Interpretation of “Installment”, “Total Payments Made” and “Full Payment of the Cash

Surrender Value” under the Maceda Law

Review of Relevant Jurisprudence and the Legislative History of R.A. No. 6552

I. Background and the Issue

Republic Act No. 6552 or the “Realty Installment Buyer Protection Act,” more popularly
known as the “Maceda Law,” was passed in 1972. The law recognizes the right of a real property
seller to rescind a contract upon the buyer’s default to make installment payments. As a form of
protection to the buyer against “onerous and oppressive conditions,”1 the law requires such
rescinding seller to apply a grace period, and to return the cash surrender value of the total
payments to a buyer who has paid at least two (2) years of installments.2

Significantly, the law does not define “installment” nor mention any allowed deductions
to the “total payments made” which is the basis for the cash surrender value. Section 3 of the
Maceda Law merely provides what are included in the computation of the total installment
payments made: “[d]own payments, deposits or options on the contract.”

This lack of definition and guide for computation has caused some confusion in the real
estate industry. No specific rules have been issued which could provide details on the nature of
installment payments covered and the extent of the cash surrender value. Presidential Decree No.
957 or “The Subdivision and Condominium Buyer’s Protective Decree,” which was enacted four
years after the Maceda Law, simply makes reference to the Maceda Law with respect to the rights
of real estate buyers on installment who fails to pay by reasons other than the failure to develop
the project.

There have been attempts to pass amendments to the Maceda Law. On September 19,
2018, Senator Nancy Binay filed Senate Bill No. 2017 that seeks to specifically prohibit developers
from deducting “any fees, penalties, charges, or other costs of whatever nature,” from the cash
surrender value, and require the HLURB to issue implementing rules and regulations to carry out
such proposed measure. To date, the bill is still pending in the Senate Committee on Urban
Planning, Housing and Resettlement.

II. Installment Definition Under the Maceda Law

One case where the Supreme Court explained the concept of installment, in relation to the
provisions of the Maceda law, is Orbe v. Filinvest.3 In Orbe, the Court characterized installment
as ratably apportioned payments across a period, typified by regular and fractional payments.

1 R.A. No. 6552, Section 2.

2 Lagandaon vs. Court of Appeals, 290 SCRA 330. Notably, the Supreme Court in Lagandaon
states that Section 3(b) of the Maceda Law does not grant the developer any legal ground to
cancel the contracts to sell; rather, it prescribes the responsibility of the seller in case the
"contract[s are] cancelled.
3 G.R. No. 208185, September 06, 2017.

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 In explaining what is not an installment payment, Orbe made reference to the earlier case
of Hermanos v. Gervacio,4 where the Court distinguished an installment payment from a straight
payment.5 Where after payment of the initial sum, the balance should be paid in its totality at the
time specified in the promissory note, such payment scheme is considered a cash/straight term.
The Supreme Court expounded on this difference as follows:

Undoubtedly, the law is aimed at those sales where the price is

payable in several installments, for, generally, it is in these cases that partial
payments consist in relatively small amounts, constituting thus a great
temptation for improvident purchasers to buy beyond their means. There is
no such temptation where the price is to be paid in cash, or, as in the instant
case, partly in cash and partly in one term, for, in the latter case, the partial
payments are not so small as to place purchasers off their guard and delude
them to a miscalculation of their ability to pay.6

Hermanos’ definition of installment as “partial payments consisting in relatively small

amounts” was adopted by the Court in Orbe where the application of Maceda Law was at issue.

It may be added that in statutes with a definition of installment, the term is limited to its
general sense of being “payments over a fixed period”7

III. “Two Years of Installments” and the Use of a Divisor

Orbe similarly dealt with the determination of “two years of installments,” which is a
condition for the return of the cash surrender value. The Supreme Court clarified that the “two
years of installments” criterion refers to value and time. The phrase does not only pertain to the
period when the buyer has been making payments, with total disregard for the value that the buyer
has actually conveyed, but also refers to the proportionate value of the installments made.

