1.

3 Sales

1.3.1 Describe the nature, forms and requisites of sales

1.3.2 Distinguish earnest money from option money

1.3.3 Determine the rights/obligations of vendor and vendee

1.3.4 Describe the warranties of sales

1.3.4.1 Express Warranties (in relation to consumer laws)

1.3.4.2 Implied Warranties

1.3.5 Discuss and apply installment sales

1.3.5.1 Personal property - Recto Law

1.3.5.2 Real Property - Maceda Law

1.3.5.3 PD 957/ Condominium Act

1.3.6 Discuss the extinguishment of a contract of sale

1.3.6.1 Conventional Redemption

1.3.7 Apply Legal Redemption on sales

 1.3 Sales

1.3.1 Describe the nature, forms and requisites of sales

Sale By the contract of sale, one of the contracting parties obligates himself to transfer the
ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in
money or its equivalent (Art. 1458, NCC).

NOTE: Gross inadequacy of price does not affect a contract of sale, except as it may indicate a
defect in the consent, or that the parties really intended a donation or some other act or contract
(Art. 1470, NCC).

Elements of a contract of sale (ENA)

1. Essential elements – FOR VALIDITY: COC

a. Consent

b. Determinate subject matter (Object)

c. Consideration

2. Natural elements – those which are inherent in the contract, and which in the absence of any
contrary provision, are deemed to exist in the contract

a. Warranty against eviction

b. Warranty against hidden defects

3. Accidental elements – dependent on parties’ stipulations;

Examples:

a. Conditions

b. Interest

c. Time & Place of payment

d. Penalty

Characteristics

1. Consensual – a sale is perfected by mere consent, manifested by the meeting of the minds as
to the offer and acceptance thereof on the subject matter, price and terms of payment.

2. Bilateral – the seller will deliver and transfer a determinate thing to the buyer and the latter
will pay an ascertained price (or equivalent) therefor.

3. GR: Commutative – the thing sold is considered the equivalent of the price paid and the price
paid is the equivalent of the thing sold. XPN: Aleatory – the consideration is not equivalent of
what has been received in the case of purchase of a lotto ticket. If the ticket wins, the prize is
much more than the price of the ticket.

4. Principal – its existence does not depend upon the existence and validity of another contract.

5. Onerous – the thing sold is conveyed in consideration of the purchase price, and vice versa.

6. Nominate – it has a specific name given by law (Pineda, p. 4, 2010 ed).

Formal requirement for the validity of a contract of sale

GR: A contract of sale may be made in writing, or by word of mouth, or partly in writing and
partly by word of mouth, or may be inferred from the conduct of the parties (Art. 1483, NCC).

Contracts shall be obligatory, in whatever form they have been entered into, provided all the
essential requisites for their validity are present.

XPNs:

a) If the law requires a document or other special form, the contracting parties may compel each
other to observe that form (Art. 1357, NCC).

b) Under Statute of Frauds, the following contracts must be in writing; otherwise, they shall be
unenforceable:

1. Sale of personal property at a price not less than P500;

2. Sale of a real property or an interest therein;

3. Sale of property not to be performed within a year from the date thereof;

4. When an applicable statute requires that the contract of sale be in a certain form (Art. 1403,
par.2, NCC)

Consent

Consent is the meeting of the minds to transfer ownership in exchange for the price. Effect
and/or consequence of the absence of consent of the owner in a contract of sale of said property

GR: The contract of sale is void. One of the essential requirements of a valid contract of sale is
the consent of the owner of the property. The buyer acquires no better title to the goods than the
seller had. This law stems from the principle that nobody can dispose of that which does not
belong to him — Nemo dat quod non habet. A stream cannot rise higher than its source.
Example: A, the seller sold a car owned by B, to C, the buyer. The contract of sale is valid since
ownership at the time of perfection is not required. A was able to deliver the car in the absence
of the knowledge of B. Later, C sold the car to D. B now comes to Court to ask for annulment of
the sale made by C to D on the principle of nemo dat quod non habet. Since, A, the first seller
was not able to transfer ownership to C because he was not the owner at the time of delivery,
then C cannot also transfer ownership to D (Tsai v. CA, G.R. No. 120098, October 2, 2001).

Q: Jose, as co-owner, sold the entire land in favor of his minor daughter, Ida. Alleging that Jose
had fraudulently registered it in his name alone, his sisters, sued him for recovery of 2/3 share
of the property. Ida did not pay for the land. Is the sale valid?

