Republic of the Philippines

SUPREME COURT
Manila

EN BANC

G.R. No. 130722 December 9, 1999

SPS. REYNALDO K. LITONJUA and ERLINDA P. LITONJUA and PHIL. WHITE

HOUSE AUTO SUPPLY, INC., petitioners,
vs.
L & R CORPORATION, VICENTE M. COLOYAN in his capacity as Acting Registrar
of the Register of Deeds of Quezon City thru Deputy Sheriff ROBERTO R.
GARCIA, respondents.

YNARES-SANTIAGO, J.:

May a mortgage contract provide: (a) that the mortgagor cannot sell the mortgaged
property without first obtaining the consent of the mortgagee and that, otherwise, the sale
made without the mortgagee's consent shall be invalid; and (b) for a right of first refusal
in favor of the mortgagee?

The controversy stems from loans obtained by the spouses Litonjua from L & R
Corporation in the aggregate sum of P400,000.00; P200,000.00 of which was obtained
on August 6, 1974 and the remaining P200,000.00 obtained on March 27, 1978. The
loans were secured by a mortgage 1 constituted by the spouses upon their two parcels of
land and the improvements thereon located in Cubao, Quezon City covered by Transfer
Certificates of Title No. 197232 and 197233, with an area of 599 and 1,436 square meters,
respectively. The mortgage was duly registered with the Register of Deeds of Quezon
City.

On July 14, 1979, the spouses Litonjua sold to Philippine White House Auto Supply, Inc.
(PWHAS) the parcels of land they had previously mortgaged to L & R Corporation for the
sum of P430,000.00. 2 The sale was annotated at the back of the respective certificates
of title of the properties. 3

Meanwhile, with the spouses Litonjua having defaulted in the payment of their loans, L &
R Corporation initiated extrajudicial foreclosure proceedings with the Ex-Oficio Sheriff of
Quezon City. On July 23, 1980, the mortgaged properties were sold at public auction to
L & R Corporation as the only bidder for the amount of P221,624.58. 4When L & R
Corporation presented its corresponding Certificate of Sale issued by Deputy Sheriff
Roberto B. Garcia, to the Quezon City Register of Deeds for registration on August 15,
1980, it learned for the first time of the prior sale of the properties made by the spouses
Litonjua to PWHAS upon seeing the inscription at the back of the certificates of title. Thus,
on August 20, 1980, it wrote a letter 5 to the Register of Deeds of Quezon City requesting
for the cancellation of the annotation regarding the sale to PWHAS. L & R Corporation
invoked a provision in its mortgage contract with the spouses Litonjua stating that the
mortgagee's prior written consent was necessary in case of subsequent encumbrance or
alienation of the subject properties. Thus, it argued that since the sale to PWHAS was
made without its prior written consent, the same should not have been registered and/or
annotated.

On March 10, 1981, or seven months after the foreclosure sale, PWHAS, for the account
of the spouses Litonjua, tendered payment of the full redemption price to L & R
Corporation in the form of China Bank Manager's Check No. HOF-M O12623 in the
amount of P238,468.04. 6 L & R Corporation, however, refused to accept the payment,
hence, PWHAS was compelled to redeem the mortgaged properties through the Ex-
Oficio Sheriff of Quezon City. On March 31, 1981, it tendered payment of the redemption
price to the Deputy Sheriff through China Bank Manager's Check No. HOF-O14750 in the
amount of P240,798.94. 7 The check was deposited with the Branch Clerk of Court who
issued Receipt No. 7522484 8 for the full redemption price of the mortgaged properties.
Accordingly, the Deputy Sheriff issued a Certificate of Redemption in favor of the spouses
Litonjua dated March 31, 1981. 9

In a letter of the same date, the Deputy Sheriff informed L & R Corporation of the payment
by PWHAS of the full redemption price and advised it that it can claim the payment upon
surrender of its owner's duplicate certificates of title. 10