When Section 3 speaks of paying "at least two years of installments," it refers to the
equivalent of the totality of payments diligently or consistently made throughout a period of two
(2) years. Hence, where installments are to be paid on a monthly basis (which more or less is always
the case in installment plans), payment of "at least two years of installments" refers to the aggregate
value of twenty-four (24) monthly installments.

To simply put, the basis for computation of the term refers to the installments that
correspond to the number of months of payments, and not to the number of months that the
contract is in effect (as well as any grace period that has been given). Thus, other than making sure
that the buyer has been paying for at least two years (time element), the total payments, divided by
the amount of each installment payment, should produce a quotient of at least twenty-four (value
element). Below is a suggested guide for this formula based on the pronouncement of the Court
in Orbe:

4 69 Phil. 52 (1939).
5 For the applicability of the Recto Law (Articles 1484-1486).
6 Underscoring supplied. The “law” referred to in the first sentence pertains to the Recto Law or
Articles 1484-1486 of the Civil Code.
7 See for example the definition of “installment purchases” in R.A. No. 10870 or the “Philippine
Credit Card Industry Regulation Law” as “transactions wherein payment for which is amortized
in parts over a fixed period.”

2
 First: Satisfy the time element – The contract should have been effective for at least 2
years.
Second: Satisfy the value element – Get the sum of all installment payments made and
divide it by the following divisor:
a. If the stipulated amount of installment payments is uniform to the entire
duration of the contract, use that amount as divisor.
b. If the installment payments are not uniform such as when there is an escalation
clause, use the lowest amount of installment payment made as divisor (Orbe
upholding a buyer-friendly interpretation).
Third: Considering that installment generally pertain to monthly payments, the
quotient should be at least 24 (months) to qualify as “two years of installments” and
be entitled to cash surrender value.

To illustrate:

Uniform Installment Escalating Installment:

(Marina v. Court of Appeals) (Orbe v. Filinvest)

A contract for the purchase of real property entered A contract for the sale of real property was entered
into in 1988 under the following terms: into in 2001 under the following terms:

Total Contract Price: 3,614,000.00 Total Contract Price: 2,566,795.00

Downpayment: 1,034,200.00
Cash Deposit: 50,000
Amortization: 67,024.22 (13 months)
The contract was cancelled in 1991 with the buyer
already making total payments of 1,810,330.70
Question: Is the buyer entitled to
a cash surrender value?
Answer: Yes. Both the time and
value elements were met. The
contract was in effect from 1988
to 1991; and the buyer has already
paid 27.01 months’ worth of
installments (1,810,330.70 divided
by 67,024.22).
Reservation Fee: 20,000.00
Downpayment: 493,357.00 - payable in 9
monthly installments of 54,818.00
Balance: 2,053,436.00 - payable in 7 years as
follows:
First year: 27,936.84
Second year: 39,758.84
Third year: 41,394.83
Fourth to Seventh year: 42,138.84
The contact was cancelled in 2004 after the buyer has
already made a total payment of 608,648.20.
Question: What divisor should be used
to divide from the total payments made?
54,818.00 (downpayment installment),
27,936.84 (1st year) 39,758.84 (2nd year)
41,394.83 (3rd year) or 42,138.84 (4th to
7th year)?
Answer: 27,936.84, being the smallest
amount of installment paid and most
favorable to the buyer.

Question: Is the buyer entitled to a cash

surrender value?
Answer: No. While the contract was in
effect for more than 2 years (2001-
2004), the aggregate payments fall short
of at least 24 months’ worth of
payments (608,648.20 divided by
27,936.84 or only 21.786 months.

3
 The Supreme Court emphasized that if we were to base the “two years of installments”
standards to just the lapse of two years without regard to the amounts paid, such interpretation
shall be arbitrary to the seller, as intermittent payments of fluctuating amounts would become
permissible, so long as they stretch for two (2) years. 8 The Court adds that such rule condones
absurdity as it sets a precedent that would endorse minimal, token payments that extend for two
(2) years. If the two-year period would be interpreted simplistically, a buyer could, then, literally
pay loose change for two (2) years and still come under the protection of Section 3 of the Maceda
Law.9

IV. Application of the Maceda Law in Deferred Payment Scheme

Whether or not deferred cash payments in a sale of real estate falls under “installment”
depends on whether the payments possess the above-mentioned characteristics of installments:
payments characterized by regular and fractional payments, which, as explained in Hermanos,
obviously should be more than two (2) payments.

