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Lalicon v National Housing Authority

GR No. 185440
July 13, 2011
(1) On November 25, 1980 the National Housing Authority (NHA) executed a Deed of Sale with
Mortgage over a Quezon City lot in favor of the spouses Isidro and Flaviana Alfaro (the Alfaros).
The deed of sale provided, among others, that the Alfaros could sell the land within five years
from the date of its release from mortgage without NHA's prior written consent. Thus:
x x x. 5. Except by hereditary succession, the lot herein sold and conveyed, or any part thereof,
cannot be alienated, transferred or encumbered within five (5) years from the date of release of
herein mortgage without the prior written consent and authority from the VENDOR-MORTGAGEE
(NHA). x x x
The mortgage and the restriction on sale were annotated on the Alfaros' title on April 14, 1981.
(2) About nine years later or on November 30, 1990, while the mortgage on the land subsisted,
the Alfaros sold the same to their son, Victor Alfaro.
(3) After full payment of the loan or on March 21, 1991 the NHA released the mortgage.
(4) Six days later or on March 27 Victor transferred ownership of the land to his illegitimate
daughters. (5) On December 14, 1995 Victor mortgaged the land to Marcela Lao Chua, Rosa Sy,
Amparo Ong, and Ida See.
(6) Subsequently, on February 14, 1997 Victor sold the property to Chua, one of the mortgagees.
RTC: 1990 sale of the land to their son Victor, and the subsequent sale of the same to Chua,
made in violation of NHA rules and regulations. It ruled that, although the Alfaros clearly violated
the five-year prohibition, the NHA could no longer rescind its sale to them since its right to do so
had already prescribed, applying Article 1389 of the New Civil Code. The NHA and the Lalicons,
who intervened, filed their respective appeals to the Court of Appeals (CA).
CA: CA reversed the RTC decision and found the NHA entitled to rescission. The CA declared TCT
277321 in the name of the Alfaros and all subsequent titles and deeds of sale null and void. It
ordered Chua to reconvey the subject land to the NHA but the latter must pay the Lalicons the
full amount of their amortization, plus interest, and the value of the improvements they
constructed on the property.
ISSUE: Whether or not the subsequent sales constituted breach in the obligation and may give
rise to rescission
--------------------------------------------------------------------------------------------------------------APPLICABLE LAW/S:
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. (1124)
Art. 1381. The following contracts are rescissible:
(1) Those which are entered into by guardians whenever the wards whom they represent suffer
lesion by more than one-fourth of the value of the things which are the object thereof;
(2) Those agreed upon in representation of absentees, if the latter suffer the lesion stated in the
preceding number;

(3) Those undertaken in fraud of creditors when the latter cannot in any other manner collect the
claims due them;
(4) Those which refer to things under litigation if they have been entered into by the defendant
without the knowledge and approval of the litigants or of competent judicial authority;
(5) All other contracts specially declared by law to be subject to rescission. (1291a)
--------------------------------------------------------------------------------------------------------------HELD: (1) Lalicons' request for exemption from the five-year restriction was not granted. Resale
without NHA's consent is a substantial breach.
The five-year restriction against resale, counted from the release of the property from the NHA
mortgage, measures out the desired hold that the government felt it needed to ensure that its
objective of providing cheap housing for the homeless is not defeated by wily entrepreneurs.
The restriction clause is more of a condition on the sale of the property to the Alfaros rather than
a condition on the mortgage constituted on it.
The Lalicons claim that the NHA
unreasonably ignored their letters that asked for consent to the resale of the subject property.
They also claim that their failure to get NHA's prior written consent was not such a substantial
breach that warranted rescission. But the NHA had no obligation to grant the Lalicons' request
for exemption from the five-year restriction as to warrant their proceeding with the sale when
such consent was not immediately forthcoming. And the resale without the NHA's consent is a
substantial breach. The essence of the government's socialized housing program is to preserve
the beneficiary's ownerships for a reasonable length of time, here at least within five years from
the time he acquired it free from any encumbrance.
(2) Action has not prescribed.
NHA sought annulment of the Alfaros' sale to Victor because they violated the five-year
restriction against such sale provided in their contract. Thus, the CA correctly ruled that such
violation comes under Article 1191 where the applicable prescriptive period is that provided in
Article 1144 which is 10 years from the time the right of action accrues. The NHA's right of
action accrued on February 18, 1992 when it learned of the Alfaros' forbidden sale of the
property to Victor. Since the NHA filed its action for annulment of sale on April 10, 1998, it did so
well within the 10-year prescriptive period.
(3) Lalicons and Chua were not buyers in good faith.
Since the five-year prohibition against alienation without the NHA's written consent was
annotated on the property's title, the Lalicons very well knew that the Alfaros' sale of the
property to their father, Victor, even before the release of the mortgage violated that prohibition.
(4) Lastly, since mutual restitution is required in cases involving rescission under Article 1191,
the NHA must return the full amount of the amortizations it received for the property, plus the
value of the improvements introduced on the same, with 6% interest per annum from the time of
the finality of this judgment.
Case Digest: DBP v. Licuanan
LICUANAN, Respondents.
G.R. No. 150097, February 26, 2007.
In 1974, Respondent spouses Alejandro and Adelaida Licuanan ("Respondents") were granted a
P4,700 loan by petitioner Development Bank of the Philippines ("DBP") to mature in 1979, and
secured by a real estate mortgage over a 980-square meter property.
In 1975, DBP granted respondents a second loan of P12,000 payable on or before the year 1980,
which was secured by a real estate mortgage over four parcels of land.
In 1975, DBP granted Respondents a third loan of P22,000 maturing in 1985, and was secured by
a real estate mortgage over three parcels of land.
In 1979, petitioner and respondents restructured the second loan, extending the maturity date to