On April 2, 1981, the spouses Litonjua presented for registration the Certificate of
Redemption issued in their favor to the Register of Deeds of Quezon City. The Certificate
also informed L & R Corporation of the fact of redemption and directed the latter to
surrender the owner's duplicate certificates of title within five days. 11

On April 22, 1981, L & R Corporation wrote a letter to the Sheriff, copy furnished to the
Register of Deeds, stating: (1) that the sale of the mortgaged properties to PWHAS was
without its consent, in contravention of paragraphs 8 and 9 of their Deed of Real Estate
Mortgage; and (2) that it was not the spouses Litonjua, but PWHAS, who was seeking to
redeem the foreclosed properties, when under Articles 1236 and 1237 of the New Civil
Code, the latter had no legal personality or capacity to redeem the same. 12

On the other hand, on May 8 and June 8, 1981, the spouses Litonjua asked the Register
of Deeds to annotate their Certificate of Redemption as an adverse claim on the titles of
the subject properties on account of the refusal of L & R Corporation to surrender the
owner's duplicate copies of the titles to the subject properties. With the refusal of the
Register of Deeds to annotate their Certificate of Redemption, the Litonjua spouses filed
a Petition 13 on July 17, 1981 against L & R Corporation for the surrender of the owner's
duplicate of Transfer Certificates of Title No. 197232 and 197233 before the then Court
of First Instance of Quezon City, Branch IV, docketed as Civil Case No. 32905.
On August 15, 1981, while the said case was pending, L & R Corporation executed an
Affidavit of Consolidation of Ownership. 14 Thereafter, on August 20, 1981, the Register
of Deeds cancelled Transfer Certificates of Title No. 197232 and 197233 and in lieu
thereof, issued Transfer Certificates of Title No. 280054 15 and 28055 16 in favor of L & R
Corporation, free of any lien or encumbrance.

With titles issued in its name, L & R Corporation advised the tenants of the apartments
situated in the subject parcels of land that being the new owner, the rental payments
should be made to them, and that new lease contracts will be executed with interested
tenants before the end of August, 1981. 17 Upon learning of this incident from their
tenants, the spouses Litonjua filed an adverse claim 18 and a notice of lis pendens 19 with
the Register of Deeds. In the process, they learned that the prior sale of the properties in
favor of PWHAS was not annotated on the titles issued to L & R.

A complaint for Quieting of Title, Annulment of Title and Damages with preliminary
injunction was filed by the spouses Litonjua and PWHAS against herein respondents
before the then Court of First Instance of Quezon City, Branch 9, docketed as Civil Case
No. Q-33362. 20 On February 10, 1987, the lower court rendered its Decision 21dismissing
the Complaint upon its finding that the sale between the spouses Litonjua and PWHAS
was null and void and unenforceable against L & R Corporation and that the redemption
made was also null and void.

On appeal, the decision of the trial court was set aside by the Court of Appeals in its
Decision dated June 22, 1994, 22 on the ground that the sale made to PWHAS as well as
the redemption effected by the spouses Litonjua were valid. However, the same was
subsequently reconsidered and set aside in an Amended Decision dated September 11,
1997. 23

Hence, the instant Petition on the following issues:

(1) whether or not paragraphs 8 and 9 of the Real Estate Mortgage are valid
and enforceable;

(2) whether or not the sale of the mortgaged properties by the spouses
Litonjua to PWHAS, without the knowledge and consent of L & R
Corporation, is valid and enforceable;

(3) whether or not PWHAS had the right to redeem the foreclosed properties
on the account of the spouses Litonjua; and

(4) whether or not there was a valid redemption.

Paragraphs 8 and 9 of the subject Deed of Real Estate Mortgage read as follows —
 8. That the MORTGAGORS shall not sell, dispose of, mortgage, nor in any
other manner encumber the real property/properties subject of this
mortgage without the prior written consent of the MORTGAGEE;

9. That should the MORTGAGORS decide to sell the real

property/properties subject of this mortgage, the MORTGAGEE shall be
duly notified thereof by the MORTGAGORS, and should the MORTGAGEE
be interested to purchase the same, the latter shall be given priority over all
the other prospective buyers; 24

There is no question that the spouses Litonjua violated both the aforesaid provisions,
selling the mortgaged properties to PWHAS without the prior written consent of L & R
Corporation and without giving the latter notice of such sale nor priority over PWHAS.