Deferred Cash Payment is designed as an alternative to spot cash payment, bank (or Pag-
Ibig) financing and in-house financing. It means that the total price of a real estate will be divided
equally in a given period of time. Distinguished from a bank or Pag-Ibig financing, no third party
funder is involved. Developers often offer this scheme to buyers who can pay larger sums over a
period—consequently shorter than in-house financing—who do not wish to be burdened by the
submission of loan documents to a financing company.

Deferred payment has the characteristics of a spot cash payment in that no interest
generally accrues and, in cases of ready-for-occupancy units, the buyer is generally allowed to
immediately take possession of the house. In some cases, developers also offer discounts as an
incentive to large periodic payments undertaken by the buyer.

Relevantly, these large periodic payments are the basis for the distinction between sale on
installment plan and deferred payment sale insofar as time of payment of creditable withholding taxes
are concerned, thus:

(i) If the sale is a sale of property on the installment plan (that is payments in the
year of sale do not exceed 25% of the selling price), the tax shall be deducted and
withheld by the buyer on every installment.
(ii) If, on the other hand, the sale is on a “cash basis” or is a “deferred payment sale
not on the installment plan” (that is, payments in the year of sale exceed 25% of
the selling price), the buyer shall withhold the tax based on the gross selling price
or fair market value of the property, whichever is higher, on the first installment. 10

For tax purposes, there is a distinction between installment plan and deferred payment
plan, which distinction is ultimately based on whether or not the periodic payments during the
first year of sale has reached at least 25% of the selling price. This tax-treatment distinction has
not been cited by the Supreme Court in its discussion of “installment” in any of the cases where
the applicability of the Maceda Law was put in issue. Nevertheless, one may point out that in Orbe,
the Court subscribed to Hermanos’ definition of installment as “partial payments consist[ing] [of]

8 Gatchalian Realty v. Angeles, G.R. No. 202358, November 27, 2013.

9 Id.
10 Revenue Regulations 6-2001.

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relatively small amounts”. How small a payment should be to be considered an installment in the
Maceda Law remains unclear.

It is submitted that deferred payment through amortized amounts spread over a fixed
period is considered an installment under the Maceda Law. The characterization of payments as
installments is not conditioned on the existence of interest for each payment. To stress,
installments pertain to “ratable apportionment of the contract price throughout the entire duration
of the contract term.” Further, the Maceda law does not qualify the length of payments made for
purposes of determining whether periodic payments are installment payments. The 2-year period
was a condition for the entitlement of a buyer to a refund under Section 3 of the Maceda Law and
not on the classification of payment as installment. Should payments be made for less than 2 years,
Section 4 on grace period still applies.

To underscore, it is the partition of the contract price into monthly amortizations that
manifests the ratable apportionment across a complete contract term that is the essence of sales
on installment.11

V. Scope of Total Payments Made

Payments on the principal amount including interest and taxes form part of “total
payments made” under Section 3 of the Maceda law. This is the clear intention of the law as
highlighted below in the discussion of the legislative history of R.A. No. 6552. In addition, Section
3 of the law has an express provision on what items constitute “total payments made”:

Down payments, deposits or options on the contract shall be

included in the computation of the total number of installment
payments made.12

The controversy therefore rests on whether deductions on all payments made by the buyer
may be made on account of penalties, surcharges, incidental (marketing, administrative) and
opportunity costs, and other charges.

