167 MA.sales page167.pdf

San Beda College of Law

167

speak of (Zamora Realty and Development Corporation vs. Office of the President, G.R. No. 165724, November 2, 2006). 3. Absent a proviso in the contract that the

title to the property is reserved in the vendor until full payment of the purchase price or a stipulation giving the vendor the right to unilaterally rescind the contract the moment the vendee fails to pay within the fixed period, the transaction is an absolute contract of sale not a contract to sell (Dignos v. CA, G.R. No. L-59266. February 29, 1988).

The real character of the contract is NOT the title given, but the intention of the parties. Although a document is denominated as “Deed of Absolute Sale,” and there is no provision therein of reservation of ownership to the seller, it will be construed as a Contract to Sell if the true intent of the parties is to transfer the ownership of the properties only upon the buyer’s full payment of the purchase price (Sps. Orden, et. al. v. Sps. Aurea, et. al., G.R. No. 172733, August 20, 2008).

Other Cases of Contract to Sell 1. Where subject matter is indeterminate 2. Sale of future goods 3. Stipulation that deed of sale and

corresponding certificate of sale would be issued only after full payment

Contract of Sale and Contract to Sell Distinguished

Contract of Sale Contract to Sell

Transfer of ownership

Title passes to the buyer upon delivery of the thing sold

Ownership is reserved in the seller and will pass only to the buyer upon full payment of the price.

Effect of non-payment of price

Non-payment of the price is a negative resolutory condition. The remedies of the seller are: specific performance or rescission.

Full payment is a positive suspensive condition, the failure of which is not a breach but prevents the obligation of the vendor to convey title from having binding force

Title over the thing

Vendor loses and cannot recover ownership of the thing sold and delivered until the contract of sale is set aside

Title remains in the vendor if the vendee does not comply with the condition precedent of making payment at the time specified in the contract

Conditional Sale and Contract to Sell Distinguished

Conditional Sale Contract to Sell

Reservation of title to the subject property

In both cases the seller may reserve the title to property until fulfillment of the suspensive condition (e.g. payment)

Effect of fulfillment of suspensive condition

The sale is perfected; if there has been previous delivery of subject property to the buyer, ownership automatically transfers to the buyer by operation of law without any further act on the part of the seller

Ownership is not automatically transferred to the buyer although the property may have been previously delivered to him. The prospective seller has to convey title to the prospective buyer by entering into a contract of absolute sale.

Effect of sale of the subject property to 3rd

persons

A subsequent buyer who has actual/constructive knowledge of a defect in the seller’s title is not a registrant in good faith. The rights of the 1

st buyer cannot be

defeated. Ratio: Fulfillment of the suspensive conditions affects the seller’s title to the property and previous delivery of the property automatically transfers ownership/title to the buyer.

A subsequent buyer, despite fulfillment of the suspensive condition is not a buyer in bad faith and the prospective buyer cannot seek the relief of reconveyance of property.

REQUISITES:

1. Things a. Determinate or determinable (Art.

1460) b. Licit (Arts. 1347, 1409 [1,4], 1459) c. Not impossible (Art. 1348) (e.g. must

be within the commerce of man) 2. Rights – must be transmissible Exceptions: 1. Future inheritance (Art. 1088) 2. Service (Art. 1347)

OBJECTS OF SALE


168

Emptio Rei Speratae and Emptio Spei Distinguished

Emptio Rei Speratae Emptio Spei

Definition

Sale of an expected thing

Sale of a mere hope or expectancy that the thing will come to existence; Sale of the hope itself

Effectivity of the contract

Sale is subject to the condition that the thing will exist; if it does not, there is no contract

Sale is effective even if the thing does not come into existence, UNLESS it is a vain hope

Uncertainty

The uncertainty is with regard to the quantity and quality of the thing and not the existence of the thing

The uncertainty is with regard to the existence of the thing

Object of sale

Object is a future thing Object is a present thing which is the hope or expectancy

Note: In case of doubt, the presumption is in favor of emptio rei speratae; it is more in keeping with the commutative character of the contract. GOODS WHICH MAY BE THE OBJECTS OF SALE (Art. 1462) 1. Existing goods – goods owned or

possessed by the seller at the time of perfection.

2. Future Goods – goods to be manufactured, raised or acquired by the seller after the perfection of the contract.

Valid only as an executory contract to be fulfilled by the acquisition and delivery of goods specified.

There can be a sale of future property, but there can generally be no donation of future property (Art. 751)

Future inheritance cannot be sold.

A contract of sale of goods to be delivered at a future time, entered into without intention of having any goods pass from one party to another, but with an understanding that at a fixed time, purchaser is merely to receive or pay the difference between the contract and the market prices, is illegal, falling under the definition of “futures” where parties merely gamble on the rise or fall of prices which is null and void (Art. 2018, Onapal Phil. Commodities, Inc. v. CA, G.R. No. 90707 February 1, 1993).

Note: A usufructuary may generally sell his usufructuary right. General Rule: A person cannot sell or convey what he does not have or own. Exceptions: 1. Sale of a thing having potential existence

(Art. 1461) 2. Sale of future goods (Art. 1462) 3. Contract for the delivery at a certain price

of an article which the vendor in the ordinary course of the business manufactures or procures for the general market, whether the same is on hand at the time or not (Art. 1467).

Note: Although the seller must be the owner of the thing in order to transfer ownership thereof, he need not be the owner at the time of perfection of the contract, it is sufficient that he is the owner at the time of delivery. (Art. 1459) Sale and Agency to Sell Distinguished (Art. 1466)

Sale Agency to Sell


Buyer receives the goods as owner

Agent receives the goods as goods of the principal who retains his ownership over them

Obligation as regards the price

Buyer pays the price Agent delivers the price, which he got from his buyer, to his principal

Right to return the thing

Buyer, as a general rule, cannot return the object sold

Agent can return the goods in case he is unable to sell the same to a third person

Warranty as to the object sold

Seller warrants the thing sold

Agent makes no warranty for which he assumes personal liability as long as he acts within his authority and in the name of the seller

Right over the thing

Buyer can deal with the thing sold as he pleases being the owner

Agent in dealing with the thing received, must act according to the instructions of the principal

Revocability

Contract of sale is not unilaterally revocable

Essentially revocable, because it covers an underlying fiduciary relationship between the principal and the agent


169

RULES TO DETERMINE IF THE CONTRACT IS ONE OF SALE OR A PIECE OF WORK (Art. 1467): 1. Sale - If ordered or manufactured in the

ordinary course of business 2. Piece of work - If manufactured specially

for the customer and upon his special order, and not for the general market

Schools of Thought: 1. Massachusetts Rule: If specially done at

the order of another, this is a contract for a piece of work (Philippine Application).

2. New York Rule: If the thing already exists-SALE; if not - WORK.

3. English Rule: If material is more valuable-SALE; if skill is more valuable – WORK.

Contract of Piece of Work and Sale Distinguished

Contract for Piece of Work

Sale

Existence of thing

1. The thing transferred is not in existence and would never have existed but for the order of the party desiring to acquire it

1. The thing transferred is one which would have existed and would have been the subject of sale to some other person, even if the order had not been given

Object of the contract

2. The services dominate the contract even though there is a sale of goods involved

2. The primary objective of the contract is a sale of the manufactured item; it is a sale of goods even though the item is manufactured by labor furnished by the seller and upon previous order of the customer

Applicability of Statute of Frauds

3. Not within the Statute of Frauds

3. Governable by the Statute of Frauds

BARTER One of the parties binds himself to give one thing in consideration of the other's promise to give another thing. Note: In barter, there is no element of the price certain in money or its equivalent. If the consideration is partly in money and partly in another thing, the nature of the contract will depend on: 1. The manifest intention of the parties 2. If the intent is not clear, apply the following

rules: a. It is Barter - If the thing is more

valuable than money

b. It is Sale – if the money and the thing are of equal value or if the thing is less valuable than money (Art. 1468)

Sale and Dation in Payment Distinguished

Sale Dation in Payment

As to credit

No pre-existing credit Pre-existing credit

As to obligation

Obligations are created Obligations are extinguished

As to consideration

Consideration on the part of the seller is the price; on the part of the buyer is the acquisition of the object

The debtor’s consideration is the extinguishment of the debt; the creditor’s consideration is the acquisition of the object offered in lieu of the original credit

As to determination of price

Greater freedom in determining the price

Less Freedom in determining the price

As to payment of price

Buyer still has to pay the price

The payment is received by the debtor before the contract is perfected.

The sum stipulated as the equivalent of the thing sold and also every incident taken into consideration for the fixing of the price, put to the debit of the vendee and agreed to by him.

MANNER OF PAYMENT OF PURCHASE PRICE Before a valid and binding contract of sale can exist, the manner of payment of the purchase price must first be established since the agreement on the manner of payment goes into the price such that a disagreement on the manner of payment is tantamount to a failure to agree on the price (Sps. Navarra vs. Planters Development Bank, G.R. No. 172674, July 12, 2007).

REQUISITES OF PRICE: 1. Certainty or ascertainability at the time of

perfection; 2. Real and not simulated; 3. In some cases, must not be grossly

inferior to the value of the thing sold; 4. Paid in money or its equivalent. Note: It is not necessary that the price be actual or determined at the time of the execution of the contract (Art. 1469).

PRICE


170

The price is certain in the following cases: 1. If the parties have fixed or agreed upon a

definite amount;

Fixing of price cannot be left to the discretion of one of the parties, UNLESS the price fixed by one is accepted by the other, resulting in a perfected sale (Art. 1473)

2. If it be certain with reference to another thing certain

3. If the determination of the price is left to the judgment of a specified person or persons even before such determination

The price fixed by the third person designated is binding upon the parties UNLESS the third person: a. Acts in bad faith or by mistake; b. Disregards the specific

instructions or procedure marked out by the parties (Art. 1469)

If he refuses or cannot fix the price, the contract becomes ineffective UNLESS the parties subsequently agree on the price

If he is prevented from fixing the price by the seller or buyer’s fault, the party not at fault may obtain redress against the party at fault (rescission or fulfillment with damages in either case) (Art. 1469)

4. In the cases provided under Art. 1472, NCC

Gross Inadequacy of Price (Art. 1470): 1. Voluntary Sales

General Rule: Mere inadequacy of price does not affect validity of the sale if fixed in good faith and without fraud (Hulst v. PR Builders Inc., G.R. No. 156364, September 3, 2007). Exceptions: a. Where low price indicates a vice of

consent, sale may be annulled or the contract is presumed to be an equitable mortgage

b. Where the price is so low as to be “shocking to the conscience,” sale may be set aside.

c. Where the price is simulated such as when the seller really intended to transfer the thing gratuitously, the sale is void

d. Where the parties did not intend to be bound at all, the contract is void and inexistent

2. Involuntary or Forced Sales General Rule: Mere inadequacy of the price is not a sufficient ground for the cancellation of the sale of real property.

Exceptions: a. Where the price is so low as to be

shocking to the moral conscience, judicial sale of personal property will be set aside; or

b. If in the event of a resale, a better price can be obtained.

Note: The validity of the sale is not necessarily affected where the law gives to the owner the right to redeem, upon the theory that the lesser the price, the easier it is for the owner to effect redemption.

Simulated Price (Art. 1471) 1. If shown to be in reality a donation or

some other act or contract – The sale is void but the act or contract may be valid as a donation

2. If not - The contract is void and inexistent Effect of Failure to Determine Price: 1. Where contract executory – The contract

is inefficacious 2. Where the thing has been delivered to and

appropriated by the buyer – The buyer must pay a reasonable price therefore (Art. 1474)

Reasonable Price is generally the market price at the time and place fixed by the contract or by law for the delivery of the goods.

PREPARATION The period of negotiation and bargaining. Policitation – An unaccepted unilateral promise to buy or sell. This produces no juridical effect and creates no legal bond. This is a mere offer, and has not yet been converted into a contract.

Option contract (Art. 1479) A contract granting a privilege in one person, for which he has paid a consideration, giving him the right to buy certain merchandise at anytime within the agreed period at a fixed price.

An option without consideration is VOID and the effect is as if there was no option.

There is sufficient consideration if there is any benefit to the promisee or any detriment to the promisor. A benefit should not necessarily accrue to the promisee if a detriment to the promisor is present; there is consideration if the promisee does anything legal which he is not bound to do

FORMATION OF CONTRACT OF SALE


171

or refrain from doing anything he has a right to do, whether or not there is any actual loan or detriment to him or actual benefit to the promisor (JMA House Inc. vs. Sta. Monica Industrial and Development Corp., G.R. No. 154156, August 31, 2006).

HOWEVER, in Sanchez vs. Rigos (1972), even though the option was not supported by a consideration, the moment it was accepted, a perfected contract of sale resulted, applying Art. 1324 of the NCC. The significance of the said consideration is that the option cannot be withdrawn by the grantor after acceptance.

In an option to buy, the party who has an option may validly exercise his right by merely notifying the owner of the former’s decision to buy and expressing his readiness to pay the stipulated price.

Elements of an Option Contract 1. The offer to sell, which does not become a

contract until accepted; 2. The completed contract to lease the offer

for a specified time (JMA House Inc. vs. Sta. Monica Industrial and Development Corp., G.R. No. 154156, August 31, 2006)

RIGHT OF FIRST REFUSAL – It is a right of first priority, all things and conditions being equal; identity of the terms and conditions offered to the optionee and all other prospective buyers, with optionee to enjoy the right of first priority.

A deed of sale executed in favor of a third party not deemed a purchaser in good faith, in violation of the right of first refusal granted to the optionee is valid but rescissible under Articles 1380 to 1381(3) of the New Civil Code (Guzman Bocaling & Co. v. Bonnevie, G.R. No. 86150, March 2, 1992; Riviera Filipina, Inc. v. CA et. al. GR No. 117355, April 5, 2002).

In an option to buy, the basis of the right of first refusal must be the current offer to sell of the seller or offer to purchase of any prospective buyer. Only after the optionee fails to exercise its right of first priority under the same terms and within the period contemplated could the owner validly offer to sell the property to a third person, again, under the same terms as offered to the optionee (Paranaque Kings Enterprises, Inc. v. CA. GR No. 111538, February 26, 1997).

Option contract and right first refusal distinguished: An option contract is a separate and distinct contract from that which the parties may enter into upon the consummation of the option. It must be supported by a consideration. The right of first refusal is an integral part of the contract of lease. The consideration is built into the reciprocal obligations of the parties (Sps. Litonjua et al. vs. L and R Corp., G.R. No. 130722, Mar. 27, 2000). Effect of promise under Art. 1479: 1. Accepted unilateral promise to sell or buy

(Art. 1479, par. 2)

Only one makes the promise, which is accepted by the other. E.g., A promises to sell to B, B accepts the promise, but does not in turn promise to buy.

If accepted, it is binding upon the promisor if the promise is supported by a consideration (option money) distinct from the price. This results in a perfected contract.

Pending notice of its withdrawal, the accepted promise partakes the nature of an offer to sell, which if accepted, results in a perfected contract of sale, although the option is given without consideration (Sanchez v. Rigos, G.R. No. L-25494, June 14, 1972).

2. Bilateral promise to buy and sell (Art. 1479, par. 1)

One party accepts the other’s promise to buy, and the latter the former’s promise to sell, a determinate thing for a price certain

It is reciprocally demandable – parties have the right to demand fulfillment or damages but there is no transfer of title of dominion yet

It requires no consideration distinct from the selling price

PERFECTION It is the stage where the validity of the contract of sale is determined; the moment when the parties come to agree on the terms of the contract.