A: No. Jose did not have the right to transfer ownership of the entire property to petitioner since
2/3 thereof belonged to his sisters. Also, Ida could not have given her consent to the contract,
being a minor at the time. Consent of the contracting parties is among the essential requisites of
a contract, including one of sale, absent which there can be no valid contract. Moreover, Ida
admittedly did not pay any centavo for the property, which makes the sale void. Article 1471 of
the Civil Code provides: If the price is simulated, the sale is void, but the act may be shown to
have been in reality a donation, or some other act or contract (Labagala v. Santiago, G.R. No.
132305, Dec. 4, 2001).

Rules in determining if the contract is one of sale or a piece of work

1. Sale – if ordered or manufactured in the ordinary course of business (Art. 1467, NCC).
2. Piece of work – if manufactured especially for the customer and upon his special order,
and not for the general market (Art. 1467, NCC).

Contract to sell

Contract to sell may be defined as a bilateral contract whereby the prospective seller, while
expressly reserving the ownership of the subject property despite delivery thereof to the
prospective buyer, binds himself to sell the said property exclusively to the prospective buyer
upon fulfillment of the condition agreed upon, that is, full payment of the purchase price
(Coronel v. Court of appeals, G.R. no. 103577, October 7, 1996).
Q: Having agreed to sell property which they inherited from their father, which was then still in
their father’s name, the Coronels executed a document entitled "Receipt of Down Payment" in
favor of Ramona for the purchase of their house and lot, with the condition that Ramona will
make a down payment upon execution of the document. The Coronels would then cause the
transfer of the property in the name of Ramona and will execute a deed of absolute sale in favor
of Ramona.

a. Ramona paid the downpayment as agreed. Is there a perfected contract of sale or a mere
contract to sell?

b. Instead of executing a deed of Absolute Sale in favor of Ramona, the Coronels sold the
property to Catalina and unilaterally and extrajudicially rescinded the contract with Ramona.
Ramona then filed a complaint for specific performance. Will Ramona’s action prosper?

A: a) The agreement could not have been a contract to sell because the sellers herein made no
express reservation of ownership or title to the subject parcel of land. The Coronels had already
agreed to sell the house and lot they inherited from their father, completely willing to transfer
full ownership of the subject house and lot to the buyer if the documents were then in order.
However, the TCT was then still in the name of their father, that is why they caused the
issuance of a new TCT in their names upon receipt of the down payment. As soon as the new
TCT is issued in their names, they were committed to immediately execute the deed of absolute
sale. Only then will the obligation of the buyer to pay the remainder of the purchase price arise.
This suspensive condition was fulfilled. Thus, the conditional contract of sale became
obligatory, the only act required for the consummation thereof being the delivery of the
property by means of the execution of the deed of absolute sale in a public instrument, which
they unequivocally committed themselves to do as evidenced by the "Receipt of Down
Payment." (Coronel, et al. v. CA, G.R. No. 103577, Oct. 7, 1996).

b) Yes. Under Article 1187, the rights and obligations of the parties with respect to the perfected
contract of sale became mutually due and demandable as of the time of fulfillment or
occurrence of the suspensive condition. Hence, petitioner-sellers' act of unilaterally and
extrajudicially rescinding the contract of sale cannot be justified, there being no express
stipulation authorizing the sellers to extrajudicially rescind the contract of sale (Coronel, et al. v.
CA, G.R. No. 103577, Oct. 7, 1996)

Q: Ursal and Spouses Monesets entered into a “Contract to Sell” of a house and lot. A
downpayment was to be paid by Ursal and subsequently the balance of the price is to be paid
every month until it is fully paid. After 6 months, the monthly installments were stopped
because the spouses did not give Ursal the transfer of certificate title. Subsequently, the Spouses
Monesets sold the property to Dr. Canora. The same property was also mortgaged by the
spouses to a rural bank. When the spouses failed to pay the rural bank, the bank moved to
foreclose the mortgage. Does Ursal have vested ownership over the property?

A: No. In such contract, the prospective seller expressly reserves the transfer of title to the
prospective buyer, until the happening of an event, which in this case is the full payment of the
purchase price. In this case, the parties not only titled their contract as “Contract to Sell Lot and
House” but specified in their agreement that the vendor shall only execute a deed of absolute
sale on the date of the final payment by the vendee. Since the contract in this case is a contract to
sell, the ownership of the property remained with the Monesets even after petitioner has paid
the down payment and took possession of the property. In other words, petitioner did not
acquire ownership over the subject property as she did not pay in full the equal price of the
contract to sell (Ursal v. Court of Appeals, et. al, G.R. No. 142411, Oct. 14, 2005)

Requisites of a proper objects of sale

1. Things

a. Determinate or determinable

b. Lawful (licit), otherwise contract is void

c. Should not be impossible (within the commerce of men)

NOTE: From the viewpoint of risk or loss, not until the object has really been made determinate
can we say that the object has been lost, because “genus never perishes.”

