PCI LEASING AND FINANCE, INC. v.
Whether or not the underlying Lease
GIRAFFE-X CREATIVE IMAGING, INC.
Facts:
PCI Leasing and Finance, Inc. (PCI) and
Giraffe-X Creative Imaging, Inc. entered into a
lease agreement whereby the former leased
to the latter several equipment for 36
months. The agreement provided that in case
of Giraffe’s default, PCI may recover the
rentals for the remaining term, and obtain
possession of the equipment (cumulative
remedies). A year later, Giraffe defaulted. PCI
sent a letter to Giraffe demanding payment of
the rentals for the remaining term of the lease
OR surrender of the subject equipment.
Giraffe did not heed the demand.
PCI filed a complaint against Giraffe
for the recovery of the leased property with a
prayer for writ of replevin, and in addition, to
pay the balance of the rental obligation
amounting to Php 8,000,000. PCI contends
that the Recto Law, i.e., the Civil Code
provisions on installment sales of movable
property, does not apply to a financial leasing
agreement because such agreement does not
confer on the lessee the option to buy the
property subject of the financial lease. PCI
argues that the absence of an option-to-buy
stipulation in a financial leasing agreement,
as understood under R.A. No. 8556, prevents
the application thereto of Articles 1484 and
1485 of the Civil Code Giraffe sought for the
dismissal of the case arguing that the subject
transaction fall within the coverage of Art.
1484 (Recto Law), being in actuality, a lease
with an option to buy. And that PCI’s recovery
of the possession of the subject property was
tantamount to a foreclosure thereof which
bars recovery of the balance.
The trial court dismissed the
complaint.
Issue:
Agreement, Lease Schedules and the
Disclosure Statements that embody the
financial leasing arrangement between the
parties are covered by and subject to the
consequences of Articles 1484 and 1485 of
the New Civil Code.
Ruling:
YES. The PCI LEASING- GIRAFFE lease
agreement is in reality a lease with an option
to purchase the equipment. This has been
made manifest by the actions of the petitioner
itself, foremost of which is the declarations
made in its demand letter to the respondent.
There could be no other explanation than that
if the respondent paid the balance, then it
could keep the equipment for its own; if not,
then it should return them. This is clearly an
option to purchase given to the respondent.
Being so, Article 1485 of the Civil Code should
apply.
The present case reflects a situation
where the financing company can withhold
and conceal – up to the last moment – its
intention to sell the property subject of the
finance lease, in order that the provisions of
the Recto Law may be circumvented. It may
be, as petitioner pointed out, that the basic
“lease agreement” does not contain a
“purchase option” clause. The absence,
however, does not necessarily argue against
the idea that what the parties are into is not a
straight lease, but a lease with option to
purchase. The Court has long been aware of
the practice of vendors of personal property
of denominating a contract of sale on
installment as one of lease to prevent the
ownership of the object of the sale from
passing to the vendee until and unless the
price is fully paid.
In choosing, through replevin, to
deprive the respondent of possession of the
leased equipment, the petitioner waived its
right to bring an action to recover unpaid
rentals on the said leased items. Paragraph
(3), Article 1484 in relation to Article 1485 of
the Civil Code, which we are hereunder re-
reproducing, cannot be any clearer.
The remedies provided for in Article
1484 of the Civil Code are alternative, not
cumulative. The exercise of one bars the
exercise of the others. This limitation applies
to contracts purporting to be leases of
personal property with option to buy by
virtue of the same Article 1485. The condition
that the lessor has deprived the lessee of
possession or enjoyment of the thing for the
purpose of applying Article 1485 was fulfilled
in this case by the filing by petitioner of the
complaint for a sum of money with prayer for
replevin to recover possession of the office
equipment.
Petition is denied.