General Rule: It is perfected at the moment there is a meeting of the minds upon a determinate thing (object), and a certain price (consideration) (Art. 1475, par. 1).

A contract of sale is perfected even if at the time of perfection, the seller is not the owner of the thing sold, as long as long as the seller is


172

the owner at the time of delivery. Otherwise he may be held liable for breach of warranty against eviction.

Exception: When the sale is subject to a suspensive condition by virtue of law or stipulation. Requirements for Perfection: 1. When parties are face to face: When an

offer is accepted without conditions or qualifications; a conditional acceptance is a counter-offer, hence, acceptance must be certain, absolute and complete

2. For an offer to be valid, it must be certain, definite and intentional (Art. 1319)

3. If negotiated thru phone it is as if it is negotiated face to face

4. When contract is thru correspondence or thru telegram: When the offeror receives or has knowledge of the acceptance by the offeree; hence, if buyer accepted but seller had no knowledge of it yet, the seller may still withdraw.

5. When a sale is subject to a suspensive condition: From the moment the condition is fulfilled

Rules Governing Auction Sales (Art. 1476) 1. Sales of separate lots by auction are

separate contracts of sale. 2. Sale is perfected by the fall of the

hammer.

When the auction sale had already been perfected, a supplemental sale with higher consideration at the instance of only one party could no longer be validly executed. (Dizon v. Dizon, G.R. No. 156539, September 5, 2007).

Seller has the right to bid in the auction, provided: a. Such right was reserved; b. Notice was given that the sale was subject

to a right to bid on behalf of the seller; and c. Right is not prohibited by law or by

stipulation Ratio: To avoid puffing or secret bidding

Advertisements for bidders are simply invitations to make proposals, and the advertiser is not bound to accept the highest or lowest bid, unless the contrary appears.

Earnest money or “arras” (Art. 1482) Something of value to show that the buyer was really in earnest, and given to the seller to bind the bargain. It is considered as: 1. Part of the purchase price – earnest

money is deducted from the total price

2. Proof of perfection of the contract Note: Option money may become earnest money if the parties so agree. Earnest Money and Option Money Distinguished

Earnest Money Option Money


Title passes to the buyer upon delivery of the thing sold

Ownership is reserved to the seller and is not to pass until full payment

Effect of non-payment

In case of non-payment, an action for specific performance or for rescission can be filed by the injured party

In case of non-payment, there can be action for specific performance

As to consideration given

Part of the purchase price

Money given as a distinct consideration for an option contract

Obligation of the buyer upon payment of consideration

When given, the buyer is bound to pay the balance

The would-be buyer is not required to buy

Perfection of sale

There is already a sale Applies to a sale not yet perfected

CONSUMMATION Delivery of the thing together with the payment of the price, marks the consummation of the contract of sale (PNB v. Ling, G.R. No. L-26937, October 5, 1927).

General Rule: Sale is a consensual contract. No form is required for its validity. It can be in writing, by word of mouth, partly in writing and partly by word of mouth or it can be inferred from the conduct of the parties (Art. 1483). Exceptions: The following must be in writing to be enforceable: 1. Sale of personal property at a price not

less than P500 2. Sale of real property or an interest therein 3. Sale of property not to be performed within

a year from the date thereof 4. When an applicable statute requires that

the contract of sale be in a certain form Note: Statute of Frauds is applicable only to executory contracts and not to contracts which are totally or partially performed.

FORMALITIES OF CONTRACT OF SALE


173

General Rule: All persons who can bind themselves also have legal capacity to buy and sell. (Art. 1489, par. 1) Exceptions: 1. Absolute incapacity (minors, demented

persons, imbeciles, deaf and dumb, prodigals, civil interdictees) Purchase by Minor (Art. 1489, par. 2) – Contract is generally voidable but where necessaries are sold and delivered to a minor or other person without capacity to act, he must pay a reasonable price therefore. Necessaries are those in Art. 290.

2. Relative incapacity – incapacity exists only with reference to certain persons or a certain class of property a. Husband and Wife (Art. 1490)

GENERALLY, a sale by one spouse to another is void. This is to protect third persons who, relying on the supposed property of either spouse, enters into a contract with either of them, only to find that such property relied on was transferred to another spouse. Exceptions:

Regime of separation of property governs them

A judicial separation of property under Articles 134 and 135 of the Family Code has been decreed

b. Incapacity by reason of relation to property (Art. 1491) The following cannot acquire property by purchase, even at a public auction, either in person or through the mediation of another: (GAEP-JO) i. Guardian, with respect to the

property of his ward; ii. Agents, with respect to the

property whose administration or sale may have been entrusted to them, unless the consent of the principal has been given;

iii. Executor or administrator, with respect to the property of the estate under administration;

iv. Public officers and employees, with respect to the properties of the government, its political subdivisions, or GOCCs, that are entrusted to them;

v. Judges, justices, prosecuting attorneys, clerks of courts, etc., with respect to the property in custodia legis; and

vi. Any other person specially disqualified by law.

Examples of Persons Especially Disqualified by Law: 1. Aliens disqualified to purchase or acquire

real property UNLESS by hereditary succession (intestate succession).

2. While the intent to circumvent the constitutional proscription on aliens owning real property was evident by virtue of the execution of the Contract to Sell, such violation of the law did not materialize because the alien-buyer caused the rescission of the contract before the execution of the final deed transferring ownership (Hulst vs. PR Builders, Inc., G.R. No. 156364, September 3, 2007).

3. An unpaid seller having a right of lien or having stopped the goods in transitu, who is prohibited from buying the goods either directly or indirectly in the resale of the same, at public or private sale which he may make.

4. The officer holding the execution, or his deputy.

Note: While those disqualified under Arts. 1490 and 1491 may not be lessees (Art. 1646); aliens may still be lessees even if they cannot buy lands. Effect of violation: 1. Violation of Nos. i-iii results in voidable

sale Reason: If private rights are violated, ratification is possible. In the case of Lao vs. Genato (G.R. No. L-56451, June 19, 1985), the SC found that the sale by the administrator of certain properties of the estate in order to settle the existing obligations of the estate was made to the administrator’s son for a grossly low price. The said sale was not submitted to the probate court for approval as mandated by the order authorizing the administrator to sell. The sale was illegal, irregular and fictitious, and the court’s approval of the assailed compromise agreement violated Art. 1491 and cannot work to ratify a fictitious contract which is NON-EXISTENT AND VOID from the very beginning.

CAPACITY TO BUY OR SELL


174

2. Violations of Nos. iv-vi results in void sale Reason: Violation of public policy cannot be subject to ratification The prohibitions are applicable to sales in legal redemption (Art. 1619, NCC); compromises (Art.2028, NCC); and renunciations (Arts. 6 and 1270, NCC)

General Rule: Buyer acquires no title even if in good faith and for value under the maxim nemo dat quad non habet (nobody can dispose of that which does not belong to him) Exceptions: 1. Owner is estopped or precluded by his

conduct (Art. 1505) 2. Sale made by the registered or apparent

owner in accordance with registration laws (Art. 1505)

3. Sales sanctioned by judicial or statutory authority (Art. 1505)

4. Purchases in a merchant's store, fairs or markets; the thing must be on display to make it part of the goods for sale to bar recovery by the true owner (Art. 1505)

5. When a person who is not the owner sells and delivers a thing, and subsequently acquires title thereto (Art. 1434)

6. When the seller has a voidable title which has not been avoided at the time of the sale (Art. 1506)

7. Sale by co-owner of whole property or a definite portion thereof

8. Special rights of unpaid seller (Arts. 1526-1533)

UNLAWFUL DEPRIVATION is when there is no valid transmission of ownership. Such is no longer limited to the criminal acts of robbery or theft.

A document of title which states that the goods referred to therein will be delivered to the bearer, or to the order of any person named in such document. (Art. 1507) It is negotiable by delivery or indorsement. DOCUMENT IS NEGOTIABLE IF GOODS ARE: 1. Deliverable to the bearer; OR

2. Deliverable to the order of a certain person (Art. 1507)

PERSONS WHO MAY NEGOTIATE NDT (Art. 1512) 1. The owner; OR 2. Any person to whom the possession or

custody thereof has been entrusted by the owner, if by the terms of the document the bailee issuing the document undertakes to deliver the goods to the order of the person to whom the possession or custody of the document has been entrusted or if at the time of such entrusting the document in such form that it may be negotiated by delivery.

Note: If the holder of a BEARER negotiable document of title entrusts the document to a friend for deposit, but the friend betrays the trust and negotiates the document by delivering it to another who is in good faith, the said owner cannot impugn the validity of the negotiation. As between two innocent persons, he who made the loss possible shall bear the loss, without prejudice to his right to recover from the wrongdoer. RIGHTS OF PERSON TO WHOM DOCUMENT HAS BEEN NEGOTIATED (Art. 1513): 1. The title of the person negotiating the

document, over the goods covered by the document;

2. The title of the person (depositor or owner) to whose order by the terms of the document the goods were to be delivered, over such goods; AND

3. The direct obligation of the bailee to hold possession of the goods for him, as if the bailee had contracted with him directly. For a mere transferee to acquire such right, he must notify the bailee.

WARRANTIES (Art. 1516): 1. Document is genuine; 2. He has a legal right to negotiate or transfer

it; 3. He has knowledge of no fact which would

impair the validity or worth of the document; AND

4. He has a right to transfer the title to the goods and that the goods are merchantable or fit for a particular purpose.

WHO CAN DEFEAT RIGHTS OF TRANSFEREE (Art. 1516, par. 3): 1. Creditor of transferor 2. Transferor

SALE BY NON OWNER

NEGOTIABLE DOCUMENT OF TITLE

(NDT)


175

3. Subsequent purchaser

1. Transfer ownership - cannot be waived 2. Deliver the thing sold - cannot be waived 3. Warranty against eviction and hidden

defects - can be waived or modified; warranty is not an essential element of the contract of sale

4. Take care of the thing, pending delivery, with proper diligence (Art. 1163, NCC)

5. Pay for the expenses of the deed of sale, unless there is stipulation to the contrary

6. To accord the buyer the right to examine the goods

A. TRANSFER OF OWNERSHIP (Art. 1495)

General Rule: Ownership of the thing sold is acquired only upon its delivery, actual or constructive, to the buyer (Daus v. Sps. De Leon, GR No. 149750, June 16, 2003), even if purchase was made on credit. Payment of the purchase price is not essential to the transfer of ownership, as long as the property sold has been delivered (Sampaguita Pictures, Inc. v. Jalwindor Manufacturers, Inc., GR No. L-43059, October 11, 1979).

Nonpayment only creates a right to demand payment or to rescind the contract, or to criminal prosecution in the case of bouncing checks (EDCA Publishing and Distributing Corp. v. Santos, G.R. No. 80298, April 26, 1990).

Exceptions: 1. Contrary stipulation or pactum

reservati dominii (contractual reservation of title) – a stipulation, usually in sales by installment, whereby, despite delivery of the property sold, ownership remains with the seller until full payment of the price is made.

2. Contract to sell 3. A perfected contract of sale, even

without delivery, vests in the vendee an equitable title, an existing interest over the goods sufficient to be the subject of insurance.

B. DELIVERY (Art. 1497)

A mode of acquiring ownership, as a consequence of certain contracts such as sale, by virtue of which, actually or constructively, the object is placed in

the control and possession of the vendee.

Seller is bound to deliver all goods UNLESS delivery by installment has been agreed upon. Art. 1583)

Requisites: 1. Intentional: The act of delivery must

be coupled with the intention of delivering the thing and putting the buyer under control (Norkis Distributor, Inc. v. CA, G.R. No. 91029, February 7, 1991)

2. Identity/ integrity of the thing sold 3. Voluntary

Kinds of delivery 1. Actual or real – placing the thing

under the control and possession of the buyer.

2. Legal or constructive – delivery is represented by other signs or acts indicative thereof a. Delivery by execution of public

instrument (Art. 1498, par. 1) – gives rise to prima facie presumption of delivery, which is destroyed when actual delivery is not effected due to legal impediment (Ten Forty Realty v. Cruz, G.R. No. 151212, September 10, 2003).

To be effective, it is necessary that the vendor have such control over the thing sold that, at the moment of the sale, its material delivery could have been made (Addison v. Felix, G.R. No. L-12342, April 30, 1939).

b. Traditio Symbolica – to effect delivery, parties use a token or symbol to represent the thing delivered

c. Traditio Longa Manu – seller points out to the buyer the things (must be in sight) which are transferred

d. Traditio Brevi Manu – buyer continues to be in possession of the thing but under title of ownership

e. Traditio constitutum possessorium – seller continues in possession but under a different title other than ownership.(Art. 1500)

3. Quasi-tradition (Art. 1501) – delivery of rights, credits or incorporeal property, made by:

OBLIGATIONS OF THE VENDOR


176

a. Placing titles of ownership in the hands of buyer; OR

b. Allowing buyer to make use of rights

4. Tradition by operation of law

Requisites of constructive delivery 1. The seller must have control over the

thing; 2. The buyer must be put under control; 3. There must be the intention to deliver

the thing for purposes of ownership.

When vendor not bound to deliver (Art. 1524): The seller is NOT bound to deliver the thing sold: 1. If vendee has not paid him the price

UNLESS a period of payment has been fixed

2. If no period for payment has been fixed in the contract

3. A period for payment has been fixed in the contract but the vendee has lost the right to make use of the same.

Delivery to the Carrier

General Rule: Where the seller is authorized or required to send the goods to the buyer, delivery to the carrier is delivery to the buyer. (Art. 1523)

Note: This rule applies only if there is an agreement between the seller and the buyer that the former will ship the goods.

Exceptions: 1. When a contrary intention appears 2. Implied reservation of ownership

under pars. 1, 2, and 3 of Art. 1503

Kinds of delivery to the carrier 1. C.I.F. (cost, insurance, freight) –

signifies that the price fixed covers the costs of the goods, the expense of the freight and the insurance to be paid by the seller

2. F.O.B. (free on board) – goods are to be delivered free of expense to the buyer to the point where they are F.O.B. The point of F.O.B. (either at the point of shipment or the point of destination) determines when the ownership passes.

3. C.O.D. (collect on delivery) – carrier acts for the seller in collecting purchase price, which buyer must pay to obtain possession of the goods.

Note: C.I.F. and F.O.B. merely make rules of presumption

Seller’s duty after delivery to carrier (Art. 1523, pars. 2 and 3) 1. To enter on behalf of the buyer into

such contract as may be reasonable under the circumstances

2. To give notice to the buyer regarding necessity of insuring the goods

Instances where seller is still the owner despite delivery: 1. Sale on trial, approval or satisfaction

(Art. 1502, par. 2) 2. Contrary intention appears 3. Implied reservation of ownership (Art.

1503)

a. If under the bill of lading, the goods are deliverable to the seller or agent or their order;

b. If the bill of lading, although stating that the goods are to be delivered to the buyer or his agent, is kept by the seller or his agent;

c. When the buyer does not honor the bill of exchange sent along the bill of lading given to him, although the goods are deliverable to order of buyer

Place of delivery (Art. 1521)

1. The place of delivery agreed upon 2. In the absence of agreement, place is

determined by usage of trade 3. In the absence of agreement and

prevalent usage, the seller’s place 4. In any other case, place of delivery is

the seller’s residence 5. In case of specific goods known by the

parties at some place at the time of the perfection of sale, such is the place of delivery, in the absence of agreement or usage of trade to the contrary

Time of delivery

1. Stipulated time 2. In the absence thereof, within a

reasonable time

How does an as-is where-is type of sale affect the vendor’s obligation to deliver? The phrase as-is where-is basis pertains solely to the physical condition of the thing sold, not to its legal situation (NDC vs. Madrigal Wan Hai Lines Corp., G.R. No. 148332, Sep. 30, 2003).