2. Rights

GR: Must be transmissible. Example: right of redemption, right of usufruct, sale of credit, right
to inheritance already assigned, etc.
XPN: a. Future inheritance – cannot be the subject of sale b. Service – cannot be the object of
sale. They are not determinate things and no transfer of ownership is available but it can be the
object of certain contracts such as contract for a piece of work (Pineda, 2010).

Thing considered as determinate

A thing is determinate when it is particularly designated or physically segregated from all

others of the same class (Art. 1460, NCC). The requisite that a thing be determinate is satisfied if
at the time the contract is entered into, the thing is capable of being made determinate without
the necessity of a new or further agreement between the parties.

When a thing is determinable

When the thing is capable of being made determinate without the necessity of a new or further
agreement between the parties (Art. 1460, NCC)

Q: Rodriguez first purchased a portion of a Lot A consisting of 345 square meters located in the
middle of Lot B, which has a total area of 854 square meters, from Juan. He then purchased
another portion of said lot. As shown in the receipt, the late Juan received P500.00 from
Rodriguez as "advance payment for the residential lot adjoining his previously paid lot on three
sides excepting on the frontage. Juan’s heirs now contests the validity of the subsequent sale,
alleging that the object is not determinate or determinable. Decide.

A: Their contention is without merit. There is no dispute that Rodriguez purchased a portion of
Lot A consisting of 345 square meters. This portion is located in the middle of B, which has a
total area of 854 square meters, and is clearly what was referred to in the receipt as the
"previously paid lot." Since the lot subsequently sold to Rodriguez is said to adjoin the
"previously paid lot" on three sides thereof, the subject lot is capable of being determined
without the need of any new contract. The fact that the exact area of these adjoining residential
lots is subject to the result of a survey does not detract from the fact that they are determinate or
determinable. Concomitantly, the object of the sale is certain and determinate (Heirs of San
Andres v. Rodriguez, G.R. No. 135634, May 31, 2000).

NOTE: Where land is sold for a lump sum and not so much per unit of measure or number, the
boundaries of the land stated in the contract determine the effects and scope of the sale, not the
area thereof. The vendors are obligated to deliver all the land included within the boundaries,
regardless of whether the real area should be greater or smaller than that recited in the deed.
This is particularly true where the area is described as "humigit kumulang," that is, more or less
(Semira v. CA, G.R. No. 76031, Mar. 2, 1994).

Q: Lino entered into a contract to sell with Ramon, undertaking to convey to the latter one of the
five lots he owns, without specifying which lot it was, for the price of P1 million. Later, the
parties could not agree which of five lots he owned Lino undertook to sell to Ramon. What is
the standing of the contract? (2011 Bar Question)

A: It is a void contract since the particular lot sold cannot be determined.

Sale of a good made by a person who does not own it In the case of sale of property, ownership
is not required at the time of perfection in order for the sale to be valid. Ownership is material
only at the time of delivery but only for the purpose of transferring ownership and does not
affect the validity of the contract of sale. This is because validity is determined not at the time of
performance but at the time of perfection. If the seller is still not the owner of the thing subject
of the sale at the time of delivery, then the contract of sale does not become void. It is still valid.

The remedy of the buyer is rescission with damages under Art. 1191. What the law requires is
that the seller has the right to transfer ownership at the time the thing sold is delivered.
Perfection per se does not transfer ownership which occurs upon the constructive delivery of
the thing sold. A perfected contract of sale cannot be challenged on the ground of non-
ownership on the part of the seller at the time of its perfection (Quijada v. CA, 299 SCRA 69).
NOTE: Future inheritance cannot be the subject of sale.

1.3.2 Distinguish earnest money from option money

Option money

It is the distinct consideration in case of an option contract. It does not form part of the purchase
price hence, it cannot be recovered if the buyer did not continue with the sale. (Art. 1479, NCC).

NOTE: An option is not itself a purchase, but merely secures the privilege to buy. It is not a sale
of property but a sale of right to purchase. He does not sell his land; he does not then agree to
sell it; but he does sell something, i.e., the right or privilege to buy at the election or option of
the other party. Its distinguishing characteristic is that it imposes no binding obligation on the
person holding the option, aside from the consideration for the offer (Limson v. CA, G.R. No.
135929, 2001).

Consideration of payment as option money

Payment is considered option money when it is given as a separate and distinct consideration
from the purchase price. Consideration in an option contract may be anything or undertaking of
value.

Earnest money or “arras”

This is the money given to the seller by the prospective buyer to show that the latter is truly
interested in buying the property, and its aim is to bind the bargain (Pineda, 2010).