In 1981, DBP sent a letter to Respondents informing them that they would institute extrajudicial
foreclosure proceedings for breach of the conditions of the mortgage (of the first loan).
After an application for extrajudicial foreclosure, the properties were sold in a public auction, in
which DBP was the highest bidder for bidding a total of P16,340.
In 1984, DBP informed Respondents that the properties could be reacquired by negotiated sale.
Three days later, however, the properties were sold to one Emelita Peralta for P104,000.
After being informed of the sale, Respondents offered to repurchase the properties, but it was
rejected by DBP.
Respondents then filed a complaint for recovery of real properties and damages in RTC of
Lingayen against DBP and Peralta.
In its counterclaim, DBP asserts its right to claim for deficiency since the proceeds of the sale
(P104,000) did not cover the debt of Petitioners of P131,642.33. Thus, it is entitled to claim the
difference (P27,642.33) with interest.
DBP also argues that demand is not necessary as the maturity dates are already known to
Respondents, and that Respondents are estopped from questioning the foreclosure sale since
they offered to repurchase the property.
The RTC ruled in favor of respondents. It held that there was no demand for payment prior to the
extrajudicial foreclosure and ordered Peralta to reconvey the properties to respondents, subject
to Peraltas right to be paid. It also held that petitioner did not deal fairly with respondents
making it liable for nominal and moral damages, as well as attorneys fees and litigation
CA affirmed RTC's findings.
1st Issue: W/N a demand for payment of the loans was made before the mortgage was
Ruling: No.
Whether or not demand was made is a question of fact. Both the CA and RTC found that demand
was never made, and no compelling reason has been shown by DBP to rule otherwise.
(The issue of whether demand was made before the foreclosure was effected is essential. If
demand was made and duly received by the respondents and the latter still did not pay, then
they were already in default and foreclosure was proper. However, if demand was not made, then
the loans had not yet become due and demandable. This meant that respondents had not
defaulted in their payments and the foreclosure by petitioner was premature. Foreclosure is valid
only when the debtor is in default in the payment of his obligation.)
2nd Issue: W/N demand is necessary to make respondents guilty of default.
Ruling: Yes.
It is only when demand to pay is made and subsequently refused that respondents can be
considered in default and DBP obtains the right to file an action to collect the debt or foreclose
the mortgage.
The maturity dates only indicate when payment can be demanded. It is the refusal to pay after
demand that gives the creditor a cause of action against the debtor.
Since demand was never made by DBP, the foreclosure was premature and therefore null and
Further, DBP's argument that respondents are estopped from questioning the validity of the
foreclosure sale since they offered to repurchase the foreclosed properties is incorrect.
An offer to repurchase should not be construed as a waiver of the right to question the sale.
Instead, it must be taken as an intention to avoid further litigation and thus is in the nature of an
offer to compromise. By offering to redeem the properties, respondents can attain their ultimate
objective: to pay off their debt and regain ownership of their lands.