177

It is merely descriptive of the state of the thing sold. Thus, the as-is where-is basis merely describes the actual state and location of the property sold. The depiction does not alter the seller’s responsibility to deliver the property to the buyer.

SALE ON TRIAL, APPROVAL, OR SATISFACTION

(Art. 1502, par. 2) A contract in the nature of an option to purchase if the goods prove to be satisfactory, the approval of the buyer being a condition precedent; the sale is dependent upon the quality of goods.

Rules:

1. Title remains in the seller 2. Risk of loss remains with seller

EXCEPT when the buyer is at fault or has agreed to bear the loss

3. Buyer must give the goods a trial, EXCEPT where it is evident that it cannot perform the work

4. Period within which buyer must signify acceptance runs only when all parts essential for the operation of the object have been delivered.

5. If it is stipulated that a third person must signify approval or satisfaction, the provision is valid, but the third person must be in good faith. If refusal to accept is not justified, seller may still sue.

6. Generally, the sale and delivery to a buyer who is an expert on the object purchased is not a sale on approval, trial, or satisfaction.

SALE OR RETURN (Art. 1502, par. 1)

Property is sold, but the buyer, who becomes the owner of the property on delivery, has the option to return the same to the seller instead of paying the price; such sale depends upon the discretion of the buyer.

It is a sale with a condition subsequent:

1. The buyer must comply with the express or implied conditions attached to the return privilege; otherwise, the sale becomes absolute.

2. Buyer bears the risk of loss

Sale or Return and Sale on Trial Distinguished

Sale or Return Sale on Trial

Condition imposed

Subject to a resolutory condition

Subject to a suspensive condition

Option of buyer to purchase

Depends entirely on the will of the buyer

Depends on the character or quality of the goods


Ownership passes to the buyer on delivery and subsequent return reverts ownership in the seller

Ownership remains in the seller until buyer signifies his approval or acceptance to the seller

Risk of loss

Risk of loss or injury rests upon the buyer

Risk of loss remains with the seller

SALE BY DESCRIPTION (Art. 1481)

A sale where a seller sells a thing as being of a certain kind, the buyer merely relying on the seller’s representations or descriptions.

There is warranty that the thing sold corresponds to the representations or descriptions.

SALE BY SAMPLE (Art. 1481)

A sale where a small quantity of a commodity is exhibited by the seller as a fair specimen of the bulk, which is not present and as to which there is no opportunity to inspect or examine.

Mere exhibition of the sample does not necessarily make it a sale by sample. The exhibition must have been the sole basis or inducement of the sale.

Warranty: That the bulk of the commodity will correspond in kind, quality, and character with the sample exhibited.

2-fold warranty in sale by sample and description: That the thing corresponds both on the sample and description.

Rights of buyer in sale by sample 1. Return the thing and recover the

money paid, OR 2. Retain the thing and sue for the

breach of warranty. (Paras., Civil Code, Book V, 2000)

Sale by sample and by description distinguished: In the former, the thing is shown to the buyer, whereas in the latter, the thing is only described.

SALE OF MOVABLES 1. When quantity is LESS than agreed

upon (Art. 1522, par. 1): a. Buyer may reject; OR


178

b. Buyer may accept what has been delivered at the contract rate: If buyer was not aware that full delivery would not be made – FAIR VALUE ONLY

2. When quantity is MORE than agreed upon (Art. 1522, par. 2): a. Buyer may reject all; OR b. Buyer may accept the goods

agreed upon and reject the rest; OR

c. Buyer may accept all and must pay for them at the contract rate

Note: There is implied acceptance when the buyer exercises acts of ownership over the excess goods. Rules when goods mixed with goods of different description (Art. 1522, par. 3):

Buyer may accept the goods which are in accordance with the contract and reject the rest.

If the subject matter is indivisible, in case of delivery of larger quantity of goods or of mixed goods, the buyer may reject the whole of the goods

SALE OF REAL PROPERTY BY UNITS 1. Entire area stated in the contract must be

delivered 2. If entire area could not be delivered,

vendee may: a. Enforce the contract with the

corresponding decrease in price b. Rescind the sale:

i. If the lack in area is at least 1/10 than that stated or stipulated

ii. If the deficiency in quality specified in the contract exceeds 1/10 of the price agreed upon

iii. If vendee would not have bought the immovable had he known of its smaller area or inferior quality irrespective of the extent of lack of area or quality

SALE FOR A LUMP SUM (Cuerpo Cierto) (Art. 1542)

Vendor is obligated to deliver all the land included within the boundaries, regardless of whether the real area should be greater or smaller

There can be no rescission or reduction or increase whether the area be greater or lesser, UNLESS there is gross mistake.

Note: The Civil Code presumes that the purchaser had in mind a particular piece of land and that he ascertained its area and

quality before the contract of sale was perfected. If he did not do so, or if having done so he made no objection and consented to the transaction, he can blame no one but himself (Teran v. Villanueva Viuda de Riosa, 56 Phil 677, No. 34697, March 26, 1932). Where the area of the immovable is stated in the contract based on an estimate, the actual area delivered may not measure up exactly with the area stated in the contract. According to Article 1542, in the sale of real estate made for a lump sum, there shall be no increase or decrease of the price, although there be a greater or lesser area or number than that stated in the contract (Feliciano Esguerra, ET. AL. v. Virginia Trinidad, G.R. NO. 169890, MARCH 12, 2007). DOUBLE SALE (Art. 1544) Requisites: (VOSC) 1. Two or more transactions must constitute

valid sales; 2. They must pertain exactly to the same

object or subject matter; 3. They must be bought from the same or

immediate seller; AND 4. Two or more buyers who are at odds over

the rightful ownership of the subject matter must represent conflicting interests.

Art. 1544 does NOT apply when: 1. Not all the elements are present - the

principle of prior tempore, potior jure or (he who is first in time is preferred in right) should apply. He is a purchaser in good faith because at the time he bought the real property, there was still no sale as to the second vendee (Consolidated Rural Bank (Cagayan Valley) v. CA, G.R. No. 13216, January 17, 2005).

2. Where the two different contracts of sale are made by two different persons, one of them not being the owner of the property sold (Sps. Salera v. Sps. Rodaje, G.R. No. 135900, August 11, 2007).

Rules on Preference: 1. Personal Property - first possessor in good

faith 2. Real Property

a. First registrant in good faith: second buyer must register the document in good faith, otherwise, he does not have a better right (Fudot v. Cattleya Land Inc., GR No. 175942, September 13, 2007).

b. First possessor in good faith


179

c. Person with oldest title in good faith (Martinez v. CA, GR No. 123547, May 21, 2001)

Purchaser in good faith: One who buys another’s property without notice that some other person has a right to or interest in such property and pays a full and fair price for the same at the time of such purchase or before he has notice of the claim or interest of some other person in the property. General Rule: A purchaser maybe considered a purchaser in good faith if he has examined the latest certificate of title. Exception: When there exist important facts that would create suspicion in an otherwise reasonable man to go beyond the present title and to investigate those that preceded it (Amancio et al. vs. CA et. Al., G.R. No. 152627, September 16, 2005; Mercado v. Allied Bank, GR No 171460, July 27, 2007). Does the rule of caveat emptor apply? Yes. One who purchases real property which is in actual possession of others should make some inquiry concerning the rights of those in possession. First buyer always in good faith: Knowledge gained by the first buyer of the second sale cannot defeat the first buyer’s rights except only as provided by the Civil Code and that is where the second buyer first registers in good faith the second sale ahead of the first. Such knowledge of the first buyer does not bar him from availing of his rights under the law, among them, to register first his purchase as against the second buyer. The converse is true for the second buyer. 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 (Carbonell v. Court of Appeals). Registration requires actual recording: If the property was never really registered as when the registrar forgot to do so although he has been handed the document, there is no registration.

Bad faith on the part of one buyer amounts to registration in favor of the innocent buyer.

A buyer of an unregistered land acquires a better title than a subsequent buyer, even if the latter registered the sale in good faith after the registration of the land by the seller because the second buyer merely

steps into the shoes of the seller who at the time of the sale to him is no longer the owner of the property.

Banks: The rule that persons dealing with registered lands can rely solely on the certificate does not apply to banks because their business is one affected with public interest keeping in trust the money belonging to their depositors (Amancio v. CA, GR No. 152627, September 16, 2005). Good faith must concur with registration: To be entitled to priority, the second purchaser must not only establish prior recording of his deed, but must have acted in good faith (Gabriel v. Mabanta, GR No. 142403, March 26, 2003).

Possession is either actual or constructive (Sanchez v. Ramos, No. 13442, December 20, 1919).

Possession in Art. 1544 is either material or symbolic (Ten Forty Realty v. Cruz G.R. No. 151212, September 10, 2003).

Title means title because of sale, and not any other title (Lichauco v. Berenguer G.R. No. L-5933, August 25, 1911).

Hernandez v. Katigbak Rule When the property sold on execution is with a Torrens title, registration is the operative act that gives validity to the transfer or creates a lien on the land. A purchaser on execution sale is not required to go behind the registry to determine the conditions of the property. Exception: Where the purchaser had knowledge, prior to or at the time of the levy, of such previous lien or encumbrance, his knowledge is equivalent to registration. Is a duly registered attachment superior to a prior unregistered sale? Yes. It is a settled rule that an attachment which is duly registered takes precedence over a prior unregistered sale. The preference created by the levy is not diminished even by subsequent registration of the prior sale. The reason is that an attachment is a proceeding in rem. It is against the particular property and is enforceable against the whole world (Valdevieso vs. Dalamerio, G.R. No. 133303, Feb 17, 2005). C. CONDITIONS AND WARRANTIES

CONDITION – An uncertain event or contingency on the happening of which the obligation or right of the contract depends.


180

Effect of non-fulfillment of condition (Art. 1545)

1. The other party may: a. Refuse to proceed with the

contract; OR b. Proceed with the contract, waiving

the performance of the condition. 2. If the condition is in the nature of a

promise that it should happen, the non-performance of such condition may be treated by the other party as breach of warranty.

Note: A distinction must be made between a condition imposed on the perfection of a contract and a condition imposed merely on the performance of an obligation. The failure to comply with the first condition prevents the juridical relation itself from coming into existence. Failure to comply with the second merely gives the option either to refuse or proceed with the sale or to waive the condition.

The fact that the second contract of sale was perfected in good faith is not sufficient if, before title passes, the second vendee acquires knowledge of the first transaction. The good faith or innocence of the later vendee needs to continue until his contract ripens into ownership by tradition or registration (Palanca v. Dir. Of Lands, GR No. 15950, March 9, 1922).

Warranty and Condition Distinguished

Warranty Condition

As to obligation of parties

Goes into the performance of such obligation and in fact may constitute an obligation in itself

Goes into the root of the existence of the obligation

As to existence on contract

May form part of the obligation or contract by provision of the law without the parties having agreed thereto

Must be stipulated by the parties in order to form part of an obligation

In relation to subject matter of contract

Whether express or implied relates to the subject matter itself or to the obligations of the seller as to the subject matter of the sale

May attach itself either to the obligation of the seller to deliver possession and transfer ownership over the subject matter of the sale

WARRANTY (Art. 1546) – A statement or representation made by the seller contemporaneously and as a part of the contract of sale, having reference to the character, quality, or title of the goods, and

by which he promises or undertakes to insure that certain facts are or shall be as he then represents.

Note: Although the definition pertains only to the seller, the buyer may make warranties as well, as when he warrants that he will pay or when he makes any affirmation or promise to induce the seller to enter into the contract of sale.

Kinds: 1. Express (Art. 1546) – any affirmation

of fact or promise by the seller relating to the thing, inducing the buyer to purchase the same and if the buyer purchases the thing relying thereon.

A mere expression of opinion, no matter how positively asserted, does not import a warranty UNLESS the seller is an expert and his opinion was relied upon by the buyer.

2. Implied (Art. 1547) – that which the law derives from the nature of the transaction or the relative situation or circumstances of the parties, irrespective of any intention of the seller to create it.

It is a natural, not an essential element of a contract, deemed incorporated in the contract of sale. It may be waived or modified by express stipulation.

There is no implied warranty as to the condition, adaptation, fitness or suitability or the quality of an article sold as a second-hand article. Such articles might be sold under such circumstances as to raise an implied warranty. A certification issued by a vendor that a second-hand machine was in A-1 condition is an express warranty binding on the vendor (Moles v. IAC. G.R. No. 73913, January 31, 1981). a. Warranty against eviction b. Warranty against hidden

defects c. Warranty as to Fitness and

Merchantability

Warranty Against Eviction (Art. 1548)

The seller guarantees that he has the right to sell the thing sold and to transfer ownership to the buyer, who shall not be disturbed in his legal and peaceful possession thereof.


181

Elements: 1. Vendee is deprived, in whole or in

part, of the thing purchased; 2. Deprivation is by virtue of a final

judgment; 3. Judgment is based on a prior right to

the sale or an act imputable to the vendor;

4. Vendor was summoned in the suit for eviction at the instance of the vendee (a) to enable the seller to prove his claim; (b) to avoid multiplicity of suits; and (c) to satisfy due process.

5. No waiver of warranty by the vendee.

Vendor's liability shall consist of: 1. Total eviction: (VICED) (Art. 1555)

a. Value of the thing at the time of eviction;

b. Income or fruits if he has been ordered to deliver them to the party who won the suit;

c. Costs of the suit; d. Expenses of the contract; AND e. Damages and interests if the sale

was in bad faith. 2. Partial eviction, vendee may: (Art.

1556) a. Enforce vendor’s liability for

eviction (VICED); OR b. Demand rescission of contract.

Note: Rescission is not a remedy in case of total eviction because rescission contemplates that the one demanding it is able to return whatever he has received under the contract. Since the vendee can no longer restore the subject-matter of the sale to the vendor, rescission cannot be carried out.

The suit for the breach can be directed only against the immediate seller, UNLESS the sellers of the seller promised to warrant in favor of later buyers or the immediate seller has expressly assigned to the buyer his own right to sue his own seller.

The disturbance referred to in the case of eviction is a disturbance in law which requires that a person go to the courts of justice claiming the thing sold, or part thereof and invoking reasons.

Mere trespass in fact does not give rise to the application of the doctrine of eviction.

Waiver of liability Vendor’s liability is waivable but any stipulation exempting the vendor from the

obligation to answer for eviction shall be void if he acted in bad faith.

Kinds of waiver (Art. 1554): 1. Consciente – voluntarily made by the

vendee without the knowledge and assumption of the risks of eviction.

Vendor shall pay only the value which the thing sold had at the time of eviction.

2. Intencionada – made by the vendee with knowledge of the risks of eviction and assumption of its consequences, in which case vendor is not liable provided he did not act in bad faith.

Note: Every waiver is presumed to be consciente. To consider it intencionada, it must be accompanied by some circumstance which reveals the vendor’s knowledge of the risks of eviction and his intention to submit to such consequences.

Where immovable sold encumbered with non-apparent burden (Art. 1560) 1. Right of vendee

a. Rescission, or b. Indemnity

2. When right cannot be exercised a. If the non-apparent burden or

servitude is registered; or b. If vendee had knowledge of the

encumbrance, whether it is registered or not

Note:

Action must be brought within ONE YEAR from the execution of the deed of sale.