It is considered as:
1. Part of the purchase price – earnest money is deducted from the total price;

2. Proof of perfection of the contract (Art. 1482, NCC).

NOTE: Option money may become earnest money if the parties agree (De Leon, 2011).

Effect of giving an earnest money

It is statutory rule that whenever earnest money is given in a contract of sale, it shall be
considered as part of the price and as proof of the perfection of the contract. It constitutes an
advance payment and must, therefore be deducted from the total price (Adelfa Properties, Inc.
v. CA, 240 SCRA 265).

Effect of rescission on earnest money received

When the seller seeks to rescind the sale, he is obliged to return the thing which was the object
of the contract along with fruits and interest (Art. 1385, NCC)

Question: Bert offers to buy Simeon's property under the following terms and conditions: P1
million purchase price, 10% option money, the balance payable in cash upon the clearance of
the property of all illegal occupants. The option money is promptly paid and Simeon clears the
property of all illegal occupants in no time at all. However, when Bert tenders payment of the
balance and asks for the deed of absolute sale, Simeon suddenly has a change of heart, claiming
that the deal is disadvantageous to him as he has found out that the property can fetch three
times the agreed purchase price. Bert seeks specific performance but Simeon contends that he
has merely given Bert an option to buy and nothing more and offers to return the option money
which Bert refuses to accept.

1. Will Bert's action for specific performance prosper? Explain.

2. May Simeon justify his refusal to proceed with the sale by the fact that the deal is financially
disadvantageous to him? Explain. (2002 Bar Question)

Answers:
1. Bert's action for specific performance will prosper because there was a binding agreement of
sale, not just an option contract. The sale was perfected upon acceptance by Simeon of 10% of
the agreed price. This amount is in reality an earnest money because the agreement states that
the balance was to be paid after fulfilling the condition. Under Art. 1482, it "shall be considered
as part of the price and as proof of the perfection of the contract." (Topacio v. CA, G.R. No.
102606, July 3, 1992; Villongco Realty v. Bormaheco, G.R. No. L-26872, July 25, 1975).

2. Simeon cannot justify his refusal to proceed with the sale by the fact that the deal is
financially disadvantageous to him. Having made a bad bargain is not a legal ground for
pulling out of a binding contract of sale, in the absence of some actionable wrong by the other
party (Vales v. Villa, G.R. No. 10028, Dec. 16, 1916), and no such wrong has been committed by
Bert.

Question: Spouses Pangan owned a lot and a two-door apartment. The wife, Consuelo Pangan
agreed to sell the properties to spouses Perreras. Consuelo received P20,000 from the
respondents as earnest money with a receipt that also contained the terms of agreement. Later
on, the parties agreed to increase the price from P540,000 to P580,000. Spouses Perreras issued
two checks in compliance to the new agreement amounting to P200,000 and P250,000. Consuelo,
however, refused to accept the checks. She justified her refusal by saying that her children, co-
owners of the subject properties, did not agree to sell the properties. Consuelo offered to return
the P20,000 earnest money to the spouses buyers but the latter rejected it. Hence, Consuelo filed
a complaint for consignation. Spouses Perreras insisted on enforcing the agreement, hence they
filed an action for specific performance. In Consuelo’s answer, she claimed that the contract
became ineffective for lack of the requisite consent from the co-owners, her children. Decide.

Answer: The presence of Consuelo’s consent and, corollarily, the existence of a perfected
contract between the parties are further evidenced by the payment and receipt of P20,000.00, an
earnest money by the contracting parties’ common usage. The law on sales, specifically Article
1482 of the Civil Code, provides that whenever earnest money is given in a contract of sale, it
shall be considered as part of the price and proof of the perfection of the contract. Although the
presumption is not conclusive, as the parties may treat the earnest money differently, there is
nothing alleged in the present case that would give rise to a contrary presumption. In cases
where the Court reached a conclusion contrary to the presumption declared in Article 1482, we
found that the money initially paid was given to guarantee that the buyer would not back out
from the sale, considering that the parties to the sale have yet to arrive at a definite agreement
as to its terms – that is, a situation where the contract has not yet been perfected. These
situations do not obtain in the present case, as neither of the parties claimed that the P20,000.00
was given merely as guarantee by the respondents, as vendees, that they would not back out
from the sale (Heirs of Pangan v. Spouses Perreras, G.R. No. 157374, Aug. 27, 2009)

1.3.3 Determine the rights/obligations of vendor and vendee

Obligations of the Buyer (Vendee)

1. Payment of the price

GR: Seller is not bound to deliver unless the purchase price is paid

XPN: A period of payment has been fixed

2. Accept delivery of thing sold

NOTE: A grace period granted the buyer in case of failure to pay is a right not an obligation.
Non-payment would still generally require judicial or extrajudicial demand before default can
arise.