Re: Validity of prohibition against subsequent sale of mortgaged property

without prior written consent of mortgagee and validity of subsequent sale
to PWHAS

Petitioners defend the validity of the sale between them by arguing that paragraph 8
violates Article 2130 of the New Civil Code which provides that "(A) stipulation forbidding
the owner from alienating the immovable mortgaged shall be void."

In the case of Philippine Industrial Co. v. El Hogar Filipino and

25
Vallejo, a stipulation prohibiting the mortgagor from entering into second or subsequent
mortgages was held valid. This is clearly not the same as that contained in paragraph 8
of the subject Deed of Real Estate Mortgage which also forbids any subsequent sale
without the written consent of the mortgagee. Yet, in Arancillo v. Rehabilitation Finance
Corporation, 26 the case of Philippine Industrial Co., supra, was erroneously cited to have
held a mortgage contract against the encumbrance, sale or disposal of the property
mortgaged without the consent of the mortgagee is valid. No similar prohibition forbidding
the owner of mortgaged property from (subsequently) mortgaging the immovable
mortgaged is found in our laws, making the ruling in Philippine Industrial Co., supra,
perfectly valid. On the other hand, to extend such a ruling to include subsequent sales or
alienation runs counter not only to Philippine Industrial Co., itself, but also to Article 2130
of the New Civil Code.

Meanwhile in De la Paz v. Macondray &; Co., Inc., 27 it was held that while an agreement
of such nature does not nullify the subsequent sale made by the mortgagor, the
mortgagee is authorized to bring the foreclosure suit against the mortgagor without the
necessity of either notifying the purchaser or including him as a defendant. At the same
time, the purchaser of the mortgaged property was deemed not to have lost his equitable
right of redemption.

In Bonnevie v. Court of Appeals, 28 where a similar provision appeared in the subject

contract of mortgage, the petitioners therein, to whom the mortgaged property were sold
without the written consent of the mortgagee, were held as without the right to redeem
the said property. No consent having been secured from the mortgagee to the sale with
assumption of mortgage by petitioners therein, the latter were not validly substituted as
debtors. It was further held that since their rights were never recorded, the mortgagee
was charged with the obligation to recognize the right of redemption only of the original
mortgagors-vendors. Without discussing the validity of the stipulation in question, the
same was, in effect, upheld.

Again, in Cruz v. Court of Appeals, 29 while a similar provision was recognized and
applied, no discussion as to its validity was made since the same was not raised as an
issue.

On the other hand, in Tambunting v. Rehabilitation Finance

30
Corporation, the validity of a similar provision was specifically raised and discussed
and found as invalid. It was there ratiocinated that —

To be sure, the deed of second mortgage executed by the Escuetas in favor

of Aurora Tambunting, married to Antonio L. Tambunting, does contain a
provision that "the property mortgaged shall not be . . . the subject of any
new or subsequent contracts of agreements, saving and excepting those
having connection with the first mortgage with the RFC, without first
securing the written permission and consent of MORTGAGEE". But the
provision can only be construed as directed against subsequent mortgages
or encumbrance, not to an alienation of the immovable itself. For while
covenants prohibiting the owner from constituting a later mortgage over
property registered under the Torrens Act have been held to be legally
permissible (Phil. Industrial Co. v. El Hogar Filipino, et al., 45 Phil. 336, 341-
342; Bank of the Philippines v. Ty Camco Sobrino, 57 Phil. 801), stipulations
"forbidding the owner from alienating the immovable mortgaged" are
expressly declared void by law (Art. 2130, Civil Code). It is clear that the
stipulation against "subsequent agreements" above mentioned had not
been breached by the assignment by the Escuetas (to the Hernandezes) of
their right of redemption in connection with the mortgage constituted if favor
of the R.F.C. The assignment was not subsequent mortgage or
encumbrance, licitly comprehended by the prohibitory stipulation, but was
actually a sale or conveyance of all their rights in the encumbered real
property — in truth, an alienation of the immovable — which could not
lawfully be forbidden. Moreover, since the subject of the assignment to the
Hernandezes had "connection with the first assignment with the R.F.C.", it
did not fall within, but was explicitly excepted from, the prohibitory stipulation
in question. Finally, it should not be forgotten that since the Tambuntings,
in their own deed of conditional sale with the R.F.C., had accepted without
demur the provision that said contract could be revoked within one (1) year
from September 16, 1955 at the option of the RFC, as vendor, should the
former owner (Escueta) exercise his right to redeem the property; and that
the redemption of the property within said period by "the former owner or
his successor-in-interest" would render their instrument of conditional sale
 "automatically null and void and without effect", they cannot now assume a
position inconsistent with said provision.