An implied warranty may be converted by the parties into an express warranty by stipulation, in which case, they may agree on a longer period of prescription.

Warranty Against Hidden Defects (Art. 1561)

Seller guarantees that the thing sold is free from any hidden faults or defects or any charge or encumbrance not declared or known to the buyer.

This warranty in Sales is applicable in Lease (Yap Kim Chuan v. Tiaoqui, GR No. 1006, September 18, 1915).

Hidden faults or defects pertain only to those that make the object unfit for the use for which it was intended at the time of the sale.


182

Elements: (SHENPW) 1. Defect is serious or important; 2. Defect is hidden; 3. Exists at the time of the sale; 4. Vendee must give notice of the defect

to the vendor within a reasonable time;

5. Remedies must be brought within the period of 6 mos. from delivery of the thing or 40 days from date of delivery in case of animals (Arts. 1571 and 1577); and

6. No waiver of the warranty.

Remedies of the vendee (Art. 1567): 1. Accion redhibitoria (rescission) 2. Accion quanti minoris (reduction of the

price)

Effect of loss of thing on account of hidden defects (Art. 1568): 1. If vendor was aware of hidden defects,

he shall bear the loss and vendee shall have the right to recover (PED): a. The price paid; b. Expenses of the contract; AND c. Damages

2. If vendor was NOT aware, he shall be obliged to return: (PIE)

a. Price paid; b. Interest thereon; AND c. Expenses of the contract if paid by

the vendee

Effect if the cause of loss was not the hidden defect (Art. 1569) 1. If the thing sold had any hidden fault

at the time of the sale and should thereafter be lost by a (1) fortuitous event or (2) through the fault of the vendee, the vendee may demand of the vendor the price which he paid less the value of the thing at the time of its loss.

The difference between the price paid and the value of the thing at the time of its loss represents the damage suffered by the vendee and the amount which the vendor enriched himself at the vendee’s expense

2. If the vendor acted in bad faith, the vendor shall pay damages to the vendee.

Implied warranties of quality

Warranty of Fitness (Art. 1562, par. 2) The seller guarantees that the thing sold is reasonably fit for the known particular purpose for which it was

acquired by the buyer. It exists in the following instances: a. Where the buyer, expressly or by

implication manifests to the seller the particular purpose for which the goods are acquired

b. Where the buyer relies upon the seller’s skill or judgment

Warranty of Merchantability (Art. 1562, par. 3) The seller guarantees, where the goods were bought by description, that they are reasonably fit for the general purpose for which they are sold. It requires identity between what is described in the contract and what is tendered, in the sense that the latter is of such quality and value.

Instances where implied warranties are inapplicable: 1. As-is and where-is sale – vendor

makes no warranty as to the quality or workable condition of the goods; the vendee takes them in the condition in which they are found and from the place where they are located.

2. Sale of second-hand articles 3. Sale by virtue of authority in fact or

law Caveat venditor (Let the seller beware)

The vendor is liable to the vendee for any hidden faults or defects in the thing sold, even though he was not aware thereof.

Caveat emptor (Let the buyer beware)

Requires the purchaser to be aware of the supposed title of the vendor; one who buys without checking the vendor's title takes all the risks and losses consequent to such failure (Consolidated Rural bank Inc., vs. CA, G.R. No. 132161, Jan 17, 2005).

MIRROR DOCTRINE Every person dealing with registered land may safely rely on the correctness of the certificate of title issued therefor and the law will not oblige him to go beyond the certificate to determine the condition of the property. Where there is nothing in the certificate of title to indicate any cloud or vice in the ownership of the property, or any encumbrance thereon, the purchaser is not required to explore further than what the Torrens Title upon its face indicates in quest for any hidden defects or inchoate


183

right that may subsequently defeat his right thereto. But this rule shall not apply when the party has actual knowledge of facts and circumstances that would impel a reasonably cautious man to make such inquiry or when the purchaser has knowledge of a defect or the lack of title in his vendor or of sufficient facts to induce a reasonably prudent man to inquire into the status of the title of the property in litigation (Sigaya v. Mayuga, G.R. No. 143254, August 18, 2005).

When to enforce warranties 1. Express Warranty – the general rule

on rescission of contracts which provides for a prescriptive period of four years applies.

2. Implied Warranty – six months from the date of delivery of the thing sold (Art. 1571) or 40 days in case of animals (Art. 1677)

Rule in case of sale of animals (Arts. 1572-1578) 1. When two or more animals have been

sold at the same time and the redhibitory defect is in one or some of them but not in all, the general rule is that the redhibition will not affect the others without it. It is immaterial whether the price has been fixed for a lump sum for all the animals or for a separate price for each.

2. No warranty against hidden defects of animals sold at fairs or at public auctions, or of livestock sold as condemned.

3. Sale of animals shall be void when: a. Animals sold are suffering from

contagious disease b. If found to be unfit for the purpose

for which they were bought as stated in the contract

4. The action must be brought within 40 days from the date of their delivery to the vendee

5. Vendor shall be liable if the animal should die within 3 days after its purchase if the disease which caused the death existed at the time of the contract

D. TO ACCORD THE BUYER TO EXAMINE

THE GOODS (Art. 1584)

General Rule: The buyer has a right to examine the goods before accepting delivery to determine whether they conform to the contract

A denial of the buyer's right to examine is a ground for the recovery by the buyer of money advanced or to rescind the contract

Exceptions: 1. There is a stipulation to the contrary (Art.

1584, par 1.); OR 2. When the goods are delivered C.O.D.

Unless there is an agreement or a usage of trade permitting such examination (Art. 1584, par.2)

Note: The mere delivery of the goods by the seller to the carrier does not preclude the buyer from rejecting the goods if they are not in fact as ordered, even though the buyer authorized the shipment of the goods to the carrier. (Paras, Civil Code, Book V, 2000)

PRINCIPAL OBLIGATIONS (Art. 1582): 1. To accept delivery 2. To pay the price of the thing sold in legal

tender UNLESS another mode has been agreed upon

Grace Period to Vendee A grace period granted the vendee in case of failure to pay the amount/s due is a right not an obligation. The grace period must not be likened to an obligation, the nonpayment of which, under Article 1169 of the Civil Code, would still generally require judicial or extra-judicial demand before default can be said to arise (Bricktown Dev’t. Corp. v. Amor Tierra Dev’t. Corp., G.R. No. 112182, December 12, 1994). OTHER OBLIGATIONS 1. To take care of the goods without the

obligation to return, where the goods are delivered to the buyer and he rightfully refuses to accept (Art. 1587)

The buyer in such a case is in the position of a bailee who has had goods thrust upon him without his assent. He has the obligation to take reasonable care of the goods but nothing more can be demanded of him.

The goods in the buyer’s possession are at the seller’s risk.

2. To be liable as a depositary if he voluntarily constituted himself as such (Art. 1587)

3. To pay interest for the period between delivery of the thing and the payment of the price in the following cases (Art. 1589);

OBLIGATIONS OF THE VENDEE


184

a. Should it have been stipulated b. Should the thing sold and delivered

produce fruits or income; OR c. Should he be in default, from the time

of judicial or extra-judicial demand for the payment of the price

PERTINENT RULES: 1. The vendor is not required to deliver the

thing sold until the price is paid nor the vendee to pay the price before the thing is delivered in the absence of an agreement to the contrary (Art. 1524);

2. If stipulated, the vendee is bound to accept delivery and to pay the price at the time and place designated;

3. If there is no stipulation as to the time and place of payment and delivery, the vendee is bound to pay at the time and place of delivery (Art. 1582, par. 2);

4. In the absence of stipulation as to the place of delivery, it shall be made wherever the thing might be at the moment the contract was perfected (Art. 1251); or

5. If only the time of delivery has been fixed in the contract, the vendee is required to pay even before the thing is delivered to him; if only the time of payment has been fixed, the vendee is entitled to delivery even before the price is paid by him.

ACCEPTANCE

Acceptance and delivery are separate acts; acceptance is the buyer’s obligation while delivery is the vendor’s.

Acceptance is not a condition to complete delivery. Vendee has nothing to do with the vendor’s delivery. The seller must comply with his obligation to deliver although there is no acceptance yet by the buyer.

Unless otherwise agreed upon, acceptance by the buyer does not discharge the seller from liability for damages or other legal remedy like for breach of any promise or warranty

Acceptance and Actual Receipt

Acceptance and actual receipt do not imply each other; acceptance implies approval while receipt is only the physical act of taking or receiving the goods sold

Acceptance by the buyer may precede actual delivery; there may be actual receipt without acceptance and there may be acceptance without receipt

Ways of accepting goods (Art. 1585): 1. Express acceptance – when the buyer,

after delivery of the goods, intimates to the seller, verbally or in writing, that he has accepted them

2. Implied acceptance a. When buyer performs acts of

ownership b. Failure to return goods after

reasonable lapse of time Note: The buyer must notify the seller within a reasonable time after the buyer knows or ought to know of the breach; otherwise, the seller will be released from such liability (Art.1586, last par.).

Notice is still required even if the seller has knowledge of the facts constituting the breach because whether or not the defect constitute a breach must be taken from the point of view of the buyer. (Paras, Civil Code, Book V, 2000)

REMEDIES OF THE SELLER A. Action for payment of price (NCC Art.

1595) B. Action for damages in case of non-

acceptance of goods (NCC Art. 1596) C. Action for rescission of contract

In all cases of rescission, there must be substantial breach as to defeat the very object of the parties and not merely a slight or casual breach: 1. In case of immovables (Art. 1592,

NCC):

Automatic rescission upon judicial or notarial demand for rescission and not for the payment of the price.

Vendee may pay, even after the expiration of the period, as long as no demand for rescission has been made upon him

Offer to pay prior to the demand for rescission is sufficient to defeat the vendor's right under Art. 1592, NCC (Ocampo v. CA, 52 SCAD 610, G.R. No. 97442, June 30, 1994)

A judicial or notarial act is necessary before a valid rescission can take place, whether or not automatic rescission has been stipulated since the law uses “even though” (Iringan vs. Court of

REMEDIES FOR BREACH OF CONTRACT


185

Appeals, G.R. No. 129107, September 26, 2001).

The cross-claim found in the answer filed in the trial court constitutes judicial demand for rescission that satisfies the requirements of Article 1592. (Ramil, et. al. vs. Aquino, et. al., G.R. No. 133208, July 31, 2006)

Note: Article 1592 does not apply to: a. Sale on installment of real estate b. Contract to sell c. Conditional sale d. Cases covered by RA 6552 (Realty Installment Buyer Protection Act)

2. In case of movables (Art. 1593, NCC)

Automatic rescission in the interest of the vendor if the vendee upon the expiration of the period for delivery of thing: a. Should not have appeared to

receive it; OR b. Having appeared, should not

have tendered the price at the time

Applies only when thing sold has not been delivered to the buyer

3. Technical Rescission under Art. 1597, NCC: Requisites:

a. Goods have not yet been delivered;

b. Buyer has repudiated the sale or manifested his inability to perform his obligations; or committed a breach thereof; and

c. Notice to rescind given to the buyer.

Note: In all cases, if there has been delivery, Art. 1191, and not those mentioned under 1-3, would apply. In such case, automatic rescission is not allowed – the action being one to rescind judicially (Guevarra v. Pascual, No. 4679, December 22, 1908).

4. When the vendor has reasonable grounds to fear the loss of an immovable and its price. However, should such ground not exist, Article 1191, shall apply (Art. 1591).

ENFORCEMENT OF REMEDIES OF AN UNPAID SELLER Who is an Unpaid Seller (Art. 1526): 1. The seller who has not been paid or to

whom the price has not been tendered 2. The seller of the goods, in case a bill of

exchange or other negotiable instrument has been received as conditional payment, AND the condition on which it was received has been broken by reason of the dishonor of the instrument, insolvency of the buyer or otherwise.

Remedies of unpaid seller (PASSS-RAMS) 1. Possessory lien 2. Stoppage of goods in transitu 3. Special right of resale 4. Special right of rescission 5. Action for the price 6. Action for damages 7. Recto Law 8. Maceda Law 9. Specific performance

Possessory lien (Art. 1527) When may it be exercised: a. The goods have been sold without any

stipulation as to credit b. The goods have been sold on credit,

but the term of credit has expired c. The buyer becomes insolvent Note: Notwithstanding transfer of ownership, possessory lien may still be exercised as long as the goods are in the possession of the seller. When lost (Art. 1529):

Delivery of the goods to a carrier or bailee for the purpose of transmission to the buyer without reserving ownership or right of possession

When the buyer lawfully obtains possession of the goods

By waiver of the lien Note: Possessory lien is lost after the seller loses possession but his lien as an unpaid seller remains. His preference can only be defeated by the government’s claim to the specific tax on the goods themselves (Arts. 2247 and 2241). The bringing of an action to recover the purchase price is not one of the ways of losing the possessory lien. An unpaid seller does not lose his lien by reason that he has obtained a money judgment or decree for the price of goods (Art. 1529, last paragraph).


186

Stoppage of goods in transitu (Art. 1530) Requisites: (UTI - BES) a. Seller must be unpaid b. Buyer must be insolvent c. Goods must be in transit d. Seller must either:

i. Actually take possession of the goods sold; OR

ii. Give notice of his claim to the carrier or other person in possession

e. Seller must surrender the negotiable document of title, if any, issued by the carrier or bailee

f. Seller must bear the expenses of delivery of the goods after the exercise of the right

Goods are considered in transitu (Art. 1531, par. 1): a. After delivery to a carrier or other

bailee and before the buyer or his agent takes delivery of them; and

b. If the goods are rejected by the buyer, and the carrier or other bailee continues in possession of them

Note: Taking of the goods in transit by an unauthorized agent of the buyer does not extinguish the right of stoppage in transitu. (Civil Code of the Philippines, Paras) In case of misdelivery, the goods are still considered in transit, hence, the seller may still exercise said right, pursuant to Art. 1523, which provides that an unpaid seller may exercise his right of stoppage in transitu by giving notice of his claim to the carrier “or other bailee in whose possession the goods are”. Goods no longer considered in transitu (Art. 1531, par. 2): a. After delivery to the buyer or his agent

in that behalf; b. If the buyer or his agent obtains

possession of the goods at a point before the destination originally fixed;

c. If the carrier or the bailee acknowledges to hold the goods in behalf of the buyer; and

d. If the carrier or bailee wrongfully refuses to deliver the goods to the buyer

Effects of the exercise of the right a. The goods are no longer in transit.

b. The contract of carriage ends; the carrier now becomes a mere bailee, and will be liable as such.

c. The carrier should not deliver anymore to the buyer or the latter’s agent; otherwise he will be liable for damages.

Ways of exercising the right to stop (Art. 1532): a. By taking actual possession of the

goods b. By giving notice of his claim to the

carrier or bailee

Effect if the buyer has already sold the goods (Art. 1535):

General rule: The unpaid seller’s right to lien or stoppage in transitu remains even if buyer has sold the goods. Exceptions: a. When the seller has given consent

thereto; OR b. When the buyer is a purchaser in good

faith for value of a negotiable document of title.