Other Obligations of the Buyer

1. To take care of the goods without the obligation to return, where the goods are delivered
to the buyer and he rightfully refuses to accept;
NOTE: The goods in the buyer’s possession are at the seller’s risk.
2. To be liable as a depositary if he voluntarily constituted himself as such;
3. To pay interest for the period between delivery of the thing and the payment of the
price in the following cases:
a. should it have been stipulated;
b. should the thing sold and delivered produces fruits or income; or
c. should he be in default, from the time of judicial or extra-judicial demand for the
payment of the price.

Obligations of the Seller

1. Deliver the thing sold;

2. Deliver fruits & accessions/accessories accruing from perfection of sale;

3. Transfer the ownership;

4. Warranties;

5. Take care of the thing, pending delivery, with proper diligence;

6. Pay for the expenses of the deed of sale unless there is a stipulation to the contrary

Obligation of the Seller in terms of the nature of the subject matter of the sale

When the subject matter of the sale is a determinate thing, the seller must deliver the thing to
the buyer when compelled by the latter. When the subject matter is an indeterminate or generic
thing, the seller may be asked that the obligation be complied with at his expense (Art. 1165,
NCC). Seller’s obligation in case of delay or promise to deliver the thing to two or more persons
who do not have the same interest The seller shall be responsible for any fortuitous event that
may occur until he has delivered the thing (Art. 1165, NCC).

Seller need NOT be the owner of the thing at the time of perfection of the contract
GR: Seller must have the right to transfer ownership at the time of delivery or consummation
stage. He need not be the owner at the time of perfection of the contract.

XPN: Foreclosure sale wherein the mortgagor should be the absolute owner.

Transfer of ownership by the Seller to the Buyer

GR: The ownership of the thing sold is acquired by the vendee from the moment it is delivered
to him in any ways specified in articles 1497 to 1501. This is the case when the sale is absolute.

XPN: Any other manner signifying an agreement that the possession is transferred from vendor
to vendee. The sale in this exception is a conditional one.

Question: Spouses De Leon alleged that they are the owners of a parcel of land which was
inherited by the husband from his father. They engaged the services of Atty. Juan to take care of
the documents of the properties of his parents. The lawyer let them sign voluminous
documents. After the death of Atty. Juan, some documents surfaced and revealed that their
properties had been conveyed by sale or quitclaim to the husband's brothers and sisters and to
Atty. Juan and his sisters, when in truth and in fact, no such conveyances were ever intended by
them. His signature in the deed was forged. The land in question was subsequently sold to
Alcantara by Rodolfo De Leon, one of the brothers. The spouses demanded annulment of the
document and reconveyance but it was refused. Likewise, Alcantara averred that she bought
the land in question in good faith and for value. Was there a right to transfer ownership of the
land?

Answer: None. It is during the delivery that the law requires the seller to have the right to
transfer ownership of the thing sold. In general, a perfected contract of sale cannot be
challenged on the ground of the seller’s non-ownership of the thing sold at the time of the
perfection of the contract. Undisputed is the fact that at the time of the sale, Rodolfo de Leon
was not the owner of the land he delivered to petitioner. Thus, the consummation of the
contract and the consequent transfer of ownership would depend on whether he subsequently
acquired ownership of the land. A comparison of the genuine signatures of Hermoso de Leon
with his purported signature on the Deed of Extrajudicial Partition with Quitclaim will readily
reveal that the latter is a forgery (Alcantara-Daus v. Spouses De Leon, G.R. No. 149750, June 16,
2003).

1.3.4 Describe the warranties of sales

1.3.4.1 Express Warranties (in relation to consumer laws)

Warranty A statement or representation made by the seller of goods, as part of the contract of
sale, having reference to the character, quality, or title, of the goods, and by which he promises
or undertakes to insure that certain facts are or shall be as he then represents (De Leon, 2011).

NOTE: May either be express or implied.

Effect of a breach of warranty

Buyer may:

1. Refuse to proceed with the contract; or

2. Proceed with the contract and waive the condition.

NOTE: If the condition is in the nature that it should happen, the non-performance may be
treated as a breach of warranty.

Express warranties

Any affirmation of fact or any promise by the seller relating to the thing if the natural tendency
of such affirmation or promise is to induce the buyer to purchase the same, and if the buyer
purchases the thing relying thereon (Art. 1546, NCC).

