Sales 7-9
Despite their disparate rulings, the RTC and the appellate court agree on the following
VOL. 443, NOVEMBER 19, 2004 231
Vazquez vs. Ayala Corporation
G.R. No. 149734. November 19, 2004.*
DR. DANIEL VAZQUEZ and MA. LUIZA M. VAZQUEZ, petitioners, vs. AYALA
CORPORATION, respondent.
Civil Law; Contracts; Default; Requirements; In order that the debtor may be in
default it is necessary that the following requisites be present.—In order that the debtor may
be in default it is necessary that the following requisites be present: (1) that the obligation
be demandable and already liquidated; (2) that the debtor delays performance; and (3) that
the creditor requires the performance judicially or extrajudicially.
Same; Same; Sales; Option Contract; Right of First Refusal;Distinguished; The Court
has clearly distinguished between an option and a right of first refusal.—An option is a
preparatory contract in which one party grants to another, for a fixed period and at a
determined price, the privilege to buy or sell, or to decide whether or not to enter into a
principal contract. It binds the party who has given the option not to enter into the principal
contract with any other person during the period designated, and within that period, to
enter into such contract with the one to whom the option was granted, if the latter should
decide to use the option. It 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 consideration.
In a right of first refusal, on the other hand, while the object might be made determinate,
the exercise of the right would be dependent not only on the grantor’s eventual intention to
enter into a binding juridical relation with another but also on terms, including the price,
that are yet to be firmed up.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Candelaria, Candelaria & Candelaria Law Firm for petitioners.
_______________
* SECOND DIVISION.
232
232 SUPREME COURT REPORTS ANNOTATED
Vazquez vs. Ayala Corporation
Poblador, Bautista & Reyesfor respondent.
TINGA, J.:
The rise in value of four lots in one of the country’s prime residential developments, Ayala
Alabang Village in Muntinlupa City, over a period of six (6) years only, represents big
money. The huge price difference lies at the heart of the present controversy. Petitioners
insist that the lots should be sold to them at 1984 prices while respondent maintains that
the prevailing market price in 1990 should be the selling price.
Dr. Daniel Vazquez and Ma. Luisa Vazquez1 filed this Petition for Review on
Certiorari2 dated October 11, 2001 assailing the Decision3of the Court of Appeals dated
September 6, 2001 which reversed the Decision4of the Regional Trial Court (RTC) and
dismissed their complaint for specific performance and damages against Ayala Corporation.
antecedents: 5
“On April 23, 1981, spouses Daniel Vasquez and Ma. Luisa M. Vasquez (hereafter, Vasquez
spouses) entered into a Memorandum of Agreement (MOA) with Ayala Corporation
(hereafter, AYALA) with AYALA buying from the Vazquez spouses, all of the latter’s shares
of stock in Conduit Development, Inc. (hereafter, Conduit). The main asset of Conduit was a
49.9 hectare property in Ayala Alabang, Muntinlupa, which was then being developed by
Conduit under a development plan where the land was divided into Villages
_______________
Alternatively spelled Vasquez.
1
Rollo, pp. 10-187 with Annexes.
2
3 Id., at pp. 193-210; Penned by Associate Justice Perlita J. Tria-Tirona and concurred
in by Associate Justices Eugenio S. Labitoria and Eloy R. Bello, Jr.
4 Id., at pp. 74-79; Dated September 11, 1995.
5 Id.,at pp. 193-198; Culled from the Decision of the Court of Appeals.
233
VOL. 443, NOVEMBER 19, 2004 233
Vazquez vs. Ayala Corporation
1, 2 and 3 of the “Don Vicente Village.” The development was then being undertaken for
Conduit by G.P. Construction and Development Corp. (hereafter, GP Construction).
Under the MOA, Ayala was to develop the entire property, less what was defined as the
“Retained Area” consisting of 18,736 square meters. This “Retained Area” was to be retained
by the Vazquez spouses. The area to be developed by Ayala was called the “Remaining
Area”. In this “Remaining Area” were 4 lots adjacent to the “Retained Area” and Ayala
agreed to offer these lots for sale to the Vazquez spouses at the prevailing price at the time
of purchase. The relevant provisions of the MOA on this point are:
“5.7. The BUYER hereby commits that it will develop the ‘Remaining Property’
into a first class residential subdivision of the same class as its New Alabang
Subdivision, and that it intends to complete the first phase under its amended
development plan within three (3) years from the date of this Agreement. x x x”
5.15. The BUYER agrees to give the SELLERS a first option to purchase four
developed lots next to the “Retained Area” at the prevailing market price at the
time of the purchase.”
The parties are agreed that the development plan referred to in paragraph 5.7
is not Conduit’s development plan, but Ayala’s amended development plan which
was still to be formulated as of the time of the MOA. While in the Conduit plan,
the 4 lots to be offered for sale to the Vasquez Spouses were in the first phase
thereof or Village 1, in the Ayala plan which was formulated a year later, it was in
the third phase, or Phase II-c.
Under the MOA, the Vasquez spouses made several express warranties, as follows:
“3.1. The SELLERS shall deliver to the BUYER:
xxx
3.1.2. The true and complete list, certified by the Secretary and Treasurer of the
Company showing:
xxx
D. A list of all persons and/or entities with whom the Company has pending contracts, if
any.
234
234 SUPREME COURT REPORTS ANNOTATED
1

Vazquez vs. Ayala Corporation
xxx
1. 3.1.5.Audited financial statements of the Company as at Closing date.
1. 4.Conditions Precedent All obligations of the BUYER under this Agreement are
subject to fulfillment prior to or at the Closing, of the following conditions:
1. 4.1.The representations and warranties by the SELLERS contained in
this Agreement shall be true and correct at the time of Closing as
though such representations and warranties were made at such
time;andx x x
1. 6.Representation and Warranties by the SELLERS The SELLERS jointly and
severally represent and warrant to the BUYER that at the time of the execution
of this Agreement and at the Closing:x x x
1. 6.2.3.There are no actions, suits or proceedings pending, or to the knowledge of the
SELLERS, threatened against or affecting the SELLERS with respect to the
Shares or the Property; and
1. 7.Additional Warranties by the SELLERS
1. 7.1.With respect to the Audited Financial Statements required to be submitted at
Closing in accordance with Par. 3.1.5 above, the SELLER jointly and severally
warrant to the BUYER that:
1. 7.1.1The said Audited Financial Statements shall show that on the day of Closing,
the Company shall own the “Remaining Property”, free from all liens and
encumbrances and that the Company shall have no obligation to any party
except for billings payable to GP Construction & Development
Corporation and advances made by Daniel Vazquez for which BUYER
shall be responsible in accordance with Par. 2 of this Agreement.
2. 7.1.2Except to the extent reflected or reserved in the Audited Financial
Statements of the Company as of Closing, and those disclosed to
BUYER, the Company as
235
VOL. 443, NOVEMBER 19, 2004 235
Vazquez vs. Ayala Corporation
1. of the date thereof, has no liabilities of any nature whether accrued,
absolute, contingent or otherwise, including, without limitation, tax
liabilities due or to become due and whether incurred in respect of or measured
in respect of the Company’s income prior to Closing or arising out of transactions
or state of facts existing prior thereto.
2. 7.2SELLERS do not know or have no reasonable ground to know of any
basis for any assertion against the Company as at closing or any
liability of any nature and in any amount not fully reflected or reserved
Sales 7-9
against such Audited Financial Statements referred to above, and those
disclosed to BUYER.
xxx xxx xxx
1. 7.6.3Except as otherwise disclosed to the BUYER in writing on or before
the Closing, the Company is not engaged in or a party to, or to the best
of the knowledge of the SELLERS, threatened with, any legal action or
other proceedings before any court or administrative body,nor do the
SELLERS know or have reasonable grounds to know of any basis for any such
action or proceeding or of any governmental investigation relative to the
Company.
1. 7.6.4To the knowledge of the SELLERS, no default or breach exists in the due
performance and observance by the Company of any term, covenant or
condition of any instrument or agreement to which the company is a
party or by which it is bound, and no condition exists which, with
notice or lapse of time or both, will constitute such default or breach.”
After the execution of the MOA, Ayala caused the suspension of work on Village 1 of the
Don Vicente Project. Ayala then received a letter from one Maximo Del Rosario of Lancer
General Builder Corporation informing Ayala that he was claiming the amount of
P1,509,558.80 as the subcontractor of G.P. Construction . . .
G.P. Construction not being able to reach an amicable settlement with Lancer, on
March 22, 1982, Lancer sued G.P. Construction, Conduit and Ayala in the then Court of
First Instance of Manila in Civil Case No. 82-8598. G.P. Construction in turn filed a cross-
claim against Ayala. G.P. Construction and Lancer both tried to enjoin Ayala from
undertaking the development of the property.
236
236 SUPREME COURT REPORTS ANNOTATED
Vazquez vs. Ayala Corporation
The suit was terminated only on February 19, 1987, when it was dismissed with prejudice
after Ayala paid both Lancer and GP Construction the total of P4,686,113.39.
Taking the position that Ayala was obligated to sell the 4 lots adjacent to the “Retained
Area” within 3 years from the date of the MOA, the Vasquez spouses sent several
“reminder” letters of the approaching so-called deadline. However, no demand after April
23, 1984, was ever made by the Vasquez spouses for Ayala to sell the 4 lots. On the contrary,
one of the letters signed by their authorized agent, Engr. Eduardo Turla, categorically
stated that they expected “development of Phase 1 to be completed by February 19, 1990,
three years from the settlement of the legal problems with the previous contractor.”
By early 1990 Ayala finished the development of the vicinity of the 4 lots to be offered
for sale. The four lots were then offered to be sold to the Vasquez spouses at the prevailing
price in 1990. This was rejected by the Vasquez spouses who wanted to pay at 1984 prices,
thereby leading to the suit below.
After trial, the court a quorendered its decision, the dispositive portion of which states:
“THEREFORE, judgment is hereby rendered in favor of plaintiffs and against defendant,
ordering defendant to sell to plaintiffs the relevant lots described in the Complaint in the
Ayala Alabang Village at the price of P460.00 per square meter amounting to P1,349,540.00;
ordering defendant to reimburse to plaintiffs attorney’s fees in the sum of P200,000.00 and
to pay the cost of the suit.”
2

In its decision, the court a quo concluded that the Vasquez spouses were not obligated to
disclose the potential claims of GP Construction, Lancer and Del Rosario; Ayala’s
accountants should have opened the records of Conduit to find out all claims; the warranty
against suit is with respect to “the shares of the Property” and the Lancer suit does not
affect the shares of stock sold to Ayala; Ayala was obligated to develop within 3 years; to say
that Ayala was under no obligation to follow a time frame was to put the Vasquezes at
Ayala’s mercy; Ayala did not develop because of a slump in the real estate market; the MOA
was drafted and prepared by the AYALA who should suffer its ambiguities; the option to
purchase the 4 lots is valid because it was supported by consideration as the op-
237
VOL. 443, NOVEMBER 19, 2004 237
Vazquez vs. Ayala Corporation
tion is incorporated in the MOA where the parties had prestations to each other.” [Emphasis
supplied]
Ayala Corporation filed an appeal, alleging that the trial court erred in holding that
petitioners did not breach their warranties under the MOA6 dated April 23, 1981; that it
was obliged to develop the land where the four (4) lots subject of the option to purchase are
located within three (3) years from the date of the MOA; that it was in delay; and that the
option to purchase was valid because it was incorporated in the MOA and the consideration
therefor was the commitment by Ayala Corporation to petitioners embodied in the MOA.
As previously mentioned, the Court of Appeals reversed the RTC Decision.According to
the appellate court, Ayala Corporation was never informed beforehand of the existence of
the Lancer claim. In fact, Ayala Corporation got a copy of the Lancer subcontract only on
May 29, 1981 from G.P. Construction’s lawyers. The Court of Appeals thus held that
petitioners violated their warranties under the MOA when they failed to disclose Lancer’s
claims. Hence, even conceding that Ayala Corporation was obliged to develop and sell the
four (4) lots in question within three (3) years from the date of the MOA, the obligation was
suspended during the pendency of the case filed by Lancer.
Interpreting the MOA’s paragraph 5.7 above-quoted, the appellate court held that Ayala
Corporation committed to develop the first phase of its own amended development plan and
not Conduit’s development plan. Nowhere does the MOA provide that Ayala Corporation
shall follow Conduit’s development plan nor is Ayala Corporation prohibited from changing
the sequence of the phases of the property it will develop.
Anent the question of delay, the Court of Appeals ruled that there was no delay as
petitioners never made a demand for Ayala Corporation to sell the subject lots to them.
Accord-
_______________
6 Id., at pp. 50-62.
238
238 SUPREME COURT REPORTS ANNOTATED
Vazquez vs. Ayala Corporation
ing to the appellate court, what petitioners sent were mere reminder letters the last of
which was dated prior to April 23, 1984 when the obligation was not yet demandable. At any
rate, the Court of Appeals found that petitioners in fact waived the three (3)-year period
when they sent a letter through their agent, Engr. Eduardo Turla, stating that they “expect
that the development of Phase I will be completed by 19 February 1990, three years from
the settlement of the legal problems with the previous contractor.”7
The appellate court likewise ruled that paragraph 5.15 above-quoted is not an option
contract but a right of first refusal there being no separate consideration therefor. Since
Sales 7-9
petitioners refused Ayala Corporation’s offer to sell the subject lots at the reduced 1990
price of P5,000.00 per square meter, they have effectively waived their right to buy the
same.
In the instant Petition,petitioners allege that the appellate court erred in ruling that
they violated their warranties under the MOA; that Ayala Corporation was not obliged to
develop the “Remaining Property” within three (3) years from the execution of the MOA;
that Ayala was not in delay; and that paragraph 5.15 of the MOA is a mere right of first
refusal. Additionally, petitioners insist that the Court should review the factual findings of
the Court of Appeals as they are in conflict with those of the trial court.
Ayala Corporation filed a Comment on the Petition8dated March 26, 2002, contending
that the petition raises questions of fact and seeks a review of evidence which is within the
domain of the Court of Appeals. Ayala Corporation maintains that the subcontract between
GP Construction, with whom Conduit contracted for the development of the property under
a Construction Contract dated October 10, 1980, and Lancer was not disclosed by
petitioners during the negotiations. Nei-
_______________
7 Id., at p. 206.
8 Id., at pp. 240-289.
239
VOL. 443, NOVEMBER 19, 2004 239
Vazquez vs. Ayala Corporation
ther was the liability for Lancer’s claim included in the Audited Financial Statements
submitted by petitioners after the signing of the MOA. These justify the conclusion that
petitioners breached their warranties under the afore-quoted paragraphs of the MOA. Since
the Lancer suit ended only in February 1989, the three (3)-year period within which Ayala
Corporation committed to develop the property should only be counted thence. Thus, when
it offered the subject lots to petitioners in 1990, Ayala Corporation was not yet in delay.
In response to petitioners’ contention that there was no action or proceeding against
them at the time of the execution of the MOA on April 23, 1981, Ayala Corporation avers
that the facts and circumstances which gave rise to the Lancer claim were already extant
then. Petitioners warranted that their representations under the MOA shall be true and
correct at the time of “Closing” which shall take place within four (4) weeks from the signing
of the MOA.9 Since the MOA was signed on April 23, 1981, “Closing” was approximately the
third week of May 1981. Hence, Lancer’s claims, articulated in a letter which Ayala
Corporation received on May 4, 1981, are among the liabilities warranted against under
paragraph 7.1.2 of the MOA.
Moreover, Ayala Corporation asserts that the warranties under the MOA are not just
against suits but against all kinds of liabilities not reflected in the Audited Financial
Statements. It cannot be faulted for relying on the express warranty that except for billings
payable to GP Construction and advances made by petitioner Daniel Vazquez in the amount
of P38,766.04, Conduit has no other liabilities. Hence, petitioners cannot claim that Ayala
Corporation should have examined and investigated the Audited Financial Statements of
Conduit and should now assume all its obligations and liabilities including the Lancer suit
and the cross-claim of GP Construction.
_______________
9 Id., at p. 53.
240
240 SUPREME COURT REPORTS ANNOTATED
3

Vazquez vs. Ayala Corporation
Furthermore, Ayala Corporation did not make a commitment to complete the development
of the first phase of the property within three (3) years from the execution of the MOA. The
provision refers to a mere declaration of intent to develop the first phase of its (Ayala
Corporation’s) own development plan and not Conduit’s. True to its intention, Ayala
Corporation did complete the development of the first phase (Phase II-A) of its amended
development plan within three (3) years from the execution of the MOA. However, it is not
obliged to develop the third phase (Phase II-C) where the subject lots are located within the
same time frame because there is no contractual stipulation in the MOA therefor. It is free
to decide on its own the period for the development of Phase II-C. If petitioners wanted to
impose the same three (3)-year timetable upon the third phase of the amended development
plan, they should have filed a suit to fix the time table in accordance with Article 119710 of
the Civil Code. Having failed to do so, Ayala Corporation cannot be declared to have been in
delay.
Ayala Corporation further contends that no demand was made on it for the performance
of its alleged obligation. The letter dated October 4, 1983 sent when petitioners were
already aware of the Lancer suit did not demand the delivery of the subject lots by April 23,
1984. Instead, it requested Ayala Corporation to keep petitioners posted on the status of the
case. Likewise, the letter dated March 4, 1984 was merely an inquiry as to the date when
the development of Phase 1 will
_______________
10 Art. 1197. If the obligation does not fix a period, but from its nature and the
circumstances it can be inferred that a period was intended, the courts may fix the duration
thereof.
The courts shall also fix the duration of the period when it depends upon the will of the
debtor.
In every case, the courts shall determine such period as may under the circumstances
have been probably contemplated by the parties. Once fixed by the courts, the period cannot
be changed by them.
241
VOL. 443, NOVEMBER 19, 2004 241
Vazquez vs. Ayala Corporation
be completed. More importantly, their letter dated June 27, 1988 through Engr. Eduardo
Turla expressed petitioners’ expectation that Phase 1 will be completed by February 19,
1990.
Lastly, Ayala Corporation maintains that paragraph 5.15 of the MOA is a right of first
refusal and not an option contract.
Petitioners filed their Reply11 dated August 15, 2002 reiterating the arguments in
their Petitionand contending further that they did not violate their warranties under the
MOA because the case was filed by Lancer only on April 1, 1982, eleven (11) months and
eight (8) days after the signing of the MOA on April 23, 1981. Ayala Corporation admitted
that it received Lancer’s claim before the “Closing” date. It therefore had all the time to
rescind the MOA. Not having done so, it can be concluded that Ayala Corporation itself did
not consider the matter a violation of petitioners’ warranty.
Moreover, petitioners submitted the Audited Financial Statements of Conduit and
allowed an acquisition audit to be conducted by Ayala Corporation. Thus, the latter bought
Conduit with “open eyes.”
Petitioners also maintain that they had no knowledge of the impending case against
Conduit at the time of the execution of the MOA. Further, the MOA makes Ayala
Corporation liable for the payment of all billings of GP Construction. Since Lancer’s claim
Sales 7-9
was actually a claim against GP Construction being its sub-contractor, it is Ayala
Corporation and not petitioners which is liable.
Likewise, petitioners aver that although Ayala Corporation may change the sequence of
its development plan, it is obliged under the MOA to develop the entire area where the
subject lots are located in three (3) years.
_______________
11 Supra, note 2 at pp. 300-323.
242
242 SUPREME COURT REPORTS ANNOTATED
Vazquez vs. Ayala Corporation
They also assert that demand was made on Ayala Corporation to comply with their
obligation under the MOA. Apart from their reminder letters dated January 24, February
18 and March 5, 1984, they also sent a letter dated March 4, 1984 which they claim is a
categorical demand for Ayala Corporation to comply with the provisions of the MOA.
The parties were required to submit their respective memoranda in
the Resolution12 dated November 18, 2002. In compliance with this directive, petitioners
submitted their Memorandum13 dated February 14, 2003 on even date, while Ayala
Corporation filed its Memorandum14 dated February 14, 2003 on February 17, 2003.
We shall first dispose of the procedural question raised by the instant petition.
It is well-settled that the jurisdiction of this Court in cases brought to it from the Court
of Appeals by way of petition for review under Rule 45 is limited to reviewing or revising
errors of law imputed to it, its findings of fact being conclusive on this Court as a matter of
general principle. However, since in the instant case there is a conflict between the factual
findings of the trial court and the appellate court, particularly as regards the issues of
breach of warranty, obligation to develop and incurrence of delay, we have to consider the
evidence on record and resolve such factual issues as an exception to the general rule. 15 In
any event, the submitted issue relating to the categorization of the right to purchase
granted to petitioners under the MOA is legal in character.
The next issue that presents itself is whether petitioners breached their warranties
under the MOA when they failed to
_______________
12 Id., at pp. 324-325.
13 Id., at pp. 331-369.
14 Id., at pp. 370-433.
15 Rosario v. Court of Appeals,369 Phil. 729; 310 SCRA 464 (1999), citations omitted.
243
VOL. 443, NOVEMBER 19, 2004 243
Vazquez vs. Ayala Corporation
disclose the Lancer claim. The trial court declared they did not; the appellate court found
otherwise.
Ayala Corporation summarizes the clauses of the MOA which petitioners allegedly
breached when they failed to disclose the Lancer claim:
1. “a)Clause 7.1.1.—that Conduit shall not be obligated to anyone except to GP
Construction for P38,766.04, and for advances made by Daniel Vazquez;
2. b)Clause 7.1.2.—that except as reflected in the audited financial statements
Conduit had no other liabilities whether accrued, absolute, contingent or
otherwise;
4

3. c)Clause 7.2. – that there is no basis for any assertion against Conduit of any
liability of any value not reflected or reserved in the financial statements, and
those disclosed to Ayala;
4. d)Clause 7.6.3.—that Conduit is not threatened with any legal action or other
proceedings; and
5. e)Clause 7.6.4.—that Conduit had not breached any term, condition, or covenant
of any instrument or agreement to which it is a party or by which it is bound.”16
The Court is convinced that petitioners did not violate the foregoing warranties.
The exchanges of communication between the parties indicate that petitioners
substantially apprised Ayala Corporation of the Lancer claim or the possibility thereof
during the period of negotiations for the sale of Conduit.
In a letter17 dated March 5, 1984, petitioner Daniel Vazquez reminded Ayala
Corporation’s Mr. Adolfo Duarte (Mr. Duarte) that prior to the completion of the sale of
Conduit, Ayala Corporation asked for and was given information that GP Construction sub-
contracted, presumably to Lancer, a greater percentage of the project than it was allowed.
Petitioners gave this information to Ayala Corporation because
_______________
16 Supra, note 2 at pp. 401-402.
17 RTC Records, pp. 60-61.
244
244 SUPREME COURT REPORTS ANNOTATED
Vazquez vs. Ayala Corporation
the latter intimated a desire to “break the contract of Conduit with GP.” Ayala Corporation
did not deny this. In fact, Mr. Duarte’s letter18 dated March 6, 1984 indicates that Ayala
Corporation had knowledge of the Lancer subcontract prior to its acquisition of Conduit.
Ayala Corporation even admitted that it “tried to explore . . . legal basis to discontinue the
contract of Conduit with GP” but found this “not feasible when information surfaced about
the tacit consent of Conduit to the sub-contracts of GP with Lancer.”
At the latest, Ayala Corporation came to know of the Lancer claim before the date of
Closing of the MOA. Lancer’s letter19 dated April 30, 1981 informing Ayala Corporation of
its unsettled claim with GP Construction was received by Ayala Corporation on May 4,
1981, well before the “Closing”20which occurred four (4) weeks after the date of signing of
the MOA on April 23, 1981, or on May 23, 1981.
The full text of the pertinent clauses of the MOA quoted hereunder likewise indicate
that certain matters pertaining to the liabilities of Conduit were disclosed by petitioners to
Ayala Corporation although the specifics thereof were no longer included in the MOA:
1. 7.1.1The said Audited Financial Statements shall show that on the day of Closing,
the Company shall own the “Remaining Property”, free from all liens and
encumbrances and that the Company shall have no obligation to any party
except for billings payable to GP Construction & Development Corporation and
advances made by Daniel Vazquez for which BUYER shall be responsible in
accordance with Paragraph 2 of this Agreement.
2. 7.1.2Except to the extent reflected or reserved in the Audited Financial
Statements of the Company as of Closing, and those disclosed to
BUYER, the Company as of the date hereof, has no liabilities of any nature
whether accrued, absolute, contingent or otherwise, including, without
limitation, tax liabilities
_______________
Sales 7-9
18 Id., at pp. 90-91.
19 Id., at p. 77.
20 Supra note 2 at p. 53.
245
VOL. 443, NOVEMBER 19, 2004 245
Vazquez vs. Ayala Corporation
due or to become due and whether incurred in respect of or measured in respect of the
Company’s income prior to Closing or arising out of transactions or state of facts existing
prior thereto.
7.2 SELLERS do not know or have no reasonable ground to know of any basis for any
assertion against the Company as at Closing of any liability of any nature and in any
amount not fully reflected or reserved against such Audited Financial Statements referred
to above, and those disclosed to BUYER.
xxx xxx xxx
7.6.3 Except as otherwise disclosed to the BUYER in writing on or before the
Closing, the Company is not engaged in or a party to, or to the best of the knowledge of the
SELLERS, threatened with, any legal action or other proceedings before any court or
administrative body, nor do the SELLERS know or have reasonable grounds to know of any
basis for any such action or proceeding or of any governmental investigation relative to the
Company.
7.6.4 To the knowledge of the SELLERS, no default or breach exists in the due
performance and observance by the Company of any term, covenant or condition of any
instrument or agreement to which the Company is a party or by which it is bound, and no
condition exists which, with notice or lapse of time or both, will constitute such default or
breach.”21 [Emphasis supplied]
Hence, petitioners’ warranty that Conduit is not engaged in, a party to, or threatened with
any legal action or proceeding is qualified by Ayala Corporation’s actual knowledge of the
Lancer claim which was disclosed to Ayala Corporation before the “Closing.”
At any rate, Ayala Corporation bound itself to pay all billings payable to GP
Construction and the advances made by petitioner Daniel Vazquez. Specifically, under
paragraph 2 of the MOA referred to in paragraph 7.1.1, Ayala Corporation undertook
responsibility “for the payment of all billings of the contractor GP Construction &
Development Corporation after the first billing and any payments made by the company
_______________
21 Id., at pp. 58-60.
246
246 SUPREME COURT REPORTS ANNOTATED
Vazquez vs. Ayala Corporation
and/or SELLERS shall be reimbursed by BUYER on closing which advances to date is
P1,159,012.87.”22
The billings knowingly assumed by Ayala Corporation necessarily include the Lancer
claim for which GP Construction is liable. Proof of this is Ayala Corporation’s letter 23 to GP
Construction dated before “Closing” on May 4, 1981, informing the latter of Ayala
Corporation’s receipt of the Lancer claim embodied in the letter dated April 30, 1981,
acknowledging that it is taking over the contractual responsibilities of Conduit, and
requesting copies of all sub-contracts affecting the Conduit property. The pertinent excerpts
of the letter read:
_______________
5

Id., at pp. 52-53. The full text of paragraph 2 reads:
22
2. Purchase Price and Mode of Payment
The Purchase Price shall be FIFTY-SIX MILLION SIX HUNDRED TWENTY THREE
THOUSAND THREE HUNDRED THIRTY EIGHT PESOS AND EIGHTY CENTAVOS
(P56,623,338.80) and shall be paid at the Closing by the BUYER by means of a manager’s
check(s) payable to Ma. Luisa M. Vazquez in her own behalf and as representative of the
other SELLERS, less the earnest money of EIGHT MILLION PESOS (P8,000,000.00) herein
paid as mentioned below; provided, however, that on or before the Closing, SELLERS shall
deliver to the BUYER duly executed letters of instruction from the other SELLERS
specifically authorizing Ma. Luisa M. Vazquez to receive on their own behalf their
respective payments by means of a manager’s check for the entire Purchase Price stated in
this Paragraph payable to SELLERS. In addition to the foregoing, BUYER shall be
responsible for the payment of all billings of the contractor GP Construction & Development
Corporation after the first billing and any payments made by the company and/or SELLERS
shall be reimbursed by BUYER on closing which advances to date is P1,159,012.87. Earnest
money in the sum of EIGHT MILLION PESOS (P8,000,000.00), Philippine Currency, shall
be paid upon signing of this document.
23 Supra, note 17 at p. 78.
247
VOL. 443, NOVEMBER 19, 2004 247
Vazquez vs. Ayala Corporation
...
In this connection, we wish to inform you that this morning we received a letter from
Mr. Maximo D. Del Rosario, President of Lancer General Builders Corporation apprising us
of the existence of subcontracts that they have with your corporation. They have also
furnished us with a copy of their letter to you dated 30 April 1981.
Since we are taking over the contractual responsibilities of Conduit Development, Inc.,
we believe that it is necessary, at this point in time, that you furnish us with copies of all
your subcontracts affecting the property of Conduit, not only with Lancer General Builders
Corporation, but all subcontracts with other parties as well. . . .24
Quite tellingly, Ayala Corporation even attached to its Pre-Trial Brief25 dated July 9, 1992 a
copy of the letter26 dated May 28, 1981 of GP Construction’s counsel addressed to Conduit
furnishing the latter with copies of all sub-contract agreements entered into by GP
Construction. Since it was addressed to Conduit, it can be presumed that it was the latter
which gave Ayala Corporation a copy of the letter thereby disclosing to the latter the
existence of the Lancer sub-contract.
The ineluctable conclusion is that petitioners did not violate their warranties under the
MOA. The Lancer subcontract and claim were substantially disclosed to Ayala Corporation
before the “Closing” date of the MOA. Ayala Corporation cannot disavow knowledge of the
claim.
Moreover, while in its correspondence with petitioners, Ayala Corporation did mention
the filing of the Lancer suit as an obstacle to its development of the property, it never
actually brought up nor sought redress for petitioners’ alleged
_______________
24 Ibid.
25 Supra, note 17 at pp. 69-76.
26 Id., at pp. 81-82.
248
248 SUPREME COURT REPORTS ANNOTATED
Sales 7-9
Vazquez vs. Ayala Corporation
breach of warranty for failure to disclose the Lancer claim until it filed its Answer27 dated
February 17, 1992.
We now come to the correct interpretation of paragraph 5.7 of the MOA. Does this
paragraph express a commitment or a mere intent on the part of Ayala Corporation to
develop the property within three (3) years from date thereof? Paragraph 5.7 provides:
5.7. The BUYER hereby commits that it will develop the ‘Remaining Property’ into a first
class residential subdivision of the same class as its New Alabang Subdivision, and that it
intends to complete the first phase under its amended development plan within three (3)
years from the date of this Agreement . . .28
Notably, while the first phrase of the paragraph uses the word “commits” in reference to the
development of the “Remaining Property” into a first class residential subdivision, the
second phrase uses the word “intends” in relation to the development of the first phase of
the property within three (3) years from the date of the MOA. The variance in wording is
significant. While “commit”29 connotes a pledge to do something, “intend”30merely signifies a
design or proposition.
Atty. Leopoldo Francisco, former Vice President of Ayala Corporation’s legal division
who assisted in drafting the MOA, testified:
COURT
You only ask what do you mean by that intent. Just answer on that point.
ATTY. BLANCO
Don’t talk about standard.
_______________
27 Id., at pp. 32-38.
28 Supra, note 2 at p. 55.
29 BLACK’S LAW DICTIONARY, Sixth Edition, p. 273.
30 Id., at p. 809.
249
VOL. 443, NOVEMBER 19, 2004 249
Vazquez vs. Ayala Corporation
WITNESS
A Well, the word intent here, your Honor, was used to emphasize the tentative character of
the period of development because it will be noted that the sentence refers to and I quote
“to complete the first phase under its amended development plan within three (3) years
from the date of this agreement, at the time of the execution of this agreement, your
Honor.” That amended development plan was not yet in existence because the buyer had
manifested to the seller that the buyer could amend the subdivision plan originally
belonging to the seller to conf orm with its own standard of development and second,
your Honor. (interrupted)31
It is thus unmistakable that this paragraph merely expresses an intention on Ayala
Corporation’s part to complete the first phase under its amended development plan within
three (3) years from the execution of the MOA. Indeed, this paragraph is so plainly worded
that to misunderstand its import is deplorable.
6