Special right of resale (Art. 1533): May be exercised only when the unpaid seller has either a right of lien or has stopped the goods in transitu and under any of the following conditions: a. Goods are perishable in nature b. The right to resell is expressly

reserved in case the buyer should make a default

c. The buyer delays in the payment of the price for an unreasonable time

Rescission Special Right to Rescind under Art. 1534 – If the seller has either the right of lien or a right to stop the goods in transitu and under either of 2 situations: a. Where the right to rescind on default

has been expressly reserved b. Where the buyer has been in default

for an unreasonable time

Action for the price (Art. 1595) When may be exercised: a. Where the ownership has passed to

the buyer AND he wrongfully neglects or refuses to pay for the price

b. Where price is payable on a day certain AND he wrongfully neglects or refuses to pay for the price,


187

irrespective of the delivery or transfer of title

c. Where the goods cannot readily be resold for a reasonable price AND the buyer wrongfully refuses to accept them even before the ownership of the goods has passed, if Art. 1596 is inapplicable.

Action for damages When may be exercised: a. In case of wrongful neglect or refusal

by the buyer to accept or pay for the thing sold (Art. 1596, par. 1)

b. In an executory contract, where the ownership in the goods has not passed, and the seller cannot maintain an action to recover the price (Art. 1595)

c. If the goods are not yet identified at the time of the contract or subsequently

Article 1484 or Recto Law – provides for remedies of vendor in sale of personal property by installments. Requisites: a. Contract of sale b. Personal property c. Payable in installments d. In the case of the second and third

remedies, that there has been a failure to pay two or more installments

Note: Rules and limits apply to contracts purporting to be leases of personal property with option to buy Art. 1484 does not apply to a sale: a. Payable on straight terms (partly in

cash and partly in one term) b. Of Real property c. Action for replevin Alternative and Exclusive Remedies: a. Specific performance upon vendee’s

failure to pay In sales on installments, where the action instituted is for specific performance and the mortgaged property is subsequently attached and sold, the sale thereof does not amount to a foreclosure of the mortgage, hence, the seller-creditor is entitled to deficiency judgment (Southern Motors Inc. v. Moscoso, G.R. No. L-14475, May 30, 1961).

b. Rescission of the sale if vendee shall have failed to pay two or more installments

This requires mutual restitution and bars further action on the purchase price (Nonato v. IAC, G.R. No. L-67181, November 22, 1985) General Rule: All partial payments of price or rents must be returned. Exception: If there is a contrary stipulation which is not unconscionable (Art. 1486). c. Foreclosure of the chattel mortgage

on the thing sold if vendee shall have failed to pay two or more installments. In this case, there shall be no deficiency judgment.

Any agreement to the contrary is void.

Further recovery is barred only from the time of actual sale at public auction conducted pursuant to foreclosure

Other chattels given as security cannot be foreclosed if they are not subject of the installment sale (Ridad v. Filipinas Investment and Finance Corp. GR 39806, January. 28, 1983)

When the vendor assigns his credit to another person, the latter is likewise bound by the same law (Borbon II v. Servicewide Specialist, Inc., G.R. No. 106418, July 11, 1996).

Guarantor may not be compelled to pay the balance of the purchase price as ultimately it will be the vendee who will be made to bear the payment of the balance of the price, despite the earlier foreclosure of the chattel given by him (Pascual v. Universal Motors Corp., G.R. No. L-27862, November 20, 1974))

The scheme adopted by the seller of asking for foreclosure and the payment of the unpaid balance is a circumvention of the prohibition of the law. By praying for the foreclosure of the mortgage over the thing, it renounced whatever claim it may have under the promissory note. It is intended to prevent any abuses committed by mortgagees from signing the


188

mortgaged property, suing it at foreclosure sale for a low price and then bringing a suit against a mortgagor for a deficiency judgment. The almost invariable result of this procedure is that, the mortgagor is found minus the property and still owing practically the full amount of his original indebtedness (Magna Financial Services Group, Inc. v. Colorina, G.R. No. 158635, December 9, 2005).

Art. 1484(3) does not bar one to whom the vendor has assigned on a with a recourse basis his credit against the vendee from recovering from the vendor the assigned credit in full although the vendor may have no right of recovery against the vendee for the deficiency (Filipinas Invest. & Finance Corp. v. Vitug, Jr., G.R. No. L-25951, June 30, 1969)

R.A. 6552 or Maceda Law Governs the sale or financing of real estate on installment payment. It provides protection to buyers of real estate on installment payments.

Note: Section 3 of the Maceda Law is comprehensive enough to include both contracts of sale and contracts to sell, provided that the terms of the payment of the price require at least two installments.

Does not apply to: a. Sale of industrial or commercial lands b. Sale of urban land covered by Urban Land Reform Law and agricultural land under the Agrarian Reform Law c. Sale of lands payable in straight terms Requisites: a. Transactions or contracts involving the

sale OR financing of real estate on installment payments, including residential condominium apartments; and

b. Buyer defaults in payment of succeeding installments.

Note: While under Sec. 3, down payment is included in computing the total number of installment payments made, the proper divisor is the monthly installment on the down payment. (Jestra Development and Management Corp. vs. Pacifico, G.R. No. 167452, January 30, 2007)

Rights of the buyer: If buyer has paid at LEAST TWO (2) years of installments: a. The buyer must pay, without additional

interest, the unpaid installments due within the total grace period earned by him. There shall be one (1) month grace period for every one (1) year of installment payments made

Note: This right shall be exercised by the buyer only once in every 5 years of the life of the contract AND its extensions.

b. Actual cancellation can only take

place after 30 days from receipt by the buyer of the notice of cancellation or demand for rescission by a notarial act and upon full payment of the cash surrender value to the buyer (Olympia Housing v. Panasiatic, G.R. No. 140468, January 16, 2003) Note: The seller shall refund to the buyer the cash surrender value of the payments on the property equivalent to 50% of the total payments made. After five (5) years of installments, there shall be an additional 5% every year but not to exceed 90% of the total payments made.

c. The buyer shall have the right to sell his rights or assign the same to another person or to reinstate the contract by updating the account during the grace period and before actual cancellation of the contract.

d. The buyer shall have the right to pay in advance any installment or the full unpaid balance of the purchase price any time without interest and to have such full payment of the purchase price annotated in the certificate of title covering the property.

If Buyer has paid LESS THAN TWO (2) years of installments a. The seller shall give the buyer a grace

period of NOT less than 60 days from the date the installment became due. If the buyer fails to pay the installments due at the expiration of the grace period, the seller may cancel the contract after 30 days from receipt by the buyer of the notice of cancellation or the demand for rescission of contract by a notarial act.


189

b. Same (b) and (d) of paragraph (1) above

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

REMEDIES OF THE BUYER 1. Action for Specific Performance (Art.

1598)

Where seller has broken the contract to deliver specific or ascertained goods

The judgment or decree may be unconditional, or upon such terms and conditions as to damages, payment of the price and otherwise as the court may deem just

2. Enforcement of remedies by buyer for seller’s breach of warranty (Art. 1599): a. Recoupment – accept the goods and

set up the seller’s breach to reduce or extinguish the price

b. Accept the goods and maintain an action for damages for breach of warranty

c. Refuse to accept the goods and maintain an action for damages for breach of warranty

d. Rescind the contract by returning or offering the return of the goods, and recover the price or any part thereof

Note: These are ALTERNATIVE remedies. When rescission by buyer not allowed: a. If the buyer accepted the goods

knowing of the breach of warranty without protest

b. If he fails to notify the seller within a reasonable time of his election to rescind

c. If he fails to return or offer to return the goods in substantially as good condition as they were in at the time of the transfer of ownership to him

Rights and obligations of buyer in case of rescission a. Buyer shall cease to be liable for the

price, his only obligation being to return the goods;

b. If he has paid the price or any part thereof, he may recover it from the seller;

c. He has the right to hold the goods as bailee for the seller should the latter refuse the return of the goods; and

d. He has a right to have a lien on the goods for any portion of the price already paid which lien he may enforce as if he were an unpaid seller.

3. Rescission (Art. 1481, NCC): a. In a contract of sample or description,

if the bulk of the goods do not correspond to the sample or description.

b. In sale by description and sample, if the bulk of the goods do not correspond with the sample and description.

4. Suspension of payment of the price

(Art. 1590, NCC)

Presupposes that the price or any part thereof has not yet been paid and the contract is not yet consummated.

Under Article 1590, the vendee has no cause of action for rescission before final judgment; otherwise the vendor might become a victim of machinations between the vendee and the third person.

When exercised: a. If he is disturbed in the possession or

ownership of the thing bought

If the disturbance is caused by the existence of non-apparent servitude, the remedy of the buyer is rescission, not suspension of payment.

b. If he has well-grounded fear that his possession or ownership would be disturbed by a vindicatory action or foreclosure of mortgage

When vendee cannot suspend payment of the price (Art. 1590): a. If the vendor gives security for the

return of the price in a proper case b. If it has been stipulated that

notwithstanding any such contingency, the vendee must make payment (see Art. 1548 par. 3)

c. If the vendor has caused the disturbance or danger to cease

d. If the disturbance is a mere act of trespass

e. If the vendee has fully paid the price


190

1. The thing sold is lost before perfection –

Seller bears the loss. 2. The thing sold is lost at the time of

perfection: a. Thing entirely lost at the time of

perfection: Contract is void and inexistent

b. Thing only partially lost: Vendee may elect between withdrawing from the contract or demanding the remaining part, paying its proportionate price (Art. 1493)

3. The thing sold is lost after perfection, but before delivery: General Rule: Who bears the risk of loss is governed by the stipulations in the contract. In the Absence of any Stipulation:

First view: Buyer bears the loss as an exception to the rule of res perit domino.

Note: Considered to be the better view since the vendee stands to benefit in case of improvements, fruits, accessions and accessories as provided under Art. 1538 in relation to Art. 1189, NCC (De Leon, Comments and Cases on Sales and Lease, 2005) Exceptions: a. When object sold consists of fungible

goods for a price fixed according to weight, number or measure. If no delivery yet, the seller bears the loss, unless the buyer is in mora accipiendi

b. Seller is guilty of fraud, negligence, default or violation of contractual terms

c. Object sold is generic (genus nunquam perit) (Paras, Civil Code, Book V, 2000)

Second view: Where the ownership is transferred by delivery, the application of the axiom res perit domino, imposes the risk of loss upon the vendor; hence, if the thing is lost by fortuitous event before delivery, the vendor suffers the loss and cannot recover the price from the vendee (Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, Book V)

4. The thing is lost after delivery - Buyer bears the loss.

CAUSES OF EXTINGUISHMENT 1. Same causes as in all other obligations 2. Conventional Redemption 3. Legal Redemption CONVENTIONAL REDEMPTION (Art. 1601) The right which the vendor reserves to himself, to reacquire the property sold provided he returns to the vendee: 1. Price of the sale; 2. Expenses of the contract; 3. Any other legitimate payments made

therefore; the necessary and useful expenses made on the thing sold; and

4. Fulfills other stipulations which may have been agreed upon.

Ownership over the property is transferred to the vendee a retro upon delivery but subject to the resolutory condition that title will be vested again to the vendor upon repurchase.

Failure to perform said resolutory condition vests upon the vendee, by operation of law, absolute title or ownership over the property sold (Sps. Alexander and

Adelaida Cruz vs. Eleuterio Luis, et al., G.R. No. 125233, Mar 9, 2000).

The vendee a retro cannot compel the vendor a retro to repurchase the property neither can he refuse to resell it to the latter within the redemption period.

Nature of Conventional Redemption (CARP- RPM-OR) 1. Purely contractual 2. Accidental 3. Real right 4. Potestative 5. Resolutory condition 6. Power or privilege 7. Reserved at the moment of the perfection

of contract 8. Person entitled to exercise is necessarily

the owner 9. Gives reciprocal obligation A sale with conventional redemption is deemed to be an equitable mortgage in any of the following cases (Art. 1602): (IPERTOD) 1. Unusually inadequate purchase price; 2. Possession by the vendor remains, as

lessee or otherwise;

RISK OF LOSS AND DETERIORATION AND ITS EFFECTS

(Arts. 1480, 1504, 1493 and 1494)

EXTINGUISHMENT OF SALE


191

3. Extension of redemption period after expiration;

4. Retention by the vendee of part of the purchase price;

5. Vendor binds himself to pay the taxes of the thing sold;

6. Any other case where the parties really intended that the transaction should secure the payment of a debt or the performance of any obligation; or

7. When there is doubt as to whether contract is contract of sale with right of repurchase or an equitable mortgage (Art. 1602).

EQUITABLE MORTGAGE One which lacks the proper formalities, form of words, or other requisites prescribed by law for a mortgage, but shows the intention of the parties to make the property subject of the contract as security for a debt and contains nothing impossible or contrary to law (Cachola v. CA. G.R. No. 97822, May 7, 1992)

Requisites for Presumption of Equitable Mortgage 1. Parties entered into a contract

denominated as sale, and 2. Their intention was to secure an existing

debt by way of mortgage. (Romulo vs. Spouses Layug, G.R. No. 151217, September 8, 2006)

Note: In the cases referred to in Arts. 1602 and 1604, the apparent vendor may ask for the reformation of the instrument. Remedy of reformation (Art. 1605) To correct the instrument so as to make it express the true intent of the parties. Can the creditor institute an action for consolidation of ownership? If the contract is an equitable mortgage, the action for consolidation of ownership is not the proper remedy. The creditor cannot appropriate the things given by way of pledge or mortgage or dispose of them, otherwise, that would result in pactum commissorium. The proper remedy is foreclosure of the mortgage. If there is no foreclosure, the debtor retains the ownership (Vasquez vs. CA, G.R. No. 144882, Feb. 4,2005).

Redemption period (Art. 1606) 1. If there is an agreement: Period agreed

upon cannot exceed 10 years 2. If no agreement as to the period: 4 years

from the date of the contract

3. The vendor who fails to repurchase the property within the period agreed upon may, however, exercise the right to repurchase within 30 days from the time final judgment was rendered in a civil action on the basis that the contract was a true sale with right of repurchase

This refers to cases involving a transaction where one of the parties contests or denies that the true agreement is one of sale with right to repurchase; not to cases where the transaction is conclusively a pacto de retro sale (Felicen v. Orias, GR No. L-33182, December 18, 1987; Vda. De Macoy v. CA, GR No. 95753, February 12, 1992). Example: Where a buyer a retro honestly believed that he entered merely into an Equitable Mortgage, not a pacto de retro transaction, and because of such belief he had not redeemed within the proper period.

Tender of payment is sufficient to compel redemption, but is not in itself a payment that relieves the vendor from his liability to pay the redemption price (Paez v. Magno, GR No. L-793, April 27, 1949). It is enough for the vendor a retro to tender the repurchase price at the time of redemption. The other amounts provided under Art. 1616, NCC, may be paid afterwards. (Tolentino, Civil Code of the Philippines) Tender of payment is needed in order to show that the repurchase was made within the redemption period.

Consignation is only required if the vendee a retro refuses to accept the redemption price or when a judicial action has already been filed to enforce compliance with the contract of sale with right of repurchase. When ownership of the vendee over property subject of the pacto de retro sale becomes absolute: 1. Consolidation - takes effect by operation of

law after the lapse of the redemption period. (Art. 1607, NCC)

2. Judicial Order - only required for purposes of registering the property in the Registry of Deeds in the name of the vendee but not to vest absolute title to the latter which ultimately happens upon expiration of the redemption period.


192

LEGAL REDEMPTION (Art. 1619) The right to be subrogated, upon the same terms and conditions stipulated in the contract, in the place of one who acquires a thing by (1) purchase OR (2) dation in payment, or (3) by any other transaction whereby ownership is transferred by onerous title.

It must be exercised within thirty (30) days from the notice in writing by the vendor

May be effected against movables and immovables.