3rd Issue: W/N respondents are liable for the deficiency claim of petitioner.
Ruling: No.
While it is true that in extrajudicial foreclosure of mortgage, the mortgagee has the right to
recover the deficiency from the debtor, this presupposes that the foreclosure must first be valid.
4th Issue: W/N petitioner is liable for damages.
Ruling: Yes
DBP is liable for moral damages. Apart from the rushed foreclosure proceedings, certain acts of
DBP were most certainly ruthless and in bad faith, which caused serious anxiety and wounded
feelings to Respondents, to wit 1st: DBP granted the three loans for a total of P45,740.61 because the market value of the
collaterals exceeds P100,000.00. But 6 years later, when the value must have appreciated, DBP
bidded for a measly P16,000.00 and claimed a deficiency. That it was measly and shocking to the
conscience was conclusively proven by the fact that Peralta bought the properties for
P104,000.00 barely three 3 years later.
2nd: It is odd that DBP restructured the second loan, but not the first. This lulled Respondents
into a false sense of security and a feeling of relief that the entire loan accommodation will
mature in 1985. Thus, they were blindsided by the foreclosure proceedings, causing them to
suffer sleepless nights.
3rd: Respondents also made pleas to repurchase the properties, which fell on deaf ears. It also
had the temerity to unconscionably making deficiency claims plus interest.
Further, Respondents property rights were invaded or violated, hence the grant of nominal
damages was also proper.
Respondents are likewise entitled to the award of attorneys fees and expenses of litigation since
the premature foreclosure by petitioner compelled them to incur expenses to protect their
G.R. No. 190107
June 6, 2011
Petitioners vs.
JAPRL Development Corporation (JAPRL) was granted credit facility by Security Bank Corporation
(SBC). Rafael C. Limson(Limson) and Jose Uy Arollado (Arollado), JAPRL Chairman and President,
respectively guaranteed the due and full payment and performance of JAPRLs guaranteed
obligations under the credit facility. SBC soon discovered material inconsistencies in the financial
statements submitted by JAPRL when it applied for a credit facility, which made SBC, conclude
that JAPRL committed misrepresentation. SBC demanded payment from JAPRL, Limson and
Arollado but the same was not heeded. SBC then filed a complaint for sum of money against
JAPRL, Limson and Arollado. Meanwhile, a Stay Order was issued by the RTC of Quezon City
wherein JAPRLs petition for rehabilitation was lodged. The Makati RTC ordered the suspension of
SBCs complaint for sum of money until disposition by the Quezon City RTC of JAPRLs petition for
rehabilitation. SBC contended that the suspension of theproceedings should only be with respect
to JAPRL but not with respect to Limson and Arollado invoking Section 6(b) of theInterim Rules of
Procedure of Corporate Rehabilitation provides that a stay order does not apply to sureties who
are solidarily liable with the debtor. Limson and Arollado raised defenses against SBCs claim that
they acted as sureties of JAPRL.
May a Court suspends the proceedings against a surety of a corporation which is in the process
of rehabilitation.
A creditor can demand payment from the surety solidarily liable with the corporation seeking
rehabilitation it being not included in the list of stayed claims. Indeed, Section 6(b) of the Interim
Rules of Procedure of Corporate Rehabilitation provides that a stay order does not apply to
sureties who are solidarily liable with the debtor. Limson and Arollado, as sureties, whoseliability
is solidary cannot, therefore, claim protection from the rehabilitation court, they not being the
financially-distressed corporation that may be restored, not to mention that the rehabilitation
court has no jurisdiction over them. IN FINE, SBC can pursue its claim against Limson and