More focal to the resolution of the instant case is paragraph 5.7’s clear reference to the
first phase of Ayala Corporation’s amended development plan as the subject of the three (3)-
year intended timeframe for development. Even petitioner Daniel Vazquez admitted on
cross-examination that the paragraph refers not to Conduit’s but to Ayala Corporation’s
development plan which was yet to be formulated when the MOA was executed:
Q: Now, turning to Section 5.7 of this Memorandum of Agreement, it is stated as follows: “The
Buyer hereby commits that to develop the remaining property into a first class residential
subdivision of the same class as New Alabang Subdivision, and that they intend to complete
the first phase under its amended development plan within three years from the date of this
agreement.”
_______________
31 TSN, November 18, 1993, pp. 35-36.
250
250 SUPREME COURT REPORTS ANNOTATED
Vazquez vs. Ayala Corporation
Now, my question to you, Dr. Vasquez is that there is no dispute that the amended
development plan here is the amended development plan of Ayala?
A: Yes, sir.
Q: In other words, it is not Exhibit “D-5” which is the original plan of Conduit?
A: No, it is not.
Q: This Exhibit “D-5” was the plan that was being followed by GP Construction in 1981?
A: Yes, sir.
Q: And point of fact during your direct examination as of the date of the agreement, this
amended development plan was still to be formulated by Ayala?
A: Yes, sir.32
As correctly held by the appellate court, this admission is crucial because while the subject
lots to be sold to petitioners were in the first phase of the Conduit development plan, they
were in the third or last phase of the Ayala Corporation development plan. Hence, even
assuming that paragraph 5.7 expresses a commitment on the part of Ayala Corporation to
develop the first phase of its amended development plan within three (3) years from the
execution of the MOA, there was no parallel commitment made as to the timeframe for the
development of the third phase where the subject lots are located.
Lest it be forgotten, the point of this petition is the alleged failure of Ayala Corporation
to offer the subject lots for sale to petitioners within three (3) years from the execution of the
MOA. It is not that Ayala Corporation committed or intended to develop the first phase of
its amended development plan within three (3) years. Whether it did or did not is actually
beside the point since the subject lots are not located in the first phase anyway.
_______________
32 TSN, August 3, 1993, pp. 17-19.
251
VOL. 443, NOVEMBER 19, 2004
Sales 7-9
Vazquez vs. Ayala Corporation
We now come to the issue of default or delay in the fulfillment of the obligation.
Article 1169 of the Civil Code provides:
Art. 1169. Those obliged to deliver or to do something incur in delay from the time the
obligee judicially or extrajudicially demands from them the fulfillment of their obligation.
However, the demand by the creditor shall not be necessary in order that delay may
exist:
1. (1)When the obligation or the law expressly so declares; or
2. (2)When from the nature and the circumstances of the obligation it appears that
the designation of the time when the thing is to be delivered or the service is to
be rendered was a controlling motive for the establishment of the contract; or
3. (3)When demand would be useless, as when the obligor has rendered it beyond his
power to perform.
In reciprocal obligations, neither party incurs in delay if the other does not comply or is
not ready to comply in a proper manner with what is incumbent upon him. From the
moment one of the parties fulfills his obligation, delay by the other begins.
In order that the debtor may be in default it is necessary that the following requisites be
present: (1) that the obligation be demandable and already liquidated; (2) that the debtor
delays performance; and (3) that the creditor requires the performance judicially or
extrajudicially.33
Under Article 1193 of the Civil Code, obligations for whose fulfillment a day certain has
been fixed shall be demandable only when that day comes. However, no such day certain
was fixed in the MOA. Petitioners, therefore, cannot demand performance after the three (3)
year period fixed by the MOA for the development of the first phase of the property since
this is not the same period contemplated for the development of the subject lots. Since the
MOA does not specify a period for the
_______________
33 4 A. TOLENTINO, COMMENTARIES AND JURISPRUDENCE ON THE CIVIL
CODE OF THE PHILIPPINES, 102 (1991).
252
252 SUPREME COURT REPORTS ANNOTATED
Vazquez vs. Ayala Corporation
development of the subject lots, petitioners should have petitioned the court to fix the period
in accordance with Article 119734 of the Civil Code. As no such action was filed by
petitioners, their complaint for specific performance was premature, the obligation not being
demandable at that point. Accordingly, Ayala Corporation cannot likewise be said to have
delayed performance of the obligation.
Even assuming that the MOA imposes an obligation on Ayala Corporation to develop
the subject lots within three (3) years from date thereof, Ayala Corporation could still not be
held to have been in delay since no demand was made by petitioners for the performance of
its obligation.
As found by the appellate court, petitioners’ letters which dealt with the three (3)-year
timetable were all dated prior to April 23, 1984, the date when the period was supposed to
expire. In other words, the letters were sent before the obligation could become legally
demandable. Moreover, the letters were mere reminders and not categorical demands to
perform. More importantly, petitioners waived the three (3)-year period as evidenced by
251 their agent, Engr. Eduardo Turla’s letter to the effect that petitioners agreed that the three
7

(3)-year period should be counted from the termination of the case filed by Lancer. The
letter reads in part:
1. I.Completion of Phase I
As per the memorandum of Agreement also dated April 23, 1981, it was undertaken by your
goodselves to complete the development of Phase I within three (3) years. Dr. & Mrs.
Vazquez were made to understand that you were unable to accomplish this because of legal
problems with the previous contractor. These legal problems were resolved as of February
19, 1987, and Dr. & Mrs. Vazquez therefore expect that the development of Phase I will be
completed by February 19, 1990, three years from the settlement of the legal problems with
the previous contractor. The reason for this is, as you know, that security-wise, Dr. & Mrs.
Vazquez have been advised not
_______________
34 Supra note 10.
253
VOL. 443, NOVEMBER 19, 2004 253
Vazquez vs. Ayala Corporation
to construct their residence till the surrounding area (which is Phase I) is developed and
occupied. They have been anxious to build their residence for quite some time now, and
would like to receive assurance from your goodselves regarding this, in compliance with the
agreement.
1. II.Option on the adjoining lots
We have already written your goodselves regarding the intention of Dr. & Mrs. Vazquez
to exercise their option to purchase the two lots on each side (a total of 4 lots) adjacent to
their “Retained Area”. They are concerned that although over a year has elapsed since the
settlement of the legal problems, you have not presented them with the size, configuration,
etc. of these lots. They would appreciate being provided with these at your earliest
convenience.35
Manifestly, this letter expresses not only petitioners’ acknowledgement that the delay in the
development of Phase I was due to the legal problems with GP Construction, but also their
acquiescence to the completion of the development of Phase I at the much later date of
February 19, 1990. More importantly, by no stretch of semantic interpretation can it be
construed as a categorical demand on Ayala Corporation to offer the subject lots for sale to
petitioners as the letter merely articulates petitioners’ desire to exercise their option to
purchase the subject lots and concern over the fact that they have not been provided with
the specifications of these lots.
The letters of petitioners’ children, Juan Miguel and Victoria Vazquez, dated January
23, 198436 and February 18, 198437 can also not be considered categorical demands on Ayala
Corporation to develop the first phase of the property within the three (3)-year period much
less to offer the subject lots for sale to petitioners. The letter dated January 23, 1984 reads
in part:
_______________
35 Supra, note 17 at p. 651.
36 Id., at p. 151.
37 Id., at p. 154.
Sales 7-9
254
254 SUPREME COURT REPORTS ANNOTATED
Vazquez vs. Ayala Corporation
You will understand our interest in the completion of the roads to our property, since we
cannot develop it till you have constructed the same. Allow us to remind you of our
Memorandum of Agreement, as per which you committed to develop the roads to our
property “as per the original plans of the company”, and that
1. 1.The back portion should have been developed before the front portion—which
has not been the case.
2. 2.The whole project—front and back portions be completed by 1984.38
The letter dated February 18, 1984 is similarly worded. It states:
In this regard, we would like to remind you of Articles 5.7 and 5.9 of our Memorandum of
Agreement which states respectively:. . .39
Even petitioner Daniel Vazquez’ letter40 dated March 5, 1984 does not make out a
categorical demand for Ayala Corporation to offer the subject lots for sale on or before April
23, 1984. The letter reads in part:
. . . and that we expect from your goodselves compliance with our Memorandum of
Agreement, and a definite date as to when the road to our property and the development of
Phase I will be completed.41
At best, petitioners’ letters can only be construed as mere reminders which cannot be
considered demands for performance because it must appear that the tolerance or
benevolence of the creditor must have ended.42
_______________
38 Supra, note 36.
39 Supra, note 37.
40 Supra, note 17 at pp. 157-158.
41 Id., at p. 158.
42 A. TOLENTINO, op. cit. supra, note 33 citing 2 Castan 528 and 3 Valverde 104.
255
VOL. 443, NOVEMBER 19, 2004 255
Vazquez vs. Ayala Corporation
The petition finally asks us to determine whether paragraph 5.15 of the MOA can properly
be construed as an option contract or a right of first refusal. Paragraph 5.15 states:
5.15 The BUYER agrees to give the SELLERS first option to purchase four developed lots
next to the “Retained Area” at the prevailing market price at the time of the purchase. 43
The Court has clearly distinguished between an option contract and a right of first refusal.
An option is a preparatory contract in which one party grants to another, for a fixed period
and at a determined price, the privilege to buy or sell, or to decide whether or not to enter
into a principal contract. It binds the party who has given the option not to enter into the
principal contract with any other person during the period designated, and within that
period, to enter into such contract with the one to whom the option was granted, if the latter
should decide to use the option. It 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
consideration.44
8

In a right of first refusal, on the other hand, while the object might be made
determinate, the exercise of the right would be dependent not only on the grantor’s eventual
intention to enter into a binding juridical relation with another but also on terms, including
the price, that are yet to be firmed up.45
Applied to the instant case, paragraph 5.15 is obviously a mere right of first refusal and
not an option contract. Al-
_______________
43Supra, note 2 at p. 57.
44Litonjua v. L&R Corporation,385 Phil. 538; 328 SCRA 796 (2000); Carceller v. Court
of Appeals, 362 Phil. 332; 302 SCRA 718 (1999); Equatorial Realty Development, Inc. v.
Mayfair Theater, Inc., 332 Phil. 525; 264 SCRA 483 (1996).
45 Ang Yu Asuncion v. Court of Appeals, G.R. No. 109125, December 2, 1994, 238 SCRA
602.
256
256 SUPREME COURT REPORTS ANNOTATED
Vazquez vs. Ayala Corporation
though the paragraph has a definite object, i.e., the sale of subject lots, the period within
which they will be offered for sale to petitioners and, necessarily, the price for which the
subject lots will be sold are not specified. The phrase “at the prevailing market price at the
time of the purchase” connotes that there is no definite period within which Ayala
Corporation is bound to reserve the subject lots for petitioners to exercise their privilege to
purchase. Neither is there a fixed or determinable price at which the subject lots will be
offered for sale. The price is considered certain if it may be determined with reference to
another thing certain or if the determination thereof is left to the judgment of a specified
person or persons.46
Further, paragraph 5.15 was inserted into the MOA to give petitioners the first crack to
buy the subject lots at the price which Ayala Corporation would be willing to accept when it
offers the subject lots for sale. It is not supported by an independent consideration. As such
it is not governed by Articles 1324 and 1479 of the Civil Code, viz.:
Art. 1324. When the offeror has allowed the offeree a certain period to accept, the offer may
be withdrawn at any time before acceptance by communicating such withdrawal, except
when the option is founded upon a consideration, as something paid or promised.
Art. 1479. A promise to buy and sell a determinate thing for a price certain is
reciprocally demandable.
An accepted unilateral promise to buy or to sell a determinate thing for a price certain
is binding upon the promissor if the promise is supported by a consideration distinct from
the price.
Consequently, the “offer” may be withdrawn anytime by communicating the withdrawal to
the other party.47
_______________
46 Art. 1469, Civil Code.
47 A. TOLENTINO, op. cit. supra,note 33 at p. 465.
257
VOL. 443, NOVEMBER 19, 2004 257
Vazquez vs. Ayala Corporation
In this case, Ayala Corporation offered the subject lots for sale to petitioners at the price of
P6,500.00/square meter, the prevailing market price for the property when the offer was
Sales 7-9
made on June 18, 1990.48 Insisting on paying for the lots at the prevailing market price in
1984 of P460.00/square meter, petitioners rejected the offer. Ayala Corporation reduced the
price to P5,000.00/square meter but again, petitioners rejected the offer and instead made a
counter-offer in the amount of P2,000.00/square meter.49Ayala Corporation re-
_______________
Supra, note 2 at p. 63.
48
Id., at pp. 209-210.
49
The testimony of petitioner Daniel Vazquez on direct examination reads:
Q Mr. Witness, at the last hearing which was interrupted by the brown-out, we were on Exhibit
“L”, which I am handing to you, upon receipt of Exhibit “L” which is the June 18, 1990 letter
of Ayala to you, what did you do, if any?
A We contacted Ayala to tell them we wanted to exercise our option and that we were not
agreeable with the price they are mentioning here, sir.
Q Did you offer any price?
A Yes, sir, we offered them a price.
Q According to the complaint, the price in April 1984 could have been only P460.00 pesos per
square meter. Where did you get that price?
A One of our secretaries, Mr. Eusebio, I believe, contacted the Ayala Corporation and that was
the price the Ayala Corporation was selling it at that time, sir.
Q Did the Ayala Corporation reduce this price for purposes of arriving in an agreeable or
acceptable offer?
A Yes, sir, we did.
Q How much did the Ayala Corporation dropped to?
A Ayala dropped, if I remember right, to I think P4,000.00 pesos, sir.
258
258 SUPREME COURT REPORTS ANNOTATED
Vazquez vs. Ayala Corporation
jected petitioners’ counter-offer. With this rejection, petitioners lost their right to purchase
the subject lots.
It cannot, therefore, be said that Ayala Corporation breached petitioners’ right of first
refusal and should be compelled by an action for specific performance to sell the subject lots
to petitioners at the prevailing market price in 1984.
WHEREFORE, the instant petition is DENIED. No pronouncement as to costs.
SO ORDERED.
Puno (Chairman), Austria-Martinez, Callejo, Sr. and Chico-Nazario, JJ.,concur.
Petition denied.
9

VOL. 264, NOVEMBER 21, 1996
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
G.R. No. 106063. November 21, 1996.*
EQUATORIAL REALTY DEVELOPMENT, INC. & CARMELO & BAUERMANN, INC.,
petitioners, vs. MAYFAIR THEATER, INC., respondent.
Civil Law; Contracts; Sales; The contractual stipulation provides for a right of first
refusal in favor of Mayfair.—We agree with the respondent Court of Appeals that the
aforecited contractual stipulation provides for a right of first refusal in favor of Mayfair. It is
not an option clause or an option contract. It is a contract of a right of first refusal.
Same; Same; Same; The deed of option or the option clause in a contract in order to be
valid and enforceable must among other things indicate the definite price at which the person
granting the option is willing to sell.—The rule so early established in this jurisdiction is
that the deed of option or the option clause in a contract, in order to be valid and
enforceable, must, among other things, indicate the
____________________________
*EN BANC.
484
4 SUPREME COURT REPORTS ANNOTATED
84
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
definite price at which the person granting the option, is willing to sell.
Same; Same; Same; An accepted unilateral promise which specifies the thing to be sold
and the price to be paid when coupled with a valuable consideration distinct and separate
from the price is what may properly be termed a perfected contract of option.—An accepted
unilateral promise which specifies the thing to be sold and the price to be paid, when
coupled with a valuable consideration distinct and separate from the price, is what may
properly be termed a perfected contract of option. This contract is legally binding, and in
sales, it conforms with the second paragraph of Article 1479 of the Civil Code, viz: ‘ART.
1479. x x x An accepted unilateral promise to buy or to sell a determinate thing for a price
certain is binding upon the promisor if the promise is supported by a consideration distinct
from the price.
Same; Same; Same; The option is not the contract of sale itself.—Observe, however,
that the option is not the contract of sale itself. The optionee has the right, but not the
obligation, to buy. Once the option is exercised timely, i.e., the offer is accepted before a
breach of the option, a bilateral promise to sell and to buy ensues and both parties are then
reciprocally bound to comply with their respective undertakings.
Same; Same; Same; Respondent Court of Appeals correctly ruled that paragraph 8
grants the right of first refusal to Mayfair and is not an option contract.—In the light of the
foregoing disquisition and in view of the wording of the questioned provision in the two
lease contracts involved in the instant case, we so hold that no option to purchase in
contemplation of the second paragraph of Article 1479 of the Civil Code, has been granted to
Mayfair under the said lease contracts. Respondent Court of Appeals correctly ruled that
the said paragraph 8 grants the right of first refusal to Mayfair and is not an option
contract. It also correctly reasoned that as such, the requirement of a separate consideration
for the option, has no applicability in the instant case.
Same; Same; Same; An option is a contract granting a privilege to buy or sell within
an agreed time and at a determined price.—An option is a contract granting a privilege to
buy or sell within an agreed time and at a determined price. It is a separate and distinct
485
Sales 7-9
VOL. 264, NOVEMBER 21, 1996 485
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
contract from that which the parties may enter into upon the consummation of the
option. It must be supported by consideration. In the instant case, the right of first refusal is
an integral part of the contracts of lease. The consideration is built into the reciprocal
obligations of the parties.
Same; Same; Same; Rescission; Rescission is a relief allowed for the protection of one
of the contracting parties and even third persons from all injury and damage the contract
may cause or to protect some incompatible and preferred right by the contract.—The facts of
the case and considerations of justice and equity require that we order rescission here and
now. Rescission is a relief allowed for the protection of one of the contracting parties and
even third persons from all injury and damage the contract may cause or to protect some
incompatible and preferred right by the contract. The sale of the subject real property by
Carmelo to Equatorial should now be rescinded considering that Mayfair, which had
substantial interest over the subject property, was prejudiced by the sale of the subject
property to Equatorial without Carmelo conferring to Mayfair every opportunity to
negotiate within the 30-day stipulated period.
PADILLA, J., Separate Opinion:
Civil Law; Contracts; Sales; Court should categorically recognize Mayfair’s right of
first refusal under its contract of lease with Carmelo and Bauermann, Inc. and order the
rescission of the sale of the Claro M. Recto property by the latter to Equatorial.—I am of the
considered view (like Mr. Justice Jose A. R. Melo) that the Court in this case should
categorically recognize Mayfair’s right of first refusal under its contract of lease with
Carmelo and Bauermann, Inc. (hereafter, Carmelo) and, because of Carmelo’s and
Equatorial’s bad faith in riding “roughshod” over Mayfair’s right of first refusal, the Court
should order the rescission of the sale of the Claro M. Recto property by the latter to
Equatorial (Art. 1380-1381[3], Civil Code). The Court should, in this same case, to avoid
multiplicity of suits, likewise allow Mayfair to effectively exercise said right of first refusal,
by paying Carmelo the sum of P11,300,000.00 for the entire subject property, without any
need of instituting a separate action for damages against Carmelo and/or Equatorial.
486
4 SUPREME COURT REPORTS ANNOTATED
86
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
Same; Same; Same; There appears no basis in law for adding 12% per annum
compounded interest to the purchase price of P11,300,000.00 payable by Mayfair to
Carmelo.—There appears to be no basis in law for adding 12% per annum compounded
interest to the purchase price of P11,300,000.00 payable by Mayfair to Carmelo since there
was no such stipulation in writing between the parties (Mayfair and Carmelo) but, more
importantly, because Mayfair neither incurred in delay in the performance of its obligation
nor committed any breach of contract. Indeed, why should Mayfair be penalized by way of
making it pay 12% per annum compounded interest when it was Carmelo which violated
Mayfair’s right of first refusal under the contract?
VITUG, J., Dissenting Opinion:
Civil Law; Contracts: Sales;A right of first refusal cannot have the effect of a contract
because by its very essence certain basic terms would have yet to be determined and fixed.—
An obligation, and so a conditional obligation as well (albeit subject to the occurrence of the
condition), in its context under Book IV of the Civil Code, can only be “a juridical necessity
10

to give, to do or not to do” (Art. 1156, Civil Code), and one that is constituted by law,
contracts, quasi-contracts, delicts and quasi-delicts (Art. 1157, Civil Code) which all have
their respective legal significance rather well settled in law. The law certainly must have
meant to provide congruous, albeit contextual, consequences to its provisions. Interpretare et
concordore legibus est optimus interpretendi. As a valid source of an obligation, a contract
must have the concurrence of (a) consent of the contracting parties, (b) object certain(subject
matter of the contract) and (c) cause (Art. 1318, Civil Code). These requirements, clearly
defined, are essential. The consent contemplated by the law is that which is manifested by
the meeting of the offer and of the acceptance upon the object and the cause of the obligation.
The offer must be certain and the acceptance absolute (Article 1319 of the Civil Code). Thus,
a right of first refusal cannot have the effect of a contract because, by its very essence, certain
basic terms would have yet to be determined and fixed.
PETITION for review of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
487
VOL. 264, NOVEMBER 21, 1996 487
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
Romulo, Mabanta, Buenaventura, Sayoc & De los Angelesfor Equitorial Realty Dev., Inc.
Emilio S. Samson, E. Balderrama-Samson and Mary Ann B. Samson for Carmelo &
Bauermann, Inc.
Antonio P. Barredoand De Borja, Medialdea, Ata, Bello, Guevarra & Serapio for
respondent.
HERMOSISIMA, JR., J.:
Before us is a petition for review of the decision1 of the Court of Appeals2 involving questions
in the resolution of which the respondent appellate court analyzed and interpreted
particular provisions of our laws on contracts and sales. In its assailed decision, the
respondent court reversed the trial court3 which, in dismissing the complaint for specific
performance with damages and annulment of contract, 4 found the option clause in the lease
contracts entered into by private respondent Mayfair Theater, Inc. (hereafter, Mayfair) and
petitioner Carmelo & Bauermann, Inc. (hereafter, Carmelo) to be impossible of performance
and unsupported by a consideration and the subsequent sale of the subject property to
petitioner Equatorial Realty Development, Inc. (hereafter, Equatorial) to have been made
without any breach of or prejudice to, the said lease contracts. 5
We reproduce below the facts as narrated by the respondent court, which narration, we
note, is almost verbatim the
____________________________
1 Decision in CA-G.R. CV No. 32918 penned by Justice Manuel Herrera, promulgated on
June 23, 1992; Rollo, pp. 37-54.
2 Twelfth Division composed of the following members: Associate Justices Manuel
Herrera, Nicolas Lapena, Jr., and Maria Alicia Austria.
3 Regional Trial Court, Branch VII, Manila, presided by Judge Alfredo Cantos.
4 Docketed as Civil Case No. 118019, entitled, “Mayfair Theater, Inc. vs. Carmelo &
Bauermann, Inc., et al.”
5 Decision of the RTC in Civil Case No. 118019; Rollo, pp. 241-248.
488
488 SUPREME COURT REPORTS ANNOTATED
Sales 7-9
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
basis of the statement of facts as rendered by the petitioners in their pleadings:
“Carmelo owned a parcel of land, together with two 2-storey buildings constructed thereon
located at Claro M. Recto Avenue, Manila, and covered by TCT No. 18529 issued in its name
by the Register of Deeds of Manila.
On June 1, 1967 Carmelo entered into a contract of lease with Mayfair for the latter’s
lease of a portion of Carmelo’s property particularly described, to wit:
‘A PORTION OF THE SECOND FLOOR of the two-storey building, situated at C.M. Recto
Avenue, Manila, with a floor area of 1,610 square meters.
THE SECOND FLOOR AND MEZZANINE of the two-storey building, situated at C.M.
Recto Avenue, Manila, with a floor area of 150 square meters,’
for use by Mayfair as a motion picture theater and for a term of twenty (20) years.
Mayfair thereafter constructed on the leased property a movie house known as ‘Maxim
Theatre.’
Two years later, on March 31, 1969, Mayfair entered into a second contract of lease with
Carmelo for the lease of another portion of Carmelo’s property, to wit:
‘A PORTION OF THE SECOND FLOOR of the two-storey building, situated at C.M. Recto
Avenue, Manila, with a floor area of 1,064 square meters.
THE TWO (2) STORE SPACES AT THE GROUND FLOOR and MEZZANINE of the
two-storey building situated at C.M. Recto Avenue, Manila, with a floor area of 300 square
meters and bearing street numbers 1871 and 1875,’
for similar use as a movie theater and for a similar term of twenty (20) years. Mayfair
put up another movie house known as ‘Miramar Theatre’ on this leased property.
Both contracts of lease provides (sic) identically worded paragraph 8, which reads:
‘That if the LESSOR should desire to sell the leased premises, the LESSEE shall be given
30-days exclusive option to purchase the same.
489
VOL. 264, NOVEMBER 21, 1996 489
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
In the event, however, that the leased premises is sold to someone other than the
LESSEE, the LESSOR is bound and obligated, as it hereby binds and obligates itself, to
stipulate in the Deed of Sale thereof that the purchaser shall recognize this lease and be
bound by all the terms and conditions thereof.’
Sometime in August 1974, Mr. Henry Pascal of Carmelo informed Mr. Henry Yang,
President of Mayfair, through a telephone conversation that Carmelo was desirous of selling
the entire Claro M. Recto property. Mr. Pascal told Mr. Yang that a certain Jose Araneta
was offering to buy the whole property for US Dollars 1,200,000, and Mr. Pascal asked Mr.
Yang if the latter was willing to buy the property for Six to Seven Million Pesos.
Mr. Yang replied that he would let Mr. Pascal know of his decision. On August 23, 1974,
Mayfair replied through a letter stating as follows:
‘It appears that on August 19, 1974 your Mr. Henry Pascal informed our client’s Mr. Henry
Yang through the telephone that your company desires to sell your above-mentioned C.M.
Recto Avenue property.
Under your company’s two lease contracts with our client, it is uniformly provided:
‘8. That if the LESSOR should desire to sell the leased premises the LESSEE shall be
given 30-days exclusive option to purchase the same. In the event, however, that the leased
premises is sold to someone other than the LESSEE, the LESSOR is bound and obligated,
as it is (sic) herebinds (sic) and obligates itself, to stipulate in the Deed of Sale thereof that
the purchaser shall recognize this lease and be bound by all the terms and conditions hereof
(sic).’
Carmelo did not reply to this letter.
On September 18, 1974, Mayfair sent another letter to Carmelo purporting to express
interest in acquiring not only the leased premises but ‘the entire building and other
11

improvements if the price is reasonable. However, both Carmelo and Equatorial questioned
the authenticity of the second letter.
Four years later, on July 30, 1978, Carmelo sold its entire C.M. Recto Avenue land and
building, which included the leased premises housing the ‘Maxim’ and ‘Miramar’ theatres,
to Equatorial
490
490 SUPREME COURT REPORTS ANNOTATED
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
by virtue of a Deed of Absolute Sale, for the total sum of P11,300,000.00.
In September 1978, Mayfair instituted the action a quo for specific performance and
annulment of the sale of the leased premises to Equatorial. In its Answer, Carmelo alleged
as special and affirmative defense (a) that it had informed Mayfair of its desire to sell the
entire C.M. Recto Avenue property and offered the same to Mayfair, but the latter answered
that it was interested only in buying the areas under lease, which was impossible since the
property was not a condominium; and (b) that the option to purchase invoked by Mayfair is
null and void for lack of consideration. Equatorial, in its Answer, pleaded as special and
affirmative defense that the option is void for lack of considertion (sic) and is unenforceable
by reason of its impossibility of performance because the leased premises could not be sold
separately from the other portions of the land and building. It counterclaimed for
cancellation of the contracts of lease, and for increase of rentals in view of alleged
supervening extraordinary devaluation of the currency. Equatorial likewise cross-claimed
against co-defendant Carmelo for indemnification in respect of Mayfair’s claims.
During the pre-trial conference held on January 23, 1979, the parties stipulated on the
following:
1. ‘1.That there was a deed of sale of the contested premises by the defendant
Carmelo x x x in favor of defendant Equatorial x x x;
2. 2.That in both contracts of lease there appear (sic) the stipulation granting the
plaintiff exclusive option to purchase the leased premises should the lessor
desire to sell the same (admitted subject to the contention that the stipulation is
null and void);
3. 3.That the two buildings erected on this land are not of the condominium plan;
4. 4.That the amounts stipulated and mentioned in paragraphs 3(a) and (b) of the
contracts of lease constitute the consideration for the plaintiff’s occupancy of the
leased premises, subject of the same contracts of lease, Exhibits A and B;
5. x x x xxx xxx
6. 6.That there was no consideration specified in the option to buy embodied in the
contract;
491
VOL. 264, NOVEMBER 21, 1996 491
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
1. 7.That Carmelo & Bauermann owned the land and the two buildings erected
thereon;
2. 8.That the leased premises constitute only the portions actually occupied by the
theaters; and
3. 9.That what was sold by Carmelo & Bauermann to defendant Equatorial Realty is
the land and the two buildings erected thereon.’
4. x x x xxx xxx
Sales 7-9
After assessing the evidence, the court a quo rendered the appealed decision, the
decretal portion of which reads as follows:
‘WHEREFORE, judgment is hereby rendered:
1. (1)Dismissing the complaint with costs against the plaintiff;
2. (2)Ordering plaintiff to pay defendant Carmelo & Bauermann P40,000.00 by way
of attorney’s fees on its counter-claim;
3. (3)Ordering plaintiff to pay defendant Equatorial Realty P35,000.00 per month as
reasonable compensation for the use of areas not covered by the contract (sic) of
lease from July 31, 1979 until plaintiff vacates said area (sic) plus legal interest
from July 31, 1978; P70,000.00 per month as reasonable compensation for the
use of the premises covered by the contracts (sic) of lease dated (June 1, 1967
from June 1, 1987 until plaintiff vacates the premises plus legal interest from
June 1, 1987; P55,000.00 per month as reasonable compensation for the use of
the premises covered by the contract of lease dated March 31, 1969 from March
30, 1989 until plaintiff vacates the premises plus legal interest from March 30,
1989; and P40,000.00 as attorney’s fees;
4. (4)Dismissing defendant Equatorial’s crossclaim against defendant Carmelo &
Bauermann.
The contracts of lease dated June 1, 1967 and March 31, 1969 are declared expired and
all persons claiming rights under these contracts are directed to vacate the premises.’ ”6
____________________________
6Decision of the Court of Appeals in CA-G.R. No. 32918, supra, pp. 1-7; Rollo, pp. 37-43.
492
492 SUPREME COURT REPORTS ANNOTATED
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
The trial court adjudged the identically worded paragraph 8 found in both aforecited lease
contracts to be an option clause which however cannot be deemed to be binding on Carmelo
because of lack of distinct consideration therefor.
The court a quoratiocinated:
“Significantly, during the pre-trial, it was admitted by the parties that the option in the
contract of lease is not supported by a separate consideration. Without a consideration, the
option is therefore not binding on defendant Carmelo & Bauermann to sell the C.M. Recto
property to the former. The option invoked by the plaintiff appears in the contracts of lease
x x x in effect there is no option, on the ground that there is no consideration. Article 1352 of
the Civil Code, provides:
‘Contracts without cause or with unlawful cause, produce no effect whatever. The cause is
unlawful if it is contrary to law, morals, good custom, public order or public policy.’
Contracts therefore without consideration produce no effect whatsoever. Article 1324
provides:
‘When the offeror has allowed the offeree a certain period to accept, the offer may be
withdrawn at any time before acceptance by communicating such withdrawal, except when
the option is founded upon consideration, as something paid or promised.’
in relation with Article 1479 of the same Code:
‘A promise to buy and sell a determinate thing for a price certain is reciprocally
demandable.
An accepted unilateral promise to buy or to sell a determinate thing for a price certain
is binding upon the promisor if the promise is supported by a consideration distinct from the
price.’
12