It is not available in cases of donation, succession and barter (Reason: Definition of legal redemption under Art. 1619, NCC “by any other transaction whereby ownership is transferred by onerous title”. Example: B, owner of a land adjoining the land of A. A donated it to X. In this case, B cannot exercise legal redemption to acquire the property from X since the latter acquired the adjoining lot gratuitously through donation and not by onerous title.

Art. 1623 does not prescribe any distinctive method for notifying the redemptioner (Etcuban v. CA, G.R. No. L-45164, March 16, 1987).

Tender of payment is not necessary; offer to redeem is enough.

There is no prescribed form for an offer to redeem to be properly effected. Hence, it can either be through a formal tender with consignation of the redemption price within the prescribed period. What is paramount is the availment of the fixed and definite period within which to exercise the right of legal redemption.

Pre-emption and Redemption Distinguished

Pre-Emption Redemption

As to time of exercise of right

Arises before sale Arises after sale

Remedy of rescission

No rescission because no sale yet exists

There can be rescission of the original sale

Against whom the action is directed

The action is directed against the prospective seller

Action is directed against the buyer

Requirements for the exercise of the right of pre-emption or redemption (Art. 1622) 1. The one exercising the right must be an

adjacent owner 2. The piece of land sold must be so small

and so situated that major portion thereof cannot be used for any practical purpose within reasonable time

3. Such urban land was bought by its owner merely for speculation

Instances of legal redemption 1. Under the Civil Code:

a. Sale of a co-owner of his share to a stranger (Art. 1620)

b. When a credit or other incorporeal right in litigation is sold (Art. 1634)

c. Sale of an heir of his hereditary rights to a stranger (Art. 1088)

d. Sale of adjacent rural lands not exceeding one hectare (Art. 1621)

e. Sale of adjacent small urban lands bought merely for speculation (Art. 1622)

2. Under special laws: a. An equity of redemption in cases of

judicial foreclosures b. A right of redemption in cases of

extra-judicial foreclosures c. Redemption of homesteads d. Redemption in tax sales e. Redemption by an agricultural tenant

of land sold by the landowner May a co-owner sell the part belonging to him without notifying the other co-owners? If a property of a co-ownership is partly sold by a co-owner, the others must be informed so that they can exercise the right of redemption (Cabales vs. CA, G.R. No. 162421, Aug. 31, 2007). A co-owner is entitled to a written notice from the selling co-owner in order to remove all uncertainties about the sale, terms and conditions, as well as its efficacy and status (Verdad vs. CA, G.R. No. 109972, Apr. 29, 1996).

The owner of a credit transfers to another his rights and actions against a third person in consideration of a price certain in money or its equivalent

May be onerous or gratuitous

One selling an inheritance without enumerating the things of which it is composed shall only be answerable for his character as an heir

Transfer of rights takes place by the perfection of the contract of assignment without the necessity of delivering the document evidencing the credit.

Contract of assignment of credits may be entered orally since it is consensual

ASSIGNMENT OF CREDIT


193

Note: The last two paragraphs above do not apply to negotiable documents and documents of title which are governed by special laws. EFFECTS OF ASSIGNMENT: 1. Transfers the right to collect the full value

of the credit, even if he paid a price less than such value

2. Transfers all the accessory rights (e.g. guaranty, mortgage, pledge, preference) (Art. 1627) Note: If the period for payment has been extended without the consent of the guarantor, the assignee cannot go after the former because, as to him his guaranty is only up to the original period

3. Debtor can set up against the assignee all the defenses he could have set up against the assignor

4. Assignee cannot go after the assignor to enforce the credit if through his own negligence he allowed the credit to prescribe provided the assignee was given enough time to enforce the said credit Example: A lends money to B on March 30, 2009. A then assigned the credit to C on April 30, 2009. C demanded payment from B only on May 30, 2019. C cannot collect from B since the loan has already prescribed; neither can he collect from A (the assignor) - he cannot through his own negligence, (and considering he was given enough time to enforce the credit) go after the assignor if he cannot anymore collect from the debtor.

EFFECTIVITY AGAINST THIRD PERSONS (Art. 1625) 1. If personal property is involved, a public

instrument is needed to make the assignment effective against third persons;

2. If real property is involved, registration in the Registry of Property would be needed (Paras, Civil Code, Book V, 2000)

EFFECT OF PAYMENT BY THE DEBTOR AFTER ASSIGNMENT OF CREDIT (Art. 1626) 1. Before Notice of the assignment

Payment to the original creditor is valid and debtor shall be released from his obligation

2. After Notice Payment to the original creditor is not valid as against the assignee. He can be made to pay again by the assignee

WARRANTIES OF THE ASSIGNOR OF CREDIT (Art. 1628): 1. He warrants the existence of the credit 2. He warrants the legality of the credit at the

perfection of the contract Note: There is no warranty as to the solvency of the debtor UNLESS it is expressly stipulated or unless the insolvency was already existing and of public knowledge at the time of the assignment Liabilities of the Assignor of Credit for Violation of His Warranties 1. Assignor in good faith (Art. 1628, par. 2) –

Liability is limited only to the price received and to the expenses of the contract, and any other legitimate payments by reason of the assignment

2. Assignor in bad faith (Art. 1628, par. 3) – Liable not only for the payment of the price and all the expenses but also for damages

Legal Redemption in Sale of Credit or Other Incorporeal Right in Litigation (Art. 1634) Requisites: 1. There must be a sale or assignment of

credit; 2. There must be a pending litigation at the

time of the assignment; 3. The debtor must pay the assignee:

a. Price paid by him b. Judicial cost incurred by him; and c. Interest on the price from the date of

payment; and 4. The right must be exercised by the debtor

within 30 days from the date the assignee demands (judicially or extra-judicially) payment from him.

Sale of Credit or Other Incorporeal Rights in Litigation (Art. 1635) General Rule: Debtor has the right of legal redemption in sale of credit or incorporeal rights in litigation Exceptions: 1. Sale to a co-heir or co-owner

Reason: the law does not favor co-ownership

2. Sale to a creditor in payment of his credit Presumption: the assignment is above suspicion and is in the form of dacio en pago, thus perfectly legal


194

3. Sale to the possessor of property in question Purpose: to presumably preserve the tenement

Contract whereby one of the parties binds himself to give one thing in consideration of the other’s promise to give another thing (Art. 1638).

It is similar to a sale with the only difference that instead of paying a price in money, another thing is given in lieu of the purchase price

Barter is a mutual sale. Each party really is both a vendor and a vendee.

PERFECTION AND CONSUMMATION

Perfected from the moment there is meeting of minds upon the things promised by each party in consideration of the other.

Consummated from the time of mutual delivery by the contracting parties of the things promised.

RULES: 1. Where the giver of the thing bartered is not

the lawful owner thereof, the aggrieved party cannot be compelled to deliver the thing which he has promised and is also entitled to damages (Art. 1639).

2. Where a party is evicted of the thing exchanged, the injured party is given the option, either to recover the property he has given in exchange with damages or only claim an indemnity for damages (Art. 1640).

3. As to matters not provided for by the provisions on barter, the provisions on sales will apply suppletorily (Art. 1641).

PURPOSE OF THE LAW To prevent the defrauding of creditors by the secret sale or disposal or mortgage in bulk of all or substantially all of a merchant’s stock of goods. WHEN SALE OR TRANSFER IN BULK Any sale, transfer, mortgage, or assignment: 1. Of a stock of goods, wares, merchandise,

provisions, or materials otherwise than in the ordinary course of trade and the regular prosecution of business; or

2. Of all or substantially all, of the business or trade; or

3. Of all or substantially all, of the fixtures and equipment used in the business of the vendor, mortgagor, transferor or assignor (Sec. 2)

WHEN SALE OR TRANSFER IN BULK NOT COVERED BY BULK SALES LAW 1. Sale or transfer is in the ordinary course of

trade and the regular prosecution of business of the vendor;

2. If it is made by one who produces and delivers a written waiver of the provisions of the Bulk Sales Act from his creditors

3. If it is made by an executor, administrator, receiver, assignee in insolvency, or public officer, acting under judicial process (Sec. 8); and

4. If it refers to properties exempt from attachment or execution (Rules of Court, Rule 39, Sec. 12)

PROTECTION ACCORDED TO CREDITORS BY BULK SALES LAW 1. Requires the vendor, mortgagor, transferor

or assignor to deliver to the vendee, mortgagee, or to his or its agent or representative a sworn written statement of names and addresses of all creditors to whom said vendor, etc. may have been indebted together with the amount due or to be due (Sec. 3).

2. Requires the vendor, mortgagor, transferor or assignor, at least 10 days before the sale, transfer, mortgage, assignment to make a full detailed inventory showing the quantity and the cost of price of goods, and to notify every creditor of the price terms and conditions of the sale, etc. (Sec. 5)

EFFECTS OF FALSE STATEMENTS IN THE SCHEDULE OF CREDITORS 1. Without knowledge of buyer

If the statement is fair upon its face and the buyer has no knowledge of its incorrectness and nothing to put him on inquiry about it, he will be protected in its purchase

The remedy of the creditor is not against the goods but to prosecute the seller criminally

2. With knowledge or imputed knowledge of buyer

The vendee accepts it at his peril

The sale is valid only as between the vendor and the vendee but void against the creditors

BARTER

BULK SALES LAW (ACT NO. 3952)


195

3. With names of certain creditors without notice are omitted from the list

The sale is void as to such creditors, whether the omission was fraudulent or not.

4. With respect to an innocent purchaser

for value from the original purchaser

An innocent purchaser for value from the original purchaser is protected

If the circumstances are such as to bind the subsequent purchaser with constructive notice that the sale to the vendor (original purchaser) was fraudulent, the property will be liable in his hands to creditors of the original vendor

EFFECT OF VIOLATION OF LAW ON TRANSFER 1. As between the parties

The Bulk Sales Law does not in any way affect the validity of the transfer as between the intermediate parties thereto

A sale not in compliance with the Bulk Sales Law is valid against all persons other than the creditors.

2. As against creditors

A purchaser in violation of the law acquires no right in the property purchased as against the creditors of the seller.

His status is that of a trustee or receiver for the benefit of the creditors of the seller; as such, he is responsible for the disposition of the property.

REMEDIES AVAILABLE TO CREDITORS 1. The proper remedy is one against the

goods to subject them to the payment of the debt, such as execution, attachment, garnishment, or by a proceeding in equity

2. An ordinary action against the purchaser to obtain money judgment will not lie, UNLESS the purchaser has sold or otherwise disposed of, or dealt with the property, so as to become personally liable to creditors for value of it.

ACTS PUNISHED BY BULK SALES LAW 1. Knowingly or willfully making or delivering

a statement required by the Act which does not include the names of all the creditors of the vendor, etc. with the correct amount due or to become due or which contains any false or untrue statement (Sec. 6) and

2. Transferring title to any stock of goods, wares, merchandise, provisions or materials sold in bulk without consideration or for nominal consideration (Sec. 7)

Retail Trade Any act, occupation or calling of habitually selling direct to the general public merchandise, commodities or goods for consumption, but the restrictions of this law shall not apply to the following: 1. Sales by manufacturer, processor, laborer,

or worker, to the general public the products manufactured, processed produced by him if his capital does not exceed P100,000;

2. Sales by a farmer or agriculturalist selling the products of his farm

3. Sales in restaurant operations by a hotel owner or inn-keeper irrespective of the amount of capital; provided that the restaurant is incidental to the hotel business; and

4. Sales which are limited only to products manufactured, processed or assembled by a manufacturer through a single outlet, irrespective of capitalization.

ELEMENTS OF RETAIL TRADE 1. The seller habitually engaged in selling; 2. The sale is direct to the general public;

and 3. The object of the sale is limited to

merchandise, commodities or goods for consumption.

HIGH-END OR LUXURY GOODS

Goods which are not necessary for life maintenance and whose demand is generated in large part by the higher income groups

Includes but not limited to: jewelry, branded or designer clothing and footwear, wearing apparel, leisure and sporting goods, electronics and other personal effects

Note: A natural-born citizen of the Philippines who has lost his citizenship but who resides in the Philippines shall be granted the same rights as Filipino citizens. FOREIGN EQUITY PARTICIPATION Foreign-owned partnerships, associations and corporations formed and organized under the

RETAIL TRADE LIBERALIZATION ACT

(R.A. 8762)


196

laws of the Philippines may, upon registration with the Securities and Exchange Commission (SEC) and Department of Trade and Industry (DTI), or in case of foreign-owned single proprietorship with the DTI, engage or invest in retail trade business, subject to the following categories: 1. Category A:

Paid-up capital of the equivalent in Philippine Peso of: less than $2,500,00 Reserved exclusively for Filipino citizens and corporations wholly owned by citizens

2. Category B: Minimum paid-up capital of the equivalent in Philippine Peso of $2,500,000, but less than $7,500,000 May be wholly owned by foreigners except for the first two years after the effectivity of this Act wherein foreign participation shall be limited to not more than 60% of total equity.

3. Category C: Paid-up capital of the equivalent in Philippine Peso of: $7,500,000 or more May be wholly owned by foreigners Note: In no case shall the investments for establishing a store in Categories B and C be less than the equivalent in Philippine Peso of: US $830,000 All retail Trade enterprises under categories B and C in which foreign ownership exceeds 80% of equity shall offer a minimum of 30% of their equity to the public through any stock exchange in the Philippines within 8 years from the start of the operations

4. Category D: Enterprises specializing in high-end or luxury products with paid-up capital of the equivalent in Philippine Peso of: $250,000 per store May be wholly owned by foreigners Note: Foreign investor shall be required to maintain in the Philippines the FULL amount of the prescribed minimum capital, UNLESS the foreign investor has notified the SEC and the DTI of its intention to repatriate its capital and cease operations in the Philippines

Failure to maintain the full amount of the prescribed minimum capital prior to notification of the SEC and the DTI shall subject the foreign investors to penalties or restrictions on any future trading activities/business in the Philippines Foreign Investors Acquiring Shares of Stock of existing retail stores whether or not publicly listed whose net worth is in excess of the Peso equivalent of $2,500,000 may purchase only up to the maximum of 60% of the equity thereof within the first 2 years, and thereafter, they may acquire the remaining percentage consistent with the allowable foreign participation as herein provided

QUALIFICATION OF FOREIGN RETAILERS 1. Minimum of $200,000,000 net worth in its

parent corporation for Categories B and C and $50,000,000 net worth in its parent corporation for Categories D

2. 5 retailing branches or franchises in operation anywhere around the world UNLESS such retailer has at least 1 store capitalized at a minimum of $25,000,000

3. 5-year track record in retailing; and 4. Only nationals from, or juridical entities

formed or incorporated in Countries which are allowed to engage in retail trade in the Philippines

A consensual, bilateral, onerous, and commutative contract by virtue of which one person binds himself to grant temporarily the use of the thing or to render some service to another who undertakes to pay some rent. RENT

The compensation either in money, provisions, chattels, or labor, received by the lessor from the lessee.

Because lease is consensual and not imposed by law, only the lessor has the right to fix the rents. But the increasing of the rent is not an absolute right on the part of the lessor.

KINDS OF LEASES FROM THE VIEW POINT OF THE SUBJECT MATTER (Art. 1642) 1. Lease of things 2. Lease of service 3. Lease of work Note: There is a contract of lease when the use and enjoyment of a safety deposit box in a

LEASE


197

bank is given for a price certain and is not a contract of deposit. A lease of personal property with option to buy (at a nominal amount) at the end of the lease can be considered a sale.