LAFORTEZA v. MACHUCA
Facts:
The property involved consists of a house and
lot located at Marcelo Green Village,
Paraaque, Metro Manila, covered by Transfer
Certificate of Title (TCT) No. (220656) 8941
of the Registered of Deeds of Paranaque. The
subject property is registered in the name of
the late Francisco Laforteza, although it is
conjugal in nature.
The heirs of the late Francisco
Laforteza represented by Roberto and
Gonzalo entered into a Memorandum of
Agreement (Contract to Sell) with Alonzo
Machuca over the subject property for the
sum P630,000.00. The P30,000 of which will
be paid upon signing the agreement and the
remaining P600,000 upon issuance of the
new certificate of title in the name of the late
Francisco Q. Laforteza and upon execution of
an extra-judicial settlement of the decedent’s
estate with sale in favor of the plaintiff. The
defendant was able to pay P30,000 as
stipulated. The Lafortezas sent letter
informed the defendant via letter of his
obligation to pay the remaining balance to be
due after thirty (30) days, and the
reconstituted title, which the defendant asked
for an extension until November 15, 1989.
On November 20, 1989, defendant
informed the heirs that Roberto Laforteza
had the payment for the balance, but said
heirs refused to accept said payment. Roberto
declared the property not for sale for failure
to comply with the contractual obligations,
and the agreement rescinded by the heirs of
Laforteza.
Respondent filed the action for
specific performance with the lower court.
The court ruled in his favor and ordered the
heirs of Laforteza to accept the balance and to
execute a registrable deed of absolute sale
over the subject property in favor of the
respondent. Such ruling was affirmed by the
CA.
The petitioners argue that the MOA
was merely a lease agreement with “option to
purchase”; thus, it only gave the respondent a
right to purchase the subject property within
a limited period without imposing upon them
any obligation to purchase it. Also, since the
respondent’s tender of payment was made
after the lapse of the option agreement, his
payment did not give rise to the perfection of
a contract of sale. It is further maintained by
the petitioners that the Court of Appeals
erred in ruling that rescission of the contract
was already out of the question. Rescission
implies that a contract of sale was perfected
unlike the Memorandum of Agreement in
question which as previously stated is
allegedly only an option contract.
Issues:
1. Whether or not there was a perfected
contract.
 2. Whether or not there was a breach of
contract.
Ruling:
1. YES. The petitioners fail to distinguish
between a condition imposed upon
the perfection of the contract and a
condition imposed on the
performance of an obligation. Failure
to comply with the first condition
results in the failure of a contract,
while the failure to comply with the
second condition only gives the other
party the option either to refuse to
proceed with the sale or to waive the
condition.
In the case at bar, there was already a
perfected contract. The condition was
imposed only on the performance of
the obligations contained therein.
Since the title was eventually
"reconstituted" and that the
petitioners admitted their ability to
execute the extrajudicial settlement of
their fathers estate, the respondent
had a right to demand fulfillment of
the petitioners obligation to deliver
and transfer ownership of the house
and lot.
Furthermore, petitioners did not
enter into a contract of sale is the fact
that the respondent paid thirty
thousand pesos (P30,000.00) as
earnest money. Earnest money is
something of value to show that the
buyer was really in earnest, and given
to the seller to bind the bargain.
Whenever earnest money is given in a
contract of sale, it is considered as
part of the purchase price and proof
of the perfection of the contract.
2. NO. The failure of the respondent to
pay the balance of the purchase price
was a breach of the contract and was
a ground for rescission thereof. The
extension of thirty (30) days allegedly
granted to the respondent by Roberto
Z. Laforteza was correctly found by
the Court of Appeals to be ineffective
inasmuch as the signature of Gonzalo
Z. Laforteza did not appear thereon as
required by the Special Powers of
Attorney. However, the evidence
reveals that after the expiration of the
six-month period provided for in the
contract, the petitioners were not
ready to comply with what was
incumbent upon them, i.e. the
delivery of the reconstituted title of
the house and lot. It was only on
September 18, 1989 or nearly eight
months after the execution of the
Memorandum of Agreement when the
petitioners informed the respondent
that they already had a copy of the
reconstituted title and demanded the
payment of the balance of the
purchase price. The respondent could
not therefore be considered in delay
for in reciprocal obligations, neither
party incurs in delay if the other party
does not comply or is not ready to
comply in a proper manner with what
was incumbent upon him.