The plaintiff cannot compel defendant Carmelo to comply with the promise unless the
former establishes the existence of a distinct consideration. In other words, the promisee
has the burden of proving the consideration. The consideration cannot be presumed as in
Article 1354:
493
VOL. 264, NOVEMBER 21, 1996 493
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
‘Although the cause is not stated in the contract, it is presumed that it exists and is lawful
unless the debtor proves the contrary.’
where consideration is legally presumed to exist. Article 1354 applies to contracts in
general, whereas when it comes to an option it is governed particularly and more
specifically by Article 1479 whereby the promisee has the burden of proving the existence of
consideration distinct from the price. Thus, in the case of Sanchez vs. Rigor, 45 SCRA 368,
372-373, the Court said:
1. ‘(1)Article 1354 applies to contracts in general, whereas the second paragraph of
Article 1479 refers to sales in particular, and, more specifically, to an accepted
unilateral promise to buy or to sell. In other words, Article 1479 is controlling in
the case at bar.
2. (2)In order that said unilateral promise may be binding upon the promisor, Article
1479 requires the concurrence of a condition, namely, that the promise be
supported by a consideration distinct from the price.
Accordingly, the promisee cannot compel the promisor to comply with the promise, unless
the former establishes the existence of said distinct consideration. In other words, the
promisee has the burden of proving such consideration. Plaintiff herein has not even alleged
the existence thereof in his complaint.’7
It follows that plaintiff cannot compel defendant Carmelo & Bauermann to sell the C.M.
Recto property to the former.”
Mayfair taking exception to the decision of the trial court, the battleground shifted to the
respondent Court of Appeals. Respondent appellate court reversed the court a quo and
rendered judgment:
1. “1.Reversing and setting aside the appealed Decision;
2. 2.Directing the plaintiff-appellant Mayfair Theater, Inc. to pay and return to
Equatorial the amount of P11,300,000.00 within
____________________________
7Decision of the RTC, supra;Rollo, pp. 244-246.
494
494 SUPREME COURT REPORTS ANNOTATED
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
1. fifteen (15) days from notice of this Decision, and ordering Equatorial Realty
Development, Inc. to accept such payment;
2. 3.Upon payment of the sum of P11,300,000, directing Equatorial Realty
Development, Inc. to execute the deeds and documents necessary for the
issuance and transfer of ownership to Mayfair of the lot registered under TCT
Nos. 17350, 118612, 60936, and 52571; and
Sales 7-9
3. 4.Should plaintiff-appellant Mayfair Theater, Inc. be unable to pay the amount as
adjudged, declaring the Deed of Absolute Sale between the defendants-
appellants Carmelo & Bauermann, Inc. and Equatorial Realty Development, Inc.
as valid and binding upon all the parties.”8
Rereading the law on the matter of sales and option contracts, respondent Court of Appeals
differentiated between Article 1324 and Article 1479 of the Civil Code, analyzed their
application to the facts of this case, and concluded that since paragraph 8 of the two lease
contracts does not state a fixed price for the purchase of the leased premises, which is an
essential element for a contract of sale to be perfected, what paragraph 8 is, must be a right
of first refusal and not an option contract. It explicated:
“Firstly, the court a quo misapplied the provisions of Articles 1324 and 1479, second
paragraph, of the Civil Code.
Article 1324 speaks of an ‘offer’ made by an offeror which the offeree may or may not
accept within a certain period. Under this article, the offer may be withdrawn by the offeror
before the expiration of the period and while the offeree has not yet accepted the offer.
However, the offer cannot be withdrawn by the offeror within the period if a consideration
has been promised or given by the offeree in exchange for the privilege of being given that
period within which to accept the offer. The consideration is distinct from the price which is
part of the offer. The contract that arises is known as option. In the case of Beaumont vs.
Prieto, 41 Phil. 670, the Supreme Court, citing Bouvier, defined an option as follows: ‘A
contract by virtue of which A, in consideration of the payment of a certain sum to B,
acquires the privilege of buying from or selling to
___________________
8Decision of the Court of Appeals, p. 18; Rollo, p. 54.
495
VOL. 264, NOVEMBER 21, 1996 495
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
B, certain securities or properties within a limited time at a specified price.’ (pp. 686-7).
Article 1479, second paragraph, on the other hand, contemplates of an ‘accepted
unilateral promise to buy or to sell a determinate thing for a price within (which) is binding
upon the promisee if the promise is supported by a consideration distinct from the price.’
That ‘unilateral promise to buy or to sell a determinate thing for a price certain’ is called an
offer. An ‘offer,’ in law, is a proposal to enter into a contract (Rosenstock vs. Burke, 46 Phil.
217). To constitute a legal offer, the proposal must be certain as to the object, the price and
other essential terms of the contract (Art. 1319, Civil Code).
Based on the foregoing discussion, it is evident that the provision granting Mayfair ‘30-
days exclusive option to purchase’ the leased premises is NOT AN OPTION in the context of
Arts. 1324 and 1479, second paragraph, of the Civil Code. Although the provision is certain
as to the object (the sale of the leased premises) the price for which the object is to be sold is
not stated in the provision. Otherwise stated, the questioned stipulation is not, by itself, an
‘option’ or the ‘offer to sell’ because the clause does not specify the price for the subject
property.
Although the provision giving Mayfair ‘30-days exclusive option to purchase’ cannot be
legally categorized as an option, it is, nevertheless, a valid and binding stipulation. What
the trial court failed to appreciate was the intention of the parties behind the questioned
proviso.
xxx xxx xxx
The provision in question is not of the pro-forma type customarily found in a contract of
lease. Even appellees have recognized that the stipulation was incorporated in the two
Contracts of Lease at the initiative and behest of Mayfair. Evidently, the stipulation was
13

intended to benefit and protect Mayfair in its rights as lessee in case Carmelo should decide,
during the term of the lease, to sell the leased property. This intention of the parties is
achieved in two ways in accordance with the stipulation. The first is by giving Mayfair
‘30days exclusive option to purchase’ the leased property. The second is, in case Mayfair
would opt not to purchase the leased property, ‘that the purchaser (the new owner of the
leased property) shall recognize the lease and be bound by all the terms and conditions
thereof.’
496
496 SUPREME COURT REPORTS ANNOTATED
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
In other words, paragraph 8 of the two Contracts of Lease, particularly the stipulation
giving Mayfair ‘30-days exclusive option to purchase the (leased premises),’ was meant to
provide Mayfair the opportunity to purchase and acquire the leased property in the event
that Carmelo should decide to dispose of the property. In order to realize this intention, the
implicit obligation of Carmelo once it had decided to sell the leased property, was not only to
notify Mayfair of such decision to sell the property, but, more importantly, to make an offer
to sell the leased premises to Mayfair, giving the latter a fair and reasonable opportunity to
accept or reject the offer, before offering to sell or selling the leased property to third parties.
The right vested in Mayfair is analogous to the right of first refusal, which means that
Carmelo should have offered the sale of the leased premises to Mayfair before offering it to
other parties, or, if Carmelo should receive any offer from third parties to purchase the
leased premises, then Carmelo must first give Mayfair the opportunity to match that offer.
In fact, Mr. Pascal understood the provision as giving Mayfair a right of first refusal
when he made the telephone call to Mr. Yang in 1974. Mr. Pascal thus testified:
‘Q. Can you tell this Honorable Court how you made the offer to Mr. Henry Yang by telephone?
A. I have an offer from another party to buy the property and having the offer we decided to
make an offer to Henry Yang on a first-refusal basis.’ (TSN, November 8, 1983, p. 12.).
and on cross-examination:
‘Q. When you called Mr. Yang on August 1974 can you remember exactly what you have told
him in connection with that matter, Mr. Pascal?
A. More or less, I told him that I received an offer from another party to buy the property and I
was offering him first choice of the entire property.’ (TSN, November 29, 1983, p. 18).
We rule, therefore, that the foregoing interpretation best renders effectual the intention of
the parties.”9
____________________________
9Ibid., pp. 12-15; Rollo, pp. 48-51.
497
VOL. 264, NOVEMBER 21, 1996
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
Besides the ruling that paragraph 8 vests in Mayfair the right of first refusal as to which
the requirement of distinct consideration indispensable in an option contract, has no
application, respondent appellate court also addressed the claim of Carmelo and Equatorial
that assuming arguendo that the option is valid and effective, it is impossible of
performance because it covered only the leased premises and not the entire Claro M. Recto
property, while Carmelo’s offer to sell pertained to the entire property in question. The
Court of Appeals ruled as to this issue in this wise:
Sales 7-9
“We are not persuaded by the contentions of the defendants-appellees. It is to be noted that
the Deed of Absolute Sale between Carmelo and Equatorial covering the whole Claro M.
Recto property, made reference to four titles: TCT Nos. 17350, 118612, 60936 and 52571.
Based on the information submitted by Mayfair in its appellant’s Brief (pp. 5 and 46) which
has not been controverted by the appellees, and which We, therefore, take judicial notice of
the two theaters stand on the parcels of land covered by TCT No. 17350 with an area of
622.10 sq. m. and TCT No. 118612 with an area of 2,100.10 sq. m. The existence of four
separate parcels of land covering the whole Recto property demonstrates the legal and
physical possibility that each parcel of land, together with the buildings and improvements
thereon, could have been sold independently of the other parcels.
At the time both parties executed the contracts, they were aware of the physical and
structural conditions of the buildings on which the theaters were to be constructed in
relation to the remainder of the whole Recto property. The peculiar language of the
stipulation would tend to limit Mayfair’s right under paragraph 8 of the Contract of Lease to
the acquisition of the leased areas only. Indeed, what is being contemplated by the
questioned stipulation is a departure from the customary situation wherein the buildings
and improvements are included in and form part of the sale of the subjacent land. Although
this situation is not common, especially considering the non-condominium nature of the
buildings, the sale would be valid and capable of being performed. A sale limited to the
leased premises only, if hypothetically assumed, would have brought into operation the
provisions of co-ownership under which Mayfair would have become the exclusive owner of
the leased premises and
498
498 SUPREME COURT REPORTS ANNOTATED
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
at the same time a co-owner with Carmelo of the subjacent land in proportion to Mayfair’s
interest over the premises sold to it.”10
Carmelo and Equatorial now comes before us questioning the correctness and legal basis for
the decision of respondent Court of Appeals on the basis of the following assigned errors:
“I
THE COURT OF APPEALS GRAVELY ERRED IN CONCLUDING THAT THE OPTION
CLAUSE IN THE CONTRACTS OF LEASE IS ACTUALLY A RIGHT OF FIRST REFUSAL
PROVISO. IN DOING SO THE COURT OF APPEALS DISREGARDED THE CONTRACTS
OF LEASE WHICH CLEARLY AND UNEQUIVOCALLY PROVIDE FOR AN OPTION,
AND THE ADMISSION OF THE PARTIES OF SUCH OPTION IN THEIR STIPULATION
OF FACTS.
II
WHETHER AN OPTION OR RIGHT OF FIRST REFUSAL, THE COURT OF
APPEALS ERRED IN DIRECTING EQUATORIAL TO EXECUTE A DEED OF SALE
497
EIGHTEEN (18) YEARS AFTER MAYFAIR FAILED TO EXERCISE ITS OPTION (OR,
EVEN ITS RIGHT OF FIRST REFUSAL ASSUMING IT WAS ONE) WHEN THE
CONTRACTS LIMITED THE EXERCISE OF SUCH OPTION TO 30 DAYS FROM
NOTICE.
III
THE COURT OF APPEALS GRIEVOUSLY ERRED WHEN IT DIRECTED
IMPLEMENTATION OF ITS DECISION EVEN BEFORE ITS FINALITY, AND WHEN IT
14

GRANTED MAYFAIR A RELIEF THAT WAS NOT EVEN PRAYED FOR IN THE
COMPLAINT.
IV
THE COURT OF APPEALS VIOLATED ITS OWN INTERNAL RULES IN THE
ASSIGNMENT OF APPEALED CASES WHEN IT ALLOWED THE SAME DIVISION XII,
PARTICULARLY JUSTICE
499
VOL. 264, NOVEMBER 21, 1996 499
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
MANUEL HERRERA, TO RESOLVE ALL THE MOTIONS IN THE ‘COMPLETION
PROCESS’ AND TO STILL RESOLVE THE MERITS OF THE CASE IN THE ‘DECISION
STAGE.’ ”11
We shall first dispose of the fourth assigned error respecting alleged irregularities in the
raffle of this case in the Court of Appeals. Suffice it to say that in our Resolution, 12dated
December 9, 1992, we already took note of this matter and set out the proper applicable
procedure to be the following:
“On September 20, 1992, counsel for petitioner Equatorial Realty Development, Inc. wrote a
letter-complaint to this Court alleging certain irregularities and infractions committed by
certain lawyers, and Justices of the Court of Appeals and of this Court in connection with
case CA-G.R. CV No. 32918 (now G.R. No. 106063). This partakes of the nature of an
administrative complaint for misconduct against members of the judiciary. While the letter-
complaint arose as an incident in case CA-G.R. CV No. 32918(now G.R. No. 106063), the
disposition thereof should be separate and independent from Case G.R. No. 106063.
However, for purposes of receiving the requisite pleadings necessary in disposing of the
administrative complaint, this Division shall continue to have control of the case. Upon
completion thereof, the same shall be referred to the Court En Banc for proper
disposition.”13
This court having ruled the procedural irregularities raised in the fourth assigned error of
Carmelo and Equatorial, to be an independent and separate subject for an administrative
complaint based on misconduct by the lawyers and justices implicated therein, it is the
correct, prudent and consistent course of action not to pre-empt the administrative
proceedings to be undertaken respecting the said irregularities. Certainly, a discussion
thereupon by us in this case would entail a finding on the merits as to the real nature of the
questioned
____________________________
11 Petition dated July 16, 1992, pp. 8-9; Rollo, pp. 9-10; Joint Memorandum dated February
15, 1993, p. 9; Rollo, p. 481.
12 Rollo, pp. 416-417.
13 Resolution of the Second Division dated December 9, 1992, p. 2; Rollo, p. 417.
500
500 SUPREME COURT REPORTS ANNOTATED
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
procedures and the true intentions and motives of the players therein.
In essence, our task is two-fold: (1) to define the true nature, scope and efficacy of
paragraph 8 stipulated in the two contracts of lease between Carmelo and Mayfair in the
face of conflicting findings by the trial court and the Court of Appeals; and (2) to determine
Sales 7-9
the rights and obligations of Carmelo and Mayfair, as well as Equatorial, in the aftermath
of the sale by Carmelo of the entire Claro M. Recto property to Equatorial.
Both contracts of lease in question provide the identically worded paragraph 8, which
reads:
“That if the LESSOR should desire to sell the leased premises, the LESSEE shall be given
30-days exclusive option to purchase the same.
In the event, however, that the leased premises is sold to someone other than the
LESSEE, the LESSOR is bound and obligated, as it hereby binds and obligates itself, to
stipulate in the Deed of Sale thereof that the purchaser shall recognize this lease and be
bound by all the terms and conditions thereof.”14
We agree with the respondent Court of Appeals that the aforecited contractual stipulation
provides for a right of first refusal in favor of Mayfair. It is not an option clause or an option
contract. It is a contract of a right of first refusal.
As early as 1916, in the case of Beaumont vs. Prieto, 15 unequivocal was our
characterization of an option contract as one necessarily involving the choice granted to
another for a distinct and separate consideration as to whether or not to purchase a
determinate thing at a predetermined fixed price.
“It is unquestionable that, by means of the document Exhibit E, to wit, the letter of
December 4, 1911, quoted at the beginning of this decision, the defendant Valdes granted to
the plaintiff Borck the
____________________________
14Paragraph 2.4, Petition, pp. 3-4; Rollo, pp. 4-5.
1541 Phil. 670 (1916).
501
VOL. 264, NOVEMBER 21, 1996 501
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
right to purchase the Nagtajan Hacienda belonging to Benito Legarda, during the period of
three months and for its assessed valuation, a grant which necessarily implied the offer or
obligation on the part of the defendant Valdes to sell to Borck the said hacienda during the
period and for the price mentioned, x x x. There was, therefore, a meeting of minds on the
part of the one and the other, with regard to the stipulations made in the said document.
But it is not shown that there was any cause or consideration for that agreement, and this
omission is a bar which precludes our holding that the stipulations contained in Exhibit E is
a contract of option, for, x x x there can be no contract without the requisite, among others,
of the cause for the obligation to be established.
In his Law Dictionary, edition of 1897, Bouvier defines an option as a contract, in the
following language:
‘A contract by virtue of which A, in consideration of the payment of a certain sum to B,
acquires the privilege of buying from, or selling to B, certain securities or properties within
a limited time at a specified price. (Story vs. Salamon, 71 N.Y., 420.)’
From vol. 6, page 5001, of the work ‘Words and Phrases,’ citing the case of Ide vs. Leiser
(24 Pac., 695; 10 Mont., 5; 24 Am. St. Rep., 17) the following quotation has been taken:
‘An agreement in writing to give a person the option to purchase lands within a given
time at a named price is neither a sale nor an agreement to sell. It is simply a contract by
which the owner of property agrees with another person that he shall have the right to buy
his property at a fixed pricewithin a certain time. He does not sell his land; he does not then
agree to sell it; but he does sell something; that is, the right or privilege to buy at the
election or option of the other party. The second party gets in praesenti, not lands, nor an
agreement that he shall have lands, but he does get something of value; that is, the right to
call for and receive lands if he elects. The owner parts with his right to sell his lands, except
to the second party, for a limited period. The second party receives this right, or, rather,
from his point of view, he receives the right to elect to buy.’
15

But the two definitions abovecited refer to the contract of option, or, what amounts to
the same thing, to the case where there was cause or consideration for the obligation, the
subject of the
502
502 SUPREME COURT REPORTS ANNOTATED
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
agreement made by the parties; while in the case at bar there was no such cause or
consideration.”16 (Italics ours.)
The rule so early established in this jurisdiction is that the deed of option or the option
clause in a contract, in order to be valid and enforceable, must, among other things, indicate
the definite price at which the person granting the option, is willing to sell. Notably, in one
case we held that the lessee loses his right to buy the leased property for a named price per
square meter upon failure to make the purchase within the time specified; 17 in one other
case we freed the landowner from her promise to sell her land if the prospective buyer could
raise P4,500.00 in three weeks because such option was not supported by a distinct
consideration;18 in the same vein in yet one other case, we also invalidated an instrument
entitled, “Option to Purchase” a parcel of land for the sum of P1,510.00 because of lack of
consideration;19 and as an exception to the doctrine enumerated in the two preceding cases,
in another case, we ruled that the option to buy the leased premises for P12,000.00 as
stipulated in the lease contract, is not without consideration for in reciprocal contracts, like
lease, the obligation or promise of each party is the consideration for that of the other. 20 In
all these cases, the selling price of the object thereof is always predetermined and specified
in the option clause in the contract or in the separate deed of option. We elucidated, thus, in
the very recent case of Ang Yu Asuncion vs. Court of Appeals21 that:
“x x x. In sales, particularly, to which the topic for discussion about the case at bench
belongs, the contract is perfected when a
____________________________
16 Beaumont vs. Prieto, supra, pp. 686-687.
17 Tuason, Jr., etc. vs. de Asis, et al., 107 Phil. 131 (1960).
18 Mendoza vs. Comple, 15 SCRA 162.
19 Sanchez vs. Rigos, 45 SCRA 368(1972).
20 Vda. de Quirino vs. Palarca, 29 SCRA 1 (1969).
21 238 SCRA 602 (1994), pp. 611-614.
503
VOL. 264, NOVEMBER 21, 1996 503
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
person, called the seller, obligates himself, for a price certain, to deliver and to transfer
ownership of a thing or right to another, called the buyer, over which the latter agrees.
Article 1458 of the Civil Code provides:
‘Art. 1458. By the contract of sale one of the contracting parties obligates himself to
transfer the ownership of and to deliver a determinate thing, and the other to pay therefor a
price certain in money or its equivalent.
A contract of sale may be absolute or conditional.’
When the sale is not absolute but conditional, such as in a ‘Contract to Sell’ where
invariably the ownership of the thing sold is retained until the fulfillment of a positive
suspensive condition (normally, the full payment of the purchase price), the breach of the
condition will prevent the obligation to convey title from acquiring an obligatory force. x x x.
An unconditional mutual promise to buy and sell, as long as the object is made
determinate and the price is fixed, can be obligatory on the parties, and compliance
therewith may accordingly be exacted. An accepted unilateral promise which specifies the
thing to be sold and the price to be paid, when coupled with a valuable consideration
Sales 7-9
distinct and separate from the price, is what may properly be termed a perfected contract of
option. This contract is legally binding, and in sales, it conforms with the second paragraph
of Article 1479 of the Civil Code, viz:
‘ART. 1479. x x x
An accepted unilateral promise to buy or to sell a determinate thing for a price certain
is binding upon the promisor if the promise is supported by a consideration distinct from the
price. (1451a).’
Observe, however, that the option is not the contract of sale itself. The optionee has the
right, but not the obligation, to buy. Once the option is exercised timely, i.e., the offer is
accepted before a breach of the option, a bilateral promise to sell and to buy ensues and both
parties are then reciprocally bound to comply with their respective undertakings.
Let us elucidate a little. A negotiation is formally initiated by an offer. An imperfect
promise (policitacion) is merely an offer. Public advertisements or solicitations and the like
are ordinarily
504
504 SUPREME COURT REPORTS ANNOTATED
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
construed as mere invitations to make offers or only as proposals. These relations, until a
contract is perfected, are not considered binding commitments. Thus, at any time prior to
the perfection of the contract, either negotiating party may stop the negotiation. The offer,
at this stage, may be withdrawn; the withdrawal is effective immediately after its
manifestation, such as by its mailing and not necessarily when the offeree learns of the
withdrawal (Laudico vs. Arias, 43 Phil. 270). Where a period is given to the offeree within
which to accept the offer, the following rules generally govern:
1. (1)If the period is not itself founded upon or supported by a consideration, the
offeror is still free and has the right to withdraw the offer before its acceptance,
or, if an acceptance has been made, before the offeror’s coming to know of such
fact, by communicating that withdrawal to the offeree (see Art. 1324, Civil Code;
see also Atkins, Kroll & Co. vs. Cua, 102 Phil. 948, holding that this rule is
applicable to a unilateral promise to sell under Art. 1479, modifying the previous
decision in South Western Sugar vs. Atlantic Gulf, 97 Phil. 249; see also Art.
1319, Civil Code; Rural Bank of Parañaque, Inc. vs. Remolado, 135 SCRA 409;
Sanchez vs. Rigos, 45 SCRA 368). The right to withdraw, however, must not be
exercised whimsically or arbitrarily; otherwise, it could give rise to a damage
claim under Article 19 of the Civil Code which ordains that ‘every person must,
in the exercise of his rights and in the performance of his duties, act with justice,
give everyone his due, and observe honesty and good faith.’
2. (2)If the period has a separate consideration, a contract of ‘option’ is deemed
perfected, and it would be a breach of that contract to withdraw the offer during
the agreed period. The option, however, is an independent contract by itself, and
it is to be distinguished from the projected main agreement (subject matter of
the option) which is obviously yet to be concluded. If, in fact, the optioner-offeror
withdraws the offer before its acceptance (exercise of the option) by the optionee-
offeree, the latter may not sue for specific performance on the proposed contract
(‘object’ of the option) since it has failed to reach its own stage of perfection. The
optioner-offeror, however, renders himself liable for damages for breach of the
option. x x x.”
In the light of the foregoing disquisition and in view of the wording of the questioned
provision in the two lease contracts involved in the instant case, we so hold that no option to
505
VOL. 264, NOVEMBER 21, 1996 505
16

Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
purchase in contemplation of the second paragraph of Article 1479 of the Civil Code, has
been granted to Mayfair under the said lease contracts.
Respondent Court of Appeals correctly ruled that the said paragraph 8 grants the right
of first refusal to Mayfair and is not an option contract. It also correctly reasoned that as
such, the requirement of a separate consideration for the option, has no applicability in the
instant case.
There is nothing in the identical Paragraphs “8” of the June 1, 1967 and March 31, 1969
contracts which would bring them into the ambit of the usual offer or option requiring an
independent consideration.
An option is a contract granting a privilege to buy or sell within an agreed time and at a
determined price. It 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 consideration. 22 In
the instant case, the right of first refusal is an integral part of the contracts of lease. The
consideration is built into the reciprocal obligations of the parties.
To rule that a contractual stipulation such as that found in paragraph 8 of the contracts
is governed by Article 1324 on withdrawal of the offer or Article 1479 on promise to buy and
sell would render ineffectual or “inutile” the provisions on right of first refusal so commonly
inserted in leases of real estate nowadays. The Court of Appeals is correct in stating that
Paragraph 8 was incorporated into the contracts of lease for the benefit of Mayfair which
wanted to be assured that it shall be given the first crack or the first option to buy the
property at the price which Carmelo is willing to accept. It is not also correct to say that
there is no consideration in an agreement of right of first refusal. The stipulation is part and
parcel of the entire contract of lease. The consideration for the lease includes the
consideration for the right of first refusal.
____________________________
22Dela Cavade vs. Diaz, 37 Phil. 982 (1918); Beaumont vs. Prieto, 41 Phil. 670 (1916).
506
506 SUPREME COURT REPORTS ANNOTATED
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
Thus, Mayfair is in effect stating that it consents to lease the premises and to pay the price
agreed upon provided the lessor also consents that, should it sell the leased property, then,
Mayfair shall be given the right to match the offered purchase price and to buy the property
at that price. As stated in Vda. De Quirino vs. Palarca,23 in reciprocal contract, the
obligation or promise of each party is the consideration for that of the other.
The respondent Court of Appeals was correct in ascertaining the true nature of the
aforecited paragraph 8 to be that of a contractual grant of the right of first refusal to
Mayfair.
We shall now determine the consequential rights, obligations and liabilities of Carmelo,
Mayfair and Equatorial.
The different facts and circumstances in this case call for an amplification of the
precedent in Ang Yu Asuncion vs. Court of Appeals.24
First and foremost is that the petitioners acted in bad faith to render Paragraph 8
“inutile.”
What Carmelo and Mayfair agreed to, by executing the two lease contracts, was that
Mayfair will have the right of first refusal in the event Carmelo sells the leased premises. It
is undisputed that Carmelo did recognize this right of Mayfair, for it informed the latter of
its intention to sell the said property in 1974. There was an exchange of letters evidencing
the offer and counter-offers made by both parties. Carmelo, however, did not pursue the
exercise to its logical end. While it initially recognized Mayfair’s right of first refusal,
Carmelo violated such right when without affording its negotiations with Mayfair the full
Sales 7-9
process to ripen to at least an interface of a definite offer and a possible corresponding
acceptance within the “30-day exclusive option” time granted Mayfair, Carmelo abandoned
negotiations, kept a low profile for some time, and then sold, without prior notice to Mayfair,
the entire Claro M. Recto property to Equatorial.
____________________________
2329 SCRA 1 (1969).
24238 SCRA 602 (1994).
507
VOL. 264, NOVEMBER 21, 1996 507
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
Since Equatorial is a buyer in bad faith, this finding renders the sale to it of the property in
question rescissible. We agree with respondent Appellate Court that the records bear out
the fact that Equatorial was aware of the lease contracts because its lawyers had, prior to
the sale, studied the said contracts. As such, Equatorial cannot tenably claim to be a
purchaser in good faith, and, therefore, rescission lies.
“x x x 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 the
Bonnevies for they had substantial interests that were prejudiced by the sale of the subject
property to the petitioner without recognizing their right of first priority under 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 the protection of
one of the contracting parties and even third persons from all injury and damage the
contract may cause, or to protect some incompatible and preferent 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.
It is true that the acquisition by a third person of the property subject of the contract is
an obstacle to the action for its rescission where it is shown that such third person is in
lawful possession of the subject of the contract and that he did not act in bad faith.
However, this rule is not applicable in the case before us because the petitioner is not
considered a third party in relation to the Contract of Sale nor may its possession of the
subject property be regarded as acquired lawfully and in good faith.
Indeed, Guzman, Bocaling and Co. was the vendee in the Contract of Sale. Moreover,
the petitioner cannot be deemed a purchaser in good faith for the record shows that it
categorically admitted it was aware of the lease in favor of the Bonnevies, who were actually
occupying the subject property at the time it was sold to it. Although the Contract of Lease
was not annotated on the transfer certificate
508
508 SUPREME COURT REPORTS ANNOTATED
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
of title in the name of the late Jose Reynoso and Africa Reynoso, the petitioner cannot deny
actual knowledge of such lease which was equivalent to and indeed more binding than
presumed notice by registration.
A purchaser in good faith and for value is one who buys the property of another 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. Good faith connotes an honest intention to
abstain from taking unconscientious advantage of another. Tested by these principles, the
17

petitioner cannot tenably claim to be a buyer in good faith as it had notice of the lease of the
property by the Bonnevies and such knowledge should have cautioned it to look deeper into
the agreement to determine if it involved stipulations that would prejudice its own interests.
The petitioner insists that it was not aware of the right of first priority granted by the
Contract of Lease. Assuming this to be true, we nevertheless agree with the observation of
the respondent court that:
If Guzman-Bocaling failed to inquire about the terms of the Lease Contract, which includes
Par. 20 on priority right given to the Bonnevies, it had only itself to blame. Having known
that the property it was buying was under lease, it behooved it as a prudent person to have
required Reynoso or the broker to show to it the Contract of Lease in which Par. 20 is
contained.”25
Petitioners assert the alleged impossibility of performance because the entire property is
indivisible property. It was petitioner Carmelo which fixed the limits of the property it was
leasing out. Common sense and fairness dictate that instead of nullifying the agreement on
that basis, the stipulation should be given effect by including the indivisible appurtenances
in the sale of the dominant portion under the right of first refusal. A valid and legal contract
where the ascendant or the more important of the two parties is the landowner
____________________________
25Guzman, Bocaling & Co. vs. Bonnevie, 206 SCRA 668 (1992), pp. 675-677.
509
VOL. 264, NOVEMBER 21, 1996 509
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
should be given effect, if possible, instead of being nullified on a selfish pretext posited by
the owner. Following the arguments of petitioners and the participation of the owner in the
attempt to strip Mayfair of its rights, the right of first refusal should include not only the
property specified in the contracts of lease but also the appurtenant portions sold to
Equatorial which are claimed by petitioners to be indivisible. Carmelo acted in bad faith
when it sold the entire property to Equatorial without informing Mayfair, a clear violation
of Mayfair’s rights. While there was a series of exchanges of letters evidencing the offer and
counter-offers between the parties, Carmelo abandoned the negotiations without giving
Mayfair full opportunity to negotiate within the 30-day period.
Accordingly, even as it recognizes the right of first refusal, this Court should also order
that Mayfair be authorized to exercise its right of first refusal under the contract to include
the entirety of the indivisible property. The boundaries of the property sold should be the
boundaries of the offer under the right of first refusal. As to the remedy to enforce Mayfair’s
right, the Court disagrees to a certain extent with the concluding part of the dissenting
opinion of Justice Vitug. The doctrine enunciated in Ang Yu Asuncion vs. Court of
Appeals should be modified, if not amplified under the peculiar facts of this case.
As also earlier emphasized, the contract of sale between Equatorial and Carmelo is
characterized by bad faith, since it was knowingly entered into in violation of the rights of
and to the prejudice of Mayfair. In fact, as correctly observed by the Court of Appeals,
Equatorial admitted that its lawyers had studied the contract of lease prior to the sale.
Equatorial’s knowledge of the stipulations therein should have cautioned it to look further
into the agreement to determine if it involved stipulations that would prejudice its own
interests.
Since Mayfair has a right of first refusal, it can exercise the right only if the fraudulent
sale is first set aside or rescinded. All of these matters are now before us and so there should
be no piecemeal determination of this case and leave festering sores to deteriorate into
endless litigation. The facts of the
510
510 SUPREME COURT REPORTS ANNOTATED
Sales 7-9
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
case and considerations of justice and equity require that we order rescission here and now.
Rescission is a relief allowed for the protection of one of the contracting parties and even
third persons from all injury and damage the contract may cause or to protect some
incompatible and preferred right by the contract.26 The sale of the subject real property by
Carmelo to Equatorial should now be rescinded considering that Mayfair, which had
substantial interest over the subject property, was prejudiced by the sale of the subject
property to Equatorial without Carmelo conferring to Mayfair every opportunity to
negotiate within the 30-day stipulated period.27
This Court has always been against multiplicity of suits where all remedies according to
the facts and the law can be included. Since Carmelo sold the property for P11,300,000.00 to
Equatorial, the price at which Mayfair could have purchased the property is, therefore,
fixed. It can neither be more nor less. There is no dispute over it. The damages which
Mayfair suffered are in terms of actual injury and lost opportunities. The fairest solution
would be to allow Mayfair to exercise its right of first refusal at the price which it was
entitled to accept or reject which is P11,300,000.00. This is clear from the records.
To follow an alternative solution that Carmelo and Mayfair may resume negotiations
for the sale to the latter of the disputed property would be unjust and unkind to Mayfair
because it is once more compelled to litigate to enforce its right. It is not proper to give it an
empty or vacuous victory in this case. From the viewpoint of Carmelo, it is like asking a fish
if it would accept the choice of being thrown back into the river. Why should Carmelo be
rewarded for and allowed to profit from, its wrongdoing? Prices of real estate have
skyrocketed. After having sold the property for P11,300,000.00, why should it be given
another chance to sell it at an increased price?
____________________________
26Aquino vs. Tañedo, 39 Phil. 517.
27Guzman, Bocaling & Co. vs. Bonnevie, supra.
511
VOL. 264, NOVEMBER 21, 1996 511
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
Under the Ang Yu Asuncion vs. Court of Appeals decision, the Court stated that there was
nothing to execute because a contract over the right of first refusal belongs to a class of
preparatory juridical relations governed not by the law on contracts but by the codal
provisions on human relations. This may apply here if the contract is limited to the buying
and selling of the real property. However, the obligation of Carmelo to first offer the
property to Mayfair is embodied in a contract. It is Paragraph 8 on the right of first refusal
which created the obligation. It should be enforced according to the law on contracts instead
of the panoramic and indefinite rule on human relations. The latter remedy encourages
multiplicity of suits. There is something to execute and that is for Carmelo to comply with
its obligation to the property under the right of the first refusal according to the terms at
which they should have been offered then to Mayfair, at the price when that offer should
have been made. Also, Mayfair has to accept the offer. This juridical relation is not
amorphous nor is it merely preparatory. Paragraphs 8 of the two leases can be executed
according to their terms.
On the question of interest payments on the principal amount of P11,300,000.00, it
must be borne in mind that both Carmelo and Equatorial acted in bad faith. Carmelo
knowingly and deliberately broke a contract entered into with Mayfair. It sold the property
to Equatorial with purpose and intend to withhold any notice or knowledge of the sale
coming to the attention of Mayfair. All the circumstances point to a calculated and contrived
plan of non-compliance with the agreement of first refusal.
18