(Emphasis, Ours).

Earlier, in PNB v. Mallorca, 31 it was reiterated that a real mortgage is merely an

encumbrance; it does not extinguish the title of the debtor, whose right to dispose — a
principal attribute of ownership — is not thereby lost. Thus, a mortgagor had every right
to sell his mortgaged property, which right the mortgagee cannot oppose.

In upholding the validity of the stipulation in question, the amended Decision relied on the
cases of Cruz v. Court of Appeals, supra, and Medida v. Court of Appeals. 32 According
to the Court of Appeals, said cases, are not only more recent that of Tambunting, supra,
but are also more applicable to the issue at bar.

We are not convinced.

As we have mentioned, although a similar provision was recognized and applied in Cruz
v. Court of Appeals, supra, no discussion as to its validity was made since the same was
not raised as an issue. Thus, it cannot be said that the specific pronouncement in
the Tambunting case that such a stipulation can only be construed as against subsequent
mortgages or encumbrances but not to an alienation of the immovable itself, which is
prohibited under Article 2130, was abandoned thereby. On the other hand, the facts in
the case of Medida v. Court of Appeals, are different from those in the present case for
what was in issue in the said case was a second mortgage over a foreclosed property
during the period of redemption. Thus, the ruling in Medida quoted in the Amended
Decision that "what is delimited is not the mortgagor's jus dispodendi, as an attribute of
ownership, but merely the rights conferred by such act of disposal which may
correspondingly be restricted," actually refers to the fact that the only rights which a
mortgagor can legally transfer, cede and convey after the foreclosure of his properties
are the right to redeem the land, and the possession use and enjoyment of the same
during the period of redemption. It has no connection or reference to the right of a
mortgagor to sell his mortgaged property without the required consent of the mortgagee.
To be sure, there is absolutely nothing in Medida that upholds the validity of the stipulation
in controversy.

Insofar as the validity of the questioned stipulation prohibiting the mortgagor from selling
his mortgaged property without the consent of the mortgagee is concerned, therefore, the
ruling in the Tambunting case is still the controlling law. Indeed, we are fully in accord
with the pronouncement therein that such a stipulation violates Article 2130 of the New
Civil Code. Both the lower court and the Court of Appeals in its Amended Decision
rationalize that since paragraph 8 of the subject Deed of Real Estate Mortgage contains
no absolute prohibition against the sale of the property mortgaged but only requires the
mortgagor to obtain the prior written consent of the mortgagee before any such
sale, Article 2130 is not violated thereby. This observation takes a narrow and technical
view of the stipulation in question without taking into consideration the end result of
requiring such prior written consent. True, the provision does not absolutely prohibit the
mortgagor from selling his mortgaged property; but what it does not outrightly prohibit, it
nevertheless achieves. For all intents and purposes, the stipulation practically gives the
mortgagee the sole prerogative to prevent any sale of the mortgaged property to a third
party. The mortgagee can simply withhold its consent and thereby, prevent the mortgagor
from selling the property. This creates an unconscionable advantage for the mortgagee
and amounts to a virtual prohibition on the owner to sell his mortgaged property. In other
words, stipulations like those covered by paragraph 8 of the subject Deed of Real Estate
Mortgage circumvent the law, specifically, Article 2130 of the New Civil Code.