The last paragraph of Section 3 as above-quoted may be treated as an express enumeration

of what constitutes “total payments made” on top of principal, tax and interest payments. One
may invoke expressio unius est exclusio alterius as the proper way to interpret the phrase “total
payments made” and claim that all other items such as penalties, costs and other charges may be
deducted from the payments without violating the Maceda Law. Such rule of construction has
been explained by the Supreme Court as follows:

Indeed, it is an elementary rule of statutory construction

that the express mention of one person, thing, act, or consequence
excludes all others. This rule is expressed in the familiar maxim
"expressio unius est exclusio alterius." Where a statute, by its terms, is
expressly limited to certain matters, it may not, by interpretation or
construction, be extended to others. The rule proceeds from the
premise that the legislature would not have made specified

11 Orbe v. Filinvest, supra.

12 R.A. No. 6552, Section 3, last paragraph.

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 enumerations in a statute had the intention been not to restrict its
meaning and to confine its terms to those expressly mentioned.13

On the other hand, it may be argued that to allow such deductions would practically defeat
the purpose of the law. The law has a declared policy of protecting buyers from “onerous and
oppressive conditions.” This policy strengthens the fact that Maceda law was enacted to protect
real estate buyers, and interpretations of its provisions should be in their favor. In this connection,
it may be well to note the deliberations of Congress on the bill that was later to become the Maceda
Law.

Legislative Deliberations on the Maceda Law

The “total payments made” value under Section 3 of the Maceda Law was designed to
simplify the computation and accounting process. The simplification of such value, as basis for
the buyer’s refundable amount, was in fact requested by developers themselves during the public
hearings on the then bill. This was highlighted by the sponsor, Senator Ernesto Maceda, during
the deliberations:

SENATOR MACEDA. Yes, Your Honor. And if I may explain,

Your Honor. During the hearings, we excluded, in a draft, taxes and
interest upon the initial suggestion of the subdivision owners and
brokers. Obviously, they had a meeting and when they came back for
the next hearing, they said, “Well, let us just have a straight rate
because we will spend so much in accounting problems if we were to
segregate what is taxes, what is interest. And so we could just agree to
a straight fifty percent of all total payments. …14

xxx

SENATOR MACEDA. On total payments made. If I may explain,

Your Honor. In the beginning, during the public hearing, we
accepted an amendment proposed by the subdivision owners that
the refund should be less interest and less taxes paid. Of course, at
that time, the original bill was graduated with 50 per cent, 60 per
cent, 70 per cent, 80 per cent refunds, depending on the number of
years paid.

During the second hearing, they came back and said that they would
accept a straight rate of everything that is paid because it would be
simpler for their accounting purposes. If they were to keep separate
books all the time for all of these different components of the
payments, it would be harder for them. So, they actually asked that
it be a straight refund on total payments made. 15

The reason for such generous computation of the cash surrender value is that real property
appreciates in value as time goes by. As explained by the Sponsor, even after the refund, the seller

13 Centeno v. Villalon-Pornillos, G.R. No. 113092, September 1, 1994, 236 SCRA 197, 203.
14 TSN of Deliberations dated April 3, 1972, p. 4.
15 TSN of Deliberations dated April 17, 1972, p. 5.

6
could in fact gain from the increased value of the property once the same has been sold to another
buyer.

Notably, it was only Senator Benigno Aquino who questioned this rationale and hinted
that the refund value should be based on the principal payments. Senator Aquino noted that
interests could instead be treated as rentals while tax payments considered as actual costs.

SENATOR AQUINO. Your Honor, I am afraid we are legislating

in rather very abnormal times, because the appreciation in real estate
value in the Philippines is caused not really by the appreciation of
that particular values, by the depreciation of the money value. …
The only thing I am trying to say is: when one is going to get a refund
of 90 per cent of everything that he has paid, I think it would rather
be a very heavy burden.

However, a 90 per cent refund of all the principal payments, I think,

is more reasonable, where the interest would have been considered
as rent and the tax payment would have been considered as actual
costs. Therefore, a 90 per cent refund of all amortization payments
as to principal may lie, Your Honor. But when one starts including
the interests and all the taxes paid, I can see where a landowner will
be willing if the appreciation has been tremendous as in the case of
Bel-Air, San Antonio, and the other villages. But in the villages, let
us say, of San Juan or Quezon City, where progress has not been as
much, it may work to the tremendous advantage of the poor seller.16