On the part of Equatorial, it cannot be a buyer in good faith because it bought the
property with notice and full knowledge that Mayfair had a right to or interest in the
property superior to its own. Carmelo and Equatorial took unconscientious advantage of
Mayfair.
Neither may Carmelo and Equatorial avail of considerations based on equity which
might warrant the grant of interests. The vendor received as payment from the vendee
what, at the time, was a full and fair price for the property. It
512
512 SUPREME COURT REPORTS ANNOTATED
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
has used the P11,300,000.00 all these years earning income or interest from the amount.
Equatorial, on the other hand, has received rents and otherwise profited from the use of the
property turned over to it by Carmelo. In fact, during all the years that this controversy was
being litigated, Mayfair paid rentals regularly to the buyer who had an inferior right to
purchase the property. Mayfair is under no obligation to pay any interests arising from this
judgment to either Carmelo or Equatorial.
WHEREFORE, the petition for review of the decision of the Court of Appeals, dated
June 23, 1992, in CA-G.R. CV No. 32918, is HEREBY DENIED. The Deed of Absolute Sale
between petitioners Equatorial Realty Development, Inc. and Carmelo & Bauermann, Inc. is
hereby deemed rescinded; petitioner Carmelo & Bauermann is ordered to return to
petitioner Equatorial Realty Development the purchase price. The latter is directed to
execute the deeds and documents necessary to return ownership to Carmelo & Bauermann
of the disputed lots. Carmelo & Bauermann is ordered to allow Mayfair Theater, Inc. to buy
the aforesaid lots for P11,300,000.00.
SO ORDERED.
Regalado, Davide, Jr., Bellosillo, Melo, Puno, Kapunan, Mendoza and Francisco,
JJ., concur.
Narvasa, C.J., No Part: related to interested party.
Padilla, J., See separate opinion.
Romero, J., Please see my concurring and dissenting opinion.
Vitug, J., Please see dissenting opinion.
Panganiban, J.,Please see separate concurring opinion.
Torres, Jr., J., I join Justice Jose Vitug in his dissent.
513
VOL. 264, NOVEMBER 21, 1996 513
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
SEPARATE OPINION
PADILLA, J.:
I am of the considered view (like Mr. Justice Jose A. R. Melo) that the Court in this case
should categorically recognize Mayfair’s right of first refusal under its contract of lease with
Carmelo and Bauermann, Inc. (hereafter, Carmelo) and, because of Carmelo’s and
Equatorial’s bad faith in riding “roughshod” over Mayfair’s right of first refusal, the Court
should order the rescission of the sale of the Claro M. Recto property by the latter to
Equatorial (Arts. 1380-1381[3], Civil Code). The Court should, in this same case, to avoid
multiplicity of suits, likewise allow Mayfair to effectively exercise said right of first refusal,
by paying Carmelo the sum of P11,300,000.00 for the entire subject property, without any
need of instituting a separate action for damages against Carmelo and/or Equatorial.
I do not agree with the proposition that, in addition to the aforesaid purchase price,
Mayfair should be required to pay a compounded interest of 12% per annum of said amount
Sales 7-9
computed from 1 August 1978. Under the Civil Code, a party to a contract may recover
interest as indemnity for damages in the following instances:
“Art. 2209. If the obligation consists in the payment of a sum of money, and the debtor
incurs in delay, the indemnity for damages, there being no stipulation to the contrary, shall
be the payment of the interest agreed upon, and in the absence of stipulation, the legal
interest, which is six per cent per annum.
Art. 2210. Interest may, in the discretion of the court, be allowed upon damages
awarded for breach of contract.”
There appears to be no basis in law for adding 12% per annum compounded interest to the
purchase price of P11,300,000.00 payable by Mayfair to Carmelo since there was no such
stipulation in writing between the parties (Mayfair and Carmelo) but, more importantly,
because Mayfair neither incurred in delay in the performance of its obligation
514
514 SUPREME COURT REPORTS ANNOTATED
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
nor committed any breach of contract. Indeed, why should Mayfair be penalized by way of
making it pay 12% per annum compounded interest when it was Carmelo which violated
Mayfair’s right of first refusal under the contract?
The equities of the case support the foregoing legal disposition. During the intervening
years between 1 August 1978 and this date, Equatorial (after acquiring the C.M. Recto
property for the price of P11,300,000.00) had been leasing the property and deriving rental
income therefrom. In fact, one of the lessees in the property was Mayfair. Carmelo had, in
turn, been using the proceeds of the sale, investment-wise and/or operation-wise in its own
business.
It may appear, at first blush, that Mayfair is unduly favored by the solution submitted
by this opinion, because the price of P11,300,000.00 which it has to pay Carmelo in the
exercise of its right of first refusal, has been subjected to the inroads of inflation so that its
purchasing power today is less than when the same amount was paid by Equatorial to
Carmelo. But then it cannot be overlooked that it was Carmelo’s breach of Mayfair’s right of
first refusal that prevented Mayfair from paying the price of P11,300,000.00 to Carmelo at
about the same time the amount was paid by Equatorial to Carmelo. Moreover, it cannot be
ignored that Mayfair had also incurred consequential or “opportunity” losses by reason of its
failure to acquire and use the property under its right of first refusal. In fine, any loss in
purchasing power of the price of P11,300,000.00 is for Carmelo to incur or absorb on account
of its bad faith in breaching Mayfair’s contractual right of first refusal to the subject
property.
ACCORDINGLY, I vote to order the rescission of the contract of sale between Carmelo
and Equatorial of the Claro M. Recto property in question, so that within thirty (30) days
from the finality of the Court’s decision, the property should be retransferred and delivered
by Equatorial to Carmelo with the latter simultaneously returning to Equatorial the sum of
P11,300,000.00.
I also vote to allow Mayfair to exercise its right of first refusal, by paying to Carmelo the
sum of P11,300,000.00
515
VOL. 264, NOVEMBER 21, 1996 515
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
without interest for the entire subject property, within thirty (30) days from re-acquisition
by Carmelo of the titles to the property, with the corresponding obligation of Carmelo to sell
and transfer the property to Mayfair within the same period of thirty (30) days.
SEPARATE CONCURRING OPINION
PANGANIBAN, J.:
19

In the main, I concur with the ponencia of my esteemed colleague, Mr. Justice Regino C.
Hermosisima, Jr., especially with the following doctrinal pronouncements:
1. 1.That while no option to purchase within the meaning of the second paragraph of
Article 1479 of the Civil Code was given to Mayfair Theater, Inc. (“Mayfair”),
under the two lease contracts a right of first refusal was in fact granted, for
which no separate consideration is required by law to be paid or given so as to
make it binding upon Carmelo & Bauermann, Inc. (“Carmelo”);
2. 2.That such right was violated by the latter when it sold the entire property to
Equatorial Realty Development, Inc. (“Equatorial”) on July 30, 1978, for the sum
of P11,300,000.00;
3. 3.That Equatorial is a buyer in bad faith as it was aware of the lease contracts, its
own lawyers having studied said contracts prior to the sale; and
4. 4.That, consequently, the contract of sale is rescissible.
5. 5.That, finally, under the proven facts, the right of first refusal may be enforced by
an action for specific performance.
There appears to be unanimity in the Court insofar as items 1, 2 and 3 above are concerned.
It is in items 4 and 5 that there is a marked divergence of opinion. Hence, I shall limit the
discussion in this Separate Concurring Opinion to
516
516 SUPREME COURT REPORTS ANNOTATED
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
such issues, namely: Is the contract of sale between Carmelo and Equatorial rescissible, and
corollarily, may the right of first refusal granted to Mayfair be enforced by an action for
specific performance?
It is with a great amount of trepidation that I respectfully disagree with the legal
proposition espoused by two equally well-respected colleagues, Mme. Justice Flerida Ruth P.
Romero and Mr. Justice Jose C. Vitug—who are both acknowledged authorities on Civil
Law—that a breach of the covenanted right of first refusal, while warranting a suit for
damages under Article 19 of the Civil Code, cannot sanction an action for specific
performance without thereby negating the indispensable element of consensuality in the
perfection of contracts.
Ang Yu Asuncion Not In Point
Such statement is anchored upon a pronouncement in Ang Yu Asuncion vs. CA,1which was
penned by Mr. Justice Vitug himself. I respectfully submit, however, that that case turned
largely on the issue of whether or not the sale of an immovable in breach of a right of first
refusal that had been decreed in a final judgment would justify the issuance of certain orders
of execution in the same case. The validity of said orders was the subject of the attack before
this Court. These orders had not only directed the defendants to execute a deed of sale in
favor of the plaintiffs, when there was nothing in the judgment itself decreeing it, but had
also set aside the sale made in breach of said right of first refusal and even canceled the title
that had been issued to the buyer, who was not a party to the suit and had obviously not
been given its day in court. It was thus aptly held:
“The final judgment in Civil Case No. 87-41058, it must be stressed, has merely accorded a
‘right of first refusal’ in favor of petitioners. The consequence of such a declaration entails no
more
____________________________
1238 SCRA 602, December 2, 1994.
517
Sales 7-9
VOL. 264, NOVEMBER 21, 1996 517
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
than what has heretofore been said. In fine, if, as it is here so conveyed to us, petitioners are
aggrieved by the failure of private respondents to honor the right of first refusal, the remedy
is not a writ of execution on the judgment, since there is none to execute, but an action for
damages in a proper forum for the purpose.
Furthermore, whether private respondent Buen Realty Development Corporation, the
alleged purchaser of the property, has acted in good faith or bad faith and whether or not it
should, in any case, be considered bound to respect the registration of the lis
pendens in Civil Case No. 87-41058 are matters that must be independently addressed in
appropriate proceedings. Buen Realty, not having been impleaded in Civil Case No. 87-
41058, cannot be held subject to the writ of execution issued by respondent Judge, let alone
ousted from the ownership and possession of the property, without first being duly afforded
its day in court.”2
In other words, the question of whether specific performance of one’s right of first refusal is
available as a remedy in case of breach thereof was not before the Supreme Court at
all in Ang Yu Asuncion. Consequently, the pronouncements there made bearing on such
unlitigated question were mere obiter. Moreover, as will be shown later, the pronouncement
that a breach of the right of first refusal would not sanction an action for specific
performance but only an action for damages (at p. 615) is at best debatable (and in my
humble view, imprecise or incorrect), on top of its being contradicted by extant
jurisprudence.
Worth bearing in mind is the fact that two juridical relations, both contractual, are
involved in the instant case: (1) the deed of sale between the petitioners dated July 30, 1978,
and (2) the contract clause establishing Mayfair’s right of first refusal which was violated by
said sale.
With respect to the sale of the property, Mayfair was not a party. It therefore had no
personality to sue for its annulment, since Art. 1397 of the Civil Code provides, inter
alia, that “(t)he action for the annulment of contracts may be insti-
__________________
2At pp. 615-616; italics supplied.
518
518 SUPREME COURT REPORTS ANNOTATED
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
tuted by all who are thereby obliged principally or subsidiarily.”
But the facts as alleged and proved clearly in the case at bar make out a case for
rescission under Art. 1177, in relation to Art. 1381(3), of the Civil Code, which pertinently
read as follows:
“Art. 1177. The creditors, after having pursued the property in possession of the debtor to
satisfy their claims, may exercise all the rights and bring all the actions of the latter for the
same purpose, save those which are inherent in his person; they may also impugn the acts
which the debtor may have done to defraud them.”
“Art. 1381. The following contracts are rescissible:
xxx xxx xxx
(3) Those undertaken in fraud of creditors when the latter cannot in any other manner
collect the claims due them;
xxx xxx x x x” (italics supplied)
The term “creditors” as used in these provisions of the Civil Code is broad enough to include
the obligee under an option contract3 as well as under a right of first refusal, sometimes
known as a right of first priority.4 Thus, in Nietes, the Supreme Court, speaking through
then Mr. Chief Justice Roberto Concepcion, repeatedly referred to the grantee or optionee as
20

“the creditor” and to the grantor or optioner as “the debtor.” 5 In any case, the personal
elements of an obligation are the active and passive subjects thereof, the former being
known as creditors or obligees and the latter as debtors or obligors.6 Insofar as the right of
first refusal is concerned, Mayfair is the obligee or creditor.
____________________________
Cf. Nietes vs. CA, 46 SCRA 654, 662, August 18, 1972.
3
Guzman, Bocaling & Co. vs. Bonnevie, 206 SCRA 668, March 2, 1992.
4
5 Supra, at p. 662.
6 Tolentino, Commentaries and Jurisprudence on the Civil Code of the Philippines, 1986
Ed., Vol. IV, pp. 54-55.
519
VOL. 264, NOVEMBER 21, 1996 519
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
As such creditor, Mayfair had, therefore, the right to impugn the sale in question by way
of accion paulianaunder the last clause of Art. 1177, aforequoted, because the sale was an
act done by the debtor to defraud him of his right to acquire the property. 7 Rescission was
also available under par. 3, Art. 1381, abovequoted, as was expressly held in Guzman,
Bocaling & Co., a case closely analogous to this one as it was also an action brought by the
lessee to enforce his “right of first priority”—which is just another name for the right of first
refusal—and to annul a sale made by the lessor in violation of such right. In said case, this
Court, speaking through Mr. Justice Isagani A. Cruz, affirmed the invalidation of the sale
and the enforcement of the lessee’s right of first priority this wise: 8
“The petitioner argues that assuming the Contract of Sale to be voidable, only the parties
thereto could bring an action to annul it pursuant to Article 1397 of the Civil Code. It is
stressed that private respondents are strangers to that agreement and therefore have no
personality to seek its annulment.
The respondent court correctly held that the Contract of Sale was not voidable
but rescissible. Under Article(s) 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 the Bonnevies for they had
substantial interests that were prejudiced by the sale of the subject property to the petitioner
without recognizing their right of first priority under the Contract of Lease.” (emphasis
supplied)
By the same token, the status of a defrauded creditor can, and should, be granted to
Mayfair, for it certainly had substantial interests that were prejudiced by the sale of the
subject property to petitioner Equatorial in open violation of Mayfair’s right of first refusal
under its existing contracts with Carmelo.
____________________________
7Id.,
p. 140.
8Supra, at p. 675.
520
520 SUPREME COURT REPORTS ANNOTATED
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
In fact, the parity between that case and the present one does not stop there but extends to
the crucial and critical fact that there was manifest bad faith on the part of the buyer. Thus,
in Guzman, this Court affirmed in toto the appealed judgment of the Court of Appeals
which, in turn, had affirmed the trial court’s decision insofar as it invalidated the deed of
sale in favor of the petitioner-buyer, cancelled its TCT, and ordered the lessor to execute a
Sales 7-9
deed of sale over the leased property in favor of the lessee for the same price and “under the
same terms and conditions,” aside from affirming as well the damages awarded, but at a
reduced amount.9 In other words, the aggrieved party was allowed to acquire the property
itself.
The inescapable conclusion from all of the foregoing is not only that rescission is the
proper remedy but also—and more importantly—that specific performance was actually
used and given free rein as an effective remedy to enforce a right of first refusal in the wake
of its violation, in the cited case of Guzman.
On the other hand, and as already commented on above, the pronouncement in Ang Yu
Asuncion to the effect that specific performance is unavailable to enforce a violated right of
first refusal is at best a debatable legal proposition, aside from being contradicted by extant
jurisprudence. Let me explain why.
The consensuality required for a contract of sale is distinct from, and should not be
confused with, the consensuality attendant to the right of first refusal itself. While indeed,
prior to the actual sale of the property to Equatorial and the filing of Mayfair’s complaint for
specific performance, no perfected contract of sale involving the property ever existed
between Carmelo as seller and Mayfair as buyer, there already was, in law and in fact, a
perfected contract between them which established a right of first refusal, or of first
priority.
____________________
9Supra, at pp. 672-673.
521
VOL. 264, NOVEMBER 21, 1996 521
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
Specific Performance Is Viable Remedy
The question is: Can this right (of first refusal) be enforced by an action for specific
performance upon a showing of its breach by an actual sale of the property under
circumstances showing palpable bad faith on the part of both seller and buyer?
The answer, I respectfully submit, should be ‘yes.’
As already noted, Mayfair’s right of first refusal in the case before us is embodied in an
express covenant in the lease contracts between it as lessee and Carmelo as lessor, hence
the right created is one springing from contract.10 Indubitably, this had the force of law
between the parties, who should thus comply with it in good faith.11Such right also
established a correlative obligation on the part of Carmelo to give or deliver to Mayfair a
formal offer of sale of the property in the event Carmelo decides to sell it.The decision to sell
was eventually made. But instead of giving or tendering to Mayfair the proper offer to sell,
Carmelo gave it to its now co-petitioner, Equatorial, with whom it eventually perfected and
consummated, on July 30, 1978, an absolute sale of the property, doing so within the period
of effectivity of Mayfair’s right of first refusal. Less than two months later, or in September
1978, with the lease still in full force, Mayfair filed the present suit.
Worth stressing at this juncture is the fact that Mayfair had the right to require that
the offer to sell the property be sent to it by Carmelo, and not to anybody else. This was
violated when the offer was made to Equatorial. Under its covenant with Carmelo, Mayfair
had the right, at that point, to sue for either specific performance or rescission, with
damages in either case, pursuant to Arts. 1165 and 1191, Civil
____________________________
10Art. 1157, par. 2, Civil Code.
11Arts. 1159 and 1315, Civil Code.
522
21

522 SUPREME COURT REPORTS ANNOTATED
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
Code.12 An action for specific performance and damages seasonably filed, fortified by a writ
of preliminary injunction, would have enabled Mayfair to prevent the sale to Equatorial from
taking place and to compel Carmelo to sell the property to Mayfair for the same terms and
price, for the reason that the filing of the action for specific performance may juridically be
considered as a solemn, formal, and unqualified acceptance by Mayfair of the specific terms
of the offer of sale. Note that by that time, the price and other terms of the proposed sale by
Carmelo had already been determined, being set forth in the offer of sale that
had wrongfully been directed to Equatorial.
As it turned out, however, Mayfair did not have a chance to file such suit, for it learned
of the sale to Equatorial only after it had taken place. But it did file the present action for
specific performance and for invalidation of the wrongful sale immediately after learning
about the latter act. The act of
____________________________
12“Art. 1165. When what is to be delivered is a determinate thing, the creditor, in
addition to the right granted him by Article 1170, may compel the debtor to make the
delivery.
If the thing is indeterminate or generic, he may ask that the obligation be complied with at
the expense of the debtor.
If the obligor delays, or has promised to deliver the same thing to two or more persons
who do not have the same interest, he shall be responsible for any fortuitous event until he
has effected the delivery.
.........
“Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of
the obligors should not comply with what is incumbent upon him.
The injured party may choose between the fulfillment and the rescission of the
obligation, with the payment of damages in either case. He may also seek rescission, even
after he has chosen fulfillment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing the
fixing of a period.
This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.”
523
VOL. 264, NOVEMBER 21, 1996 523
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
promptly filing this suit, coupled with the fact that it is one for specific performance,
indicates beyond cavil or doubt Mayfair’s unqualified acceptance of the misdirected offer of
sale, giving rise, thereby, to a demandable obligation on the part of Carmelo to execute the
corresponding document of sale upon the payment of the price of P11,300,000.00. In other
words, the principle of consensuality of a contract of sale should be deemed satisfied. The
aggrieved party’s consent to, or acceptance of, the misdirected offer of sale should be legally
presumed in the context of the proven facts.
To say, therefore, that the wrongful breach of a right of first refusal does not sanction
an action for specific performance simply because, factually, there was no meeting of the
minds as to the particulars of the sale since ostensibly no offer was ever made to, let alone
accepted by, Mayfair, is to ignore the proven fact of presumed consent. To repeat, that
consent was deemed given by Mayfair when it sued for invalidation of the sale and for
specific performance of Carmelo’s obligation to Mayfair. Nothing in the law as it now stands
will be violated, or even simply emasculated, by this holding. On the contrary, the decision
in Guzman supports it.
Sales 7-9
Moreover, under the Civil Code provisions on the nature, effect and kinds of
obligations,13 Mayfair’s right of first refusal may be classified as one subject to a suspensive
condition—namely, if Carmelo should decide to sell the leased premises during the life of
the lease contracts, then it should make an offer of sale to Mayfair. Futurity and
uncertainty, which are the essential characteristics of a condition, 14 were distinctly present.
Before the decision to sell was made, Carmelo had absolutely no obligation to sell the
property to Mayfair, nor even to make an offer to sell, because in conditional obligations,
where the condition is suspensive, the acquisition of rights depends upon the happening of
the event which
____________________________
13Chapters 2 and 3, Title I, Book IV of the Civil Code.
14Tolentino, Civil Code, 1991 Ed., Vol. IV, p. 144.
524
524 SUPREME COURT REPORTS ANNOTATED
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
constitutes the condition.15Had the decision to sell not been made at all, or had it been
made after the expiry of the lease, the parties would have stood as if the conditional
obligation had never existed.16 But the decision to sell was in fact made. And it was made
during the life and efficacy of the lease. Undoubtedly, the condition was duly fulfilled; the
right of first refusal effectively accrued and became enforceable; and correlatively, Carmelo’s
obligation to make and send the offer to Mayfair became immediately due and
demandable.17 That obligation was to deliver to Mayfair an offer to sell a determinate thing
for a determinate price. As things turned out, a definite and specific offer to sell the entire
property for the price of P11,300,000.00 was actually made by Carmelo—but to the wrong
party. It was that particular offer, and no other, which Carmelo should have delivered to
Mayfair, but failed to deliver. Hence, by the time the obligation of Carmelo accrued through
the fulfillment of the suspensive condition, the offer to sell had become a determinate thing.
Art. 1165 of the Civil Code, earlier quoted in footnote 12, indicates the remedies
available to the creditor against the debtor, when it provides that “(w)hen what is to be
delivered is a determinate thing, the creditor, in addition to the right granted him by Article
1170, may compel the debtor to make the delivery,” clearly authorizing not only the recovery
of damages under Art. 1170 but also an action for specific performance.
But even assuming that Carmelo’s prestation did not involve the delivery of a
determinate offer but only a generic one, the second paragraph of Art. 1165 explicitly gives
to the creditor the right “to ask that the obligation be complied with at the expense of the
debtor.” The availability of an action for
____________________________
Art. 1181, Civil Code; Wise & Co. vs. Kelly, 37 Phil. 696 (1918).
15
Gaite vs. Fonacier, 2 SCRA 830, July 31, 1961; Rose Packing Co., Inc. vs. Court of
16
Appeals, 167 SCRA 309, November 14, 1988.
17 Hermosa vs. Longara, 93 Phil. 977, 982 (1953).
525
VOL. 264, NOVEMBER 21, 1996 525
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
specific performance is thus clear and beyond doubt. And the correctness of Guzmanbecomes
all the more manifest.
Upon the other hand, the obiter in Ang Yu Asuncion is further weakened by the fact
that the jurisprudence upon which it supposedly rests—namely, the cases of Madrigal & Co.
22

vs. Stevenson & Co.18 and Salonga vs. Farrales 19—did NOT involve a right of first refusal or
of first priority. Nor did those two cases involve an option to buy. In Madrigal, plaintiff sued
defendant for damages claiming wrongful breach of an alleged contract of sale of 2,000 tons
of coal. The case was dismissed because “the minds of the parties never met upon a contract
of sale by defendant to plaintiff,”20each party having signed the broker’s memorandum as
buyer, erroneously thinking that the other party was the seller! In Salonga, a lessee, who
was one of several lessees ordered by final judgment to vacate the leased premises, sued the
lessor to compel the latter to sell the leased premises to him, but his suit was not founded
upon any right of first refusal and was therefore dismissed on the ground that there was no
perfected sale in his favor. He just thought that because the lessor had decided to sell and in
fact sold portions of the property to her other lessees, she was likewise obligated to sell to
him even in the absence of a perfected contract of sale. In fine, neither of the two cases cited
in support of the legal proposition that a breach of the right of first refusal does not sanction
an action for specific performance but, at best, only one for damages, provides such support.
Finally, the fact that what was eventually sold to Equatorial was the entire property,
not just the portions leased to Mayfair, is no reason to deprive the latter of its right to
receive a formal and specific offer. The offer of a larger property might have led Mayfair to
reject the offer, but until and unless such rejection was actually made, its right of first
refusal still stood. Upon the other hand, an acceptance by
____________________________
18 15 Phil. 38 (1910).
19 105 SCRA 359, July 10, 1981.
20 Supra, at p. 43.
526
526 SUPREME COURT REPORTS ANNOTATED
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
Mayfair would have saved all concerned the time, trouble, and expense of this protracted
litigation. In any case, the disquisition by the Court of Appeals on this point can hardly be
faulted; in fact, it amply justifies the conclusions reached in its decision, as well as the
dispositions made therein.
IN VIEW OF THE FOREGOING, I vote to DENY the petition and to AFFIRM the
assailed Decision.
CONCURRING AND DISSENTING OPINION
ROMERO, J.:
I share the opinion that the right granted to Mayfair Theater under the identical par. 8 of
the June 1, 1967 and March 31, 1969 contracts constitute a right of first refusal.
An option is a privilege granted to buy a determinate thing at a price certain within a
specified time and is usually supported by a consideration which is why, it may be regarded
as a contract in itself. The option results in a perfected contract of sale once the person to
whom it is granted decides to exercise it. The right of first refusal is unlike an option which
requires a certainty as to the object and consideration of the anticipated contract. When the
right of first refusal is exercised, there is no perfected contract of sale because the other
terms of the sale have yet to be determined. Hence, in case the offeror reneges on his
promise to negotiate with offeree, the latter may only recover damages in the belief that a
contract could have been perfected under Article 19 of the New Civil Code.
I beg to disagree, however, with the majority opinion that the contract of sale entered
into by Carmelo and Bauermann, Inc. and Equatorial Realty, Inc., should be rescinded.
Justice Hermosisima, in citing Art. 1381 (3) as ground for rescission apparently relied on
the case of Guzman, Bocaling and Co. v. Bonnevie(206 SCRA 668 [1992]) where the offeree
Sales 7-9
was likened to the status of a creditor. The case, in citing Tolentino, stated that rescission is
a remedy granted by law to contracting parties and even to third persons, to secure
527
VOL. 264, NOVEMBER 21, 1996 527
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
reparation for damages caused to them by a contract, even if this should be valid, by means
of restoration of things to their condition prior to celebration of the contract. It is my opinion
that “third persons” should be construed to refer to the wards, creditors, absentees, heirs
and others enumerated under the law who are prejudiced by the contract sought to be
rescinded.
It should be borne in mind that rescission is an extreme remedy which may be exercised
only in the specific instances provided by law. Article 1381 (3) specifically refers to contracts
undertaken in fraud of creditors when the latter cannot in any manner collect the claims
due them. If rescission were allowed for analogous cases, the law would have so stated.
While Article 1381 (5) itself says that rescission may be granted to all other contracts
specially declared by law to be subject to rescission, there is nothing in the law that states
that an offeree who failed to exercise his right of refusal because of bad faith on the part of
the offeror may rescind the subsequent contract entered into by the offeror and a third
person. Hence, there is no legal justification to rescind the contract between Carmelo and
Bauermann, Inc. and Equatorial Realty.
Neither do I agree with Justice Melo that Mayfair Theater should pay Carmelo and
Bauermann, Inc. the amount of P11,300,000.00 plus compounded interest of 12% p.a.
Justice Melo rationalized that had Carmelo and Bauermann sold the property to Mayfair,
the latter would have paid the property for the same price that Equatorial bought it. It
bears emphasis that Carmelo and Bauermann, Inc. and Mayfair never reached an
agreement as to the price of the property in dispute because the negotiations between the
two parties were not pursued to its very end. We cannot, even for reasons of equity, compel
Carmelo to sell the entire property to Mayfair at P11,300,000.00 without violating the
consensual nature of contracts.
I vote, therefore, not to rescind the contract of sale entered into by Carmelo and
Bauermann, Inc. and Equatorial Realty Development Corp.
528
528 SUPREME COURT REPORTS ANNOTATED
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
DISSENTING OPINION
VITUG, J.:
I share the opinion that the right granted to Mayfair Theater, Inc., is neither an offer nor an
option but merely a right of first refusal as has been so well and amply essayed in
the ponencia of our distinguished colleague Mr. Justice Regino C. Hermosisima, Jr.
Unfortunately, it would seem that Article 1381 (paragraph 3) of the Civil Code invoked
to be the statutory authority for the rescission of the contract of sale between Carmelo &
Bauermann, Inc., and Equatorial Realty Development, Inc., has been misapplied. The action
for rescission under that provision of the law, unlike in the resolution of reciprocal
obligations under Article 1191 of the Code, is merely subsidiary and relates to the specific
instance when a debtor, in an attempt to defraud his creditor, enters into a contract with
another that deprives the creditor to recover his just claim and leaves him with no other
legal means, than by rescission, to obtain reparation. Thus, the rescission is only to the
extent necessary to cover the damages caused (Article 1384, Civil Code) and, consistent with
its subsidiary nature, would require the debtor to be an indispensable party in the action
(see Gigante vs. Republic Savings Bank, 135 Phil. 359).
23

The concept of a right of first refusal as a simple juridical relation, and so governed
(basically) by the Civil Code’s title on “Human Relations,” is not altered by the
fact alone that it might be among the stipulated items in a separate document or even in
another contract. A “breach” of the right of first refusal can only give rise to an action for
damages primarily under Article 19 of the Civil Code, as well as its related provisions, but
not to an action for specific performance set out under Book IV of the Code on “Obligations
and Contracts.” That right, standing by itself, is far distant from being the obligation
referred to in Article 1159 of the Code which would have the force of law sufficient to compel
compliance per se or to establish a creditor-debtor or obligee-obligor
529
VOL. 264, NOVEMBER 21, 1996 529
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
relation between the parties. If, as it is rightly so, a right of first refusal cannot even be
properly classed as an offer or as an option, certainly, and with much greater reason, it
cannot be the equivalent of, nor be given the same legal effect as, a duly perfected contract.
It is not possible to cross out, such as we have said in Ang Yu Asuncion vs. Court of
Appeals (238 SCRA 602), the indispensable element of consensuality in the perfection of
contracts. It is basic that without mutual consent on the object and on the cause, a contract
cannot exist (Art. 1305, Civil Code); corollary to it, no one can be forced, least of all perhaps
by a court, into a contract against his will or compelled to perform thereunder.
It is sufficiently clear, I submit, that, there being no binding contract between Carmelo
and Mayfair, neither the rescission of the contract between Carmelo and Equatorial nor the
directive to Carmelo to sell the property to Mayfair would be legally appropriate.
My brief disquisition should have ended here except for some personal impressions
expressed by my esteemed colleague, Mr. Justice Artemio V. Panganiban, on the Ang
Yudecision which perhaps need to be addressed.
The discussion by the Court in Ang Yu on the right of first refusal is branded as a
mere obiter dictum. Justice Panganiban states: The case “turned largely on the issue of
whether or not the sale of an immovale in breach of a right of first refusal that had been
decreed in a final judgment would justify the issuance of certain orders of execution in the
same case. x x x. In other words, the question of whether specific performance of one’s right
of first refusal is available as a remedy in case of breach thereof was not before the Supreme
Court at all in Ang Yu Asuncion.”
Black defines an obiter dictum as “an option entirely unnecessary for the decision of the
case” and thus “are not binding as precedent.” (Black’s Law Dictionary, 6th edition, 1990). A
close look at the antecedents of Ang Yuas found by the Court of Appeals and as later quoted
by this Court would readily disclose that the “right of first refusal” was a major point in the
controversy. Indeed, the trial and the appellate
530
530 SUPREME COURT REPORTS ANNOTATED
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
courts had ruled on it. With due respect, I would not deem it “entirely unnecessary” for this
Court to itself discuss the legal connotation and significance of the decreed (confirmatory)
right of first refusal. I should add that when the ponenciarecognized that, in the case of
Buen Realty Development Corporation (the alleged purchaser of the property), the latter
could not be held subject of the writ of execution and be ousted from the ownership and
possession of the disputed property without first affording it due process, the Court decided
to simply put a cap in the final disposition of the case but it could not have intended to
thereby mitigate the import of its basic ratio decidendi.
Justice Panganiban opines that the pronouncement in Ang Yu,i.e., that a breach of the
right of first refusal does not sanction an action for specific performance but only an action
for damages, “is at best debatable (x x x imprecise or incorrect), on top of its being
contradicted by extant jurisprudence.” He then comes up with the novel proposition that
Sales 7-9
“Mayfair’s right of first refusal may be classified as one subject to a suspensive condition—
namely, if Carmelo should decide to sell the leased premises during the life of the lease
contracts, then it should make an offer of sale to Mayfair,” presumably enforceable by action
for specific performance.
It would be perilous a journey, first of all, to try to seek out a common path for such
juridical relations as contracts, options, and rights of first refusal since they differ,
substantially enough, in their concepts, consequences and legal implications. Very briefly, in
the area on sales particularly, I borrow from Ang Yu, a unanimous decision of the Supreme
Court En Banc, which held:
“In the law on sales, the so-called ‘right of first refusal’ is an innovative juridical
relation. Needless to point out, it cannot be deemed a perfected contract of sale under Article
1458 of the Civil Code. Neither can the right of first refusal, understood in its normal
concept, per se be brought within the purview of an option under the second paragraph of
Article 1479, aforequoted, or possibly of an offer under Article 1319 of the same Code. An
option or an offer would require, among other things, a clear certainty on both the object
and
531
VOL. 264, NOVEMBER 21, 1996 531
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
the cause or consideration of the envisioned contract. In a right of first refusal, while the
object might be made determinate, the exercise of the right, however, would be dependent not
only on the grantor’s eventual intention to enter into a binding juridical relation with
another but also on terms, including the price, that obviously are yet to be later firmed
up. Prior thereto, it can at best be so described as merely belonging to a class of preparatory
juridical relations governed not by contracts (since the essential elements to establish
the vinculum juriswould still be indefinite and inconclusive) but by, among other laws of
general application, the pertinent scattered provisions of the Civil Code on human conduct.”
An obligation, and so a conditional obligation as well (albeit subject to the occurrence of the
condition), in its context under Book IV of the Civil Code, can only be “a juridical necessity
to give, to do or not to do” (Art. 1156, Civil Code), and one that is constituted by law,
contracts, quasi-contracts, delicts and quasi-delicts(Art. 1157, Civil Code) which all have
their respective legal significance rather well settled in law. The law certainly must have
meant to provide congruous, albeitcontextual, consequences to its provisions. Interpretare et
concordore legibus est optimus interpretendi. As a valid source of an obligation, a contract
must have the concurrence of (a) consent of the contracting parties, (b) object certain (subject
matter of the contract) and (c) cause(Art. 1318, Civil Code). These requirements, clearly
defined, are essential. The consent contemplated by the law is that which is manifested by
the meeting of the offer and of the acceptance upon the objectand the cause of the obligation.
The offer must be certain and the acceptance absolute (Article 1319 of the Civil Code). Thus,
a right of first refusal cannot have the effect of a contract because, by its very essence, certain
basic terms would have yet to be determined and fixed.How its “breach” be also its perfection
escapes me. It is only when the elements concur that the juridical act would have the force
of law between the contracting parties that must be complied with in good faith (Article
1159 of the Civil Code; see also Article 1308, of the Civil Code), and, in case of its breach,
would allow the creditor or obligee (the passive subject) to invoke the remedy that
specifically appertains to it.
532
532 SUPREME COURT REPORTS ANNOTATED
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
The judicial remedies, in general, would, of course, include: (a) The principal remedies (i)
of specific performance in obligations to give specific things (Articles 1165 and 1167 of the
Civil Code), substitute performance in an obligation to do or to deliver generic things (Article
1165 of the Civil Code) and equivalent performance for damages (Articles 1168 and 1170 of
24
 Sales 7-9

the Civil Code); and (ii) of rescission or resolution of reciprocal obligations; and (b)
Catapusan vs. Court of Appeals
the subsidiary remediesthat may be availed of when the principal remedies are unavailable
or ineffective such as (i) accion subrogatoria or subrogatory action (Article 1177 of the Civil Civil Code. (Ang Yu Asuncion vs. Court of Appeals, 238 SCRA 602[1994])
Code; see also Articles 1729 and 1893 of the Civil Code); and (ii) accion pauliana or
rescissory action (Articles 1177 and 1381 of the Civil Code). And, in order to secure the ——o0o——
integrity of final judgments, such ancillary remedies as attachments, replevin,
garnishments, receivership, examination of the debtor, and similar remedies, are
additionally provided for in procedural law.
Might it be possible, however, that Justice Panganiban was referring to how Ang
Yu could relate to the instant case for, verily, his remark, earlier quoted, was followed by an
extensive discussion on the factual and case milieu of the present petition? If it were, then I
guess it was the applicabilityof the Ang Yu decision to the instant case that he questioned,
but that would not make Ang Yu“imprecise” or “incorrect.”
Justice Panganiban would hold the Ang Yu ruling to be inconsistent
with Guzman, Bocaling & Co. vs. Bonnevie(206 SCRA 668). I would not be too hasty in
concluding similarly. In Guzman, the stipulation involved, although loosely termed a “right
of first priority,” was, in fact, a contract of option. The provision in the agreement there
stated:
“20.—In case the LESSOR desires or decides to sell the leased property, the LESSEES shall
be given a first priority to purchase the same, all things and considerations being equal.”(At
page 670; italics supplied.)
In the above stipulation, the Court ruled, in effect, that the basic terms had been
adequately, albeit briefly, spelled out
533
VOL. 264, NOVEMBER 21, 1996 533
Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.
with the lease consideration being deemed likewise to be the essential cause for the option.
The situation undoubtedly was not the same that prevailed in Ang Yu or, for that matter, in
the case at bar. The stipulation between Mayfair Theater, Inc., and Carmelo & Bauermann,
Inc., merely read:
“That if the LESSOR should desire to sell the leased premises, the LESSEE shall be given
30-days exclusive option to purchase the same.”
The provision was too indefinite to allow it to even come close to within the area of
the Guzman ruling.
Justice Panganiban was correct in saying that the “cases of Madrigal & Co. vs.
Stevenson & Co. and Salonga vs. Farrales (cited in Ang Yu) did NOT involve a right of first
refusal or of first priority. Nor did those two cases involve an option to buy.” The two cases,
to set the record straight, were cited, not because they were thought to involve a right of
first refusal or an option to buy but to emphasize the indispensability of consensuality over
the object and cause of contracts in their perfection which would explain why, parallel
therewith, Articles 1315 and 1318 of the Civil Code were also mentioned.
One final note: A right of first refusal, in its proper usage, isnot a contract; when parties
instead make certain the object and the cause thereof and support their understanding with
an adequate consideration, that juridical relation is not to be taken as just a right of first
refusal but as a contract in itself (termed an “option”). There is, unfortunately, in law a limit
to an unabated use of common parlance.
With all due respect, I hold that the judgment of the trial court, although not for all the
reasons it has advanced, should be REINSTATED.
Petition denied.
Note.—In the law on sales, the so-called “right of first refusal” is an innovative juridical
relation, but it cannot be deemed a perfected contract of sale under Article 1458 of the
534
534 SUPREME COURT REPORTS ANNOTATED