CHARACTERISTICS OR REQUISITES FOR LEASE OF THINGS 1. Consensual 2. Principal 3. Nominate 4. Purpose is to allow enjoyment or use of a

thing (person enjoying is the lessee; the person allowing the enjoyment by another is the lessor)

5. Subject matter must be within the commerce of man

6. Purpose to which the thing will be devoted should not be immoral

7. Onerous (there must be rent or price certain)

8. Period is Temporary (not perpetual, hence, the longest period is 99 years)

9. Lessor need not be the owner (e.g. a usufructuary may lease the premises in favor of a stranger, such lease to end at the time that the usufruct itself ends)

Lease and Sales Distinguished

Lease Sales

Transfer of object

Only use or enjoyment is transferred

Ownership is transferred

Extent of transfer

Transfer is temporary Transfer is permanent

Who may convey the property

Lessor need not be the owner

Seller must be the owner at the time the property is delivered

Significance of price of object

The price of the object, distinguished from the rent, is usually not mentioned

Usually, the selling price is mentioned

Lease of Things and Lease of Services Distinguished

Lease of Things Lease of Services

Object of contract

Object of contract is a thing

Object is some work or service

Obligation of lessor

Lessor has to deliver the thing leased

Lessor has to perform some work or service

Remedy in case of breach

In case of breach, there can be an action for specific performance

In case of breach, no action for specific performance

Lease of Services and Contract for Piece of Work Distinguished

Lease of Services (Locatio Operatum)

Contract for a Piece Of work

(Locatio Operas)

Object of contract

The important object is the labor performed by the lessor

The important object is the work done

Payment for labor performed

The result is generally not important, hence the laborer is entitled to be paid even if there is destruction of the work through fortuitous event

The result is generally important; generally, the price is not payable until the work is completed, and said price cannot be lawfully demanded if the work is destroyed before it is finished and accepted

Lease of Services and Agency Distinguished

Lease of Services Agency

Basis of contract

It is based on employment – the lessor of services does not represent his employer nor does he execute juridical acts.

It is based on representation – agent represents his principal and enters into juridical acts.

Type of contract

Principal contract Preparatory contract

RULE FOR LEASE OF CONSUMABLE GOODS (Art. 1645) General Rule: Consumable goods cannot be the subject matter of a contract of lease of things. Reason: To use or enjoy them, they will have to be consumed. This cannot be done in lease since ownership over them is not transferred by the contract of lease. Exceptions: 1. If they are merely exhibited 2. If they are accessory to an industrial

establishment FORM OF LEASE CONTRACT Lease may be made orally, but if the lease of real property is for more than 1 year, it must be in writing under the Statue of Frauds. RECORDING OF LEASE OF REAL PROPERTY (Art. 1648) Its purpose is to notify strangers to the transaction.


198

General Rule: Lease of real property is personal right Exceptions: Lease partakes of the nature of real right if: 1. Lease of real property is more than 1 year 2. Lease of real property is registered

regardless of duration Note: Lease of personal property cannot be registered. To be binding against third persons, the parties must execute a public instrument. PROPER AUTHORITY REQUIRED (Art. 1647) If a lease is to be recorded, the following persons must have proper authority (power of attorney to constitute the lease): 1. The husband with respect to the

paraphernal real estate of the wife 2. The father or guardian with respect to the

property of the minor or the ward 3. The manager (administrator) with respect

to the property under his administration. Manager may be: a. The administrator of conjugal property

(Rodriguez v. Borromeo, 43 Phil. 479, No. 17772, June 9, 1922);

b. Administrator of co-ownership (Melencio v. Dy Tiao Lay, G.R. No. L-32047, November 1, 1930); and

c. Administrator of state patrimonial property (Tipton v. Andueza, G. R. No. 2070, January 2, 1906).

PERSONS DISQUALIFIED TO BE LESSEES BECAUSE DISQUALIFIED TO BUY (Art. 1646) 1. A husband and a wife cannot lease to

each other their separate properties EXCEPT: a. If separation of property was agreed

upon b. If there has been judicial separation of

property. Reasons: a. To prevent prejudice to creditors b. To prevent the stronger spouse from

influencing unduly the weaker spouse

2. Persons referred to in Art. 1491 are disqualified because of fiduciary relationships

ASSIGNMENT OF LEASE (Art. 1649) General Rule: Lessee cannot assign the lease without consent of lessor

Reason: The objective of the law in prohibiting assignment of lease without the lessor’s consent is to protect the lessor or owner of the leased property. (Tamio vs. Ticson, G.R. No. 154895, Nov. 18, 2004). Assignment of this nature constitutes a novation (by substituting the person of the debtor) so the creditor-lessor must consent (Vda. De Hijos de Barretto v. Sevilla, Inc. G.R. No. L-41768, December 17, 1935). Exception: If there is stipulation to the contrary

A separate and distinct contract of lease wherein the original lessee becomes a sublessor to a sublessee. (Art. 1650)

Allowed unless expressly prohibited.

The sublessee is subsidiarily liable for any rent due. The lessor has an accion directa against the sublessee for unpaid rentals and improper use of the object.

Accepting boarders not equivalent to subleasing. The lessee, by accepting boarders and assigning rooms or bed spaces for the latter in the leased premises, does not surrender the control and possession of the premises or a part thereof (Malasarte vs. Court of Appeals, 178 SCRA 310 [1989]), G.R. No. 85108, October 4, 1989).

Sublease and Assignment of Lease Distinguished

Sublease Assignment of Lease

Number of juridical relations created

There are two leases and two distinct juridical relationships although immediately connected and related to each other

There is only one juridical relationship, that of the lessor and the assignee, who is converted into a lessee

As to personality of lessee

The personality of the lessee does not disappear

The personality of the lessee disappears

Transfer of rights and obligations

The lessee does not transmit absolutely his rights and obligations to the sublessee

The lessee transmits absolutely his rights to the assignee

Right of action against lessor

The sublessee, generally, does not have any direct action against the lessor

The assignee has a direct action against the lessor

SUBLEASE


199

RIGHTS OF LESSEE TO SUBLEASE (Art. 1650) Unlike in assignment, a lessee may generally sublease the property in the absence of express prohibition Reason: Lessee remains a party to the lease even if he has already created a sublease thereon RIGHTS OF LESSOR IF SUBLEASE PROHIBITED BUT ENTERED INTO BY LESSEE 1. Rescission and damages; or 2. Damages only (Contract will be allowed to

remain in force) 3. Ejectment (Paras, Civil Code, Book V,

2000) INSTANCES WHEN SUBLESSEE IS LIABLE TO THE LESSOR 1. All acts which refer to the use and

preservation of the thing leased in the manner stipulated between the lessor and the lessee (Art. 1651)

2. The sublessee is subsidiarily liable to the lessor for any rent due from the lessee. (Art. 1652) Note: The sublessee shall not be responsible beyond the amount of rent due from him, in accordance with the terms of the sublease, at the time of the extra-judicial demand by the lessor (Art. 1652). Furthermore, there must be a judgment against the lessee evicting the latter from the premises where he cannot pay the rentals and the sublessee is in possession. The mere failure of the lessee to pay the rentals does not make the sublessee subsidiarily liable (Wheelers Club Int’l vs. Bonifacio, Jr., G.R. No. 139540, Jun. 29, 2005).

Accion Directa – direct action which the lessor may bring against a sublessee who misuses the subleased property.

OBLIGATIONS OF THE LESSOR: (DNMC) 1. Delivery of the object (cannot be waived) 2. Making of necessary repairs 3. Maintenance in peaceful and adequate

possession (Art. 1654) The obligation arises only when legal trespass disturbs the lessee’s peaceful enjoyment thereof

(Bercero vs. Capitol Development Corp., G.R. No. 154765, March 29, 2007)

4. Cannot alter the form of the thing leased (Art 1661)

Note: The obligation to maintain the lessee in the peaceful and adequate enjoyment of the leased property seeks to protect the lessee not only from the acts of third persons but also from the acts of the lessor (Bercero vs. Capitol Development Corp., G.R. No. 154765, March 29, 2007). RULES ON ALTERATION OF THE FORM OF THE LEASE

Lessor can alter provided there is no impairment of the use to which the thing is devoted under the terms of the lease (Art. 1661)

Lessee can alter so long as the value of the property is not substantially impaired

RULES IN CASE OF USEFUL IMPROVEMENTS AND ORNAMENTAL EXPENSES (Art. 1678) Lessee is entitled: 1. Useful Improvements (Art. 1678, par. 1):

a. To remove the improvements should the lessor refuse to reimburse although the principal may suffer damage; OR

b. To be reimbursed by one-half of the value of said improvements at the time of termination of the lease should the lessor choose to appropriate them. Parties may stipulate that the lessor may appropriate them without reimbursing the lessee should the latter fail to comply with the terms of the lease contract. Courts may equitably reduce a stipulated penalty in the contracts (1) if the principal obligation has been partly or irregularly complied with; and (2) even if there has been no compliance if the penalty is iniquitous or unconscionable in accordance with Art. 1229, NCC (Florentino v. Supervalue, Inc., G.R. No. 172384, September 12, 2007).

To be entitled to either two remedies, the following must concur: a. Lessee must be a considered a

builder in good faith (Florentino v. Supervalue, Inc., G.R. No. 172384, September 12, 2007);

b. Improvements must be suitable to the use for which the lease is intended; and

OBLIGATIONS OF THE LESSOR


200

c. The form and substance of the property leased should not be altered.(Susana Realty, Inc. v. Hernandez, [C.A.] 54 O.G. 2206)

2. Ornamental Expenses (Art. 1678, par. 1): Lessee has no right of reimbursement but he may remove them provided: a. No damage is caused to the principal

thing; b. Lessor does not choose to retain them

by paying their value at the time of the lease

RULES IN CASE OF URGENT REPAIRS (Art. 1662)

The lessee is obliged to tolerate the work although it may be very annoying to him and although during the same time he may be deprived of a part of the premises, if repairs last for not more than 40 days.

If 40 days or more, lessee can ask for reduction of the rent in proportion to the time – including the 1

st 40 days – and the

part of the property of which he is deprived.

If less than 40 days, the lessee cannot ask for reduction of the price or for rescission

Note: In either case, rescission may be availed of if the main purpose of the lease is to provide a dwelling place and the property becomes uninhabitable. Effects If Lessor Fails to Make Urgent Repairs (Art. 1663) The lessee may: 1. Order repairs at the lessor’s cost 2. Sue for damages 3. Suspend the payment of the rent 4. Ask for rescission, in case of substantial

damage to him TRESPASS IN LEASE (Art. 1664): 1. Trespass in fact (perturbacion de mero

hecho):

Physical enjoyment is reduced

Lessor will not be held liable. Reason: The duty to maintain the lessee in the peaceful enjoyment of the lease is a warranty that the lessee shall not be disturbed in his legal, and not physical, possession (Bercero vs. Capitol Dev’t. Corp., G.R. No. 154765, Mar. 29, 2007).

2. Trespass in law (perturbacion de derecho):

A third person claims legal right to enjoy the premises

Lessor will be held liable

Note: In the Goldstein case, trespass in fact is distinguished from legal transfer; if the trespass is not accompanied or preceded by anything which reveals a juridical intention on the part of the trespasser, in such wise that the lessee can only distinguish the material fact, stripped of all legal forms or reasons, it is only trespass in fact (de mero hecho) (Goldstein v. Roces, G.R. No. L-869, March 30, 1916). While the Japanese Occupation was a fortuitous event, the lessor is still not excused from his obligation to warrant peaceful legal possession. Lease is a contract that calls for prestations both reciprocal and repetitive; the obligations of either party are not discharged at any given moment, but must be fulfilled all throughout the term of the contract (Villaruel v. Manila Motor Co., GR No. 10394, December 13, 1958).

1. To pay rent (Art. 1657)

2. To use thing leased as a diligent father of

a family, devoting it to the use stipulated; or in the absence thereof, to that inferred from the nature of the thing leased according to the custom of the place (Art. 1663)

An illegal use such as for prostitution allows the lessor to end the contract. (Paras, Civil Code, Book V, 2000)

The lessee is liable for any deterioration caused by members of his household, guests and visitors. (Art. 1668)

3. To make urgent repairs even if annoying to him (Art. 1662 [1]) UNLESS the place becomes uninhabitable (Art. 1662 [3])

4. To pay expenses for the deed of lease (Art. 1657)

5. To notify the lessor of usurpation or

untoward acts (Art. 1663)

Reasons: a. So that the lessor may bring proper

action against the ursurper (Simpao v. Dizon, 1 Phil. 261, No. 452, April 30, 1902)

b. It is unjust to compel the lessor to stand idly and trust the defense of his property to a mere lessee (Roxas v.

OBLIGATIONS OF THE LESSEE


201

Mijares, 9 Phil. 252, No. 3823, November 23, 1907)

6. To notify the lessor of need for repairs

Reason: Because the lessee is in possession and the lessor has no duty to make constant inspection. Notification is not essential if the lessor actually knows the need for the repairs (Johnson Picket Rope Co. v. Grey, CA., 40 O.G. [Supp. 11] 239)

7. To return the property leased upon termination of the lease in the same condition as he received it save what has been lost or impaired by: a. Lapse of time; b. Ordinary wear and tear; or c. Inevitable cause/fortuitous event (Art.

1665) Note: If the lessee fails to comply with (5) and (6), he would be liable for damages which the lessor would suffer and which could have been avoided by lessee's diligence (Art. 1663 [3])

REMEDIES OF THE LESSOR: 1. Rescission and damages (Art. 1659, NCC) 2. Damages only, allowing the contract to

remain in force – Specific Performance (Art. 1659, NCC)

Damages Recoverable in ejectment cases are the rents or the fair rental value of the premises and liquidated damages if agreed upon by the parties. The following cannot be successfully claimed: a. Profits plaintiff could have earned

were it not for the possible entry or unlawful detainer

b. Material injury to the premises c. Actual, moral, or exemplary damages

(Baens v. CA, GR No. L-57091, November 23, 1983)

3. May hold the sublessee bound for all acts which refer to the use and preservation of the things leased (NCC Art. 1651)

4. May hold the sublessee subsidiarily liable for any rent due from the lessee (NCC Art. 1652)

5. Ejectment (Art. 1673[2,3,4]) REMEDIES OF THE LESSEE 1. Extinguishment of the lease in case of

total destruction of the thing leased

caused by fortuitous event (Art. 1655, NCC)

2. Proportional reduction of the rent or rescission in case of partial destruction of the thing leased caused by fortuitous event (Art. 1655, NCC) Note: Art. 1655, provides for an instance where the lessee may rescind the contract of lease as a matter of right notwithstanding the fact that lessor is not guilty of breach or negligence.

3. Terminate the lease in case of dangerous condition of the thing leased for habitation (Art. 1660) Reason: Public safety cannot be stipulated against

4. Suspend payment of rent when lessor fails to make repairs (Art. 1658, NCC)

When Lessee May Suspend Payment of Rent (Art. 1658): 1. Lessor fails to undertake necessary

repairs – In case the lessee makes the repairs, he cannot suspend the payment of rent as a matter of right. The remedy is legal compensation. He still needs to pay the rent but it will be compensated by the amount he spent for the repairs.

2. Lessor fails to maintain the lessee in peaceful and adequate enjoyment of the property leased Note: “Suspend” - for the intervening period, the lessee does not have to pay the rent. Effectivity of the suspension: The right begins: a. In the case of repairs, from the time he

made the demand for said repairs and the demand went unheeded.

b. In the case of eviction, from the time the final judgment for eviction becomes effective.