Requisites of express warranties (AIR)

1. It must be an Affirmation of fact relating to the subject matter of sale

2. Natural tendency is to Induce buyer to purchase subject matter

3. Buyer purchases the subject matter Relying thereon

1.3.4.2 Implied Warranties

Implied warranties

Warranties deemed included in all contracts of sale by operation of law (Art. 1547, NCC).

1. Warranty that seller has right to sell – refers to consummation stage. Not applicable to
sheriff, auctioneer, mortgagee, pledgee

2. Warranty against eviction

Requisites: (JPENS)

a. Final Judgment

b. Buyer is Evicted in whole or in part from the subject matter of sale

c. Basis of eviction is a right Prior to sale or act imputable to seller

d. Seller has been Summoned in the suit for eviction at the instance of buyer; or made 3rd party
defendant through 3rd party complaint brought by buyer e. No waiver on the part of the buyer

NOTE: For eviction – disturbance in law is required and not just trespass in fact.

3. GR: Warranty against encumbrances (non- apparent)

Requisites:

a. immovable sold is encumbered with non-apparent burden or servitude not mentioned in the
agreement

b. nature of non-apparent servitude or burden is such that it must be presumed that the buyer
would not have acquired it had he been aware thereof

XPN: warranty not applicable when non-apparent burden or servitude is recorded in the
Registry of Property – unless there is expressed warranty that the thing is free from all burdens
and encumbrances

4. Warranty against Hidden Defects Requisites: (HENNAS)

a. Defect is important or Serious

i. The thing sold is unfit for the use which it is intended

ii. Diminishes its fitness for such use or to such an extent that the buyer would not have
acquired it had he been aware thereof

b. Defect is Hidden

c. Defect Exists at the time of the sale

d. Buyer gives Notice of the defect to the seller within reasonable time

e. Action for rescission or reduction of the price is brought within the proper period

i. 6 months – from delivery of the thing sold

ii. Within 40 days – from the delivery in case of animals

f. There must be No waiver of warranty on the part of the buyer

Non-applicability of implied warranty (ASAP)

1. “As is and where is” sale

2. Sale of second-hand articles

3. Sale by virtue of authority in fact or law

4. Sale at public auction for tax delinquency

1.3.5 Discuss and apply installment sales

1.3.5.1 Personal property - Recto Law

Installment Sales Law Commonly known as the Recto Law. It is embodied in Art. 1484 of the
NCC, which provides for the remedies of a seller in the contracts of sale of personal property by
installments.

NOTE: Art. 1484 of the NCC incorporates the provisions of Act No. 4122 passed by the
Philippine Legislature on Dec. 9, 1939, known as the "Installment Sales Law" or the "Recto Law,"
which then amended Art. 1454 of the Civil Code of 1889.

Application of Recto Law This law covers contracts of sale of personal property by installments
(Act No. 4122). It is also applied to contracts purporting to be leases of personal property with
option to buy, when the lessor has deprived the lessee of the possession or enjoyment of the
thing (PCI Leasing and Finance Inc. v. Giraffe- X Creative Imaging, Inc., G.R. No. 142618, July
12, 2007).

Requisites of the Recto Law

1. Valid contract of sale;

2. Subject matter is personal property;

3. Payable in installments; and

4. In the case of the second and third remedies, that there has been a failure to pay two or more
installments (Art. 1484, NCC).

Alternative remedies in case of sale of personal property in installments

1. Specific Performance: Exact fulfillment should the buyer fail to pay

GR: If availed of, the unpaid seller cannot anymore choose other remedies; XPN: if after
choosing, it has become impossible, rescission may be pursued

2. Rescission: Cancel the sale if buyer fails to pay 2 or more installments.

Deemed chosen when:

a. Notice of rescission is sent

b. Takes possession of subject matter of sale

c. Files action for rescission

3. Foreclosure: Foreclose on chattel mortgage if buyer fails to pay 2 or more instalments. He

shall have no further action against the purchaser to recover any unpaid balance of the price.
Any agreement to the contrary shall be void.

GR: Actual foreclosure is necessary to bar recovery of balance.

XPN: Mortgagor refuses to deliver property to effect foreclosure; expenses incurred in attorneys
fees, etc.
NOTE: The remedies are alternative not cumulative. Availment of one is a bar to the other
remedies

Rationale of Recto Law

To remedy the abuses committed in connection with the foreclosure of chattel mortgages and to
prevent mortgagees from seizing the mortgaged property, buying it at a foreclosure sale for a
low price and then bringing suit against the mortgagor for a deficiency judgment (Villanueva,
2009).

Recto Law does NOT cover a contract to sell of movables There will be nothing to rescind if the
suspensive condition (payment of full purchase price) upon which the contract is based fails to
materialize (Villanueva, 2009).