In response, Senator Maceda stressed the trend to give consumers “more and more
protection” and what he explained as a presumption that sellers can provide enough leeway to
allocate their finances. No amendment was introduced and the bill was approved with the current
provision on cash surrender value as pertaining to total payments made. It may be noted however
that no clarification was made by the Sponsor with respect to amounts paid by the buyer that the
seller may treat as rentals or consider as actual costs. The matter of classification of amortizations as
rentals was later resolved by the Supreme Court in Pagtalunan v. Manzano.17

It can be gathered from the deliberations of the bill that the cash surrender value was
meant to be based on the total payments including interests and taxes. The deliberations
highlighted the freedom of the parties to contract but later limit the same with the incorporation
of Section 7 of the law which reads:

Section 7. Any stipulation in any contract hereafter entered into

contrary to the provisions of Sections 3, 4, 5 and 6, shall be null and
void.

There was also an exhaustive debate on whether or not to include protection against
“onerous and oppressive conditions” in the declared policy of the law. The argument against its
inclusion is the risk of encouraging law suits based on such general standard. On the other hand,
those in favor of such worded policy emphasized its value in interpreting the provisions of the law

16 TSN of Deliberations dated April 17, 1972, p. 5.

17 G.R. No. 147695, September 13, 2007.

7
in favor of the buyers. Further, one reason which was considered and sustained by the Senate for
such declared policy is to prevent the parties from entering into a contract with provisions contrary
to the provision of the Maceda law by invoking autonomy or freedom to contract. The following
exchange between Senator Aquino and Senator Tolentino reflects the history of the present
Section 7 of the Maceda law.

SENATOR AQUINO. With the permission of the gentlemen on

the floor. May inquire what are these onerous and oppressive
conditions? This is a contract between two equal parties. As already
stated by the gentleman from Pangasinan (Padilla), I think, we can
regulate the relations, but to protect them against the other, what
would be the kind of protection if a buyer wants to buy on those
conditions? He is free to buy and not to buy. Now, what are these
onerous and oppressive conditions?

SENATOR TOLENTINO. I think the conditions are those

provided for in Section 4, Section 4 and Section 5, as the result or,
rather, the rules that we want to lay down, and that, we will need a
new provision to render effective this protection. We will need a
section, for instance which would read as follows.... “Any stipulation
in any contract hereafter entered into contrary to the provisions of
Secions 3, 4 and 5 shall be null and void.” That is the protection.

Jurisprudence on Penalties

The following cases illustrate how the Supreme Court treated penalties in determining the
total payments made by the buyer and in the computation of the cash surrender value.

In Jestra Development and Management Corporation v. Pacifico, the developer argues that the
amount of Php 76,600, which represent penalty payments, should be deducted from the total
payments made before dividing it by the applicable divisor (to determine whether the buyer has
paid 2 years of installments). While this was not the main issue and the Supreme Court did not
categorically rule on such question in Jestra, the Court in its computation seemed to agree with the
position of the seller by deducting Php76,000 from the payments, thus:

The P750,000 down payment was to be paid in six monthly

installments. If the down payment of P750,000 is to be deducted
from the total payment of P846,600, the remainder is only P96,600.
Since respondent was able to pay the down payment in full eleven
(11) months after the last monthly installment was due, and the sum
of P76,600 representing penalty for delay of payment is deducted
from the remaining P96,600, only a balance of P20,000 remains.

The above exclusion of penalties from the “total payments made” is, however, not a
doctrinal pronouncement by the Supreme Court in Jestra. In fact, five years later, the Supreme
Court came up with a different computation. In Gatchalian Realty v. Angeles,18 the Supreme

18 G.R. No. 202358, November 27, 2013.

8
Court added the penalty payments to the total payments as basis for the amount of the cash
surrender value; thus:

For paying more than two years of installments on the lot,

Angeles was entitled to receive cash surrender value of her payments
on the lot equivalent to fifty per cent of the total payments made.
This right is provided by Section 3(b) of R.A. 6552, as well as
paragraph 6(b) of the contract. Out of the contract price of
P450,000, Angeles paid GRI a total of P364,188.96 consisting of
P135,000 as downpayment and P229,188.96 as installments and
penalties. The cash surrender value of Angeles’ payments on the lot
amounted to P182,094.48 (50% of 364, 188.96 which includes
penalty).