Being contrary to law, paragraph 8 of the subject Deed of Real Estate Mortgage is not
binding upon the parties. Accordingly, the sale made by the spouses Litonjua to PWHAS,
notwithstanding the lack of prior written consent of L & R Corporation, is valid.

Re: Validity of redemption effected by PWHAS on the account

of the spouses Litonjua

Coming now to the issue of whether the redemption offered by PWHAS on account of the
spouses Litonjua is valid, we rule in the affirmative. The sale by the spouses Litonjua of
the mortgaged properties to PWHAS is valid. Therefore, PWHAS stepped into the shoes
of the spouses Litonjua on account of such sale and was in effect, their successor-in-
interest. As such, it had the right to redeem the property foreclosed by L & R Corporation.
Again, Tambunting, supra, clarifies that —

. . .. The acquisition by the Hernandezes of the Escuetas' rights over the

property carried with it the assumption of the obligations burdening the
property, as recorded in the Registry of Property, i.e., the mortgage debts
in favor of the RFC (DBP) and the Tambuntings. The Hernandezes, by
stepping into the Escuetas' shoes as assignees, had the obligation to pay
the mortgage debts, otherwise, these debts would and could be enforced
against the property subject of the assignment. Stated otherwise, the
Hernandezes, by the assignment, obtained the right to remove the burdens
on the property subject thereof by paying the obligations thereby secured;
that is to say, they had the right of redemption as regards the first mortgage,
to be exercised within the time and in the manner prescribed by law and the
mortgage deed; and as regards the second mortgage, sought to be judicially
foreclosed but yet unforeclosed, they had the so-called equity of
redemption.

The right of PWHAS to redeem the subject properties finds support in Section 6 of Act
3135 itself which gives not only the mortgagor-debtor the right to redeem, but also his
successors-in-interest. As vendee of the subject properties, PWHAS qualifies as such a
successor-in-interest of the spouses Litonjua.

Re: Validity of redemption made

It is clear from the records that PWHAS offered to redeem the subject properties seven
(7) months after the date of registration of the foreclosure sale, well within the one year
period of redemption.

Re: Validity and enforceability of stipulation

granting the mortgagee the right of first refusal

While petitioners question the validity of paragraph 8 of their mortgage contract, they
appear to be silent insofar as paragraph 9 thereof is concerned. Said paragraph 9 grants
upon L & R Corporation the right of first refusal over the mortgaged property in the event
the mortgagor decides to sell the same. We see nothing wrong in this provision. The right
of first refusal has long been recognized as valid in our jurisdiction. The consideration for
the loan-mortgage includes the consideration for the right of first refusal. L & R
Corporation is in effect stating that it consents to lend out money to the spouses Litonjua
provided that in case they decide to sell the property mortgaged to it, then L & R
Corporation shall be given the right to match the offered purchase price and to buy the
property at that price. Thus, while the spouses Litonjua had every right to sell their
mortgaged property to PWHAS without securing the prior written consent of L & R
Corporation, they had the obligation under paragraph 9, which is a perfectly valid
provision, to notify the latter of their intention to sell the property and give it priority over
other buyers. It is only upon failure of L & R Corporation to exercise its right of first refusal
could the spouses Litonjua validly sell the subject properties to others, under the same
terms and conditions offered to L & R Corporation.

What then is the status of the sale made to PWHAS in violation of L & R Corporation's
contractual right of first refusal? On this score, we agree with the Amended Decision of
the Court of Appeals that the sale made to PWHAS is rescissible. The case of Guzman,
Bocaling & Co. v. Bonnevie 33 is instructive on this point —

The respondent court correctly held that the Contract of Sale was not
voidable but rescissible. Under Article 1380 to 1381(3) of the Civil Code, a
contract otherwise valid may nonetheless be subsequently rescinded by
reason of injury to third persons, like creditors. The status of creditors could
be validly accorded by the Bonnevies for they had substantial interest that
were prejudiced by the sale of the subject property to the Contract of Lease.