Arollado despite the pendency of JAPRLs petition for rehabilitation. For, by the CSA in favour of
SBC, it is the obligation of the sureties, who are therein stated to be solidary with JAPRL, to see to
it that JAPRLs debt is fully paid.
WHEREFORE, the petition is DENIED.
G.R. No. 157330November 23, 2011
The thrust of the petitioners suit is that DBP accorded to her a preferential right to repurchase
the property covered by TCT No. 164117. Her version follows. In August 1982,the petitioner
negotiated with DBP to buy back the property covered by TCT No. 164117 by offeringP15,000.00
as down payment. Her offer was rejected by an executive officer of DBPs Acquired Assets
Department, who required her to pay the full purchase price of P55,500.00 for the property
within ten days.[6] She returned to DBP with the amount, only to be told that DBP would not sell
back only one lot. Being made to believe that the lot covered by TCT No. 164117 would be
released after paying two amortizations for the other lot (TCT No. 160929), however, she signed
the deed of conditional sale covering both lots for the total consideration of P157,000.00. When
she later on requested the release of the property under TCT No. 164117 after paying
two quarterly amortizations, DBP did not approve the release. She continued paying the
amortizations until she had paid P40,000.00 in all, at which point she sought again the release of
the lot under TCT No. 164117. DBP still denied her request, warning that it would rescind the
contract should her remaining amortizations Contracts be still not paid. On August 7, 1985, DBP
rescinded the deed of conditional sale over her objections. On November 25, 1987, DBP sold the
lot covered by TCT No. 164117 to respondent Pablo Cruz via a deed of absolute sale. The
petitioner consequently filed a complaint for the rescission of the sale to Cruz on January 30,
1987. Notwithstanding their knowledge of her pending suit against Cruz, respondents
Emerenciana Cabantog and Eni S.P. Atienza still bought the property from Cruz. Hence, Cabantog
and Atienza were impleaded as additional defendants by amendment.
ISSUE: Whether or not article 1332 is applicable to the acts of the petitioner?
HELD:No, The petitioner would have us consider that she had not given her full consent to the
deed of conditional sale on account of her lack of legal and technical knowledge. In effect, she
pleads for the application of Article 1332 of the Civil Code, which provides: Article 1332. When
one of the parties is unable to read, or if the contract is in a language not understood by him,
and mistake or fraud is alleged, the person enforcing the contract must show that the terms
thereof have been fully explained to the former. It is quite notable that the petitioner did not
specify which of the stipulations of the deed of conditional sale she had difficulty or deficiency in
understanding. Her generalized averment of having been misled should, therefore, be brushed
aside as nothing but a last attempt to salvage a hopeless position. Our impression is that the
stipulations of the deed of conditional sale were simply worded and plain enough for even one
with a slight knowledge of English to easily understand. The petitioner was not illiterate. She had
appeared to the trial court to be educated, its cogent observation of her as lettered (supra, at
p. 7 hereof) being based on how she had composed her correspondences to DBP. Her testimony
also revealed that she had no difficulty understanding English. Thereby revealed was her
distinctive ability to understand written and spoken English, the language in which the terms of
the contract she signed had been written. Clearly, Article 1332 of the Civil Code does not apply
to the petitioner.
G.R. No. 160322
August 24, 2011
Piltel agreed to sell to Smartnet a 3,500-square meter lot,known as the Valgoson Property, in
Makati City for P560 million. Smartnet agreed to pay Piltel P180 million as down payment with
the balance of P380 million to be partly set off against the obligations that Piltel was to incur
from its projected purchase of cellular phones and accessories from Smartnet. Smartnet agreed
to settle any unpaid portion of the purchase price of the land after the set off on or about April
30, 1997.The parties also agreed on a rescission and forfeiture clause which provided that, if
Smartnet fails to pay the full price of the land within the stipulated period and within five days

after receipt of a notice of delinquency, it would automatically forfeit to Piltel 10% of the P180
million down payment or P18 million and the contract shall be without force and effect.
Smartnet failed to pay the P380 million balance of the purchase price on or about the date it fell
due. On December 19, 1997 Piltel returned P50 million to Smartnet, a portion of the P180 million
down payment that it received. Smartnet later requested Piltel for the return of the
remaining P130 million but the latter failed to do so. Smartnet filed a complaint against Piltel for
rescission of their contract to sell involving the Valgoson Property or its partial specific
performance before the Regional Trial Court (RTC) of Makati. Smartnet alleged, among other
things, that it withheld payment of the balance of the purchase price of the subject property
because Piltel reneged on its commitment to purchase from Smartnet 300,000 units of cellular
phones and accessories. Piltel claimed that the agreement to purchase cellular phones and
accessories was not part of its contract with Smartnet for the sale of the Valgoson Property and
that Piltel committed to buy equipment from Smartnet only on a best effort basis. For this reason,
Piltel pointed out, Smartnet did not have the power to rescind the contract to sell the Valgoson
Property and, hence, cannot invoke that contracts rescission and forfeiture clause.