IMMEDIATE TERMINATION OF LEASE UNDER ART. 1660 APPLIES 1. Only to dwelling place or any other

building intended for human habitation 2. Even if at the time the contract was

perfected, the lessee knew of the dangerous condition or waived the right to rescind on account of such condition

REMEDIES


202

DURATION OF LEASE The period may be definite or indefinite but in any case, the period is only temporary, not perpetual. If there is a determinate time or period fixed (definite)

Lease will be for the said period and ends on the day fixed without the need of demand (Art. 1669)

The longest period that can be stipulated is only 99 years. It is an unsound economic policy to allow ownership and enjoyment to be separated for a very long time

If period is more than 99 years, the lease is considered as having expired at the end of the said term. The excess is considered to be an indefinite period should an implied new lease arise. (De Leon, Comments and Cases on Sales and Lease, 2005)

A lease contract providing that the lessee can stay in the premises for as long as he wants and for as long as he can pay the rentals and its increases is not permissible as it is a purely potestative condition, leaving the effectivity and enjoyment of leasehold rights to the sole and exclusive will of the lessee. HOWEVER, the SC upheld a lease contract, which provides that “the lease contract shall continue for an indefinite period provided that the lessee is up-to-date in the payment of his monthly rentals” for the contract is one with a period subject to a resolutory condition (Jespajo Realty v. CA, G.R. No. 113626, September 27, 2002).

If from the circumstances it can be inferred that a period was intended, the court may fix the duration thereof. (De Leon, Comments and Cases on Sales and Lease, 2005)

A lease of things during the lifetime of one of the parties, as the lessor or lessee may please, is one for life, ending upon the death of either party. (Eleizegui vs. Lawn Tennis Club, No. 967, May 19, 1903)

If there is no fixed period (indefinite) 1. For Rural Lands (Art. 1680)

It shall be for all the time necessary for the gathering of fruits which the whole estate may yield in 1 year, or which it may yield once

2. For Urban Lands (Art. 1687)

a. If rent is paid daily: lease is from day to day

b. If rent is paid weekly: lease is from week to week

c. If rent is paid monthly: lease is from month to month

d. If rent is paid yearly: lease is from year to year

Note: In all cases whether for definite or indefinite period (except for the last paragraph mentioned in number 1 above), the lease is not terminated by reason of the death of either the lessor or lessee. Basis: Relativity of Contracts RULES ON EXTENSION OF THE LEASE PERIOD: 1. If a lease contract for a definite term

allows lessee to extend the term, there is no necessity for lessee to notify lessor of his desire to so extend the term, UNLESS the contrary is stipulated.

2. “May be extended” as stipulation: lessee can extend without lessor’s consent but lessee must notify lessor.

3. “May be extended for 6 years agreed upon by both parties” as stipulation: This must be interpreted in favor of the lessee. Hence, ordinarily the lessee at the end of the original period may either: a. Leave the premises; OR b. Remain in possession

4. In co-ownership, assent of all is needed, otherwise it is void or ineffective against non-consenting owners

5. Where according to the terms of the contract, the lease can be extended only by the written consent of the parties thereto, no right of extension can rise without such written consent.

6. If the option is given to the lessor, the lessee cannot renew the lease against the former's refusal.

7. The lessor may impose additional conditions after the expiration of the original period.

8. Par. 2 of Art. 1687 provides that in the event that the lessee has occupied the leased premises for over a year, courts may fix a longer term of lease. The power of the courts to establish a grace period is potestative or discretionary, depending on the particular circumstances of the case. (Malayan Realty, Inc. vs. Uy Han Yong, G.R. No. 163763, November 10, 2006)

9. A verbal agreement to extend the lease is admissible to qualify the terms of a written

DURATION AND TERMINATION OF

LEASE


203

contract (Florentino vs. Super Value Inc., G.R. No. 172384, Sep. 12, 2007).

RULE IF LESSOR OBJECTS TO THE LESSEE’S CONTINUED POSSESSION (Art. 1671): Requisites: 1. Contract has expired 2. Lessee continued enjoying the thing 3. Lessor Objected to this enjoyment Note: If the three requisites are present, the lessee shall be considered a possessor in bad faith. IMPLIED NEW LEASE (Tacita Reconducion) (Art. 1670)

Lease which arises if at the end of the contract the lessee should continue enjoying the thing leased for 15 days with the acquiescence of the lessor, unless a notice to the contrary had previously been given by either party. Requisites: 1. The term of the original contract has

expired; 2. The lessor has not given the lessee a

notice to vacate; and 3. The lessee continued enjoying the thing

leased for at least 15 days with the acquiescence of the lessor.

When there is no implied new lease: 1. When before or after the expiration of the

term, there is a notice to vacate given by either party.

2. When there is no definite fixed period in the original lease contract as in the case of successive renewals.

Effects: 1. The period of the new lease is not that

stated in the original contract but the time in Articles 1682 and 1687.

2. Accessory obligations contracted by a third person are extinguished (Art. 1672)

3. Other terms of the original contract are revived.

Note: Terms that are revived are only those which are germane to the enjoyment of possession, but not those with respect to special agreements which are by nature foreign to the right of occupancy or enjoyment inherent in a contract of lease – such as an option to purchase the leased premises (Dizon v. Magsaysay. GR No. 23399, May 31, 1974).

PURCHASE OF THE LEASED PROPERTY (Art. 1676) General Rule: Purchaser of thing leased can terminate lease. Exceptions: 1. Lease is recorded in Registry of Property 2. There is stipulation in the contract of sale

that purchaser shall respect the lease 3. Purchaser knows, whether actual or

constructive, the existence of the lease 4. Sale is fictitious; there is a disputable

presumption that it is fictitious if the sale is not registered

5. Sale is made with right of repurchase (Art. 1677)

GROUNDS FOR JUDICIAL EJECTMENT UNDER ART. 1673: (ELVU) 1. Expiration of the period agreed upon or

the period under Arts. 1682 and 1687; Note: If and when the term expires and the lessee is still in possession, the contract is NOT deemed terminated. The lessor must notify the lessee that he has no intention to extend the lease in order for the implied new lease not to apply.

2. Lack of payment of the price stipulated; 3. Violation of any of the conditions agreed

upon in the contract; and 4. Unauthorized use or service by the lessee

of the thing leased. Note: In all cases except number 1, for the case of unlawful detainer to prosper, a demand to pay and vacate should be given to the lessee. A notice or demand to vacate does not have to expressly use the word “vacate” as it suffices that the demand letter puts the lessee or occupant on notice that if he does not pay the rentals or comply with the terms of the lease contract, it should move out of the leased premises (Irao v. By the Bay, Inc., G.R. No. 177120, July 14, 2008).

TERMINATION OF THE LEASE 1. By the expiration of the period 2. By the resolution of the right of the lessor

(e.g. when the lessor is a usufructuary and the usufruct is terminated)

3. By the will of the purchaser or transferee of the thing (Art. 1676[1])

4. By total loss of the thing (Art. 1655) 5. By rescission due to non-performance of

the obligation of one of the parties set forth in Arts. 1654 and 1657. (Art. 1659)


204

6. In case the dwelling place or any other building is unfit for human habitation and is dangerous to life or health (Art. 1660)

Upon the termination of the lease, the lessee claims reimbursement for the improvements introduced on the property alleging that they were made in good faith. Is the claim proper? To be entitled to reimbursement for improvements introduced on the property of another, he must be a builder in good faith. A builder in good faith is one who is unaware of any flaw on his title. A lessee cannot claim to be a builder in good faith because he knows that his occupation would continue only for the life of the lease (Josefa vs. Buenaventura, G.R. No. 163429, Mar. 3, 2006).

REGISTRATION OF PROJECTS The registered owner of a parcel of land who wishes to convert the same into a subdivision project shall submit his subdivision plan to the HOUSING AND LAND USE REGULATORY BOARD, which shall act upon and approve the same, upon a finding that the plan complies with the Subdivision Standards and Regulations enforceable at the time the plan is submitted. The same procedure shall be followed in the case of a plan for a condominium project except that, in addition, said Authority shall act upon and approve the plan with respect to the building or buildings included in the condominium project in accordance with the National Building Code (R.A. 6541). The subdivision plan, as so approved, shall then be submitted to the Director of Lands for approval in accordance with the procedure prescribed in Section 44 of the Land Registration Act (Act No. 496, as amended by R.A. 440): Provided, that in case of complex subdivision plans, court approval shall no longer be required. The condominium plan as likewise so approved shall be submitted to the Register of Deeds of the province or city in which the property lies and the same shall be acted upon subject to the conditions and in accordance with the procedure prescribed in Section 4 of the Condominium Act (R.A. 4726). National Housing authority (now Housing and Land Use Regulatory Board) has the exclusive jurisdiction to regulate the real estate trade and business.

LICENSE TO SELL Such owner or dealer to whom has been issued a registration certificate shall not, however, be authorized to sell any subdivision lot or condominium unit in the registered project unless he shall have first obtained a license to sell the project within two weeks from the registration of such project.

EXEMPT TRANSACTIONS A license to sell and performance bond shall not be required in any of the following transactions: 1. Sale of a subdivision lot resulting from the

partition of land among co-owners and co-heirs.

2. Sale or transfer of a subdivision lot by the original purchaser thereof and any subsequent sale of the same lot.

3. Sale of a subdivision lot or a condominium unit by or for the account of a mortgagee in the ordinary course of business when necessary to liquidate a bona fide debt.

GROUNDS FOR REVOCATION OF REGISTRATION CERTIFICATE AND LICENSE TO SELL OF OWNERS OR DEALERS 1. Is insolvent; or 2. Has violated any of the provisions of this

Decree or any applicable rule or regulation of the Authority, or any undertaking of his/its performance bond; or

3. Has been or is engaged or is about to engage in fraudulent transactions; or

4. Has made any misrepresentation in any prospectus, brochure, circular or other literature about the subdivision project or condominium project that has been distributed to prospective buyers; or

5. Is of bad business repute; or 6. Does not conduct his business in

accordance with law or sound business principles.

APPROVED: July 14, 2009 COVERAGE: 1. All residential units in the National Capital

Region and other highly urbanized cities the total monthly rent for each of which ranges from one peso (P1.00) to ten thousand pesos (P10,000.00).

2. All residential units in all other areas the total monthly rent for each of which ranges

SUBDIVISION AND CONDOMINIUM BUYERS’ PROTECTIVE DECREE

(PD 957)

RENT CONTROL ACT OF 2009

(R.A. 9653)


205

from one peso (P1.00) to five thousand pesos (5,000.00) (Sec. 5).

Except: Already existing contracts. LIMIT ON INCREASE IN RENT For a period of one year from effectivity, no increase shall be imposed on the rent of any residential unit covered by this Act.

After such period until December 31, 2013, the rent shall not be increased by more than 7% annually as long as the unit is occupied by the same lessee.

When the residential unit becomes vacant, the lessor may set the initial rent for the next lessee.

In case of boarding houses, dormitories, rooms and bedspaces offered to students, no increase in rental more than once per year shall be allowed (Sec. 4).

Exception:

Rent to own scheme (Sec. 11)

At the option of the lessor, he or she may engage the lessee in a written rent-to-own agreement that will result in the transfer of ownership of the particular dwelling in favor of the latter. Such an agreement shall be exempt from the coverage of Section 5 of this Act.

DEFINITION OF TERMS Rent – the amount paid for the use or occupancy of a residential unit whether payment is made on a monthly or other basis Residential unit – shall refer to an apartment, house and/or land on which another’s dwelling is located and used for residential purposes and shall include not only buildings, part or units thereof used solely as dwelling places, boarding houses, dormitories, rooms and bed spaces offered for rent by their owners, except motels, motel rooms, hotels, hotel rooms but also those used for home industries, retail stores or other business purposes if the owner thereof and his or her family actually live therein and use it principally for dwelling purposes. Immediate members of family of the lessee or lessor (for purposes of repossessing the leased premises) – limited to his or her spouse, direct descendants or ascendants, by consanguinity or affinity. Lessee – the person renting a residential unit Owner/lessor – includes the owner or administrator or agent of the owner of the residential unit

Sublessor – the person who leases or rents out a residential unit leased to him by an owner. Sublessee - the person who leases or rents out a residential unit from a sublessor Note: Rent shall be paid in advance within the first five (5) days of every current month or the beginning of the lease agreement unless the contract provides for a later date of payment. Lessor cannot demand more than one (1) month advance rent. Neither can he demand more than two (2) months deposit which shall be kept in a bank under the lessor’s account name during the entire duration of the lease agreement Any and all interest that shall accrue shall be returned to the lessee at the expiration of the lease contract. In the event, however, that the lessee fails to settle rent, electric, telephone, water or such other utility bills or destroys any house components or accessories, the deposits and interests therein shall be forfeited in favor of the latter in the amount commensurate to the pecuniary damage done by the former (Sec. 7). Assignment of Lease or Subleasing (Sec. 8) PROHIBITED, if without the written consent of the owner/lessor - includes the acceptance of boarders or bed-spacers. GROUNDS FOR JUDICIAL EJECTMENT (Sec. 9) 1. Assignment of lease or subleasing of

residential units in whole or in part, including the acceptance of boarders or bedspacers, without the written consent of the owner/lessor;

2. Arrears in payment of rent for a total of three (3) months In case of refusal by the lessor to accept payment of the rent agreed upon, the lessee may either deposit, by way of consignation, the amount in court or with the city or municipal treasurer, as the case may be, or barangay chairman, or in a bank in the name of and with notice to the lessor, within one month after the refusal of the lessor to accept payment Lessee shall thereafter deposit the rent within ten (10) days of every current


206

month. Failure to deposit the rent for three months shall constitute a ground for ejectment. The lessor, upon authority of the court in case of consignation or upon joint affidavit by him and the lessee to be submitted to the city or municipal treasurer or barangay chairman and to the bank where deposit was made, shall be allowed to withdraw the deposits;

3. Legitimate need of the owner/lessor to repossess his share or her property for his or her own use or for the use of any immediate member of his family as a residential unit Conditions:

The lease for a definite period has expired

The lessor has given the lessee formal notice three (3) months in advance of the lessor’s intention to repossess the property

The owner/lessor is prohibited from leasing the residential unit or allowing its use by a third party for a period of at least one (1) year from the time of repossession

4. Need of the lessor to make necessary repairs of the leased premises which is the subject of an existing order of condemnation by appropriate authorities concerned in order to make the said premises safe and habitable Conditions:

After said repair, the lessee ejected shall have the first preference to lease the same premises;

The new rent shall be reasonably commensurate with the expenses incurred for the repair of the said residential unit

That if the residential unit is condemned or completely demolished, the lease of the new building will no longer be subject to the aforementioned first preference rule

5. Expiration of the period of the lease contract Note: No lessor or his successor in interest shall be entitled to eject the lessee upon the ground that the leased premises have been sold or mortgaged to a third

person regardless of whether the lease or mortgage is registered or not (Sec. 10). Except when the lease is for a definite period, the provision of paragraph (1) of Article 1673 of the Civil Code of the Philippines, insofar as they refer to residential units covered by this Act, shall be suspended during the effectivity of this Act, but other provisions of the Civil Code and the Rules of Court on lease contracts, insofar as they are not in conflict with the provisions of this Act shall apply (Sec. 12).

167 MA.sales page167.pdf

Documents

Transcript of 167 MA.sales page167.pdf