Even assuming arguendo that the
petitioners were ready to comply with
their obligation, the rescission of the
contract will still not prosper. The
rescission of a sale of an immovable
property is specifically governed by
Article 1592 of the New Civil Code.
The letter of the petitioners informing
the respondent of the automatic
rescission of the agreement did not
amount to a demand for rescission, as
it was not notarized. It was also made
five days after the respondents
attempt to make the payment of the
purchase price. This offer to pay prior
to the demand for rescission is
sufficient to defeat the petitioners
right under article 1592 of the Civil
Code. Besides, the Memorandum
Agreement between the parties did
not contain a clause expressly
authorizing the automatic
cancellation of the contract without
court intervention in the event that
the terms thereof were violated. A
seller cannot unilaterally and
extrajudicially rescind a contract of
sale where there is no express
stipulation authorizing him to
extrajudicially rescind. Thus, when
the respondent filed his complaint for
specific performance, the agreement
was still in force inasmuch as the
contract was not yet rescinded. At any
rate, considering that the six-month
period was merely an approximation
of the time it would take to
reconstitute the lost title and was not
a condition imposed on the perfection
of the contract and considering
further that the delay in payment was
only thirty days which was caused by
the respondents justified but
mistaken belief that an extension to
pay was granted to him, we agree
with the Court of Appeals that the
delay of one month in payment was a
mere casual breach that would not
entitle the respondents to rescind the
contract. Rescission of a contract will
not be permitted for a slight or casual
breach, but only such substantial and
fundamental breach as would defeat
the very object of the parties in
making the agreement.
Petitioners’ insistence that the
respondent should have consigned
the amount is not determinative of
whether respondents action for
specific performance will lie.
Petitioners themselves point out that
the effect of consignation is to
extinguish the obligation. It releases
the debtor from responsibility
therefor. The failure of the
respondent to consign the
P600,000.00 is not tantamount to a
breach of the contract for by the fact
of tendering payment, he was willing
and able to comply with his
obligation.
The Court of Appeals correctly found
the petitioners guilty of bad faith and
awarded moral damages to the
respondent. As found by the said
Court, the petitioners refused to
comply with their obligation for the
reason that they were offered a higher
price therefor and the respondent
was even offered P100,000.00 by the
petitioners lawyer, Attorney
Gutierrez, to relinquish his rights over
the property. The award of moral
damages is in accordance with Article
119131 of the Civil Code pursuant to
Article 2220 which provides that
moral damages may be awarded in
case of a breach of contract where the
defendant acted in bad faith.
OLYMPIA HOUSING, INC. v. PANASIATIC
TRAVEL CORPORATION
Facts:
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
comprising an area of 160.50 square meters,
situated on the ground floor of Olympia
Condominium located at Makati, Metro
Manila, for the agreed price of P2,340,000.00
payable in installments of P33,657.40 per
month. 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 and
hence allegedly rescinded the contract by a
Notarial Act of Rescission. RTC ruled against
Nelida Galvez-Ycasiano and the CA affirmed.
Issue:
Whether or not there is a valid rescission of
contract to sell by notarial act.
Ruling:
NO. The so-called "notarial rescission" was
not sent to respondents prior to the
institution of the case for reconveyance but
merely served on 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 contract.
A careful study of the evidence
presented does not show a notice of
cancellation or the demand for rescission of
the contract by a notarial act.
The plaintiff appears to be claiming
that the June 2, 1988 letter is a notice of
cancellation or a demand for rescission of the
contract by a notarial act. This could not be
what the law contemplates. It should be a
notice of cancellation or demand for
rescission of the contract by notarial act.