Whether Smartnet can rescind the contract to sell

Smartnets allegations respecting fraud and breach of contract referred to what appears to be
Piltels non-binding promise to buy cellular phones and accessories from Smartnet. These are
matters independent of the parties agreement concerning Piltels sale of the Valgoson Property
to Smartnet. All that matters is that since Smartnet failed to pay the balance of the purchase
price, automatic rescission set in and this placed Piltel under an obligation to return the down
payment it received, less the portion that it forfeited due to Smartnets default. Consequently, it
is but proper for Piltel to fully abide by such obligation. Piltel cannot avoid rescission since it in
fact partially abided by rescissions consequences when it returned to Smartnet on December 19,
1997 a P50 million portion of the down payment it received.
By returning part of the down payment, it is clear that Piltel recognized that the contract to sell
the Valgoson Property had reached the point of automatic rescission. Piltel argues that Smartnet
cannot, as a defaulting buyer, rescind the contract to sell between them by the simple act of
refusing to pay. But, Smartnets nonpayment of the full price of the property was not an act of
rescission. It was but an event that rendered the contract to sell without force and effect. In a
contract to sell, the prospective seller binds himself to part with his property only upon fulfillment
of the condition agreed, in this case, the payment in full of the purchase price. If this condition is
not fulfilled, the seller is then released from his obligation to sell.


G.R. No. 177685 January 26, 2011
The Plaza, Inc. (The Plaza) is a corporation engaged in the restaurant business. The Plaza entered
into a contract with Rhogen Builders represented by Ramon C. Gaite, for the construction of a
restaurant building located in Greenbelt, Makati on July 16, 1980. Gaite and FGU Insurance
Coroparation (FGU) executed a surety bond in the amount of P1,155,000 in favor of The Plaza to
secure Rhogens compliance with its obligation under the contract. The Plaza paid the surety
bond less withholding taxes as a downpayment to Gaite. The construction of the restaurant
building is thereafter commenced by Rhoegen.
Gaite received a letter on September 10, 1980 from the acting building official of Makati ordering
the former to cease and desist from continuing with the construction for violation of the

provisions of National Building Code. The Plazas Project Manager, in his Construction memo
stated that the actual jobsite assessment showed that the finished works fall short of Rhogens
claimed percentage of accomplishment and Rhogen was entitled to only P32,684.16 and not
P260,649.91 as demanded by Rhogen. Further the said amount payable to Rhogen be withheld
due to stoppage of work by the Municipal Engineers Office of Makati among others.
Gaite wrote to The Plaza on October 7, 1980 regarding his actions/observations on the stoppage
order issued. On the same day, Gaite notified The Plaza that he is suspending all construction
works until The Plaza and the Project Manager cooperate to resolve the issue he had raised to
address the problem. The Plaza asserted that the corporation is not the one to initiate a solution
to the situation, especially after The Plaza already paid the agreed down payment of
P1,155,000.00, which compensation so far exceeds the work completed by Rhogen before the
municipal authorities stopped the construction for several violations. The Plaza made it clear that
the corporation has no obligation to help Rhogen get out of the situation arising from nonperformance of its own contractual undertakings, and that The Plaza has its rights and remedies
to protect its interest.
Gaite informed The Plaza on January 9, 1981 that he is terminating their contract based on the
Contractors Right to Stop Work or Terminate Contracts as provided for in the General Conditions
of the Contract. Gaite accused The Plaza of not cooperating with Rhogen in solving the problem
concerning the revocation of the building permits, which he described as a minor problem.
Additionally, Gaite demanded the payment of P63,058.50 from The Plaza representing the work
that has already been completed by Rhogen
On January 13, 1981, The Plaza countered that it will hold Gaite and Rhogen fully responsible for
failure to comply with the terms of the contract and to deliver the finished structure on the
stipulated date. The Plaza also argued that the down payment made was more than enough to
cover Rhogens expenses.

The Plaza filed a complaint for breach of contract, sum of money and damages against Gaite,
Rhogen and FGU and for nullification of the project development contract against Gaite and
Rhogen. The trial court granted the claims of The Plaza on withholding payment on the progress
billing submitted by Rhogen based on the evaluation of Tayzon and the non-lifting of the
stoppage order among the other valid grounds. Instead of readily rectifying the violations,
Rhogen continued with the construction works thereby causing more damage. Having failed to
complete the project within the stipulated period and comply with its obligations, Rhogen was
thus declared guilty of breaching the Construction Contract and is liable for damages under
Articles 1170 and 1167 of the Civil Code. The CA affirmed the trial courts decision.


WoN the contract between Rhogen and The Plaza provides for reciprocal obligation which gives
Rhogen valid legal grounds to terminate the contract pursuant to Art. 1191 of the Civil Code?


