthe stipulations pointed out in the contract

and prayed for a declaration of his rights under the lease contract, specifically with respect to Stipulations

No. 5, 8, 9, 11, 13, 14 and 15 as above-quoted concerning improvements, ownership and possession,

reservation of privilege, first priority option to buy, violation and damages, term of lease and parties

bound, and the taxes due, respectively.

Meanwhile, respondent Atty. Maceren sent a letter to petitioner Johannes Riesenbeck, as lessee of

the property, informing the latter of his intention to transfer the ownership of the property subject of the

Contract of Lease to the family corporation MAGICCORP. Thereafter, respondent Atty. Maceren was

able to effect the transfer of the leased property to MAGICCORP based on an instrument denominated as

Deed of Exchange of Shares of Stocks and Transfer of Property.

Stirred by the foregoing event, on 30 March 1993, petitioners wife, Linda Villariasa -

Riesenbeck filed a complaint for Redemption tagged as Civil Case No. 2819 against M. A Gen. Industrial

and Commercial Corp. or MAGICCORP pursuant to clause 11[8]of the Contract of Lease as cited above.

In an order dated 11 March 1994, the trial court dismissed the complaint for Redemption, with a ruling

that there was no actual transfer of ownership interests of the leased property when the same was

transferred by respondent Atty. Maceren to defendant corporation in exchange for the latters shares of

stock inasmuch as the transfer was merely one in form and not in substance, citing Delpher Trades

Corporation v. Intermediate Appellate Court.[9]

The Court of Appeals affirmed the ruling of the trial

court on 08 February 2000.
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