Q: A mortgaged a diamond ring to M as a security for a loan which was to be paid 2 years
thereafter. Since A failed to pay M, she then foreclosed the mortgaged property. However, it
turned out that the proceeds of the sale were insufficient, thus, M filed an action for specific
performance. A contends that this is a violation of the Recto law since the foreclosure of the
chattel bars subsequent recovery. Is this correct?

A: No. A is not correct in invoking the Recto law since it is only applicable in case of sale of
personal property through installment. In the given case, the amount being claimed by A was to
be paid 2 years thereafter as a lump sum, not through installments. Moreover, the transaction is
a loan not a sale.

Q: A, sold and delivered a car to B which was to be paid monthly. After a series of payments, B
subsequently defaulted. A then filed an action against B for specific performance. However, the
amount collected was not sufficient to cover the amount of the car. The court then issued a writ
of execution and the sheriff levied the subject car. B contends that this is a violation of the Recto
law because having elected specific performance, A can no longer foreclose the subject car. Is
this correct?

A: No. A evidently chose the remedy of specific performance. The sheriff levied upon the car by
virtue of an execution and not as an incident of a foreclosure proceeding. The rule is that in
installment sales, if the action instituted is for specific performance and the mortgaged property
is subsequently attached and sold, the sale thereof does not amount to a foreclosure of the
mortgage. Hence, the seller-creditor is entitled to a deficiency judgment (Industrial Finance
Corporation v Ramirez, G.R. No. L-43821 May 26, 1977).

1.3.5.2 Real Property - Maceda Law

Realty Installment Buyer Act

Commonly known as the “957 Law.” It is embodied in R.A. 6552 which provides for certain
protection to particularly buyers of real estate payable on installments. The law declares as
"public policy to protect buyers of real estate on installment payments against onerous and
oppressive conditions.

NOTE: The purpose of the law is to protect buyers in installment against oppressive conditions.

Transactions/sale covered by the Maceda Law

The law involves the sale of immovables on installment (Maceda Law, R.A. 6552).

1. Coverage: Residential Real Estate

2. Exclude:

a. Industrial lots

b. Commercial buildings (and commercial lots by implication)

c. Sale to tenants under agrarian laws

d. Sale of lands payable in straight terms (R.A. 6552, Sec. 3).

QUESTION: What are the so-called “Maceda” and “Recto” laws in connection with sales on
installments? Give the most important features on each law. (1999 Bar Question)

ANSWER: The Maceda Law (R.A. 6552) is applicable to sales of immovable property on
installments. The most important features are:

1. After having paid installments for at least two years, the buyer is entitled to a mandatory
grace period of one month for every year of installment payments made, to pay the unpaid
installments without interest. If the contract is cancelled, the seller shall refund to the buyer
the cash surrender value equivalent to fifty percent (50%) of the total payments made, and
after five years of installments, an additional five percent (5%) every year but not to exceed
ninety percent (90%) of the total payments made.

2. In case the installments paid were less than 2 years, the seller shall give the buyer a grace
period of not less than 60 days. If the buyer fails to pay the installments due at the expiration
of the grace period, the seller may cancel the contract after 30 days from receipt by the buyer
of the notice of cancellation or demand for rescission by notarial act. (Rillo v. CA, G.R. No.
125347 June 19, 1997)

The Recto Law (Art.1484) refers to sale of movables payable in installments and limiting the
right of seller, in case of default by the buyer, to one of three remedies:

1. Exact fulfillment;

2. Cancel the sale of two or more installments have not been paid;
3. Foreclose the chattel mortgage on the things sold, also in case of default of two or more
installments, with no further action against the purchaser.

Other rights granted to a buyer under the Maceda Law

1. Sell or assign rights to another

2. Reinstate contract by updating within 30 days before and cancellation

3. Deed of Sale to be done by notarial act

4. Pay full installment in advance the balance of price anytime w/o interest

5. Have full payment annotated in certificate of title

1.3.5.3 PD 957/ Condominium Act

Condominium

It is an interest in real property consisting of separate interest in a unit in a residential,

industrial or commercial building and an undivided interest in common, directly or indirectly,
in the land on which it is located and in other common areas of the building.

Condominium unit

It is a part of the condominium project intended for any type of independent use or ownership,
including one or more rooms or spaces located in one or more floors (or part or parts of floors)
in a building or buildings and such accessories as may be appended thereto.

Condominium project

It is the entire parcel of real property divided or to be divided in condominiums, including all
structures thereon, Common areas The entire project excepting all units separately granted or
held or reserved.