Reciprocal obligations are those which arise from the same cause, and in which each party is a
debtor and a creditor of the other, such that the obligation of one is dependent upon the
obligation of the other. They are to be performed simultaneously such that the performance of
one is conditioned upon the simultaneous fulfillment of the other. The Plaza predicated its action
on Article 1191of the Civil Code, which provides for the remedy of rescission or more properly
resolution, a principal action based on breach of faith by the other party who violates the

reciprocity between them. The breach contemplated in the provision is the obligors failure to
comply with an existing obligation. Thus, the power to rescind is given only to the injured party.
The injured party is the party who has faithfully fulfilled his obligation or is ready and willing to
perform his obligation.

The construction contract between Rhogen and The Plaza provides for reciprocal obligations
whereby the latters obligation to pay the contract price or progress billing is conditioned on the
formers performance of its undertaking to complete the works within the stipulated period and
in accordance with approved plans and other specifications by the owner. Pursuant to its
contractual obligation, The Plaza furnished materials and paid the agreed down payment. It also
exercised the option of furnishing and delivering construction materials at the jobsite pursuant to
Article III of the Construction Contract. However, just two months after commencement of the
project, construction works were ordered stopped by the local building official and the building
permit subsequently revoked on account of several violations of the National Building Code and
other regulations of the municipal authorities.

Non-observance of laws and regulations of the local authorities affecting the construction project
constitutes a substantial violation of the Construction Contract which entitles The Plaza to
terminate the same, without obligation to make further payment to Rhogen until the work is
finished or subject to refund of payment exceeding the expenses of completing the works.

Upon the facts duly established, the CA therefore did not err in holding that Rhogen committed a
serious breach of its contract with The Plaza, which justified the latter in terminating the contract.
Petitioners are thus liable for damages for having breached their contract with respondent The
Plaza. Article 1170 of the Civil Code provides that those who in the performance of their obligations
are guilty of fraud, negligence or delay and those who in any manner contravene the tenor thereof
are liable for damages.

Rhogen failed to finish even a substantial portion of the works due to the stoppage order issued
just two months from the start of construction. Despite the down payment received from The
Plaza, Rhogen, upon evaluation of the Project Manager, was able to complete a meager
percentage much lower than that claimed by it under the first progress billing between July and
September 1980. Moreover, after it relinquished the project in January 1981, the site inspection
appraisal jointly conducted x x x x Rhogen was found to have executed the works not in
accordance with the approved plans or failed to seek prior approval of the Municipal Engineer.
Article 1167 of the Civil Code is explicit on this point that if a person obliged to do something
fails to do it, the same shall be executed at his cost.

The petition is DENIED. The Decision dated June 27, 2006 and the Resolution dated April 20, 2007
of the Court of Appeals in CA-G.R. CV No. 58790 are AFFIRMED.


G.R. No. 188064. June 1, 2011. Mendoza, J.:
Subject: Contracts (Rescission)