25
 Sales 7-9

VOL. 477, DECEMBER 9, 2005 245
Magna Financial Services Group, Inc. vs. Colarina
G.R. No. 158635. December 9, 2005.*
MAGNA FINANCIAL SERVICES GROUP, INC., petitioner, vs. ELIAS COLARINA,
respondent.
Civil Law; Mortgages; Foreclosures; Act 4122 amending Art. 1454, Civil Code of 1889
prevents mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a
low price and then bringing the suit against the mortgagor for a deficiency judgment.—Our
Supreme Court in Bachrach Motor Co., Inc. v. Millan held: “Undoubtedly the principal
object of the above amendment (referring to Act 4122 amending Art. 1454, Civil Code of
1889) was to remedy the abuses committed in connection with the foreclosure of chattel
mortgages. This amendment prevents mortgagees from seizing the mortgaged property,
buying it at foreclosure sale for a low price and then bringing the suit against the mortgagor
for a deficiency judgment. The almost invariable result of this procedure was that the
mortgagor found himself minus the property and still owing practically the full amount of
his original indebtedness.”
Same; Same; Same; In all proceedings for the foreclosure of chattel mortgages executed
on chattels which have been sold on the installment plan, the mortgagee is limited to the
property included in the mortgage.—Article 1484, paragraph 3, provides that if the vendor
has availed himself of the right to foreclose the chattel mortgage, “he shall have no further
action against the purchaser to recover any unpaid balance of the purchase price. Any
agreement to the contrary shall be void.” In other words, in all proceedings for the
foreclosure of chattel mortgages executed on
_______________
* SECOND DIVISION.
Same; Same; Same; It is deemed that there has been foreclosure of the mortgage when
all the proceedings of the foreclosure including the sale of the property at public auction have
been accomplished.—Where the mortgagee elects a remedy of foreclosure, the law requires
the actual foreclosure of the mortgaged chattel. Thus, in Manila Motor Co. v. Fernandez, our
Supreme Court said that it is actual sale of the mortgaged chattel in accordance with Sec.
14 of Act No. 1508 that would bar the creditor (who chooses to foreclose) from recovering any
unpaid balance. And it is deemed that there has been foreclosure of the mortgage when all
the proceedings of the foreclosure, including the sale of the property at public auction, have
been accomplished.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
247
VOL. 477, DECEMBER 9, 2005 247
Magna Financial Services Group, Inc. vs. Colarina
Armand A. Duran for petitioner.
Reynaldo L. Herrerafor respondent.
CHICO-NAZARIO, J.:
The undisputed facts of this case show that on 11 June 1997, Elias Colarina bought on
installment from Magna Financial Services Group, Inc., one (1) unit of Suzuki Multicab,
more particularly described as follows:
MAKE — SUZUKI MULTICAB
MODEL — ER HT

246 ENGINE NO. — 834963

2 SUPREME COURT REPORTS ANNOTATED
46
Magna Financial Services Group, Inc. vs. Colarina
chattels which have been sold on the installment plan, the mortgagee is limited to the
property included in the mortgage.
Same; Same; Same; Foreclosure may be effected either judicially or extrajudicially
that is by ordinary action or by foreclosure under power of sale contained in the mortgage.—
A contract of chattel mortgage, which is the transaction involved in the present case, is in
the nature of a conditional sale of personal property given as a security for the payment of a
debt, or the performance of some other obligation specified therein, the condition being that
the sale shall be void upon the seller paying to the purchaser a sum of money or doing some
other act named. If the condition is performed according to its terms, the mortgage and sale
immediately become void, and the mortgagee is thereby divested of his title. On the other
hand, in case of non payment, foreclosure is one of the remedies available to a mortgagee by
which he subjects the mortgaged property to the satisfaction of the obligation to secure that
for which the mortgage was given. Foreclosure may be effected either judicially or
extrajudicially, that is, by ordinary action or by foreclosure under power of sale contained in
FRAME NO — LTO -067886-RO7-C
COLOR — WHITE1
After making a down payment, Colarina executed a promissory note for the balance of
P229,284.00 payable in thirty-six (36) equal monthly installments at P6,369.00 monthly,
beginning 18 July 1997. To secure payment thereof, Colarina executed an integrated
promissory note and deed of chattel mortgage over the motor vehicle.
Colarina failed to pay the monthly amortization beginning January 1999, accumulating
an unpaid balance of P131,607.00. Despite repeated demands, he failed to make the
necessary payment. On 31 October 2000 Magna Financial Services Group, Inc. filed a
Complaint for Foreclosure of Chattel Mortgage with Replevin2before the Municipal Trial
Court in Cities (MTCC), Branch 2, Legaspi City, docketed as Civil Case No. 4822.3 Upon the
filing of a Replevin Bond, a Writ of Replevin was issued by the MTCC. On 27 December
2000, summons, together with a copy of the Writ of Replevin, was served on Colarina who
voluntarily surrendered physical possession of the vehicle to the Sheriff, Mr. Antonio
_______________
1 Rollo, p. 50.
2 Annex “A,” CA Rollo, p. 23.
3 Annex “I,” Rollo, p. 50.

the mortgage. It may be effected by the usual methods, including sale of goods at public
auction. Extrajudicial foreclosure, as chosen by the petitioner, is attained by causing the 248
mortgaged property to be seized by the sheriff, as agent of the mortgagee, and have it sold at
public auction in the manner prescribed by Section 14 of Act No. 1508, or the Chattel 248 SUPREME COURT REPORTS ANNOTATED
Mortgage Law. This rule governs extrajudicial foreclosure of chattel mortgage.

26

Magna Financial Services Group, Inc. vs. Colarina
Lozano. On 02 January 2001, the aforesaid motor vehicle was turned over by the sheriff to
Magna Financial Services Group, Inc.4 On 12 July 2001, Colarina was declared in default
for having filed his answer after more than six (6) months from the service of summons
upon him. Thereupon, the trial court rendered judgment based on the facts alleged in the
Complaint. In a decision dated 23 July 2001, it held:5
“WHEREFORE, judgment is hereby rendered in favor of plaintiff Magna Financial Services
Group, Inc. and against the defendant Elias Colarina, ordering the latter:
1. a)to pay plaintiff the principal sum of one hundred thirty one thousand six
hundred seven (P131,607.00) pesos plus penalty charges at 4.5% per month
computed from January, 1999 until fully paid;
2. b)to pay plaintiff P10,000.00 for attorney’s fees; and
3. c)to pay the costs.
The foregoing money judgment shall be paid within ninety (90) days from the entry of
judgment. In case of default in such payment, the one (1) unit of Suzuki Multicab, subject of
the writ of replevin and chattel mortgage, shall be sold at public auction to satisfy the said
judgment.”6
Colarina appealed to the Regional Trial Court (RTC) of Legazpi City, Branch 4, where the
case was docketed as Civil Case No. 10013. During the pendency of his appeal before the
RTC, Colarina died and was substituted in the case by his heirs. 7 In a decision dated 30
January 2002, the RTC affirmed in toto the decision of the MTCC.8
_______________
4 CA Rollo, p. 39.
5 CA Rollo, pp. 40-41.
6 CA Rollo, p. 41.
7 CA Rollo, p. 15.
8 Annex “H,” CA Rollo, pp. 43-47.
249
VOL. 477, DECEMBER 9, 2005 249
Magna Financial Services Group, Inc. vs. Colarina
Colarina filed a Petition for Review before the Court of Appeals, docketed as CA-G.R. SP No.
69481. On 21 January 2003, the Court of Appeals rendered its decision 9 holding:
“. . . We find merit in petitioners’ assertion that the MTC and the RTC erred in ordering the
defendant to pay the unpaid balance of the purchase price of the subject vehicle irrespective
of the fact that the instant complaint was for the foreclosure of its chattel mortgage. The
principal error committed by the said courts was their immediate grant, however erroneous,
of relief in favor of the respondent for the payment of the unpaid balance without
considering the fact that the very prayer it had sought was inconsistent with its allegation
in the complaint.
Verily, it is beyond cavil that the complaint seeks the judicial foreclosure of the chattel
mortgage. The fact that the respondent had unconscionably sought the payment of the
unpaid balance regardless of its complaint for the foreclosure of the said mortgage is glaring
proof that it intentionally devised the same to deprive the defendant of his rights. A
judgment in its favor will in effect allow it to retain the possession and ownership of the
subject vehicle and at the same time claim against the defendant for the unpaid balance of
its purchase price. In such a case, the respondent would luckily have its cake and eat it too.
Unfortunately for the defendant, the lower courts had readily, probably unwittingly, made
themselves abettors to respondent’s devise to the detriment of the defendant.
Sales 7-9
...
WHEREFORE, finding error in the assailed decision, the instant petition is hereby
GRANTED and the assailed decision is hereby REVERSED AND SET ASIDE. Let the
records be remanded to the court of origin. Accordingly, the foreclosure of the chattel
mortgage over the subject vehicle as prayed for by the respondent in its complaint without
any right to seek the payment of the unpaid balance of the purchase price or any deficiency
judgment against the petitioners pursuant to Article 1484 of the Civil Code of the
Philippines, is hereby ORDERED.”10
_______________
9 Penned by Associate Justice Josefina Guevara–Salonga with Associate Justices
Marina L. Buzon and Danilo B. Pine, concurring; CA Rollo, pp. 66-73.
10 CA Rollo, pp. 71-73.
250
250 SUPREME COURT REPORTS ANNOTATED
Magna Financial Services Group, Inc. vs. Colarina
A Motion for Reconsideration dated 11 February 200311 filed by Magna Financial Services
Group, Inc., was denied by the Court of Appeals in a resolution dated 22 May 2003.12 Hence,
this Petition for Review on Certioraribased on the sole issue:
WHAT IS THE TRUE NATURE OF A FORECLOSURE OF CHATTEL MORTGAGE,
EXTRAJUDICIAL OR JUDICIAL, AS AN EXERCISE OF THE 3RD OPTION UNDER
ARTICLE 1484, PARAGRAPH 3 OF THE CIVIL CODE.
In its Memorandum, petitioner assails the decision of the Court of Appeals and asserts that
a mortgage is only an accessory obligation, the principal one being the undertaking to pay
the amounts scheduled in the promissory note. To secure the payment of the note, a chattel
mortgage is constituted on the thing sold. It argues that an action for foreclosure of
mortgage is actually in the nature of an action for sum of money instituted to enforce the
payment of the promissory note, with execution of the security. In case of an extrajudicial
foreclosure of chattel mortgage, the petition must state the amount due on the obligation
and the sheriff, after the sale, shall apply the proceeds to the unpaid debt. This, according to
petitioner, is the true nature of a foreclosure proceeding as provided under Rule 68, Section
2 of the Rules of Court.13
_______________
Rollo, pp. 27-30.
11
Rollo, p. 39.
12
13 Memorandum for the Petitioner, p. 3; Rollo, p. 87.
Rule 68, Section 2 of the Revised Rules of Court on Foreclosure of Real Estate Mortgage
provides:
SEC. 2. Judgment on foreclosure for payment or sale.—If upon the trial in such action
the court shall find the facts set forth in the complaint to be true, it shall ascertain the
amount due to the plaintiff upon the mortgage debt or obligation, including interest and
other charges as approved by the court, and costs, and shall render judgment for the sum so
found due and order that the same be paid to the court or to the judgment obligee within a
period of not less than ninety (90) days nor more than one hundred twenty (120) days from
the entry of judgment, and that in default of such payment the property shall be sold at
public auction to satisfy the judgment.
251
VOL. 477, DECEMBER 9, 2005 251
27

Magna Financial Services Group, Inc. vs. Colarina
On the other hand, respondent countered that the Court of Appeals correctly set aside the
trial court’s decision due to the inconsistency of the remedies or reliefs sought by the
petitioner in its Complaint where it prayed for the custody of the chattel mortgage and at
the same time asked for the payment of the unpaid balance on the motor vehicle. 14
Article 1484 of the Civil Code explicitly provides:
“ART. 1484. In a contract of sale of personal property the price of which is payable in
installments, the vendor may exercise any of the following remedies:
1. (1)Exact fulfillment of the obligation, should the vendee fail to pay;
2. (2)Cancel the sale, should the vendee’s failure to pay cover two or more
installments;
3. (3)Foreclose the chattel mortgage or the thing sold, if one has been constituted,
should the vendee’s failure to pay cover two or more installments. In this case,
he shall have no further action against the purchaser to recover any unpaid
balance of the price. Any agreement to the contrary shall be void.”
Our Supreme Court in Bachrach Motor Co., Inc. v. Millan15 held: “Undoubtedly the
principal object of the above amendment (referring to Act 4122 amending Art. 1454, Civil
Code of 1889) was to remedy the abuses committed in connection with the foreclosure of
chattel mortgages. This amendment prevents mortgagees from seizing the mortgaged
property, buying it at foreclosure sale for a low price and then bringing the suit against the
mortgagor for a deficiency judgment. The almost invariable result of this procedure was that
the mortgagor found himself minus the property and still owing practically the full amount
of his original indebtedness.”
In its Complaint, Magna Financial Services Group, Inc. made the following prayer:
_______________
14 Rejoinder, Rollo, p. 95.
15 61 Phil. 409, 415 (1935).
252
252 SUPREME COURT REPORTS ANNOTATED
Magna Financial Services Group, Inc. vs. Colarina
“WHEREFORE, it is respectfully prayed that judgment render ordering defendant:
1. 1.To pay the principal sum of P131,607.00 with penalty charges at 4.5% per month
from January 1999 until paid plus liquidated damages.
2. 2.Ordering defendant to reimburse the plaintiff for attorney’s fee at 25% of the
amount due plus expenses of litigation at not less than P10,000.00.
3. 3.Ordering defendant to surrender to the plaintiff the possession of the Multicab
described in paragraph 2 of the complaint.
4. 4.Plaintiff prays for other reliefs just and equitable in the premises.
It is further prayed that pendente lite, an Order of Replevin issue commanding the
Provincial Sheriff at Legazpi City or any of his deputies to take such multicab into his
custody and, after judgment, upon default in the payment of the amount adjudged due to
the plaintiff, to sell said chattel at public auction in accordance with the chattel mortgage
law.”16
Sales 7-9
In its Memorandum before us, petitioner resolutely declared that it has opted for the
remedy provided under Article 1484(3) of the Civil Code,17 that is, to foreclosethe chattel
mortgage.
It is, however, unmistakable from the Complaint that petitioner preferred to avail itself
of the first and third remedies under Article 1484, at the same time suing for replevin. For
this reason, the Court of Appeals justifiably set aside the decision of the RTC. Perusing the
Complaint, the petitioner, under its prayer number 1, sought for the payment of the unpaid
amortizations which is a remedy that is provided under Article 1484(1) of the Civil Code,
allowing an unpaid vendee to exact fulfillment of the obligation. At the same time,
petitioner prayed that Colarina be ordered to surrender possession of the vehicle so that it
may ultimately be sold at public auction, which remedy is contained under Article 1484(3).
Such a scheme is not only irregular but is a flagrant circumvention of the prohibition of the
law. By praying for the foreclosure of the
_______________
16 CA Rollo, pp. 24-25.
17 Rollo, p. 88.
253
VOL. 477, DECEMBER 9, 2005 253
Magna Financial Services Group, Inc. vs. Colarina
chattel, Magna Financial Services Group, Inc. renounced whatever claim it may have under
the promissory note.18
Article 1484, paragraph 3, provides that if the vendor has availed himself of the right to
foreclose the chattel mortgage, “he shall have no further action against the purchaser to
recover any unpaid balance of the purchase price. Any agreement to the contrary shall be
void.” In other words, in all proceedings for the foreclosure of chattel mortgages executed on
chattels which have been sold on the installment plan, the mortgagee is limited to the
property included in the mortgage.19
Contrary to petitioner’s claim, a contract of chattel mortgage, which is the transaction
involved in the present case, is in the nature of a conditional sale of personal property given
as a security for the payment of a debt, or the performance of some other obligation specified
therein, the condition being that the sale shall be void upon the seller paying to the
purchaser a sum of money or doing some other act named. 20 If the condition is performed
according to its terms, the mortgage and sale immediately become void, and the mortgagee
is thereby divested of his title.21On the other hand, in case of non payment, foreclosure is
one of the remedies available to a mortgagee by which he subjects the mortgaged property to
the satisfaction of the obligation to secure that for which the mortgage was given.
Foreclosure may be effected either judicially or extrajudicially, that is, by ordinary action or
by foreclosure un-
_______________
18 Luneta Motor Co. v. Dimagiba, 113 Phil. 864; 3 SCRA 884 (1961).
19 Macondray and Co., Inc. v. Benito, et al., 62 Phil. 137, 142 (1935).
20 Act No. 1508—An Act providing for the Mortgaging of personal property and for the
registration of the mortgages so executed.
Section 3. A chattel mortgage is a conditional sale of personal property as security for
the payment of a debt, or the performance of some other obligation specified therein, the
condition being that the sale shall be void upon the seller’s paying to the purchaser a sum of
money or doing some other act named. If the condition is performed according to its terms
the mortgage and sale immediately become void, and the mortgagee is thereby divested of
his title.
21 Bachrach Motor Co. v. Summers, 42 Phil. 3 (1921).
28
 Sales 7-9

254
254 SUPREME COURT REPORTS ANNOTATED
Magna Financial Services Group, Inc. vs. Colarina
der power of sale contained in the mortgage. It may be effected by the usual methods,
including sale of goods at public auction.22Extrajudicial foreclosure, as chosen by the
petitioner, is attained by causing the mortgaged property to be seized by the sheriff, as
agent of the mortgagee, and have it sold at public auction in the manner prescribed by
Section 14 of Act No. 1508, or the Chattel Mortgage Law. 23 This rule governs extrajudicial
foreclosure of chattel mortgage.
In sum, since the petitioner has undeniably elected a remedy of foreclosure under
law, the delivery of possession of the mortgaged property to the mortgagee, the herein
appellee, can only operate to extinguish appellant’s liability if the appellee had actually
caused the foreclosure sale of the mortgaged property when it recovered possession thereof
(Northern Motors, Inc. v. Sapinoso, 33 SCRA 356 [1970]; Universal Motors Corp. v. Dy Hian
Tat, 28 SCRA 161 [1969]; Manila Motors Co., Inc. v. Fernandez, 99 Phil. 782[1956]).”
Be that as it may, although no actual foreclosure as contemplated under the law has taken
place in this case, since the vehicle
_______________
99 Phil. 782, 786 (1956).
24

Article 1484(3) of the Civil Code, it is bound by its election and thus may not be allowed to Pacific Commercial Co. v. De la Rama, 72 Phil. 380 (1941).
25

change what it has opted for nor to ask for more. On this point, the Court of Appeals 26 Macondray & Co., Inc. v. Tan, 38 O.G. 2606; see also Radiowealth, Inc. v. Lavin, L-

correctly set aside the trial court’s decision and instead rendered a judgment of foreclosure 18563, 27 April 1963, 7 SCRA 804; Vda. de Quiambao, et al. v. Manila Motor Co., Inc., G.R.
as prayed for by the petitioner. No. L-17334, 31 October 1961, 3 SCRA 444, 448-449.
The next issue of consequence is whether or not there has been an actual foreclosure of 27 G.R. No. 94828, 18 September 1992, 214 SCRA 103, 107.

the subject vehicle.

In the case at bar, there is no dispute that the subject vehicle is already in the 256
possession of the petitioner, Magna Financial Ser-
_______________ 256 SUPREME COURT REPORTS ANNOTATED
Saguid vs. Security Finance, Inc.
59 C.J.S. 482 cited in De Leon, Credit Transaction, 1995 Ed., p. 384.
22
is already in the possession of Magna Financial Services Group, Inc. and it has persistently
23 Bataan Hardwood Corporation v. Dy Pac and Co., G.R. No. L-29492, 29 February
and consistently avowed that it elects the remedy of foreclosure, the Court of Appeals, thus,
1972, 43 SCRA 450. ruled correctly in directing the foreclosure of the said vehicle without more.
Section 14, Act No. 1508 of the Chattel Mortgage Law provides: WHEREFORE, premises considered, the instant petition is DENIED for lack of merit
SEC. 14. The mortgagee, his executor, administrator, or assign, may, after thirty days and the decision of the Court of Appeals dated 21 January 2003 is AFFIRMED. Costs
from the time of condition broken, cause the mortgaged property, or any part thereof, to be against petitioner.
sold at public auction by a public officer at a public place in the municipality where the SO ORDERED.
mortgagor resides, or where the property is situated, provided at least ten days notice of the Puno (Chai
time, place, and purpose of such sale has been posted at two or more public places in such
municipality, and the mortgagee, his executor, administrator, or assign, shall notify the
mortgagor or person holding under him and the persons holding subsequent mortgages of
the time and place of sale, either by notice in writing directed to him or left at his abode, if
within the municipality, or sent by mail if he does not reside in such municipality, at least
ten days previous to the sale.

255
VOL. 477, DECEMBER 9, 2005 255
Magna Financial Services Group, Inc. vs. Colarina
vices Group, Inc. However, actual foreclosure has not been pursued, commenced or
concluded by it.
Where the mortgagee elects a remedy of foreclosure, the law requires the actual
foreclosure of the mortgaged chattel. Thus, in Manila Motor Co. v. Fernandez,24 our
Supreme Court said that it is actual sale of the mortgaged chattel in accordance with Sec.
14 of Act No. 1508 that would bar the creditor (who chooses to foreclose) from recovering any
unpaid balance.25 And it is deemed that there has been foreclosure of the mortgage when all
the proceedings of the foreclosure, including the sale of the property at public auction, have
been accomplished.26
That there should be actual foreclosure of the mortgaged vehicle was reiterated in the
case of De la Cruz v. Asian Consumer and Industrial Finance Corporation:27
“It is thus clear that while ASIAN eventually succeeded in taking possession of the
mortgaged vehicle, it did not pursue the foreclosure of the mortgage as shown by the fact
that no auction sale of the vehicle was ever conducted. As we ruled in Filinvest Credit Corp.
v. Phil. Acetylene Co., Inc.(G.R. No. 50449, 30 January 1982, 111 SCRA 421)—Under the

29

VOL. 274, JUNE 19, 1997
Rillo vs. Court of Appeals
G.R. No. 125347. June 19, 1997.*
EMILIANO RILLO, petitioner, vs. COURT OF APPEALS and CORB REALTY
INVESTMENT, CORP., respondents.
Sales; Rescission; In a contract to sell real property on installments, the full payment
of the purchase price is a positive suspensive condition, the failure of which is not considered
a breach, casual or serious, but simply an event which prevented the obligation of the vendor
to convey title from acquiring any obligatory force; There can be no rescission of an obligation
that is still non-existent, the suspensive condition not having happened.—The respondent
court did not err when it did not apply Articles 1191 and 1592 of the Civil Code on rescission
to the case at bar. The contract between the parties is not an absolute conveyance of real
property but a contract to sell. In a contract to sell real property on installments, the full
payment of the purchase price is a positive suspensive condition, the failure of which is not
considered a breach, casual or serious, but simply an event which prevented the obligation
of the vendor to convey title from acquiring any obligatory force.” The transfer of ownership
and title would occur after full payment of the purchase price. We held in Luzon Brokerage
Co., Inc. v. Maritime Building Co., Inc. that there can be no rescission of an obligation that
is still non-existent, the suspensive condition not having happened.
Same; Maceda Law (Republic Act No. 6552); The Maceda Law recognizes in
conditional sales of all kinds of real estate (industrial, commercial, residential) the right of
the seller to cancel the contract upon non-payment of an installment by the buyer.—Given the
nature of the contract of the parties, the respondent court correctly applied Republic Act No.
6552. Known as the Maceda Law, R.A. No. 6552 recognizes in conditional sales of all kinds
of real estate (industrial, commercial, residential) the right of the seller to cancel the
contract upon non-payment of an installment by the buyer, which is simply an event that
prevents the obligation of the vendor to convey title from acquiring binding force. It also
provides the right of the buyer on installments in case he defaults in the payment of
succeeding installments.
_______________
* SECOND DIVISION.
462
46 SUPREME COURT REPORTS ANNOTATED
2 would be subject to liquidated penalty of 1.5% for every month of default from due date. It
Rillo vs. Court of Appeals
Same; Same; Contracts; Novation; Novation is never presumed, and in the absence of
an express agreement, novation takes place only when the old and the new obligations are
incompatible on every point; A compromise agreement clarifying the total sum owed by a
buyer, with the view that he would find it easier to comply with his obligations under the
Contract to Sell does not novate said Contract to Sell.—Petitioner further contends that the
contract to sell has been novated by the parties agreement of March 12, 1989. The
contention cannot be sustained. Article 1292 of the Civil Code provides that “In order that
an obligation may be extinguished by another which substitutes the same, it is imperative
that it be so declared in unequivocal terms, or that the old and the new obligations be on
every point incompatible with each other.” Novation is never presumed. Parties to a contract
must expressly agree that they are abrogating their old contract in favor of a new one. In
Sales 7-9
the absence of an express agreement, novation takes place only when the old and the new
461
obligations are incompatible on every point. In the case at bar, the parties executed their
May 12, 1989 “compromise agreement” precisely to give life to their “Contract to Sell.” It
merely clarified the total sum owed by petitioner RILLO to private respondent CORB
REALTY with the view that the former would find it easier to comply with his obligations
under the Contract to Sell. In fine, the “compromise agreement” can stand together with the
Contract to Sell.
Same; Same; Under R.A. No. 6552, the right of the buyer to a refund accrues only
when he has paid at least two (2) years of installments.—Nevertheless, we do not agree with
the respondent Court so far as it ordered private respondent CORB REALTY to refund 50%
of P158,184.00 or P79,092.00 to petitioner RILLO. Under Republic Act No. 6552, the right of
the buyer to a refund accrues only when he has paid at least two (2) years of installments.
In the case at bar, RILLO has paid less than two (2) years in installments, hence, he is not
entitled to a refund.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Antonio E. Dollete & Associates for petitioner.
Rodolfo G. Pulanco for private respondent.
463
VOL. 274, JUNE 19, 1997
Rillo vs. Court of Appeals
PUNO, J.:
This is an appeal under Rule 45 of the Rules of Court to set aside the decision 1 of the Court
of Appeals in CA G.R. CV No. 39108 cancelling the “Contract to Sell” between petitioner
Emiliano Rillo and private respondent Corb Realty Investment Corporation. It also ordered
Rillo to vacate the premises subject of the contract and Corb Realty to return 50% of
P158,184.00 or P79,092.00 to Rillo.
The facts of the case are the following:
On June 18, 1985, petitioner Rillo signed a “Contract To Sell of Condominium Unit”
with private respondent Corb Realty Investment Corporation. Under the contract, CORB
REALTY agreed to sell to RILLO a 61.5 square meter condominium unit located in
Mandaluyong, Metro Manila. The contract price was P150,000.00, one half of which was
paid upon its execution, while the balance of P75,000.00 was to be paid in twelve (12) equal
monthly installments of P7,092.00 beginning July 18, 1985. It was also stipulated that all
outstanding balance would bear an interest of 24% per annum; the installment in arrears
was further agreed that should petitioner default in the payment of three (3) or four (4)
monthly installments, forfeiture proceedings would be governed by existing laws,
particularly the Condominium Act.2
On July 18, 1985, RILLO failed to pay the initial monthly amortization. On August 18,
1985, he again defaulted in his payment. On September 20, 1985, he paid the first monthly
installment of P7,092.00. On October 2, 1985, he paid the second monthly installment of
P7,092.00. His third payment
_______________
1 Penned by Associate Justice Conchita Carpio Morales and concurred in by Associate
Justices Fidel P. Purisima and Fermin A. Martin, Jr., Second Division.
2 Court of Appeals Decision, pp. 1-2; Rollo, pp. 20-21.
30

464
464 SUPREME COURT REPORTS ANNOTATED
Rillo vs. Court of Appeals
was on February 2, 1986 but he paid only P5,000.00 instead of the stipulated P7,092.00.3
On July 20, 1987 or seventeen (17) months after RILLO’s last payment, CORB REALTY
informed him by letter that it is cancelling their contract due to his failure to settle his
accounts on time. CORB REALTY also expressed its willingness to refund RILLO’s money. 4
CORB REALTY, however, did not cancel the contract for on September 28, 1987, it
received P60,000.00 from petitioner.5
RILLO defaulted again in his monthly installment payment. Consequently, CORB
REALTY informed RILLO through letter that it was proceeding to rescind their
contract.6 In a letter dated August 29, 1988, it requested RILLO to come to its office and
withdraw P102,459.35 less the rentals of the unit from July 1, 1985 to February 28,
1989.7 Again the threatened rescission did not materialize. A “compromise” was entered into
by the parties on March 12, 1989, which stipulated the following:
1. “1.Restructure Outstanding Balance Down to P50,000.00
2. “2.Payment @ P2,000.00/Month @
18% (Eighteen Percent)
—Monthly—To Compute No. of Installments
3. “3.To Pay Titling Plus Any Real Estate Tax Due
4. “4.Installments to start April 15, 1989.”8
Rillo once more failed to honor their agreement. RILLO was able to pay P2,000.00 on April
25, 1989 and P2,000.00 on May 15, 1989.9
_______________
3 Ibid.
4 Ibid, p. 2; Rollo, p. 21.
5 Ibid.
6 Ibid, p. 3; Rollo, p. 22.
7 Ibid.
8 Ibid.
9 Ibid.
465
VOL. 274, JUNE 19, 1997
Rillo vs. Court of Appeals
On April 3, 1990, CORB REALTY sent RILLO a statement of accounts which fixed his total
arrears, including interests and penalties, to P155,129.00. When RILLO failed to pay this
amount, CORB REALTY filed a complaint10for cancellation of the contract to sell with the
Regional Trial Court of Pasig.
In his answer to the complaint, RILLO averred, among others, that while he had
already paid a total of P149,000.00, CORB REALTY could not deliver to him his individual
title to the subject property; that CORB REALTY could not claim any right under their
previous agreement as the same was already novated by their new agreement for him to pay
P50,000.00 representing interest charges and other penalties spread through twenty-five
(25) months beginning April 1989; and that CORB REALTY’s claim of P155,129.99 over and
above the amount he already paid has no legal basis.11
At the pre-trial, the parties stipulated that RILLO’s principal outstanding obligation as
of March 12, 1989 was P50,000.00 and he has paid only P4,000.00 thereof and that the
monthly amortization of P2,000.00 was to bear 18% interest per annum based on the unpaid
Sales 7-9
balance. The issues were defined as: (1) whether or not CORB REALTY was entitled to a
rescission of the contract; and (2) if not, whether or not RILLO’s current obligation to CORB
REALTY amounts to P62,000.00 only inclusive of accrued interests.12
The Regional Trial Court held that CORB REALTY cannot rescind the “Contract to
Sell” because petitioner did not commit a substantial breach of its terms. It found that
RILLO substantially complied with the “Contract to Sell” by paying a total of P154,184.00.
It ruled that the remedy of CORB REALTY is to file a case for specific performance to collect
the outstanding balance of the purchase price.
CORB REALTY appealed the aforesaid decision to public respondent Court of Appeals
assigning the following errors, to wit:
______________
10 Docketed as Civil Case No. 59553.
11 Court of Appeals Decision, p. 4; Rollo, p. 23.
12 Ibid.
466
466 SUPREME COURT REPORTS ANNOTATED
Rillo vs. Court of Appeals
“THE TRIAL COURT ERRED IN DISREGARDING OTHER FACTS OF THE CASE,
INCLUDING THE FACT THAT THE CONTRACT TO SELL, AS NOVATED, CREATED
RECIPROCAL OBLIGATIONS ON BOTH PARTIES;
“THE TRIAL COURT ERRED IN DISREGARDING ARTICLE 1191 OF THE CIVIL
CODE;
“THE TRIAL COURT ERRED IN RENDERING JUDGMENT BY SIMPLY
DISREGARDING THE CASE OF ROQUE V. LAPUZ, 96 SCRA 744, AND WITHOUT
INDICATING THE APPLICABLE LAW ON THE CASE;
“THE TRIAL COURT ERRED IN RENDERING A DECISION WHICH DID NOT
COMPLETELY DISPOSE OF THE CASE.”
The respondent Court of Appeals reversed the decision. It ruled: (1) that rescission does not
apply as the contract between the parties is not an absolute conveyance of real property but
is a contract to sell; (2) that the Condominium Act (Republic Act No. 4726, as amended by
R.A. 7899) does not provide anything on forfeiture proceedings in cases involving
installment sales of condominium units, hence, it is Presidential Decree No. 957
(Subdivision and Condominium Buyers Protective Decree) which should be applied to the
case at bar. Under Presidential Decree No. 957, the rights of a buyer in the event of failure
to pay465installment due, other than the failure of the owner or developer to develop the
project, shall be governed by Republic Act No. 6552 or the REALTY INSTALLMENT
BUYER PROTECTION ACT also known as the Maceda Law (enacted on September 14,
1972). The dispositive portion of its Decision states:
“WHEREFORE, the decision appealed from is hereby SET ASIDE. The Contract to Sell is
hereby declared cancelled and rendered ineffective. Plaintiff-Appellant is hereby ordered to
return 50% of P158,184.00 or P79,092.00 to appellee who is hereby ordered to vacate the
subject premises.
“SO ORDERED.”13
______________
13 Rollo, pp. 25-32.
467
VOL. 274, JUNE 19, 1997
31