For the same reasons, Angeles was also entitled to receive

cash surrender value of the payments on the house equivalent to fifty
per cent of the total payments made. Out of the contract price of
P750,000, Angeles paid GRI a total of P784,107.84 consisting of
P165,000 as downpayment and P619,107.84 as installments and
penalties. The cash surrender value of Angeles’ payments on the
house amounted to P392,053.92. (50% of 619,107.84 which amount
includes penalty payments).

The foregoing shows the lack of clarity and conclusiveness as to nature and treatment of
penalty payments in relation to the provisions of the Maceda Law. While Gonzales is a later
decision, the pronouncement of the Court on inclusion of penalties in the “total payments made”
may be considered. at best, an obiter dictum.

It is submitted that the proper rule is to exclude penalties in determining the amount of
“total payments” under Section 3 of the Maceda Law. Penalties substitute the indemnity for
damages in case of noncompliance with an obligation.19 Unlike taxes and interests, penalties are
not incidental to nor attached to the amortizations to pay for the purchased real estate. To borrow
the words of petitioner in Jestra, “penalty payment is a separate item to answer for [the] lost
income [of the] seller due to the delay in the payment.”

Freedom to Contract

This position in favor of allowable deductions to total payments made is consistent with
the parties’ freedom to contract.

If the buyer has agreed to pay the charges in the Contract to Sell or other separate
agreements executed before payments were made, it is submitted that consequent deductions to
the payments made, which the buyer may later be entitled to as a refund, is not illegal.

The right of the seller to impose other charges and costs is subject to the basic rule on
meeting of the minds of the parties and provisions on fraud under the Civil Code. These other
charges should be included in the Contract and disclosed to the buyer; otherwise, the deduction
of the same to the base amount of the cash surrender value may be illegal as a circumvention of

19 Civil Code, Article 1226.

9
the Maceda law. This should be the seller’s look out inasmuch as most real estate agreements are
contracts of adhesion, interpreted against the one who drafted the contract.

To summarize the foregoing discussion:

Item Arguments for Inclusion Arguments for Exclusion

Interest The deliberations reveal that the Interest is not included in the
intention was to not deduct last paragraph of Section 3 on
interest from the total payments. the items included in the
“total number of payments
“Total Payments” should be made” (expressio unius est
interpreted its plain meaning and exclusio alterius)
in a manner favorable to the
buyer.
Taxes Same as in interests. The sponsor, Not included in Section 3.
during deliberations, explained
that there will be straight rate of Payment of taxes not for the
everything including taxes. benefit or the account of the
seller.
Penalties Gatchalian Realty v. Angeles where Jestra v Pacifico where the
the Supreme Court included Supreme Court excluded
penalties in the computation. penalties from the total
payments
Interpretation consistent with the
policy against onerous and Penalty payment is a separate
oppressive conditions. item to answer for the lost
income of the seller due to
Section 7 of the Maceda Law the delay in the payment.
against contrary provisions. .
Opportunity Costs, Interpretation in favor of the These items are separate
Marketing and buyer and the plain meaning of from the purchase price. In
Administrative “total payments” the absence of fraud, the
Charges parties may agree on such
Section 7 of the Maceda Law. deductions.

Freedom of contracting
parties to stipulate unless
contrary to public policy.

VI. Running of Installment Plan in Restructuring of Agreement

Restructuring of agreement or the modification of terms of payments in a contract is often

resorted to in cases of buyers’ default. Generally, the reason behind a restructured agreement is to
allow buyers to continue with their purchase of the property in contracts of sale and avoid the
consequences of default. As to the sellers, the contract restructuring enables them to increase the
price, adjust the rate of amortizations and modify other obligations in their favor.

The question is: should payments made by a real estate buyer before and after restructuring
be treated as one uninterrupted payment of installments? This is crucial in determining whether
such buyer has made “two years of installments” and thus entitled to a cash surrender value under
Section 3 of the Maceda law.

10
 It would seem that the answer to this question would depend on whether or not the
restructuring would result in novation of the original agreement—i.e., creation of a new obligation
and extinguishment of the old one.