FACTS: On September 10, 1992, Mila A. Reyes (petitioner) filed a complaint for Rescission of
Contract with Damages against Victoria T. Tuparan (respondent) before the RTC. In her
Complaint, petitioner alleged that she was the registered owner of a 1,274 square meter
residential and commercial lot located in Karuhatan, Valenzuela City and on that property, she
put up a three-storey commercial building known as RBJ Building and a residential apartment
building. In December 1989, respondent leased from petitioner a space on the ground floor of
the RBJ Building for her pawnshop business for a monthly rental of P4,000.00. A close friendship
developed between the two which led to the respondent investing thousands of pesos in
petitioners financing/lending business from February 7, 1990 to May 27, 1990, with interest at
the rate of 6% a month.
On June 20, 1988, petitioner mortgaged the subject real properties to the Farmers Savings
Bank and Loan Bank, Inc. (FSL Bank) to secure a loan of P2,000,000.00 payable in installments.
On November 15, 1990, petitioners outstanding account on the mortgage reached
P2,278,078.13. Petitioner then decided to sell her real properties for at least P6,500,000.00 so
she could liquidate her bank loan and finance her businesses. Respondent verbally offered to
conditionally buy petitioners real properties for P4,200,000.00 payable on installment basis
without interest and to assume the bank loan.
After petitioners verbal acceptance of all the conditions/concessions, both parties worked
together to obtain FSL Banks approval for respondent to assume her (petitioners) outstanding
bank account. The assumption would be part of respondents purchase price for petitioners
mortgaged real properties. FSL Bank approved their proposal on the condition that petitioner
would sign or remain as co-maker for the mortgage obligation assumed by respondent.
On November 26, 1990, the parties and FSL Bank executed the corresponding Deed of
Conditional Sale of Real Properties with Assumption of Mortgage. Due to their close personal
friendship and business relationship, both parties chose not to reduce into writing the other
terms of their agreement. Under the Deed of Conditional Sale of Real Properties with Assumption
of Mortgage, respondent was bound to pay the petitioner a lump sum of P1.2 million pesos
without interest as part of the purchase price in three (3) fixed instalments.
Respondent, however, defaulted in the payment of her obligations on their due dates.
Instead of paying the amounts due in lump sum on their respective maturity dates, respondent
paid petitioner in small amounts from time to time. To compensate for her delayed payments,
respondent agreed to pay petitioner an interest of 6% a month. As of August 31, 1992,
respondent had only paid P395,000.00, leaving a balance of P805,000.00 as principal on the
unpaid installments and P466,893.25 as unpaid accumulated interest.
Petitioner further averred that despite her success in finding a prospective buyer for the
subject real properties within the 3-month period agreed upon, respondent reneged on her
promise to allow the cancellation of their deed of conditional sale. Nonetheless, she consented
because respondent repeatedly professed friendship and assured her that all their verbal side
agreement would be honored as shown by the fact that since December 1990, she (respondent)
had not collected any rentals from the petitioner for the space occupied by her drugstore and
cosmetics store.
On March 19, 1992, the residential building was gutted by fire which caused the petitioner
to lose rental income in the amount of P8,000.00 a month since April 1992. Respondent
neglected to renew the fire insurance policy on the subject buildings.
Since December 1990, respondent had taken possession of the subject real properties
and had been continuously collecting and receiving monthly rental income from the tenants of
the buildings and vendors of the sidewalk fronting the RBJ building without sharing it with
petitioner. On September 2, 1992, respondent offered the amount of P751,000.00 only payable
on September 7, 1992, as full payment of the purchase price of the subject real properties and
demanded the simultaneous execution of the corresponding deed of absolute sale.
RTC ruled in favor of the respondent. Court of Appeals affirmed with modifications the
decision of the trial court.
ISSUE: Whether or not the respondents default in the payment of her obligation would give
the petitioner the right to rescind the contract.

The subject Deed of Conditional Sale with Assumption of Mortgage entered into by and among
the two parties and FSL Bank on November 26, 1990 is a contract to sell and not a contract of
Based on the provisions of the contract, the title and ownership of the subject properties
remains with the petitioner until the respondent fully pays the balance of the purchase price and
the assumed mortgage obligation. Thereafter, FSL Bank shall then issue the corresponding deed
of cancellation of mortgage and the petitioner shall execute the corresponding deed of absolute
sale in favor of the respondent.
Accordingly, the petitioners obligation to sell the subject properties becomes demandable
only upon the happening of the positive suspensive condition, which is the respondents full
payment of the purchase price. Without respondents full payment, there can be no breach of
contract to speak of because petitioner has no obligation yet to turn over the title. Respondents
failure to pay in full the purchase price is not the breach of contract contemplated under Article
1191 of the New Civil Code but rather just an event that prevents the petitioner from being
bound to convey title to the respondent.
Thus, the Court fully agrees with the CA when it resolved: Considering, however, that the
Deed of Conditional Sale was not cancelled by Vendor Reyes (petitioner) and that out of the total
purchase price of the subject property in the amount of P4,200,000.00, the remaining unpaid
balance of Tuparan (respondent) is only P805,000.00, a substantial amount of the purchase price
has already been paid. It is only right and just to allow Tuparan to pay the said unpaid balance of
the purchase price to Reyes.
Granting that a rescission can be permitted under Article 1191, the Court still cannot
allow it for the reason that, considering the circumstances, there was only a slight or casual
breach in the fulfillment of the obligation. Unless the parties stipulated it, rescission is allowed
only when the breach of the contract is substantial and fundamental to the fulfillment of the
Considering that out of the total purchase price of P4,200,000.00, respondent has already
paid the substantial amount of P3,400,000.00, more or less, leaving an unpaid balance of only
P805,000.00, it is right and just to allow her to settle, within a reasonable period of time, the
balance of the unpaid purchase price.