Rillo vs. Court of Appeals
Hence, this appeal with the following assignment of errors:
“THE HONORABLE COURT OF APPEALS SERIOUSLY AND GRAVELY ERRED IN NOT
HOLDING AND DECIDING THAT RESCISSION IS THE PROPER REMEDY ON A
PERFECTED AND CONSUMMATED CONTRACT;
“THE HONORABLE COURT OF APPEALS SERIOUSLY AND GRAVELY ERRED IN
NOT HOLDING AND DECIDING THAT THE OLD CONSUMMATED CONTRACT HAS
BEEN SUPERSEDED BY A NEW, SEPARATE, INDEPENDENT AND SUBSEQUENT
CONTRACT BY NOVATION.”
The petition is without merit.
The respondent court did not err when it did not apply Articles 1191 and 1592 of the
Civil Code on rescission to the case at bar. The contract between the parties is not an
absolute conveyance of real property but a contract to sell. In a contract to sell real property
on installments, the full payment of the purchase price is a positive suspensive condition,
the failure of which is not considered a breach, casual or serious, but simply an event which
prevented the obligation of the vendor to convey title from acquiring any obligatory
force.”14 The transfer of ownership and title would occur after full payment of the purchase
price. We held in Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc. 15 that there can
be no rescission of an obligation that is still non-existent, the suspensive condition not
having happened.
Given the nature of the contract of the parties, the respondent court correctly applied
Republic Act No. 6552. Known as the Maceda Law, R.A. No. 6552 recognizes in conditional
sales of all kinds of real estate (industrial, commercial, residential) the right of the seller to
cancel the contract upon non-payment of an installment by the buyer, which is simply an
event that prevents the obligation of the vendor to convey title
_______________
14 Roque v. Lapuz, 96 SCRA 741(1980); Bricktown Development Corporation v. Amor
Tierra Development Corp., 239 SCRA 126(1994).
15 46 SCRA 381, 388 (1972).
468
468 SUPREME COURT REPORTS ANNOTATED
Rillo vs. Court of Appeals
from acquiring binding force.16 It also provides the right of the buyer on installments in case
he defaults in the payment of succeeding installments, viz.:
(1) Where he has paid at least two years of installments,
1. “(a)To pay, without additional interest, the unpaid installments due within the
total grace period earned by him, which is hereby fixed at the rate of one month
grace period for every one year of installment payments made: Provided, That
this right shall be exercised by the buyer only once in every five years of the life
of the contract and its extensions, if any.
2. (b)If the contract is cancelled, the seller shall refund to the buyer the cash
surrender value of the payments on the property equivalent to fifty per cent of
the total payments made and, after five years of installments, an additional five
per cent every year but not to exceed ninety per cent of the total payments
made: Provided, That the actual cancellation of the contract shall take place
after cancellation or the demand for rescission of the contract by a notarial act
and upon full payment of the cash surrender value to the buyer. Down
payments, deposits or options on the contract shall be included in the
computation of the total number of installments made.”
Sales 7-9
(2) Where he has paid less than two years in installments,
“Sec. 4. x x x the seller shall give the buyer a grace period of not less than sixty 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 thirty days from
receipt by the buyer of the notice of cancellation or the demand for rescission of the contract
by a notarial act.”
Petitioner RILLO paid less than two years in installment payments, hence, he is only
entitled to a grace period of not less than sixty (60) days from the due date within which to
make his installment payment. CORB REALTY, on the other hand, has the right to cancel
the contract after thirty (30)
_______________
16 Luzon Brokerage Co., Inc. v. Maritime Bldg. Co., Inc., 86 SCRA 305 (1978).
469
VOL. 274, JUNE 19, 1997
Rillo vs. Court of Appeals
days from receipt by RILLO of the notice of cancellation. Hence, the respondent court did
not err when it upheld CORB REALTY’s right to cancel the subject contract upon repeated
defaults in payment by RILLO.
Petitioner further contends that the contract to sell has been novated by the parties
agreement of March 12, 1989. The contention cannot be sustained. Article 1292 of the Civil
Code provides that “In order that an obligation may be extinguished by another which
substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the
old and the new obligations be on every point incompatible with each other.” Novation is
never presumed.17 Parties to a contract must expressly agree that they are abrogating their
old contract in favor of a new one.18 In the absence of an express agreement, novation takes
place only when the old and the new obligations are incompatible on every point. 19 In the
case at bar, the parties executed their May 12, 1989 “compromise agreement” precisely to
give life to their “Contract to Sell.” It merely clarified the total sum owed by petitioner
RILLO to private respondent CORB REALTY with the view that the former would find it
easier to comply with his obligations under the Contract to Sell. In fine, the “compromise
agreement” can stand together with the Contract to Sell.
Nevertheless, we do not agree with the respondent Court so far as it ordered private
respondent CORB REALTY to refund 50% of P158,184.00 or P79,092.00 to petitioner
RILLO. Under Republic Act No. 6552, the right of the buyer to a refund accrues only when
he has paid at least two (2) years of installments. In the case at bar, RILLO has paid less
than two (2) years in installments, hence, he is not entitled to a refund.
IN VIEW WHEREOF, the decision appealed from is AFFIRMED with the
MODIFICATION that the refund of 50%
________________
17Pacific Mills, Inc. v. Court of Appeals, 206 SCRA 317 (1992).
470
470 SUPREME COURT REPORTS ANNOTATED
Patoray vs. Commission on Elections
P158,184.00 or P79,092.00 made in favor of petitioner Emiliano Rillo is deleted. No costs.
SO ORDERED.
Regalado(Chairman), Romero, Mendoza and Torres, Jr., JJ., concur.
Judgment affirmed with modification
32

VOL. 214, SEPTEMBER 18, 1992
De la Cruz vs. Asian Consumer and Industrial Finance Corp.
G.R. No. 94828. September 18, 1992.*
SPOUSES ROMULO DE LA CRUZ and DELIA DE LA CRUZ, and DANIEL FAJARDO,
petitioners, vs.ASIAN CONSUMER AND INDUSTRIAL FINANCE CORPORATION and
the HONORABLE COURT OF APPEALS, respondents.
Contracts; Sale on installment; Foreclosure of chattel mortgage; Application of “Recto
Law”; Remedies of seller-mortgagee alternative, not cumulative.—It is not disputed that the
instant case is covered by the so-called “Recto Law”, now Art. 1484 of the New Civil Code,
which provides: “In a contract of sale of personal property the price of which is payable in
installments, the vendor may exercise any of the follow-ing remedies: (1) Exact fulfillment of
the obligation, should the vendee fail to pay; (2) Cancel the sale, should the vendee’s failure
to pay cover two or more installments; (3) Foreclose the chattel mortgage on the thing sold,
if one has been constituted, should the vendee’s failure to pay cover two or more
installments. In this case, he shall have no further action against the purchaser to recover
any unpaid balance of the price. Any agreement to the contrary shall be void.” In this
jurisdiction, the three (3) remedies provided for in the “Recto Law” are alternative and not
cumulative; the exercise of one would preclude the other remedies. Consequently, should the
vendee-mortgagor default in the payment of two or more of the agreed installments, the
vendormortgagee has the option to avail of any of these three (3) remedies; either to exact
fulfillment of the obligation, to cancel the sale, or to foreclose the mortgage on the purchased
chattel, if one was constituted.
Same; Same; Same; Same; Seller-Mortgagee may still recover unpaid balance of
purchase price where property was not sold at public auction.—It is thus clear that while
ASIAN eventually succeeded in taking possession of the mortgaged vehicle, it did not
pursue the foreclosure of the mortgage as shown by the fact that no auction sale of the
vehicle was ever conducted. As We ruled in Filinvest Credit Corp. v. Phil. Acetylene Co.,
Inc.—“Under the law, the delivery of possession of the mortgaged property to the mortgagee,
the herein appellee, can only operate to extinguish appellant’s liability if the appellee had
actually caused the foreclosure sale of the mortgaged property when it
_____________
* FIRST DIVISION.
104
10 SUPREME COURT REPORTS ANNOTATED
4 “x x x no extrajudicial foreclosure of chattel mortgage ever transpired in the case at bar.
De la Cruz vs. Asian Consumer and Industrial Finance Corp.
recovered possession thereof (Northern Motors, Inc. v. Sapinoso, 33 SCRA 356
[1970]; Universal Motors Corp. v. Dy Hian Tat, 28 SCRA 161 [1969]; Manila Motors Co., Inc.
v. Fernandez, 99 Phil. 782 [1956]). It is worth noting that it is the fact of foreclosure and
actual sale of the mortgaged chattel that bar recovery by the vendor of any balance of the
purchaser’s outstanding obligation not satisfied by the sale (New Civil Code, par. 3, Article
1484). As held by this Court, if the vendor desisted, on his own initiative, from
consummating the auction sale, such desistance was a timely disavowal of the remedy of
foreclosure, and the vendor can still sue for specific performance” (Industrial Finance Corp.
v. Tobias, 78 SCRA 28 [1977]; Radiowealth, Inc. v. Lavin, L-18563, April 27, 1963, 7 SCRA
804; Pacific Commercial Co. v. dela Rama,72 Phil. 380 [1941]). Consequently, in the case
before Us, there being no actual foreclosure of the mortgaged property, ASIAN is correct in
resorting to an ordinary action for collection of the unpaid balance of the purchase price.
Sales 7-9
PETITION for review from the decision of the Court of Appeals.
103
The facts are stated in the opinion of the Court.
BELLOSILLO, J.:
The pivotal point before Us is whether a chattel mortgagee, after opting to foreclose the
mortgage but failing afterwards to sell the property at public auction, may still sue to
recover the unpaid balance of the purchase price.
On 22 September 1982, the spouses Romulo de la Cruz and Delia de la Cruz, and one
Daniel Fajardo, petitioners herein, purchased on installment basis one (1) unit Hino truck
from Benter Motor Sales Corporation (BENTER for brevity). To secure payment, they
executed in favor of BENTER a chattel mortgage over the vehicle 1 and a promissory note for
P282,360.00 payable in thirty (30) monthly installments of P9,412.00.2On the same date,
BENTER assigned its rights and interest over the vehicle in favor of private respondent
Asian Consumer and Industrial Finance Corporation (ASIAN for brevity).3 Although
______________
1 Exh. “C”.
2 Exh. “A”.
3 Exh. “D”.
105
VOL. 214, SEPTEMBER 18, 1992
De la Cruz vs. Asian Consumer and Industrial Finance Corp.
petitioners initially paid some installments they subsequently defaulted on more than two
(2) installments. Thereafter, notwithstanding the demand letter of ASIAN, 4 petitioners
failed to settle their obligation.
On 26 September 1984, by virtue of a petition for extrajudicial foreclosure of chattel
mortgage, the sheriff attempted to repossess the vehicle but was unsuccessful because of the
refusal of the son of petitioner, Rolando de la Cruz, to surrender the same. Hence, the
return of the sheriff that the service was not satisfied.
On 10 October 1984, petitioner Romulo de la Cruz brought the vehicle to the office of
ASIAN and left it there where it was inventoried and inspected.5
On 27 November 1984, ASIAN filed an ordinary action with the court a quofor collection
of the balance of P196,152.99 of the purchase price, plus liquidated damages and attorney’s
fees.6
After trial, the court below rendered judgment in favor of ASIAN.
On appeal, the Court of Appeals affirmed the judgment and held that—
Undoubtedly, plaintiff had first chosen to extrajudicially foreclose the mortgage, but this did
not materialize through no fault of plaintiff, as defendant refused to surrender the Hino
truck. The mere fact that the writ is now in possession of plaintiff and a Technical and
Inspection Report was made in connection therewith is not conclusive of the extrajudicial
foreclosure, for in this kind of foreclosure, possession of the chattel by the sheriff is
necessary, aside from the sale at public auction.”
“Though the remedy of foreclosure was first chosen, this remedy however proved
ineffectual due to no fault of plaintiff. Therefore, plaintiff may exercise other remedies such
as exact fulfillment of the obligation and thereafter recover the deficiency. This is the
essence of the rule of alternative remedies under Article 1484.”
______________
33

4 Exh. “E”.
5 Annex “4”, Repossession and Mechanical Inspection Report and Receipt.
6 Record, p. 16.
106
106 SUPREME COURT REPORTS ANNOTATED
De la Cruz vs. Asian Consumer and Industrial Finance Corp.
Petitioners take exception. While they do not dispute that where the mortgagee elects the
remedy of foreclosure—which, according to them, includes the option to sell in a public or
private sale, commences and pursues it, and in consideration of which he also performs
everything that is incumbent upon him to do to implement the foreclosure—they
nevertheless insist that he should not later be allowed to change course midway in the
process, abandon the foreclosure and shift to other remedies such as collection of the
balance, especially after having recovered the mortgaged chattel from them and while
retaining possession thereof.
We do not agree with petitioners.
It is not disputed that the instant case is covered by the socalled “Recto Law”, now Art.
1484 of the New Civil Code, which provides:
“In a contract of sale of personal property the price of which is payable in installments, the
vendor may exercise any of the following remedies: (1) Exact fulfillment of the obligation,
should the vendee fail to pay; (2) Cancel the sale, should the vendee’s failure to pay cover
two or more installments; (3) Foreclose the chattel mortgage on the thing sold, if one has
been constituted, should the vendee’s failure to pay cover two or more installments. In this
case, he shall have no further action against the purchaser to recover any unpaid balance of
the price. Any agreement to the contrary shall be void.”
In this jurisdiction, the three (3) remedies provided for in the “Recto Law” are alternative
and not cumulative; the exercise of one would preclude the other remedies. Consequently,
should the vendee-mortgagor default in the payment of two or more of the agreed
installments, the vendor-mortgagee has the option to avail of any of these three (3)
remedies: either to exact fulfillment of the obligation, to cancel the sale, or to foreclose the
mortgage on the purchased chattel, if one was constituted.7
The records show that on 14 September 1984 ASIAN initiated a petition for
extrajudicial foreclosure of the chattel mort-
_______________
7 See Pacific Commercial Co. v. De la Rama, 72 Phil. 380 (1941); Manila Motor, Inc. v.
Fernandez, 99 Phil. 782 (1956); Radiowealth v. Lavin, L-18563, April 27, 1963, 7 SCRA 804.
107
VOL. 214, SEPTEMBER 18, 1992
De la Cruz vs. Asian Consumer and Industrial Finance Corp.
gage. But the sheriff failed to recover the motor vehicle from petitioners due to the refusal of
the son of petitioners Romulo and Delia de la Cruz to surrender it. It was not until 10
October 1984, or almost a month later, that petitioners delivered the unit to ASIAN. The
action to recover the balance of the purchase price was instituted on 27 November 1984.
It is thus clear that while ASIAN eventually succeeded in taking possession of the
mortgaged vehicle, it did not pursue the foreclosure of the mortgage as shown by the fact
that no auction sale of the vehicle was ever conducted. As We ruled in Filinvest Credit Corp.
v. Phil. Acetylene Co., Inc.8—
“Under the law, the delivery of possession of the mortgaged property to the mortgagee, the
herein appellee, can only operate to extinguish appellant’s liability if the appellee had
actually caused the foreclosure sale of the mortgaged property when it recovered possession
Sales 7-9
thereof (Northern Motors, Inc. v. Sapinoso, 33 SCRA 356 [1970]; Universal Motors Corp. v.
Dy Hian Tat, 28 SCRA 161 [1969]); Manila Motors Co., Inc. v. Fernandez, 99 Phil.
782 [1956]). It is worth noting that it is the fact of foreclosure and actual sale of the
mortgaged chattel that bar recovery by the vendor of any balance of the purchaser’s
outstanding obligation not satisfied by the sale (New Civil Code, par. 3, Article 1484). As
held by this Court, if the vendor desisted, on his own initiative, from consummating the
auction sale, such desistance was a timely disavowal of the remedy of foreclosure, and the
vendor can still sue for specific performance” (Industrial Finance Corp. v. Tobias, 78 SCRA
28 [1977]; Radiowealth, Inc. v. Lavin, L-18563, April 27, 1963, 7 SCRA 804; Pacific
Commercial Co. v. dela Rama,72 Phil. 380 [1941]).
Consequently, in the case before Us, there being no actual foreclosure of the mortgaged
property, ASIAN is correct in resorting to an ordinary action for collection of the unpaid
balance of the purchase price.
We note however that the trial court, as well as the Court of Appeals, failed to consider
that the vehicle was already in the possession of ASIAN when it directed petitioners herein
to pay P184,466.67 representing the balance of the purchase price of
______________
8 G.R. No. 50449, 30 January 1982, 111 SCRA 421.
108
108 SUPREME COURT REPORTS ANNOTATED
De la Cruz vs. Asian Consumer and Industrial Finance Corp.
the mortgaged property. Law and equity will not permit ASIAN to have its cake and eat it
too, so to speak. By allowing ASIAN to retain possession of the vehicle and then directing
petitioners to pay the unpaid balance would certainly result in unjust enrichment of the
former. Accordingly, the ownership and possession of the vehicle should be returned to
petitioners by ASIAN in the condition that it was when delivered to it, and if this be no
longer feasible, to deduct from the adjudged liability of petitioners the amount of
P60,000.00, its corresponding appraised value.9
WHEREFORE, the assailed decision is AFFIRMED, with the MODIFICATION that the
subject vehicle be returned to petitioners or, at their option, they be allowed to deduct
P60,000.00 from their adjudged liability. No costs.
SO ORDERED.
Griño-Aquino and Medialdea, JJ., concur.
Cruz, J., On leave.
Decision affirmed with modification.
107
34

No. L-14475. May 30, 1961.
SOUTHERN MOTORS,INC., plaintiff-appellee, vs. ANGELO Moscoso, defendant-appellant.
Sale on Installments; Action filed is for specific performance; Mortgaged Property
Attached; Sale of mortgaged property not tantamount to foreclosure of mortgage; Deficiency
judgment.—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.
APPEAL from a judgment of the Court of First Instance of Iloilo.
The facts are stated in the opinion of the Court.
Diosdado Garingalaofor plaintiff-appellee.
Calixto Zaldivar for defendant-appellant.
PAREDES, J.:
The case was submitted on agreed statement of facts.
On June 6, 1957, plaintiff-appellee Southern Motors, Inc. sold to defendant-appellant
Angel Moscoso one Chevrolet truck, on installment basis, for P6,445.00. Upon making a
down payment, the defendant executed a promissory note for the sum of P4,915.00,
representing the unpaid bal-
169
VOL. 2, MAY 30, 1961
Southern Motors, Inc. vs. Moscoso
ance of the purchase price (Annex A, complaint), to secure the payment of which, a chattel
mortgage was constituted on the truck in favor of the plaintiff (Annex B). Of said account of
P4,915.00, the defendant had paid a total of P550.00, of which P110.00 was applied to the
interest up to August 15, 1957, and P400.00 to the principal, thus leaving an unpaid balance
of P4,475.00. The defendant failed to pay 3 installments on the balance of the purchase
price.
On November 4, 1957, the plaintiff filed a complaint against the defendant, to recover
the unpaid balance of the promissory note. Upon plaintiff’s petition, embodied in the
complaint, a writ of attachment was issued by the lower court on the properties of the
defendant. Pursuant thereto, the said Chevrolet truck, and a house and lot belonging to
defendant, were attached by the Sheriff of San Jose, Antique, where defendant was residing
on November 25, 1957, and said truck was brought to the plaintiff’s compound in Iloilo City,
for safe keeping.
After attachment and before the trial of the case on the merits, acting upon the
plaintiff’s motion dated December 23, 1957, for the immediate sale of the mortgaged truck,
the Provincial Sheriff of Iloilo on January 2, 1958, sold the truck at public auction in which
plaintiff itself was the only bidder for P1,000.00. The case had not been set for hearing,
then.
The trial court on March 27, 1958, condemned the defendant to pay the plaintiff the
amount of P4,475.00 with interest at the rate of 12% per annum from August 16, 1957, until
fully paid, plus 10% thereof as attorney’s fees and costs against which defendant interposed
the present appeal, contending that the trial court erred—
1. (1)In not finding that the attachment caused to be levied on the truck and its
immediate sale at public auction, was tantamount to the foreclosure of the
chattel mortgage on said truck; and
Sales 7-9
2. (2)In rendering judgment in favor of the plaintiff-appellee.
Both parties agreed that the case is governed by Article 1484 of the new Civil Case, which
provides:—
170
170 SUPREME COURT REPORTS ANNOTATED
Southern Motors, Inc. vs. Moscoso
“ART. 1484. In a contract of sale of personal property the price of which is payable in
installments, the vendor may exercise any of the following remedies:
1. (1)Exact fulfillment of the obligation, should the vendee fail to pay;
2. (2)Cancel the sale, should the vendee’s failure to pay cover two or more
installments;
3. (3)Foreclose the chattel mortgage on the thing sold, if one has been constituted,
should the vendee’s failure to pay cover two or more installments. In this case,
he shall have no further action against the purchaser to recover any unpaid
balance of the price. Any agreement to the contrary shall be void.”
While the appellee claims that in filing the complaint, demanding payment of the unpaid
balance of the purchase price, it has availed of the first remedy provided in said
article i.e. to exact fulfillment of the obligation (specific performance); the appellant, on the
other hand, contends that appellee had availed itself of the third remedy viz., the foreclosure
of the chattel mortgage on the truck.
The
169 appellant argues that considering history of the law, the circumstances leading to
its enactment, the evil that the law was intended to correct and the remedy afforded (Art.
1454-A of the old Civil Code; Act No. 4122; Bachrach Motor Co. vs. Reyes, 62 Phil. 461, 466-
469); that the appellee did not content itself by waiting for the judgment on the complaint
and then executed the judgment which might be rendered in its favor, against the properties
of the appellant; that the appellee obtained a preliminary attachment on the subject of the
chattel mortgage itself and caused said truck to be sold at public auction, in which he was
bidder for P1,000.00; the result of which, was similar to what would have happened, had it
foreclosed the mortgage pursuant to the provisions of Sec. 14 of Act No. 1508 (Chattel
Mortgage Law); the said appellee had availed itself of the third remedy aforequoted. In
other words, appellant submits that the matter should be looked at, not by the allegations in
the complaint, but by the very effect and result of the procedural steps taken and that
appellee tried to camouflage its acts by filing a complaint purportedly to exact the
fulfillment of an obligation, in an attempt to circumvent the provisions of Article
171
VOL. 2, MAY 30, 1961
Southern Motors, Inc. vs. Moscoso
1484 of the new Civil Code. Appellant concludes that under his theory, a deficiency
judgment would be without legal basis.
We do not share the views of the appellant on this matter. Manifestly, the appellee had
chosen the first remedy. The complaint is an ordinary civil action for recovery of the
remaining unpaid balance due on the promissory note. The plaintiff had not adopted the
procedure or methods outlined by Sec. 14 of the Chattel Mortgage Law but those prescribed
for ordinary civil actions, under the Rules of Court. Had appellee elected the foreclosure, it
would not have instituted this case in court; it would not have caused the chattel to be
attached under Rule 59, and had it sold at public auction, in the manner prescribed by Rule
39. That the herein appellee did not intend to foreclose the mortgage truck, is further
evinced by the fact that it had also attached the house and lot of the appellant at San Jose,
35
 Sales 7-9

Antique. In the case of Southern Motors, Inc. vs. Magbanua, G.R. No. L-8578, Oct. 29, 1956,
we held:
“By praying that the defendant be ordered to pay it the sum of P4,690.00 together with the
stipulated interest of 12% per annum from 17 March 1954 until fully paid, plus 10% of the
total amount due as attorney’s fees and cost of collection, the plaintiff elected to exact the
fulfillment of the obligation, and not to foreclose the mortgage on the truck. Otherwise, it
would not have gone to court to collect the amount as prayed for in the complaint. Had it
elected to foreclose the mortgage on the truck, all the plaintiff had to do was to cause the
truck to be sold at public auction pursuant to section 14 of the Chattel Mortgage Law. The
fact that aside from the mortgaged truck, another Chevrolet truck and two parcels of land
belonging to the defendant were attached, shows that the plaintiff did not intend to foreclose
the mortgage.
“As the plaintiff has chosen to exact the fulfillment of the defendant’s obligation, the
former may enforce execution of the judgment rendered in its favor on the personal and real
property of the latter not exempt from execution sufficient to satisfy the judgment. That
part of the judgment against the properties of the defendant except the mortgaged truck
and discharging the writ of attachment on his other properties is erroneous.”
We perceive nothing unlawful or irregular in appellee’s act of attaching the mortgaged truck
itself. Since herein
172
172 SUPREME COURT REPORTS ANNOTATED
Southern Motors, Inc. vs. Moscoso
appellee has chosen to exact the fulfillment of the appellant’s obligation, it may enforce
execution of the judgment that may be favorably rendered hereon, on all personal and real
properties of the latter not exempt from execution sufficient to satisfy such judgment. It
should be noted that a house and lot at San Jose, Antique were also attached. No one can
successfully contest that the attachment was merely an incident to an ordinary civil action.
(Sections 1 & 11, Rule 59; Sec. 16, Rule 39). The mortgage creditor may recover judgment on
the mortgage debt and cause an execution on the mortgaged property and may cause an
attachment to be issued and levied on such property, upon beginning his civil action (Tizon
vs. Valdez, 48 Phil. 910-911).
IN VIEW HEREOF, the judgment appealed from hereby is affirmed, with costs against
the defendant-appellant.
two years of installments, the buyer is entitled to the following rights in case he defaults in the payment
of succeeding installments:
(a) To pay, without additional interest, the unpaid installments due within the total grace period earned
by him which is hereby fixed at the rate of one month grace period for every one year of installment
payments made: Provided, That this right shall be exercised by the buyer only once in every five years of
the life of the contract and its extensions, if any.
(b) If the contract is canceled, the seller shall refund to the buyer the cash surrender value of the
payments on the property equivalent to fifty per cent of the total payments made, and, after five years
of installments, an additional five per cent every year but not to exceed ninety per cent of the total
payments made: Provided, That the actual cancellation of the contract shall take place after thirty days
from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by a
notarial act and upon full payment of the cash surrender value to the buyer.
Down payments, deposits or options on the contract shall be included in the computation of the total
number of installment payments made.lawphi1™
Section 4. In case where less than two years of installments were paid, the seller shall give the buyer a
grace period of not less than sixty 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 thirty days from receipt by the buyer of the notice of cancellation or the demand for
rescission of the contract by a notarial act.
Section 5. Under Section 3 and 4, 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. The deed of sale or assignment shall be done by notarial act.
Section 6. 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.

Section 7. Any stipulation in any contract hereafter entered into contrary to the provisions of Sections 3,
REPUBLIC ACT No. 6552 4, 5 and 6, shall be null and void.

AN ACT TO PROVIDE PROTECTION TO BUYERS OF REAL ESTATE ON
INSTALLMENT PAYMENTS. (Rep. Act No. 6552)
Section 1. This Act shall be known as the "Realty Installment Buyer Act."
Section 8. If any provision of this Act is held invalid or unconstitutional, no other provision shall be
affected thereby.lawphi1™
Section 9. This Act shall take effect upon its approval.

Section 2. It is hereby declared a public policy to protect buyers of real estate on installment payments
against onerous and oppressive conditions.