The case of Jestra, as earlier cited, illustrates a situation when the restructured agreement
was deemed to be a continuation of the original agreement. In said case, the house and lot buyer
requested a restructuring of the contract, which was accepted by the seller. Under the restructured
scheme, the monthly amortization was increased by more than Php 4,000. When the buyer
eventually defaulted in payment, the applicability of the Maceda Law was put in issue, and it was
where the Supreme Court offered the formula for determining satisfaction of “two years of
installments,” as discussed above. Relevantly, the amount of “total payments made” considered
by the Supreme Court was the sum of all payments made by the buyer under the original agreement
and those under the restructured agreement. 20

In contrast, Fabrigas v. San Francisco del Monte, Inc.21 illustrates a case of

restructuring of a contract that results in its novation. In Fabrigas, the original contract (Contract
to Sell No. 2482-V) was restructured (into Contract to Sell No. 2491-V) by modifying the terms of
payment for the purchase of the same property. The restructured terms included an adjustment of
the purchase price and downpayment as well as a change in the amount of the monthly installments. The Supreme
Court, in explaining how such restructuring effected novation of the original agreement,
pronounced:

Notwithstanding the improper rescission, the facts of the

case show that Contract to Sell No. 2482-V was subsequently novated
by Contract to Sell No. 2491-V. The execution of Contract to Sell No.
2491-V accompanied an upward change in the contract price, which
constitutes a change in the object or principal conditions of the
contract. In entering into Contract to Sell No. 2491-V, the parties were
impelled by causes different from those obtaining under Contract to
Sell No. 2482-V. On the part of petitioners, they agreed to the terms
and conditions of Contract to Sell No. 2491-V not only to acquire
ownership over the subject property but also to avoid the
consequences of their default under Contract No. 2482-V. On Del
Monte’s end, the upward change in price was the consideration for
entering into Contract to Sell No. 2491-V.

As a jurisprudential rule on novation, an obligation may be extinguished by another if so

declared in unequivocal terms, or when the old and the new obligations be on every point
incompatible with each other. This test of incompatibility is whether or not the two obligations
can stand together, each one having its independent existence. If they cannot, they are
incompatible and the latter obligation novates the first.22

The distinction between the respective restructuring agreements in Fabrigas and Jestra lies
on the following: In Jestra, there is a minimal adjustment to the terms of payment—the unpaid
interests were added to the total contract price and the amortizations were merely adjusted from
P34,982.50 to P39,468.00; while in Fabrigas, there was the execution a new contract that reflected

20 See Rillo v. Court of Appeals (G.R. No. 125347 June 19, 1997) where it was held that the
restructured agreement, despite being made through a compromise agreement, did not novate the
original contract.
21 G.R. No. 152346, November 25, 2005, 476 SCRA 247, 257.
22 Ever Electrical Manufacturing, Inc. v. PBCOM, G.R. No. 187822-23, August 3, 2016.

11
a substantial change in the principal conditions of the contract (purchase price, downpayment
and monthly installments) and results in the extinguishment of the old agreement.

Real property sellers, who would later offer restructuring of their contracts to sell with
their buyers, may interrupt the running of the buyers’ installment payments—and thus prevent the
buyer from being covered by Section 3 of the Maceda law—by novating the original contract. As
Fabrigas illustrates, this can be done by creating a completely new and independent contract
incompatible with the previous obligation, and not a mere minimal alteration of the terms of
payment.

VII. Manner of Payment of the Cash Surrender Value

The Maceda Law imposes two conditions for the actual cancellation of the contract: (a)
the notarial act of rescission and (b) full payment of the cash surrender value of the payments to
the buyer if the latter is qualified under Section 3 of the law.23 As regards this second condition of
full payment of the cash surrender value, the law does not specify what constitutes payment.

This absence of definition or qualification could mean that there should be actual payment
of the cash surrender value as defined under the provisions of the Civil Code. After all, the Maceda
Law’s subject are contracts of sale, which are governed by the Civil Code. Article 1232 of the Code
provides that payment is the delivery of money or the performance of the obligation.