According to Tolentino, rescission is a remedy granted by law to the

contracting parties and even to third persons, to secure reparation for
damages caused to them by a contract, even if this should be valid, by
means of the restoration of things to their condition at the moment prior to
the celebration of said contract. It is a relief allowed for one of the
contracting parties and even third persons from all injury and damage the
contract may cause, or to protect some incompatible and preferential right
created by the contract. Rescission implies a contract which, even if initially
valid, produces a lesion or pecuniary damage to someone that justifies its
invalidation for reasons of equity.
 (emphasis, Ours)

It was then held that the Contract of Sale there, which violated the right of first refusal,
was rescissible.

In the case at bar, PWHAS cannot claim ignorance of the right of first refusal granted to
L & R Corporation over the subject properties since the Deed of Real Estate Mortgage
containing such a provision was duly registered with the Register of Deeds. As such,
PWHAS is presumed to have been notified thereof by registration, which equates to
notice to the whole world.

We note that L & R Corporation had always expressed its willingness to buy the
mortgaged properties on equal terms as PWHAS. Indeed, in its Answer to the Complaint
filed, L & R Corporation expressed that it was ready, willing and able to purchase the
subject properties at the same purchase price of P430,000.00, and was agreeable to pay
the difference between such purchase price and the redemption price of P249,918.77,
computed as of August 13, 1981, the expiration of the one-year period to redeem. That it
did not duly exercise its right of first refusal at the opportune time cannot be taken against
it, precisely because it was not notified by the spouses Litonjua of their intention to sell
the subject property and thereby, to give it priority over other buyers.

All things considered, what then are the relative rights and obligations of the parties? To
recapitulate:, the sale between the spouses Litonjua and PWHAS is valid, notwithstanding
the absence of L & R Corporation's prior written consent thereto. Inasmuch as the sale to
PWHAS was valid, its offer to redeem and its tender of the redemption price, as
successor-in-interest of the spouses Litonjua, within the one-year period should have
been accepted as valid by the L & R Corporation. However, while the sale is, indeed,
valid, the same is rescissible because it ignored L & R Corporation's right of first refusal.

Foreseeing a possible rescission of the sale, the spouses Litonjua contend that with the
restoration of the original status quo, with no sale having been made, they should now be
allowed to redeem the subject properties, the period of redemption having been
suspended during the period of litigation. In effect, the spouses Litonjua want to retain
ownership of the same. We cannot, however, sanction this belated reversal of the
spouses Litonjua's decision to sell. To do so would afford them undue advantage on
account of the appreciation of the value of the subject properties in the intervening years
when they precisely were the ones who violated and ignored the right of first refusal of L
& R Corporation over the same. Moreover, it must be stressed that in rescinding the sale
made to PWHAS, the purpose is to uphold and enforce the right of first refusal of L &R
Corporation.

WHEREFORE, the Decision appealed from is hereby AFFIRMED with the following
MODIFICATIONS:

(a) Ordering the rescission of the sale of the mortgaged

properties between petitionersspouses Reynaldo and Erlinda
 Litonjua and Philippine White House Auto Supply, Inc. and
ordering said spouses to return to Philippine White House
Auto Supply, Inc. the purchase price of P430,000.00;

(c) Disallowing, due to the rescission of the sale made in its

favor, the redemption made by Philippine White House Auto
Supply, Inc. and ordering Quezon City Sheriff Roberto Garcia
to return to it the "redemption" check of P240,798.94;

(d) Allowing respondent L & R Corporation to retain its

consolidated titles to the foreclosed properties but ordering it
to pay to the Litonjua spouses the additional sum of
P189,201.96 representing the difference from the purchase
price of P430,000.00 in the rescinded sale;

(e) Deleting the awards for moral and exemplary damages

and attorney's fees to the respondents.

No pronouncement as to costs.

SO ORDERED.