Section 3. In all transactions or contracts involving the sale or financing of real estate on installment
payments, including residential condominium apartments but excluding industrial lots, commercial
buildings and sales to tenants under Republic Act Numbered Thirty-eight hundred forty-four, as
amended by Republic Act Numbered Sixty-three hundred eighty-nine, where the buyer has paid at least

36

298 SUPREME COURT REPORTS ANNOTATED
Olympia Housing, Inc. vs. Panasiatic Travel Corporation
G.R. No. 140468. January 16, 2003.*
OLYMPIA HOUSING, INC., petitioner, vs. PANASIATIC TRAVEL CORPORATION and
MA. NELIDA GALVEZ-YCASIANO, respondents.
Civil Law; Contracts; Sales; Republic Act No. 6552, or the “Realty Installment Buyer
Protection Act”; Purpose; The law has been enacted mainly “to protect buyers of real estate on
installment payments against onerous and oppressive conditions.”—The governing law is
Republic Act No. 6552, otherwise known as the “Realty Installment Buyer Protection Act,”
which has become effective since 16 September 1972. Republic Act No. 6552 is a special law
governing transactions that involve, subject to certain exceptions, the sale on installment
basis of real property. The law has been enacted mainly “to protect buyers of real estate on
installment payments against onerous and oppressive conditions.”
Same; Same; Same; Same; Remedies of Seller; The enactment recognizes the right of
the seller to cancel the contract.—The enactment recognizes the right of the seller to cancel
the contract but any such cancellation must be done in conformity with the requirements
therein prescribed. In addition to the notarial act of rescission, the seller is required to
refund to the buyer the cash surrender value of the payments on the property. The actual
cancellation of the contract can only be deemed to take place upon the expiry of a 30-day
period following the receipt by the buyer of the
_______________
* FIRST DIVISION.
299
VOL. 395, JANUARY 16, 2003
Olympia Housing, Inc. vs. Panasiatic Travel Corporation
notice of cancellation or demand for rescission by a notarial act and the full payment
of the cash surrender value.
Civil Procedure; Pleadings and Practice; Complaint; Cause of Action; A party in
litigation should not be permitted to freely and substantially change the theory or the cause of
action of his case.—Nor should a party in litigation be permitted to freely and substantially
change the theory or the cause of action of his case that, otherwise, can put to undue
disadvantage the other party by not being accurately and timely apprised of what he is up
against. The character of an action is determined from the issues raised by the complaint,
from the nature of the right or grievance asserted, and from the relief sought in the
complaint. A change of theory can result in grave alteration of the stand theretofore taken
by the parties, and a court must not thereafter take it upon itself to assume its own position
on, or the factual and legal considerations of, the case.
PETITION for review on certiorari of the decision and resolution of the Court of Appeals.
The facts are stated in the opinion of the Court.
Poblador, Bautista & Reyes for petitioner.
Narciso, Jimenez, Gonzales, Liwanag, Bello, Valdez & Caluya for private
respondents.
VITUG, J.:
Sales 7-9
The petition for review on certiorari before the Court assails the decision, promulgated on 11
June 1999, and the resolution, promulgated on 14 October 1999, of the Court of Appeals
in CA-G.R. CV Case No. 53516.
The case originated from a complaint for Recovery of Possession (Accion
Publiciana) filed by Olympia Housing, Inc., against Panasiatic Travel Corporation, Maria
Nelida Ycasiano and the latter’s husband. The object in litigation is a condominium unit
sold at the price of P2,340,000.00 payable on installments at the rate of P33,657.40 per
month.
On the basis of the facts encapsulated by the trial court, it would appear that—
“On August 8, 1984, plaintiff and defendant Ma. Nelida Galvez-Ycasiano entered into a
Contract to Sell, whereby the former agreed to sell to the latter condominium unit no. D-12,
comprising an area of 160.50 square meters, more or less, situated on the ground floor of
Olympia Con-
300
300 SUPREME COURT REPORTS ANNOTATED
Olympia Housing, Inc. vs. Panasiatic Travel Corporation
dominium located at Makati, Metro Manila, covered by Condominium Certificate of Title
No. 6711, for the agreed price of P2,340,000.00 payable in installments of P33,657.40 per
month.
“The schedule of payments [were] as follows:
Date Particulars
July 17, 1984 Reservation/Deposit
July 19, 1984 50% Down payment
“Balance of 50% payable in sixty (60) monthly installments at 24% per annum base
on diminishing balance.
299“Monthly amortization to commence on Sept. 17, 1984 ..... P33,657.40/month
“Interest of 2% is included in regular monthly amortization, past due amortization
shall bear interest of 2% per month plus penalty charge of 2% per month.
“Pursuant to the Contract to Sell, defendant Ma. Nelida Galvez-Ycasiano made a
reservation/deposit in the amount of P100,000.00 on July 17, 1984 and 50% down payment
in the amount of P1,070,000.00 on July 19, 1984.
“Defendants made several payments in cash and thru credit memos issued by plaintiff
representing plane tickets bought by plaintiff from defendant Panasiatic Travel Corp.,
which is owned by defendant Ma. Nelida Galvez-Ycasiano, who credited/offset the amount of
the said plane tickets to defendant’s account due to plaintiff.
“Plaintiff alleged that far from complying with the terms and conditions of said Contract
to Sell, defendants failed to pay the corresponding monthly installments which as of June 2,
1988 amounted to P1,924,345.52. Demand to pay the same was sent to defendant Ma.
Nelida Galvez-Ycasiano, but the latter failed to settle her obligation.
“For failure of defendant to pay her obligation plaintiff allegedly rescinded the contract
by a Notarial Act of Rescission.
“At present, the subject condominium unit is being occupied by defendant Panasiatic
Travel Corp., hence the suit for Recovery of Possession (Accion Publiciana) with prayer for
attorney’s fees, exemplary damages and reasonable rentals for the unit from July 28, 1988
at the rate of P32,100.00 per month until the condominium unit is finally vacated.
“Defendant Ma. Nelida Galvez-Ycasiano, while admitting the existence of the contract
to sell, interposed the defense that she has made substantial payments of the purchase price
of the subject condominium unit amounting to P1,964,452.82 in accordance with the
provisions of the contract to sell; that she decided to stop payment of the purchase price in
301
37

VOL. 395, JANUARY 16, 2003
Olympia Housing, Inc. vs. Panasiatic Travel Corporation
the meantime because of substantial differences between her and the plaintiff in the
computation of the balance of the purchase price.
“x x x xxx xxx
“Evidence adduced by plaintiff such as the statement of account of defendant Ma.
Nelida Galvez-Ycasiano (Exh. ‘C’) has been established by plaintiff’s witness, Mrs. Isabelita
Rivera, which indeed shows that on several occasions defendant either failed to pay on time
or was completely in default in the payment of the monthly installment of the subject
condominium unit.
“It can be deduced from said documentary evidence that defendant should start paying
the installment on September 17, 1984, but defendant paid on September 21, 1984 the
amount of P51,238.00 thru credit memo. Witness claimed that a credit memo is a document
issued by Olympia Housing, Inc. to Panasiatic Travel Corp. for the amount of ticket
purchased instead of paying in cash they just issued credit memo in order that it would be
offset on the monthly amortization due to Olympia Housing Corp. She claimed that they
based it on the invoice that they [were] sending them.
“Witness further claimed that since the amount due was only P33,657.40 what she did
to the excess of P51,238.00 was to apply it to the next installment. The next installment was
due on October 12, 1984 in the amount of P26,158.00 representing the excess. It was paid
thru credit memo no. 031 on October 17, 1984. In fact, there was still an excess of
P10,081.20. The third installment was due on November 17, 1984. Defendant made partial
payment because the excess payment of P10,081.20 was applied to the third installment.
The 4thinstallment was due on December 17, 1984; the defendant did not pay instead she
paid on January 9, 1985 the amount of P51,619.08 in cash per O.R. No. 295. Before this
payment on January 9, 1985 defendant owed plaintiff P59,931.81 based on the amortization.
The basis [was] the unpaid amortization due and payable plus 2% interest and 2% penalty
charges per month. After payment, the amount due was P8,312.73. The 5th installment was
due on January 17, 1985. No payment was made on the 6th, 7th, 8th, installments which
were due on January, February, March, April 17, 1985 respectively. The 9th installment
was due on May 17, 1985, it was not paid. Defendant made a payment on June 1985 for
P33,231.90 in cash per O.R. No. 439. The next payment was made on June 8, 1985 for
P25,574.59. After these two payments, there was still an outstanding amount due of
P32,552.44. No payment was made on the 10th and 11th installments. The next payment
was made on July 24, 1985 for P60,000.00. After this payment the outstanding amount due
was P43,881.76. She made payment on August 16, 1985 for P30,067.00 thru credit memo no.
045. After this payment the outstanding amount due was P15,160.46. She did not pay on
the 12th installment, instead she paid on August 28, 1985 for P26,043.00 thru credit memo
no.
302
302 SUPREME COURT REPORTS ANNOTATED
Olympia Housing, Inc. vs. Panasiatic Travel Corporation
046. After this payment the outstanding amount due was P23,511.07. She did not pay on
the 13th installment, instead she paid on October 10, 1985 for P20,830.00 thru credit memo
no. 006. After this payment the outstanding amount due was P38,728.61. She did not pay on
the 14th installment, instead payment was made on November 10, 1985 for P16,212.00 thru
credit memo no. 010. After this payment the outstanding amount due was P58,851.83. No
payments were made on the 15th, 16th and 17th installments. She paid on January 30,
1986 for P33,657.40 in cash per O.R. No. 842. After this payment the outstanding balance
was P138,233.23. No payment was made on the 18th and 19th installment which fell due on
February 17 and March 17, 1986. The next payment was made on April 15, 1986 for
P25,263.23. After this payment the outstanding balance was P198,425.88. She did not pay
Sales 7-9
for six (6) consecutive months from April 17 to September 17, 1986 corresponding to the
301
20th up to the 25th installment. The next payment was made on October 14, 1986 for
P82,780.33 in cash per O.R. No. 1628. After this payment the outstanding amount due was
P350,712.73. The 26th and 27th installments were not paid. She paid on November 24, 1986
for P134,629.60. After this payment the outstanding balance was P306,306.66. Witness
claimed that the basis for the computation was the unpaid amortization due payable for the
particular period plus 2% interest and 2% penalty charge per month. In computing the
interest she used the simple method. The 28th up to the 31st installments were not paid.
The next payment was made on April 30, 1987 for P22,213.00 thru credit memo no. 134.
After this payment the outstanding balance was P471,317.60. The basis for this
computation is the unpaid amortization due plus 2% interest and 2% penalty charge per
month. The 33rd, 34th and 35th installments were not paid. The next payment was made on
July 22, 1987 for P19,752.00 thru credit memo no. 146. After this payment the outstanding
balance was P664,822.78. The 36th and 37th installments were not paid.”1
On 31 January 1995, the Regional Trial Court, Branch V, of Makati City ruled thusly—
“WHEREFORE, premises considered, judgment is hereby rendered as follows:
1. “1.As the complaint has been prematurely filed without complying with the
mandate of Republic Act No. 6552, the complaint is hereby dismissed;
2. “2.That the obligation of defendant Maria Nelida Galvez Ycasiano has now become
due and demandable, said defendant is hereby ordered to pay the sum of
P4,007,473.49 as of November 30,
_______________
1 Rollo, pp. 179-184.
303
VOL. 395, JANUARY 16, 2003
Olympia Housing, Inc. vs. Panasiatic Travel Corporation
1. 1994 plus 18% interest per annum, computed from 1 December 1994, but within
sixty days from receipt of a copy of this decision;
2. “3.Upon payment thereof, for plaintiff to issue the corresponding certificate of title
in favor of defendant;
3. “4.In the event that said amount in full is not paid including the current amount
due including the interest sans penalties, then immediately thereafter, without
necessity of demand, the defendants must vacate the premises and all payments
will be charged as rentals to the property.
“No award of damages and attorney’s fees for any parties is being adjudged.
“No costs.”2
Thereupon, respondents tendered the amount of P4,304,026.53 to petitioner via Metrobank
Cashier’s Check No. 00008857. Petitioner refused to accept the payment, constraining
respondents to consign at the disposal of the court a quo the check on 26 April 1995. In an
order, dated 05 June 1996, the check was allowed to be substituted by another cashier’s
check payable to the Clerk of Court of the Makati Regional Trial Court. Complying with yet
another court order of 04 January 1996, respondents deposited the amount of P4,304,026.53
with the Land Bank of the Philippines and subsequently submitted to the court the
corresponding bank book as well as the bank’s verification.
38
 Sales 7-9

Meanwhile, both parties appealed the judgment of the trial court. In its now questioned 4 167 SCRA 627 (1988).
decision of 11 June 1999, the appellate court sustained the trial court. 5 Ibid.
The denial of the motion for reconsideration prompted petitioner to file the instant 6 Rollo, p. 429.

petition for review on certiorari, raising the following assignment of errors, to wit:
“I 305
VOL. 395, JANUARY 16, 2003
“THE COURT OF APPEALS ACTED IN A MANNER NOT IN ACCORD WITH LAW AND
APPLICABLE JURISPRUDENCE OF THE SUPREME COURT WHEN IT FAILED Olympia Housing, Inc. vs. Panasiatic Travel Corporation
AND/OR REFUSED TO RULE UPON THE EFFECT OF THE FILING OF THE fore the trial court was denominated as one for “recovery of possession,” the suit could still
COMPLAINT AND THE NOTARIAL ACT OF RESCISSION ATTACHED THERETO VIS- be considered as a case for judicial rescission considering that the issue of whether or not it
À-VIS THE REQUIREMENTS OF R.A. 6552. was entitled to recover possession over the property subject matter of the contract to sell
_______________ would require, for its resolution, passing upon the initial issue of whether or not the
contract was in fact rescinded by virtue of a notarial act.7
2 Rollo, p. 193. The petition must be denied.
The action for reconveyance filed by petitioner was predicated on an assumption that its
304 contract to sell executed in favor of respondent buyer had been validly cancelled or
rescinded. The records would show that, indeed, no such cancellation took place at any time
304 SUPREME COURT REPORTS ANNOTATED prior to the institution of the action for reconveyance. What had been sent by petitioner to
Olympia Housing, Inc. vs. Panasiatic Travel Corporation respondent was a letter, dated 02 June 1988, that read:
“02 June 1988
“MS. NELIDA GALVEZ
“II Pan Asiatic Travel Corp.
3rd Floor, S & L Building
“THE COURT OF APPEALS ACTED IN A MANNER NOT IN ACCORD WITH LAW Roxas Boulevard, Manila
AND APPLICABLE JURISPRUDENCE OF THE SUPREME COURT IN REFUSING TO “Dear Ms. Galvez:
DECREE THE RESCISSION OF THE SUBJECT CONTRACT TO SELL ON THE “We have sent you many letters in the past asking you to update your payments in
GROUND THAT PETITIONER FAILED TO PAY THE CASH SURRENDER VALUE accordance with the terms of our Contract to Sell dated August 25, 1984 as follows:
PRIOR TO THE FILING OF THE COMPLAINT.
Purchase Price, Unit No. D-12 P2,340,000.00
“III
Terms of Payment:
“THE COURT OF APPEALS ERRED IN AFFIRMING THE TRIAL COURT’S - July 17, 1984, Reservation/
DECISION ALLOWING RESPONDENT YCASIANO TO PAY ON HER ALREADY-
Deposit 100,000.00
DEFAULTED OBLIGATIONS AND, UPON SUCH PAYMENT, ORDERING PETITIONER
TO ISSUE THE CERTIFICATE OF TITLE TO HER.3 - July 19, 1984, 50%
Down payment 1,070,000.00
Respondents, upon the other hand, would insist that the petition should be held devoid of
merit considering that: first, the issues raised in the petition would strike at fundamentally - balance payable in 60
factual questions beyond the province of a petition for review on certiorari with this
monthly installments with
Court; second, there was no valid rescission of the contract to sell on account of the failure of
petitioner to give notice of rescission by notarial act, a requisite laid down in Republic Act 24% p.a. interest on
No. 6552; third, the oft-invoked Layug vs. IAC4 case would scarcely find application, it being
diminishing balance.
a case for annulment of contract, not one for the recovery of possession; fourth, no effective
rescission had taken place on account of the failure of petitioner to pay the cash surrender Monthly payments to commence
value, conformably with the terms of the law; and fifth,there being no valid rescission, the
Sept. 12, 1984 33,657.04/month
contract remained valid and subsisting, still thereby obligating respondents to pay the
_______________
outstanding balance of the purchase price.
In its Reply Brief, petitioner asseverated that, while not categorically made, the Court,
in Layug,5 had held to be sufficiently anchored, nevertheless, an action for judicial rescission
7 Rollo, p. 32.
even if no notarial act of rescission was priorly executed and the non-payment of the cash
surrender value before the filing of the complaint.6Moreover, petitioner argued that while 306
the complaint be- 306 SUPREME COURT REPORTS ANNOTATED
_______________
Olympia Housing, Inc. vs. Panasiatic Travel Corporation
3 Rollo, pp. 29-30.

39
 Sales 7-9

“Further, the law requires also full payment of the cash surrender value to the buyer
Note: Past due payments to bear interest of 2% per month plus
but there is no evidence adduced by the plaintiff that they delivered to the defendant the
penalty charge of 2% per month. cash surrender value. Admittedly, no such full payment of the cash surrender value to the
“You are in default and your overdue account now stands as follows: defendant was made. A mere promise to return is not what the law contemplates.” 9

The governing law is Republic Act No. 6552, otherwise known as the “Realty Installment
Purchase Price P2,340,000.00
Buyer Protection Act,” which has become effective since 16 September 1972. Republic Act
Add: Interest on No. 6552 is a special law governing transactions that involve, subject to certain exceptions,
the sale on installment basis of real property.10 The law has been enacted mainly “to protect
monthly
buyers of real estate on installment payments against onerous and oppressive
Amortizations conditions.”11Section 3 of the statute provides:
849,444.00
“Sec. 3. In all transactions or contracts involving the sale or financing of real estate on
P3,189,444.00
installment payments, including residential condominium apartments but excluding
Add: Interest and industrial lots, commercial buildings and sales to tenants under Republic Act Number
Thirty-eight hundred forty-four as amended by Republic Act Numbered Sixty three hundred
penalties on
eighty-nine, where the buyer has paid at least two years of installments, the buyer is
overdues (Refer entitled to the following rights in case he defaults in the payment of succeeding
installments:
to Exh. ‘A’) 679,002.34
P3,868,446.34
1. “a)To pay without additional interest, the unpaid installments due within the total
Less: Payments (Refer grace period earned by him, which is hereby fixed at the rate of one month grace
period for every one year of installment payments made: Provided, That this
To Exh. ‘B’) 1,944,100.82
right shall be exercised by the buyer only once in every five years of the life of
TOTAL DUE AND DEMANDABLE P1,924,345.52 the contract and its extensions, if any.
“Unless we receive payment in full within 30 days after service of thisnotice upon you, our 2. “b)If the contract is cancelled, the seller shall refund to the buyer the cash
Contract to Sell shall be cancelled and/or rescinded.“Please give this matter its due surrender value of the payments on the property
attention.
“Very truly yours,
_______________
“(Sgd.) Illegible
(Type) FELIX H. LIMCAOCO, JR.
President”8
9 Rollo, p. 191.
10 Layug vs. IAC, supra.
11 Sec. 2, R.A. No. 6552.
As so aptly observed by the courts below, the foregoing communication to the buyer merely
demanded payment within thirty (30) days from receipt thereof with the threat that if the
demand were not heeded, the contract would forthwith be cancelled or rescinded. Nor did 308
the appellate court erroneously ignore the “notarial rescission” attached to the complaint for 308 SUPREME COURT REPORTS ANNOTATED
reconveyance. Apparently, the so-called “notarial rescission” was not sent to
respondents prior to the institution of the case for reconveyance but merely served on Olympia Housing, Inc. vs. Panasiatic Travel Corporation
respondents by way of an attachment to the complaint. In any case, a notarial rescission,
standing alone, could not have invalidly effected, in this case, the cancellation of the
1. equivalent to fifty per cent of the total payments made and, after five years of
contract.
installments, an additional five per cent every year but not to exceed ninety per
_______________
cent of the total payments made: Provided, That the actual cancellation of the
contract shall take place after thirty days from receipt by the buyer of the notice
8 Rollo, p. 59. of cancellation or the demand for rescission of the contract by a notarial act and
upon full payment of the cash surrender value to the buyer.
307
VOL. 395, JANUARY 16, 2003 “Down
307 payments, deposits or options on the contract shall be included in the
computation of the total number of installments made.”
Olympia Housing, Inc. vs. Panasiatic Travel Corporation
As the trial court elaborated in this case: The enactment recognizes the right of the seller to cancel the contract but any such
“A careful study of the evidence presented does not show a notice of cancellation or the cancellation must be done in conformity with the requirements therein prescribed. 12 In
demand for rescission of the contract by a notarial act. The plaintiff appears to be claiming addition to the notarial act of rescission, the seller is required to refund to the buyer the
that the June 2, 1988 letter is a notice of cancellation or a demand for rescission of the cash surrender value of the payments on the property.13The actual cancellation of the
contract by a notarial act. This could not be what the law contemplates. It should be a notice contract can only be deemed to take place upon the expiry of a 30-day period following the
of cancellation or demand for rescission of the contract by notarial act.

40
 Sales 7-9

receipt by the buyer of the notice of cancellation or demand for rescission by a notarial
act and the full payment of the cash surrender value.
The Court agrees with petitioner that it is not precluded from going to the court to
demand judicial rescission in lieu of a notarial act of rescission. This much must be
recognized. Thus, in Layug vs. Intermediate Appellate Court14 the Court has ruled that a
demand for rescission by notarial act would appear to be merely circuitous, consequently
superfluous, with the filing by the seller of an action for annulment of contract and for
recovery of damages. Unfortunately for petitioner, it would be incorrect to apply Layug to
the instant case. Layug isbasically an action for annulment of contract, a kindred concept of
rescission, whereas the instant case before the Court is one for recovery of possession on the
thesis of a prior rescission of the contract covering the property. 15 Not only is
_______________

12 Leaño vs. Court of Appeals,G.R. No. 129018, 15 November 2001, 369 SCRA 36.
13 Rillo vs. Court of Appeals, 274 SCRA 461 (1997).
14 Supra.
15 Paragraph 5 of the complaint alleged that “for failure of Defendants to pay their

unpaid installments to Plaintiff within the grace period of 30 days as mandated by Republic
Act 6552, otherwise known as the Maceda Act, Plaintiff rescinded said contract by a
Notarial Act of Rescission.”

309
VOL. 395, JANUARY 16, 2003 309
Olympia Housing, Inc. vs. Panasiatic Travel Corporation
an action for reconveyance conceptually different from an action for rescission but that, also,
the effects that flow from an affirmative judgment in either case would be materially
dissimilar in various respects. The judicial resolution of a contract gives rise to mutual
restitution which is not necessarily the situation that can arise in an action for
reconveyance. Additionally, in an action for rescission (also often termed as resolution),
unlike in an action for reconveyance predicated on an extrajudicial rescission (rescission by
notarial act), the Court, instead of decreeing rescission, may authorize for a just cause the
fixing of a period.16
Nor should a party in litigation be permitted to freely and substantially change the
theory or the cause of action of his case17that, otherwise, can put to undue disadvantage the
other party by not being accurately and timely apprised of what he is up against. The
character of an action is determined from the issues raised by the complaint, from the
nature of the right or grievance asserted, and from the relief sought in the complaint. 18 A
change of theory can result in grave alteration of the stand theretofore taken by the parties,
and a court must not thereafter take it upon itself to assume its own position on, or the
factual and legal considerations of, the case.
WHEREFORE, all premises considered, the instant petition is DENIED and the
appealed decision is AFFIRMED. No costs.
SO ORDERED.

41

VOL. 167, NOVEMBER 23, 1988
Layug vs. Intermediate Appellate Court
No. L-75364. November 23, 1988.*
ANTONIO LAYUG, petitioner, vs. INTERMEDIATE APPELLATE COURT and RODRIGO GABUYA, respondents.
Civil Law; Contracts; The stipulations of a contract shall be interpreted together attributing to the doubtful ones that sense which may
result from all of them taken jointly.—Petitioner adverts to the stipulation in his contract (a) granting him, as vendee, a "30 days grace period
within which to pay" any yearly installment not paid within the time fixed therefor, and (b) declaring him liable, in the event of his failure to pay
within the grace period, "for interest at the legal rate." He argues that the stipulation indicates that rescission was not envisioned as a remedy
against a failure to pay installments; such failure was not ground for abrogating the contract but merely generated liability for interest at the legal
rate. The argument is unimpressive. It would negate the explicit provision that the failure to pay any of the yearly installments when due (or to
comply with any other covenant) would automatically render the contract null and void. The stipulations of a contract shall be interpreted together,
the law says, attributing to the doubtful ones that sense which may result from all of them taken jointly. The grace period clause should be read
conjointly with the stipulation on rescission, and in such a manner as to give both full effect. It is apparent that there is no such inconsistency
between the two as would support a hypothesis that one cannot be given effect without making the other a dead letter.
Same; Same; Sale; Rulings in Legarda Hermanos v. Saldaña and Calasanz v. Angeles invoked by Layug are inapplicable.—Layug posits
that at the very least, he is entitled to a conveyance of at least 8 of the 12 lots subject of the conditional sale, on the theory that since the total price
of the 12 lots was P1 20,000.00, each lot then had a
_______________
* FIRST DIVISION.
628
628 SUPREME COURT REPORTS ANNOTATED
Layug vs. Intermediate Appellate Court
value of P10,000.00 and, therefore, with his P80,000.00, he had paid in full the price for 8 lots. In support, he invokes our earlier rulings
in Legarda Hermanos v. Saldaña and Calasanz v. Angeles. The cited precedents are however inapplicable. In Legarda Hermanos, the contract of
sale provided for payment of the price of two (2) subdivision lots at P1,500.00 each, exclusive of interest, in 120 monthly installments, and at time of
default, the buyer had already paid P3,582.00, inclusive of interest; and in Calasanz, the agreement fixed a price of P3,720.00 with interest at 7%
per annum, and at time of default, the buyer had paid installments totaling P4,533.38, inclusive of interest. Upon considerations of justice and
equity and in light of the general provisions of the civil law, we resolved in Legarda Hermanos to direct the conveyance of one of the lots to the
buyer since he had already paid more than the value thereof, and in Calasanz, to disallow cancellation by the seller and direct transfer of title to
the buyer upon his payment of the few installments yet unpaid. In both said cases, we strove to equitably allocate the benefits and losses between
the parties to preclude undue enrichment by one at the expense of the other; and by this norm, Layug cannot be permitted to claim that all his
payments should be credited to him in their entirety, without regard whatever to the damages his default might have caused to Gabuya.
Same; Same; Same; Same; Court cannot resort to principles of equity and the general provisions of the Civil Code in resolution of the
controversy because of Republic Act. No. 6552.—It is not however possible, in any event, to apply the rulings in Legarda Hermanos and Calasanz to
the case at bar; i.e., to resort to principles of equity and the general provisions of the Civil Code in resolution of the controversy. That was done in
the cited cases because there was at then no statute specifically governing the situation. It was not so as regards the instant case. At the time of the
execution of the contract in question, and the breach thereof, there was a statute already in force and applicable thereto, Republic Act No. 6552.
This statute makes unnecessary if not indeed improper, a resort to analogous provisions of the Civil Code. It also precludes a resort to principles of
equity it being axiomatic that where there is an adequate remedy at law available to the parties, equity should not come into play. And it allows a
mitigation of the impact of the stringent contractual provisions on Layug and makes possible the grant of some measure of relief to him under the
circumstances of the case.
Same; Same; Same; Same; Same; Even in residential properties, RA 6552 recognizes and reaffirms the vendor's right to cancel the
629
VOL. 167, NOVEMBER 23, 1988
Layug vs. Intermediate Appellate Court
Sales 7-9
contract to sell upon breach and non-payment of the stipulated installments.—R.A. 6552 governs sales of real estate on installments. It
627
recognizes the vendor's right to cancel such contracts upon failure of the vendee to comply with the terms of the sale, but imposes, chiefly for the
latter's protection, certain conditions thereon. We have had occasion to rule that "even in residential properties," the Act "recognizes and reaffirms
the vendor's right to cancel the contract to sell upon breach and non-payment of the stipulated installments x x.
Same; Same; Same; Same; Same; Same; Layug is left only with the right to a refund of the cash surrender value of the payments on the
property equivalent to fifty percent of the total payments made or P40,000.00.—In the case at bar, Layug had paid two (2) annual installments of
P40,000.00 each. He is deemed therefore, in the words of the law, to have "paid at least two years of installments. "He therefore had a grace period
of "one month x x for every year of installment payments made" or two (2) months (corresponding to the two years of installments paid) from
October 5, 1980 within which to pay the final installment. That he made no payment within this grace period is plain from the evidence. He has
thus been left only with the right to a refund of the "cash surrender value of the payments on the property equivalent to fifty percent of the total
payments made" or P40,000.00 (i.e., 1/2 of the total payments of P80,000.00). Such a refund will be the operative act to make effective the
cancellation of the contract by Gabuya, conformably with the terms of the law. The additional formality of a demand on Gabuya's part for rescission
by notarial act would appear, in the premises, to be merely circuitous and consequently superfluous.
PETITION to review the decision of the Intermediate Appellate Court.
The facts are stated in the opinion of the Court.
Francisco Ma. Garciafor petitioner.
Moises F. Dalisay, Sr.for private respondent.
NARVASA, J.:
Involved in the appellate proceedings at bar is a contract for the purchase on installments by Antonio Layug of twelve (12) lots owned by Rodrigo
Gabuya, situated at Barrio Bara-as, Iligan City. The contract, entered into on October 4, 1978, set the price for the lots at P120,000.00 payable in
three (3) yearly
630
630 SUPREME COURT REPORTS ANNOTATED
Layug vs. Intermediate Appellate Court
installments, viz:
1. "1.P40,000.00, Philippine Currency, upon the signing of this agreement/contract.
2. "2.Another P40,000.00 after twelve (12) months or one year from the signing of the contract/agreement.
3. "3.The balance of P40,000.00 after 24 months or two years from the signing of the contract/agreement."
The contract also provided for the automatic cancellation of the contract and forfeiture of all installments thus far paid, which would be considered
as rentals for the use of the lots, to wit:
" x x (S)hould the vendee fail to pay any of the yearly installments when due or otherwise fail to comply with any of the terms and conditions herein
stipulated, then this deed of conditional sale shall automatically and without any further formality, become null and void, and all sums so paid by
the vendee by reason thereof, shall be considered as rentals and the vendor shall then and there be free to enter into the premises, take possession
thereof or sell the properties to any other party."1
Layug paid the first two annual installments, totalling P80,000.00. But he failed to pay the last installment of P40,000.00, which fell due on
October 5, 1980. Gabuya made several informal demands for payment; and when all these proved unavailing, he made a formal written demand
therefor under date of April 18, 1981 which was sent to and received by Layug by registered mail. When this, too, went unheeded, Gabuya finally
brought suit in the Court of First Instance of Lanao del Norte for the annulment of his contract with Layug and for the recovery of damages.2
The Trial Court's judgment went against Layug. It declared the contract of conditional sale cancelled, and forfeited in Gabuya's favor all
payments made by Layug, considering them as rentals for the 12 lots for the period from the perfection of
_______________
1 Rollo, p. 216.
2 Id.,
629p. 43. The suit was docketed as Case No. IV-726 and was raffled to Branch IV of the Court.
631
42
 Sales 7-9

no such inconsistency between the two as would support a hypothesis that one cannot be given effect without making the other a dead letter. The
VOL. 167, NOVEMBER 23, 1988 631
patent and logical import of both provisions, taken together, is that when the vendee fails to pay any installment on its due date, he becomes
Layug vs. Intermediate Appellate Court entitled to a grace period of 30 days to cure that default by paying the amount of the installment plus interest; but that if he should still fail to pay
within the grace period, then rescission of the contract takes place. It was for the judicial affirmation of this plain proposition that the private
the contract in 1978 to June 11,1981, besides requiring him to pay attorney's fees.3The judgment was, on appeal, affirmed by the Court of Appeals,
respondent instituted the original action for annulment which has given rise to this appeal.
except that it made the application of the forfeited payments, as rentals, extend up to the date of its decision: August 30,1985.4
Layug posits that, at the very least, he is entitled to a conveyance of at least 8 of the 12 lots subject of the conditional sale, on the theory that
The Appellate Court overruled Layug's claim that the contract had not fixed the date for the payment of the third and last installment and
since the total price of the 12 lots was P120,000.00, each lot then had a value of P10,000.00 and, therefore, with his P80,000.00, he had paid in full
consequently, he could not be considered to have dafaulted in the payment thereof. A reading of the contract immediately makes possible the
the price for 8 lots. In support, he invokes our earlier rulings in Legarda Hermanos v. Saldaña 9 and Calasanz v. Angeles.10 The cited precedents
determination of the due dates of each yearly installment intended by the parties; the first, on October 4, 1978, the date of execution of the contract;
are however inapplicable. In Legarda Hermanos, the contract of sale provided for payment of the price of two (2) subdivision lots at P1,500.00 each,
the second, after 12 months or 1 year "from the signing of the contract/agreement," or on October 5, 1979, and the third, or last, after "24 months
exclusive of interest, in 120 monthly installments, and at time of default, the buyer had already paid P3,582.00, inclusive of interest; and in
from x x (such) signing," or on October 5, 1980." That it was so understood by Layug is established by the evidence. As observed by the Court of
Calasanz, the agreement fixed a price of P3,720.00 with interest at 7% per annum, and at time of default, the buyer had paid installments totaling
Appeals, when Layug "paid the first (second, actually) yearly installment of P40,000.00 on January 24, 1980, or three (3) months and twenty (20)
P4,533.38, inclusive of interest. Upon considerations of justice and equity and in light of the general provisions of the civil law, we resolved
days beyond October 4, 1979, he paid an additional amount of P800.00 as interest. If he did not agree that the first (second) installment was due on
in Legarda Hermanos to direct the conveyance of one of the lots to the buyer since he had already paid more than the value thereof, and in
October 4, 1979, it puzzles Us why he had to pay an additional amount of P800.00 which was included in the receipt, Exhibit '6'."5
Calasanz, to disallow cancellation by the seller and direct transfer of title to the buyer upon his payment of the few installments yet unpaid. In both
Correctly overruled, too, was Layug's other claim that there was some doubt as to the amount of the balance of his obligation—by his
said cases, we strove to equitably allocate the benefits and losses between the parties to preclude undue enrichment by one at the expense of the
computation he only owed P30,000.00, since there was an advance payment of P10,000.00 made by him for which he should be credited—and this
other; and by this norm, Layug cannot be permitted to claim that all his payments should be credited to him in their entirety, without
had to be first resolved before his obligation to pay the last installment could be exigible. The Court of Appeals declared this to be but a lame excuse
_______________
for his delinquency; the P10,000.00 was in truth part payment of the first installment of P40,000.00; for had it been otherwise, the document of sale
would have reflected it as a
_______________ 9 55 SCRA 328.
10 135 SCRA 323.

3 Rollo, p. 61: Brief for Appellant, p. 2.

634
4 The ponente was Quetulio-Losa, J., with whom concurred Gaviola, Jr. and Luciano, JJ.
5 Rollo, p. 56. 634 SUPREME COURT REPORTS ANNOTATED

632 Layug vs. Intermediate Appellate Court

regard whatever to the damages his default might have caused to Gabuya.
632 SUPREME COURT REPORTS ANNOTATED
It is not however possible, in any event, to apply the rulings in Legarda Hermanos and Calasanz to the case at bar; i.e., to resort to principles
Layug vs. Intermediate Appellate Court of equity and the general provisions of the Civil Code in resolution of the controversy. That was done in the cited cases because there was at then no
statute specifically governing the situation. It was not so as regards the instant case. At the time of the execution of the contract in question, and
separate and distinct payment from the first installment of P40,000.00 paid upon the signing of the agreement; but Layug subscribed to the
the breach thereof, there was a statute already in force and applicable thereto, Republic Act No. 6552.11 This statute makes unnecessary if not
contract without asking for its revision. According to the Court of Appeals, "If the theory of the defendant-appellant that the P10,000.00 was
indeed improper, a resort to analogous provisions of the Civil Code. It also precludes a resort to principles of equity it being axiomatic that where
separate and distinct from the down payment of P40,000.00, then the balance as set forth in subpars. 2 and 3 quoted above should have been
there is an adequate remedy at law available to the parties, equity should not come into play.12 And it allows a mitigation of the impact of the
(correspondingly amended, e.g.,) P35,000.00 each, or a total of P70,000.00 for both installments, instead of P40,000.00 per installment, or a total of
stringent contractual provisions on Layug and makes possible the grant of some measure of relief to him under the circumstances of the case.
P80,000.00."6
R.A. 6552 governs sales of real estate on installments. It recognizes the vendor's right to cancel such contracts upon failure of the vendee to
Prescinding from the well established and oft applied doctrine that the findings of fact of the Court of Appeals are conclusive and generally
comply with the terms of the sale, but imposes, chiefly for the latter's protection, certain conditions thereon. We have had occasion to rule that
binding even on this Court,7nothing in the record has been brought to our attention to justify modification, much less reversal, of those findings.
"even in residential properties," the Act "recognizes and reaffirms the vendor's right to cancel the contract to sell upon breach and nonpayment of
Petitioner adverts to the stipulation in his contract (a) granting him, as vendee, a "30 days grace period within which to pay" any yearly
the stipulated installments x x."13
installment not paid within the time fixed therefor, and (b) declaring him liable, in the event of his failure to pay within the grace period, "for
The law provides inter alia 14 that "in all transactions or contracts involving the sale or financing of real estate on installment payments,
interest at the legal rate." He argues that the stipulation indicates that rescission was not envisioned as a remedy against a failure to pay
including residential condominium apartments, x x,15 where the buyer has paid at least two years of install-
installments; such failure was not ground for abrogating the contract but merely generated liability for interest at the legal rate. The argument is
_______________
unimpressive. It would negate the explicit provision that the failure to pay any of the yearly installments when due (or to comply with any other
covenant) would automatically render the contract null and void. The stipulations of a contract shall be interpreted together, the law
says,8attributing to the doubtful ones that sense which may result from all of them taken jointly. The grace period clause should be read conjointly 11 Effective Sept. 14,1972.

with the stipulation on rescission, and in such a manner as to give both full effect. It is apparent that there is 12 27 Am. Jr. 2d., p. 522.