The Supreme Court noted the actual delivery requirement in Planters Dev. Bank vs.
Chandumal.24 Holding that there was no valid rescission because of the seller’s failure to comply
with Section 3 of the Maceda Law, and despite the unavailability of the buyer, the Supreme Court
explained:

In this case, it is an admitted fact that PDB failed to give

Chandumal the full payment of the cash surrender value. In its
complaint, PDB admitted that it tried to deliver the cash surrender
value of the subject property as required under R.A. No. 6552 but
Chandumal was "unavailable" for such purpose. Thus, it prayed in
its complaint that it be ordered to "deposit with a banking institution
in the Philippines, for the account of Defendants (sic), the amount
of Ten Thousand Pesos (P 10,000.00), Philippine Currency,
representing the cash surrender value of the subject property; x x
x."34 The allegation that Chandumal made herself unavailable for
payment is not an excuse as the twin requirements for a valid and
effective cancellation under the law, i.e., notice of cancellation or
demand for rescission by a notarial act and the full payment of the
cash surrender value, is mandatory.35 Consequently, there was no
valid rescission of the contract to sell by notarial act undertaken by
PDB and the RTC should not have given judicial confirmation over
the same.

23 The amount to be refunded to the buyer is the cash surrender value of the payments on the
property, which is equivalent to fifty percent of the total payments made with, after five years of
installments, an additional five percent every year, up to ninety percent of the total payments
made.
24 G.R. No. 195619, September 5, 2012.

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 In Active Realty v Daroya,25 the Supreme Court declared that there was no valid
rescission of the contract of sale upon the seller’s failure to exert effort or attempt to pay the cash
surrender value; thus:

At no time, from the date it gave a notice of cancellation up

to the time immediately before the respondent filed the case against
petitioner, did the latter exert effort to pay the cash surrender value.
In fact, the records disclose that it was only during the preliminary
hearing of the case before the HLURB arbiter when petitioner
offered to pay the cash surrender value. Petitioner justifies its
inaction on the ground that the respondent was always out of the
country. Even then, the records are bereft of evidence to show that
petitioner attempted to pay the cash surrender value to respondent
through her last known address.

One may argue that this payment requirement under Section 3 of the Maceda Law could
unfairly leave the decision to cancel the contract to the hands of the buyers, such that the latter
can just refuse to accept the refund and incapacitate the seller from rescinding the contract. While
this may be partly true, the seller may nevertheless protect itself and proceed with the cancellation
by: a) consigning the refund upon tender of payment; or b) having the buyer agree beforehand on
the manner of payment—e.g., imposing time and place conditions—and even on waiver, and
effect such payment as agreed.

As a related rule, tender of payment does not by itself produce legal payment, unless it is
completed by consignation.26 Thus a straightforward application of the rules on payment would
mean that the seller has to actually deliver or at least offer to pay the refund to the buyer. If the
buyer refuses to accept the refund, then the amount can be consigned in court in order to effect
payment.

Perhaps the more practical way for sellers to prevent themselves from being “hostaged”
by the buyers, through the latters’ unjustified refusal to receive the refund, is to make sure that the
buyers had previously agreed on a specified manner of payment. As an example, the contract to
sell may include a stipulation that in cases of cancellation of the contract on account of the buyer’s
default, the buyer shall claim the cash surrender value within ten (10) days from notice, and that
the buyer’s failure to collect within said period shall be considered a waiver of his or her right to
receive payment.

Since payment, as required by the Maceda Law, is governed by the provisions of the Civil
Code, it follows that the parties retains the freedom to stipulate on the manner thereof—this still
being part of the parties’ autonomy. The Code in fact expressly mentions instances when parties
may agree on the currency,27 extrajudicial costs,28 and place of payment,29 among others. While the
Supreme Court in Planters and Active emphasized the mandatory requirement of payment, the cases
did not touch on, much less limit, the parties’ freedom to agree on conditions of payment.

25 G.R. No. 141205, May 9, 2002.

26 Civil Code, Article 1256.
27 Civil Code, Article 1249.
28 Civil Code, Article 1247.
29 Civil Code, Article 1251.

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