The law requires also full payment of
the cash surrender value to the buyer but
there is no evidence adduced by the plaintiff
that they delivered to the defendant the cash
surrender value. Admittedly, no such full
payment of the cash surrender value to the
defendant was made. A mere promise to
return is not what the law contemplates.
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.
Sec. 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 RA 3844
as amended by RA 6389, 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:
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 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 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 installments made.
RA 6552 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 notice of
cancellation or demand for rescission by a
notarial act and the full payment of the cash
surrender value.
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.
PAGTALUNAN v. VDA. DE MANZANO
Facts:
Patricio Pagtalunan, petitioner’s stepfather,
entered into a Contract to Sell with
respondent Rufina Manzano over a house and
lot for P17,800 to be paid in the following
manner: P1,500 as downpayment upon
execution of the Contract and the balance to
be paid in equal monthly installments of P150
on or before the last day of each month until
fully paid.
It was stipulated that while
respondent could immediately occupy the
house and lot, in case of default in the
payment of any of the installments for 90
days after its due date, the contract would be
automatically rescinded without need of
judicial declaration; all payments made and
all improvements done on the premises by
respondent would be considered as rentals
for the use and occupation of the property or
payment for damages suffered; and that
respondent should peacefully vacate the
premises and deliver the possession thereof
back to the vendor.
Petitioner alleged that Manzano
stopped paying after December 1979 without
any justification or explanation and that the
latter paid only P12,950. Petitioner asserted
that when respondent ceased paying her
installments, her status of buyer was
automatically transformed to that of a lessee.
On February 24, 1997, Pagtalunan issued a
demand letter for Manzano to vacate the
premises of the property but Manzano
ignored the same. Thus, Pagtalunan filed a
Complaint for unlawful detainer against
respondent.
The MTC ruled in favor of Pagtalunan.
RTC reversed the decision of the MTC. CA
affirmed RTC’s decision but held that the
parties, as well as the MTC and RTC, failed to
advert to and to apply the Maceda Law (RA
6522). It ruled that the Contract to Sell was
not validly cancelled or rescinded under Sec.
3 (b) of the Maceda Law, and recognized
respondent’s right to continue occupying
unmolested the property subject of the
contract to sell.
Issue:
Whether or not the Contract to Sell was not the Maceda Law does not provide a different
validly cancelled or rescinded under Sec. 3 (b) requirement for contracts to sell which allow
of R.A. No. 6552. possession of the property by the buyer upon
execution of the contract like the instant case
Ruling:
but the refund of the cash surrender value of
NO. While the Court agrees with petitioner the payments on the property to the buyer
that the cancellation of the Contract to Sell before cancellation of the contract.
may be done outside the court particularly
when the buyer agrees to such cancellation,
the cancellation of the contract by the seller
must be in accordance with Sec. 3 (b) of the
Maceda Law, which requires: (1) a notarial
act of rescission and (2) the refund to the
buyer of the full payment of the cash
surrender value of the payments on the
property. Actual cancellation of the contract
takes place after 30 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.
The Court found that the letter dated
Feb. 24, 1997, which was written by
petitioner’s counsel, merely made formal
demand upon the respondent to vacate the
premises in question. Clearly, the demand
letter is not the same as the notice of
cancellation or demand for rescission by a
notarial act required by the Maceda Law.
Petitioner cannot rely on Layug v. IAC
to support his contention that the demand
letter was sufficient compliance. The seller
therein filed an action for annulment of
contract, which is a kindred concept of
rescission by notarial act. Evidently, the case
of unlawful detainer filed by petitioner does
not exempt him from complying with the said
requirement.
Moreover, petitioner cannot insist on
compliance with the requirement by
assuming that the cash surrender value
payable to the buyer had been applied to
rentals of the property after respondent
failed to pay the installments due. Sec. 3 (b) of