_______________ 13 Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc., 86 SCRA 308.
14 Sec. 3.
15 ". . but excluding industrial lots, commercial buildings and sale to tenants under Republic Act Numbered Thirty-eight hundred forty-four,
6 Rollo, p. 57.
as amended by Republic Act Numbered Sixty-three hundred eighty-nine.
7 Estate of Rodolfo Jalandoni, etc. v. C.A, 144 SCRA 334; Republic v. I.A.C., 145 SCRA 25; Balde v. CA., 150 SCRA 365; Cu Bie v. I.A.C., 154
SCRA 599; Knecht v. C.A., G.R. No. 65114, February 23 1988.
635
8 ART. 1374, Civil Code.

VOL. 167, NOVEMBER 23, 1988

633
Layug vs. Intermediate Appellate Court
VOL. 167, NOVEMBER 23, 1988 633
ments, the buyer is entitled to the following rights in case he defaults in the payment of succeeding installments:
Layug vs. Intermediate Appellate Court [Grace Period]

43
 Sales 7-9

"(a) To pay, without additional interest, the unpaid installments due within the total grace period earned by him which is hereby fixed at the
rate of one month grace period for every year of installment payments made: Provided , That this right shall be exercised by the buyer only once in
every five years of the life of the contract and its extensions, if any;
[Refund of "Cash Surrender Value"]
"(b) If the contract is cancelled, the seller shall refund to the buyer the cash surrender value of the payments on the property equivalent to fifty
percent of the total payments made and, after five years of installments, an additional five percent every year but not to exceed ninety per cent of
the total payments made; Provided, That the actual cancellation of the contract shall take place after thirty days from receipt by the buyer of the
notice of cancellation or the demand for rescission of the contract by a notarial act and upon full payment of the cash surrednder value to the
buyer."

In the case at bar, Layug had paid two (2) annual installments of P40,000.00 each. He is deemed therefore, in the words of the law, to have "paid at
least two years of install-ments." He therefore had a grace period of "one month x x for every year of installment payments made," or two (2) months
(corresponding to the two years of installments paid) from October 5, 1980 within which to pay the final installment. That he made no payment
within this grace period is plain from the evidence. He has thus been left only with the right to a refund of the "cash surrender value of the
payments on the property equivalent to fifty percent of the total payments made," or P40,000.00 (i.e., 1/2 of the total payments of P80,000.00). Such
refund will be the operative act to make effective the cancellation of the contract by Gabuya, conformably with the terms of the law. The additional
formality of a demand on Gabuya's part for rescission by notarial act would appear, in the premises, to be merely circuitous and consequently
superfluous.
WHEREFORE, the decision of the Court of Appeals is AFFIRMED particularly in so far as it authorizes and sanctions
636

636 SUPREME COURT REPORTS ANNOTATED

De Tavera vs. Cacdac, Jr.

the cancellation by private respondent Gabuya of his contract of sale. with petitioner Layug, but is MODIFIED only in the sense that such
cancellation shall become effective and fully operative only upon payment to the latter's satisfaction of the "cash surrender value" of his payments,
in the sum of P40,000.00. No costs.

44

October 22, 2014. G.R. No. 160107.*
SPOUSES JAIME SEBASTIAN and EVANGELINE SEBASTIAN, petitioners, vs.BPI
FAMILY BANK, INC., CARMELITA ITAPO and BENJAMIN HAO, respondents.
Remedial Law; Civil Procedure; Appeals; It is well-settled that no question will be
entertained on appeal unless it has been raised in the proceedings below.—The petitioners
could not raise the applicability of Republic Act No. 6552, or the strict construction of the
loan agreement for being a contract of adhesion as issues for the first time either in their
motion for reconsideration or in their petition filed in this Court. To allow them to do so
would violate the adverse parties’ right to fairness and due process. As the Court held
in S.C. Megaworld Construction and Development Corporation v. Parada, 705 SCRA 584
(2013): It is well-settled that no question will be entertained on appeal unless it has been
raised in the proceedings below. Points of law, theories, issues and arguments not brought
to the attention of the lower court, administrative agency or quasi-judicial body, need
not be considered by the viewing court, as they cannot be raised for the first time at that
late stage. Basic considerations of fairness and due process impel this rule. Any issue raised
for the first time on appeal is barred by estoppel.
Civil Law; Sale of Real Property on Installments; Maceda Law; Realty Installment
Buyer Protection Act (R.A. No. 6552); Republic Act (RA) No. 6552 was enacted to protect
buyers of real estate on installment payments against onerous and oppressive conditions.—
Republic Act No. 6552 was enacted to protect buyers of real estate on installment payments
against onerous and oppressive conditions. The protections accorded to the buyers were
embodied in Sections 3, 4 and 5 of the law.
Same; Same; Same; It bears emphasizing that Republic Act (RA) No. 6552 aimed to
protect buyers of real estate on installment payments, not borrowers or mortgagors who
obtained a housing loan to pay the costs of their purchase of real estate and used the real
_______________
* FIRST DIVISION.
10
10 SUPREME COURT REPORTS ANNOTATED
Sebastian vs. BPI Family Bank, Inc.
estate as security for their loan.—It bears emphasizing that Republic Act No. 6552
aimed to protect buyers of real estate on installment payments, not borrowers or
mortgagors who obtained a housing loan to pay the costs of their purchase of real estate and
used the real estate as security for their loan. The “financing of real estate in installment
payments” referred to in Section 3, supra, should be construed only as a mode of
payment vis-à-vis the seller of the real estate, and excluded the concept of bank financing
that was a type of loan. Accordingly, Sections 3, 4 and 5, supra, must be read as to grant
certain rights only to defaulting buyers of real estate on installment, which rights are
properly demandable only against the seller of real estate.
Labor Law; Termination of Employment; Separation Pay; Illegal Dismissal;
Separation pay may be awarded to an illegally dismissed employee in lieu of
reinstatement.—As fittingly ruled in Bani Rural Bank, Inc. v. De Guzman, 709 SCRA 330
(2013): “By jurisprudence derived from this provision, separation pay may [also] be awarded
to an illegally dismissed employee in lieu of reinstatement.” Section 4(b), Rule I of the Rules
Implementing Book VI of the Labor Code provides the following instances when the award
of separation pay, in lieu of reinstatement to an illegally dismissed employee, is proper: (a)
when reinstatement is no longer possible, in cases where the dismissed employee’s position
is no longer available; (b) the continued relationship between the employer and the
employee is no longer viable due to the strained relations between them;
Sales 7-9
and (c) when the dismissed employee opted not to be reinstated, or the payment of
separation benefits would be for the best interest of the parties involved. In these
instances, separation pay is the alternative remedy to reinstatement in addition to the
award of backwages. The payment of separation pay and reinstatement are
exclusive remedies. The payment of separation pay replaces the legal consequences of
reinstatement to an employee who was illegally dismissed.
Civil Law; Mortgages; Foreclosure of Mortgage; The foreclosure of a mortgage is but
the necessary consequence of the nonpayment of an obligation secured by the mortgage.—The
foreclosure of a mortgage is but the necessary consequence of the nonpayment of an
obligation secured by the mortgage. Where the parties have stipulated in their agreement,
mortgage contract and promissory note
11
VOL. 739, OCTOBER 22, 2014
Sebastian vs. BPI Family Bank, Inc.
that the mortgagee is authorized to foreclose the mortgage upon the mortgagor’s
default, the mortgagee has a clear right to the foreclosure in case of the mortgagor’s default.
Thereby, the issuance of a writ of preliminary injunction upon the application of the
mortgagor to prevent the foreclosure will be improper.
PETITION for review on certiorari of a decision of the Court of Appeals.
The facts are stated in the opinion of the Court.
Santiago, Cruz & Sartefor petitioners.
Benedicto, Verzosa, Gealogo & Burkley Law Offices for respondent BPI.
BERSAMIN,J.:
The protection of Republic Act No. 6552 (Realty Installment Buyer Protection Act) does
not cover a loan extended by the employer to enable its employee to finance the purchase of
a house and lot. The law protects only a buyer acquiring the property by installment, not a
borrower whose rights are governed by the terms of the loan from the employer.
The Case
Under appeal is the decision promulgated on November 21, 2002,1whereby the Court of
Appeals (CA) affirmed the dismissal of the action for injunction filed by the petitioners
against the respondents to prevent the foreclosure of the mortgage constituted on the house
and lot acquired out of the proceeds of the loan from respondent BPI Family Bank (BPI
Family), their employer.
_______________
1 Rollo, pp. 10-19; penned by Associate Justice Ruben T. Reyes (later Presiding Justice,
and a member of the Court, but already retired), with Associate Justices Remedios Salazar-
Fernando and Edgardo F. Sundiam (deceased), concurring.
12
12 SUPREME COURT REPORTS ANNOTATED
Sebastian vs. BPI Family Bank, Inc.
Antecedents
The petitioners are spouses who used to work for BPI Family. At the time material to
this case, Jaime was the Branch Manager of BPI Family’s San Francisco del Monte Branch
45
 Sales 7-9

in Quezon City and Evangeline was a bank teller at the Blumentritt Branch in Manila. On _______________
October 30, 1987, they availed themselves of a housing loan from BPI Family as one of the
benefits extended to its employees. Their loan amounted to P273,000.00, and was covered by 8 Id., at p. 21.
a Loan Agreement,2 whereby they agreed that the loan would be payable in 108 equal 9 Id., at p. 22.
monthly amortizations of P3,277.57 starting on January 10, 1988 until December 10,
1996;3 and that the monthly amortizations would be deducted from his monthly salary. 4 To 14
secure the payment of the loan, they executed a real estate mortgage in favor of BPI
Family5 over the property situated in Bo. Ibayo, Marilao, Bulacan and covered by TCT No. 14 SUPREME COURT REPORTS ANNOTATED
T-30.827 (M) of the Register of Deeds of Bulacan.6 Sebastian vs. BPI Family Bank, Inc.
Apart from the loan agreement and the real estate mortgage, Jaime signed an undated
letter-memorandum addressed to BPI Family,7 stating as follows: Demand is also made upon you to pay in full whatever outstanding obligations by way
In connection with the loan extended to me by BPI Family Bank, I hereby authorize you of Housing Loans, Salary Loans, etc. that you may have with the bank. You are well
to automatically deduct an amount from my salary or any money due to me to be applied to aware that said obligations become due and demandable upon your separation
my loan, more particularly described as follows: from the service of the bank.10(Emphasis supplied)
xxxx
This authority is irrevocable and shall continue to exist until my loan is fully paid. I
hereby declare that I Immediately, the petitioners filed a complaint for illegal dismissal against BPI Family
in the National Labor Relations Commission (NLRC).11
_______________ About a year after their termination from employment, the petitioners received a
demand letter dated January 28, 1991 from BPI Family’s counsel requiring them to pay
their total outstanding obligation amounting to P221,534.50.12The demand letter stated that
2 Records, pp. 14-19. their entire outstanding balance had become due and demandable upon their separation
3 Id., at p. 20. from BPI Family. They replied through their counsel on February 12, 1991. 13
4 Id. In the meantime, BPI Family instituted a petition for the foreclosure of the real estate
5 Id., at pp. 60-61. mortgage.14 The petitioners received on March 6, 1991 the notice of extrajudicial foreclosure
6 Id., at pp. 11-13. of mortgage dated February 21, 1991.
7 Id., at p. 20. To prevent the foreclosure of their property, the petitioners filed against the
respondents their complaint for injunction and damages with application for preliminary
13 injunction and restraining order15 in the Regional Trial Court (RTC) in Malolos,
VOL. 739, OCTOBER 22, 2014 Bulacan.
13 16 They therein alleged that their obligation was not yet due and demandable
considering that the legality of their dismissal was still pending resolution by the labor
Sebastian vs. BPI Family Bank, Inc. _______________
have signed this authority fully aware of the circumstances leading to the loan extended to
me by BPI Family Bank and with full knowledge of the rights, obligations, and liabilities of 10 Id., at pp. 21-22.
a borrower under the law. 11 Id., at pp. 23-24.
I am an employee of BPI Family Bank and I acknowledge that BPI Family 12 Id., at p. 76.
Bank has granted to me the above mentioned loan in consideration of this 13 Id., at p. 71.
relationship. In the event I leave, resign or am discharged from the service of BPI 14 Records, p. 180, TSN of April 10, 1991, p. 5.
Family Bank or my employment with BPI Family Bank is otherwise terminated, I 15 Id., at pp. 3-10.
also authorize you to apply any amount due me from BPI Family Bank to the 16 Raffled to Branch 10 and docketed as Civil Case No. 155-M-91.
payment of the outstanding principal amount of the aforesaid loan and the
interest accrued thereon which shall thereupon become entirely due and 15
demandable on the effective date of such discharge, resignation or termination
without need of notice of demand, and to do such other acts as may be necessary VOL. 739, OCTOBER 22, 2014
under the circumstances. (Bold emphasis added) Sebastian vs. BPI Family Bank, Inc.
x x x x.
court; hence, there was yet no basis for the foreclosure of the mortgaged property; and
that the property sought to be foreclosed was a family dwelling in which they and their four
children resided.
The petitioners’ monthly loan amortizations were regularly deducted from Jaime’s
In its answer with counterclaim,17 BPI Family asserted that the loan extended to the
monthly salary since January 10, 1988. On December 14, 1989, however, Jaime received a
petitioners was a special privilege granted to its employees; that the privilege was
notice of termination from BPI Family’s Vice President, Severino P. Coronacion,8informing
coterminous with the tenure of the employees with the company; and that the foreclosure of
him that he had been terminated from employment due to loss of trust and confidence
the mortgaged property was justified by the petitioners’ failure to pay their past due loan
resulting from his wilful nonobservance of standard operating procedures and banking laws.
balance.
Evangeline also received a notice of termination dated February 23, 1990,9 telling her of the
cessation of her employment on the ground of abandonment. Both notices contained a
Judgment of the RTC
demand for the full payment of their outstanding loans from BPI Family, viz.:

46
 Sales 7-9

17
On June 27, 1995, the RTC rendered judgment,18disposing thusly:
VOL. 739, OCTOBER 22, 2014
IN VIEW OF THE FOREGOING CONSIDERATIONS, the Court hereby renders
judgment DISMISSING the instant case as well as defendant bank’s counterclaim without Sebastian vs. BPI Family Bank, Inc.
any pronouncement as to costs. WHETHER OR NOT RESPONDENT COURT OF APPEALS GRAVELY ERRED IN
SO ORDERED.19 DECLARING THE FORECLOSURE OF THE REAL ESTATE MORTGAGE ON
PETITIONERS’ FAMILY HOME IN ORDER.

Decision of the CA WHETHER OR NOT RESPONDENT COURT OF APPEALS GRAVELY ERRED IN

The petitioners appealed upon the following assignment of errors, namely:
THE TRIAL COURT ERRED IN FINDING THAT APPELLEE BANK’S
FORECLOSURE OF THE REAL ESTATE MORTGAGE CONSTITUTED ON
APPELLANT’S FAMILY HOME WAS IN ORDER. I.
A. Appellants cannot be considered as terminated from their employment with appellee
bank
_______________
17 Records, pp. 85-89.
18 CA Rollo, pp. 38-45.
19 Id., at p. 45.
16
16 SUPREME COURT REPORTS ANNOTATED
Sebastian vs. BPI Family Bank, Inc.
during the pendency of their complaint for illegal dismissal with the NLRC.
B. Appellee bank wrongfully refused to accept the payments of appellants’ monthly
amortizations.
THE TRIAL COURT ERRED IN DENYING APPELLANT’S PRAYER FOR
INJUNCTION. II.
A. The foreclosure of appellants’ mortgage was premature.
B. Appellants are entitled to damages.20
On November 21, 2002, the CA promulgated its assailed decision affirming the
judgment of the RTC in toto.21
The petitioners then filed their motion for reconsideration, 22 in which they
contended for the first time that their rights under Republic Act No. 6552 (Realty
Installment Buyer Protection Act) had been disregarded, considering that Section 3 of the
law entitled them to a grace period within which to settle their unpaid installments without
interest; and that the loan agreement was in the nature of a contract of adhesion that must
be construed strictly against the one who prepared it, that is, BPI Family itself.
On September 18, 2003, the CA denied the petitioners’ motion for reconsideration. 23
Issues
DENYING PETITIONERS’ MOTION FOR RECONSIDERATION DESPITE JUSTIFIABLE
REASONS THEREFOR.24
Ruling
The petition for review has no merit.
When the petitioners appealed the RTC decision to the CA, their appellants’ brief
limited the issues to the following:
(a) Whether or not appellee bank wrongfully refused to accept payments by appellants
of their monthly amortizations.
(b) Whether or not the foreclosure of appellants’ real estate mortgage was premature. 25
The CA confined its resolution to these issues. Accordingly, the petitioners could not
raise the applicability of Republic Act No. 6552, or the strict construction of the loan
agreement for being a contract of adhesion as issues for the first time either in their motion
for reconsideration or in their petition filed in this Court. To allow them to do so would
violate the adverse parties’ right to fairness and due process. As the Court held in S.C.
Megaworld Construction and Development Corporation v. Parada:26
It is well-settled that no question will be entertained on appeal unless it has been raised
in the proceed-
_______________
24 Id., at pp. 38-39.
25 CA Rollo, pp. 29-30.
26 G.R. No. 183804, September 11, 2013, 705 SCRA 584, 594.
18
18 SUPREME COURT REPORTS ANNOTATED
Sebastian vs. BPI Family Bank, Inc.
ings below. Points of law, theories, issues and arguments not brought to the attention of the
lower court, administrative agency or quasi-judicial body, need not be considered by
the viewing court, as they cannot be raised for the first time at that late stage. Basic
considerations of fairness and due process impel this rule. Any issue raised for the first time
on appeal is barred by estoppel.

In this appeal, the petitioners submit for our consideration and resolution the following
issues, to wit: The procedural misstep of the petitioners notwithstanding, the Court finds no
_______________ substantial basis to reverse the judgments of the lower courts.
Republic Act No. 6552 was enacted to protect buyers of real estate on installment
20 Id., at p. 30. payments against onerous and oppressive conditions.27 The protections accorded to the
21 Rollo, p. 19. buyers were embodied in Sections 3, 4 and 5 of the law, to wit:
22 CA Rollo, pp. 81-90. In all transactions or contracts, involving the sale or financing of real estate on
23 Rollo, p. 31. installment payments, including residential condominium apartments but excluding

47

industrial lots, commercial buildings and sales to tenants under Republic Act Numbered
Thirty-Eight hundred forty-four as amended by Republic Act Sixty-three hundred eighty-
nine, where the buyer has paid at least two years of installments, the buyer is entitled to
the following rights in case he defaults in the payment of succeeding installments: 3.
Section
To pay, without additional interest, the unpaid installments due within the total grace
period earned by him which is hereby fixed at that rate of one month grace period for every
one year of installment payments made; (a) provided, That this right shall be exercised by
the Buyer only once in every five years of the life of the contract and its extensions, if any.
If the contract is cancelled, the seller shall refund to the buyer the cash surrender value
of the payments on the property equivalent to fifty percent of the total payments made, and,
after five years of install- (b)
_______________
27 Section 2, Republic Act No. 6552.
19
VOL. 739, OCTOBER 22, 2014
Sebastian vs. BPI Family Bank, Inc.
ments, an additional five percent every year but not to exceed ninety percent of the total
payments made; Provided, That the actual cancellation or the demand for rescission of the
contract by a notarial act and upon full payment of the cash surrender value to the buyer.
Down payments, deposits or options on the contract shall be included in the
computation of the total number of installment payments made.
In case where less than two years of installments were paid, the seller shall give the
buyers a grace period of not less than sixty days from the date the installment become due.
4. SECTION
If the buyer fails to pay the installments due at the expiration of the grace period, the
seller may cancel the contract after thirty days from receipt by the buyer of the notice of
cancellation or the demand for rescission of the contract by a notarial act.
Under Sections 3 and 4, 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. The deed of sale or assignment
shall be done by notarial act. 5. SECTION
Having paid monthly amortizations for two years and four months, the petitioners now
insist that they were entitled to the grace period within which to settle the unpaid
amortizations without interest provided under Section 3, supra.28Otherwise, the foreclosure
of the mortgaged property should be deemed premature inasmuch as their obligation was
not yet due and demandable.29
The petitioners’ insistence would have been correct if the monthly amortizations being
paid to BPI Family arose from a sale or financing of real estate. In their case, however, the
monthly amortizations represented the installment payments
_______________
28 Rollo, p. 41.
29 Id., at p. 42.
20
20 SUPREME COURT REPORTS ANNOTATED
Sales 7-9
Sebastian vs. BPI Family Bank, Inc.
of a housing loan that BPI Family had extended to them as an employee’s benefit. The
monthly amortizations they were liable for was derived from a loan transaction, not a sale
transaction, thereby giving rise to a lender-borrower relationship between BPI Family and
the petitioners. It bears emphasizing that Republic Act No. 6552 aimed to protect buyers of
real estate on installment payments, not borrowers or mortgagors who obtained a
housing loan to pay the costs of their purchase of real estate and used the real estate as
security for their loan. The “financing of real estate in installment payments” referred to in
Section 3, supra, should be construed only as a mode of payment vis-à-vis the seller of the
real estate, and excluded the concept of bank financing that was a type of loan. Accordingly,
Sections 3, 4 and 5, supra, must be read as to grant certain rights only to defaulting buyers
of real estate on installment, which rights are properly demandable only against the seller
of real estate.
Thus, in Luzon Brokerage Co., Inc. v. Maritime Building Co., Inc.,30 the Court held:
Congress in enacting in September 1972 Republic Act 6552 (the Maceda law), has by
law which is its proper and exclusive province (and not that of this Court which is not
supposed to legislate judicially) has taken care of Justice Barredo’s concern over “the
unhappy and helpless plight of thousands upon thousands of subdivision buyers”
of residential
19 lots.
The Act even in residentialproperties recognizes and reaffirms the vendor’s right to
cancel the contract to sell upon breach and nonpayment of the stipulated installments but
requires a grace period after at least two years of regular installment payments (of one
month for every one year of installment payments made, but to be exercise by the buyer
only once in every five years of the life of the contract) with a refund of certain percentages
of payments made on account of the cancelled contract
_______________
30 No. L-25885, November 16, 1978, 86 SCRA 305, 329-330.
21
VOL. 739, OCTOBER 22, 2014
Sebastian vs. BPI Family Bank, Inc.
(starting with fifty percent with gradually increasing percentages after five years of
installments). In case ofindustrial and commercial properties, as in the case at bar, the
Act recognizes and reaffirmsthe Vendor’s right unqualifiedlyto cancel the sale upon the
buyer’s default.
The petitioners purchased the real estate from PHILVILLE Realty, 31 not from BPI
Family. Without the buyer-seller relationship between them and BPI Family, the provisions
of Republic Act No. 6552 were inapplicable and could not be invoked by them against BPI
Family.
Apart from relying on the grace period provided in Republic Act No. 6552 to assert the
prematurity of the foreclosure of the mortgage,32 the petitioners argue that the foreclosure of
the mortgage was null and void because BPI Family’s acceptance of their late payments
estopped it from invoking sanctions against them.33 They further argue that the printed
conditions appearing at the back of BPI Family’s official receipt,34which the CA cited to
affirm the validity of the foreclosure, partook of a contract of adhesion that must be strictly
construed against BPI Family as the party who prepared the same. 35
The petitioners’ arguments do not persuade. To reiterate, their reliance on Republic Act
No. 6552 was misplaced because its provisions could not extend to a situation bereft of any
seller-buyer relationship. Hence, they could not escape
48

_______________
31 Records, p. 108, TSN of March 19, 1991.
32 Rollo, pp. 41-43.
33 Id., at pp. 44-45.
34 “Acceptance of payment, after any delay or default or breach of contract by Borrower
shall not make, alter or discharge contracts, prejudice any of the Bank’s rights, remedies or
pending legal actions or waive forfeitures or remedies stipulated in the contracts/agree-
ments/notes due to Borrower’s default. x x x” Records, p. 221.
35 Rollo, pp. 43-44.
22
22 SUPREME COURT REPORTS ANNOTATED
Sebastian vs. BPI Family Bank, Inc.
the consequences of the maturity of their obligation by invoking the grace period
provided in Section 3, supra.
The CA correctly found that there was basis to declare the petitioners’ entire
outstanding loan obligation mature as to warrant the foreclosure of their mortgage. It is
settled that foreclosure is valid only when the debtor is in default in the payment of his
obligation.36 Here, the records show that the petitioners were defaulting borrowers, a fact
that the CA thoroughly explained in the following manner:
Appellants insist that there was no valid ground for appellee bank to institute the
foreclosure proceedings because they still have a pending case for illegal dismissal before
the NLRC. They argue that the reason for the bank’s foreclosure is their dismissal from
employment. As they are still questioning the illegality of their dismissal, the bank has no
legal basis in foreclosing the property.
xxxx
The arguments fail to persuade Us.
First, appellants cannot rely on the mere possibility that if the decision of the NLRC
will be in their favor, part of the reliefs prayed for would be reinstatement without loss of
seniority and other privilege. Such argument is highly speculative. On the contrary, in a
thirteen-page decision, the Labor Arbiter exhaustively discussed the validity of appellant
Jaime Sebastian’s termination. x x x
xxxx
Moreover, appellants appealed the Labor Arbiter’s decision as early as January 10,
1994. To date, however, nothing has been heard from appellants if they obtained a favorable
judgment from the NLRC.
_______________
36 Development Bank of the Philippines v. Licuanan, G.R. No. 150097, February 26,
2007, 516 SCRA 644, 650.
23
VOL. 739, OCTOBER 22, 2014
Sebastian vs. BPI Family Bank, Inc.
Second, even if it turns out the appellants were not validly terminated from their
employment, there is valid reason to foreclose the mortgaged property.
Appellants themselves admit that they were in arrears when they made the late
payments in March, 1991. While this admission was not in the course of the testimony of
appellant Jaime Sebastian, this was done during the hearing of the case when the trial
judge propounded the question to him. Hence, this constitute (sic) judicial admission. An
Sales 7-9
admission, verbal or written, made by a party in the course of the trial or other proceedings
in the same case does not require proof. The admission may be contradicted only by showing
that it was made through palpable mistake or that no such admission is made. Judicial
admissions are those made voluntarily by a party, which appear on record in the
proceedings of the court. Formal acts done by a party or his attorney in court on the trial of
a cause for the purpose of dispensing with proof by the opposing party of some fact claimed
by the latter to be true.
xxxx
Fourth, the terms and conditions of the loan agreement, promissory notes and the real
estate mortgage contract, do not partake of a contract of adhesion. It must be noted that
appellants are personnel of the bank. Jaime Sebastian was then a branch manager while his
wife Evangeline was a bank teller. It is safe to conclude that they are familiar with the
documents they signed, including the conditions stated therein. It is also presumed that
they take ordinary care of their concerns and that they voluntarily and knowingly signed
the contract.
Appellant Jaime Sebastian, in his letter addressed to appellee bank, even acknowledged
that “in the event of resignation or otherwise terminated from his employment, the principal
as well as the interest due shall become entirely due and demandable” (Exh. “E”). The
freedom to enter into contracts is protected by law and the courts are not quick to interfere
with such freedom unless the contract is contrary to law, morals, good customs, public policy
or public order.
24
24 SUPREME COURT REPORTS ANNOTATED
Sebastian vs. BPI Family Bank, Inc.
Courts are not authorized to extricate parties from the necessary consequences of their
acts, and the fact that the contractual stipulations may turn out to be financially
disadvantageous will not relieve parties thereto of their obligations.
Fifth, We cannot also buy appellants’ argument that appellee refused to accept the
subsequent payments made by them. It is settled that an issue which was not raised during
the trial in the court below could not be raised for the first time on appeal, as to do so, would
be offensive to the basic rules of fair play, justice and due process. Here, appellant Jaime
Sebastian twice testified before the Court, first, during the hearing on the preliminary
injunction and on the trial proper. Nothing was mentioned about the refusal on the part of
the bank to accept their subsequent payments.
Assuming, arguendo, that appellee bank indeed refused to accept the subsequent
payment from appellants, they could have consigned the same before the Court. They failed
to do so. There was no effort on their part to continue paying their obligations.
Thus, having signed a deed of mortgage in favor of appellee bank, appellants should
have foreseen that when their principal obligation was not paid when due, the mortgagee
has the right to foreclose the mortgage and to have the property seized and sold with a view
to applying the proceeds to the payment of the principal obligation.37
Equally notable was that Jaime’s undated letter-memorandum to BPI Family expressly
stated the following:
x x x In
23the event I leave, resign or am discharged from the service of BPI Family Bank or
my employment with BPI Family Bank is otherwise terminated, I also authorize you to
apply any amount due me from BPI Family Bank to the payment of the outstanding
principal
_______________
37 Rollo, pp. 14-18.
49
 Sales 7-9

25
VOL. 739, OCTOBER 22, 2014
Sebastian vs. BPI Family Bank, Inc.
amount of the aforesaid loan and the interest accrued thereon which shall thereupon
become entirely due and demandable on the effective date of such discharge,
resignation or terminationwithout need of notice of demand, and to do such other acts as
may be necessary under the circumstances.38 (Bold emphasis supplied)
The Borrower shall fail to pay when due the Loan(s) any installment thereof, or any
other amount payable under this Agreement the Note(s) or under the Collateral; or a)
25
xxxx
then, and in any such event, the Bank may by written notice to the Borrower cancel the
Commitment and/or declare all amounts owing to the Bank under this Agreement and the
Note(s), whether of principal, interest or otherwise, to be forthwith due and payable,
whereupon all such amounts shall become immediately due and payable without demand or
other notice of any kind, all of which are expressly waived by the Borrower. The Borrower
shall pay on demand by the Bank, in respect of any

The petitioners thereby explicitly acknowledged that BPI Family Bank had granted the
housing loan in consideration of their employer-employee relationship. They were thus
presumed to understand the conditions for the grant of their housing loan. Considering that
the maturity of their loan obligation did not depend on the legality of their termination from
employment, their assertion that the resolution of their labor complaint for illegal dismissal
was prejudicial to the ripening of BPI Family’s cause of action was properly rejected. Indeed,
a finding of illegal dismissal in their favor would not automatically and exclusively result in
their reinstatement. As fittingly ruled in Bani Rural Bank, Inc. v. De Guzman:39
“By jurisprudence derived from this provision, separation pay may [also] be awarded to
an illegally dismissed employee in lieu of reinstatement.” Section 4(b), Rule I of the Rules
Implementing Book VI of the Labor Code provides the following instances when the award
of separation pay, in lieu of reinstatement to an illegally dismissed employee, is proper: (a)
when reinstatement is no longer possible, in cases where the dismissed employee’s position
is no longer available; (b) the continued relationship between the employer and the
employee is no longer viable due to the strained relations between them;
and (c) when the dismissed employee opted not to be reinstated, or the payment of
separation benefits would be for the best interest of the parties involved. In these
instances,
_______________
38 Records, p. 80.
39 G.R. No. 170904, November 13, 2013, 709 SCRA 330, 348-349.
27
VOL. 739, OCTOBER 22, 2014
Sebastian vs. BPI Family Bank, Inc.
amount or principal paid in advance of stated maturity pursuant to this Section 7, a
prepayment penalty equal to the rate mentioned in Section 2.07(c).40
With demand, albeit unnecessary, having been made on the petitioners, they were
undoubtedly in default in their obligations.
The foreclosure of a mortgage is but the necessary consequence of the nonpayment of an
obligation secured by the mortgage. Where the parties have stipulated in their agreement,
mortgage contract and promissory note that the mortgagee is authorized to foreclose the
mortgage upon the mortgagor’s default, the mortgagee has a clear right to the foreclosure in
case of the mortgagor’s default. Thereby, the issuance of a writ of preliminary injunction
upon the application of the mortgagor to prevent the foreclosure will be improper. 41 As such,
the lower courts did not err in dismissing the injunction complaint of the petitioners.
WHEREFORE, the Court DENIES the petition for review on certiorari;AFFIRMS the
decision promulgated on November 21, 2002; and ORDERS the petitioners to pay the costs
of suit.
SO ORDERED.

26
26 SUPREME COURT REPORTS ANNOTATED
Sebastian vs. BPI Family Bank, Inc.
separation pay is the alternative remedy to reinstatement in addition to the award of
backwages. The payment of separation pay and reinstatement are exclusive
remedies. The payment of separation pay replaces the legal consequences of reinstatement
to an employee who was illegally dismissed.

Nonetheless, it is noteworthy that the Labor Arbiter ultimately ruled that Jaime’s
dismissal was valid and legal. Such ruling affirmed the legality of the termination of James
from BPI Family’s employment. Under the circumstances, the entire unpaid balance of the
housing loan extended to him by BPI Family became due and demandable upon such
termination in accordance with Jaime’s express and written commitment to BPI Family.
Even if we were to disregard this condition, their admission of default in their monthly
amortizations constituted an event of default within the context of Section 7 of the loan
agreement that produced the same effect of rendering any outstanding loan balance due and
demandable. Section 7 the loan agreement reads as follows:
7. SECTIONEVENTS OF DEFAULT.
If any of the following Events of Default shall have occurred and be continuing:

50