Restrictions as regards ownership of condominium units provided under the Condominium

Act

1. As regards individuals:
GR: None.
XPN: where the common areas in the condominium project are owned by the owners of
separate units as co-owners thereof, no condominium unit therein shall be conveyed or
transferred to persons other than: 1. Filipino citizens, or 2. Corporations at least sixty
percent of the capital stock of which belong to Filipino citizens
 2. As regards corporations:

Where the common areas in a condominium project are held by a corporation, no

transfer or conveyance of a unit shall be valid if the concomitant transfer of the
appurtenant membership or stockholding in the corporation will cause the alien interest
in such corporation to exceed the limits imposed by existing laws.

NOTE: Under Republic Act (R.A.) No. 4726, otherwise known as the Condominium Act,
foreign nationals can own Philippine real estate through the purchase of condominium
units or townhouses constituted under the Condominium principle with Condominium
Certificates of Title. The law provides that no condominium unit can be sold without at
the same time selling the corresponding amount of rights, shares or other interests in the
condominium management body, the Condominium Corporation; and no one can buy
shares in a Condominium Corporation without at the same time buying a condominium
unit. It expressly allows foreigners to acquire condominium units and shares in
condominium corporations up to not more than 40% of the total and outstanding capital
stock of a Filipino-owned or controlled corporation. Under this set up, the ownership of
the land is legally separated from the unit itself (Hulst v. PR Builders, Inc., G.R. No.
156364, September 25, 2008).

Condominium corporation

A corporation specially formed for the purpose, in which the holders of separate interest shall
automatically be members or shareholders, to the exclusion of others, in proportion to the
appurtenant interest of their respective units in the common areas.

NOTE: As regards title to the common areas, including the land, or the appurtenant interests in
such areas, these may be held by a condominium corporation. Term of a condominium
corporation Co-terminous with the duration of the condominium project, the provisions of the
Corporation Law to the contrary notwithstanding.

Rules regarding membership in a condominium corporation

Membership in a condominium corporation, regardless of whether it is a stock or non-stock

corporation, shall not be transferable separately from the condominium unit of which it is an
appurtenance.

NOTE: When a member or stockholder ceases to own a unit in the project in which the
condominium corporation owns or holds the common areas, he shall automatically cease to be a
member or stockholder of the condominium corporation.

1.3.6 Discuss the extinguishment of a contract of sale

Causes for extinguishment of sale

 A contract of sale is extinguished by:

1. Same causes as how an obligation is extinguished, namely:

a. Payment or performance

b. Loss of the thing due

c. Condonation or remission of the debt

d. Confusion or merger of the rights of creditor and debtor

e. Compensation

f. Novation

g. Annulment

h. Rescission

i. Fulfillment of resolutory condition

j. Prescription

2. Conventional Redemption

3. Legal redemption

1.3.6.1 Conventional Redemption

Redemption It is a mode of extinguishment wherein the seller has the right to redeem or
repurchase the thing sold upon return of the price paid.

Kinds of redemption

1. Legal

2. Conventional

Conventional redemption - Seller reserves the right to repurchase thing sold coupled with
obligation to return the purchase price of the sale, expenses incurred under the contract, other
legitimate payments and, necessary & useful expenses made on the thing sold.

Reservation of right to repurchase

The right to repurchase is reserved by a stipulation to that effect in the contract of sale. Because
it is not a right granted to the vendor by the vendee but is a right reserved by the vendor.

Equitable mortgage

One which lacks the proper formalities, form or words or other requisites prescribed by law for
a mortgage, but shows the intention of the parties to make the property subject of the contract
as security for a debt and contains nothing impossible or contrary to law (Cachola v. CA, G.R.
No. 97822, May 7, 1992)

Essential requisites of equitable mortgage

1. Parties entered into a contract of sale

2. Their intention was to secure an existing debt by way of a mortgage.

Presumption of an equitable mortgage

A sale with conventional redemption is deemed to be an equitable mortgage in any of the

following cases (Art. 1602, NCC): (AIR-STAR)

1. Price of the sale with right to repurchase is unusually Inadequate

2. Seller Remains in possession as lessee or otherwise

3. Upon or after the expiration of the right to repurchase Another instrument extending the
period of redemption or granting a new period is executed

4. Purchaser Retains for himself a part of the purchase price

5. Seller binds himself to pay the Taxes on the thing sold

6. In any other case where the real intention of the parties is that the transaction shall Secure the
payment of a debt or the performance of any other obligation.

7. Art. 1602 shall also apply to a contract purporting to be an Absolute sale (Art. 1604, NCC).

Question: Spouses Ramos executed a Deed Of Sale under Pacto De Retro over their conjugal
house and lot in favor of Susana Sarao. The contract granted the Ramos spouses the option to
repurchase the property within six months plus an interest of 4.5 percent a month. It was
further agreed that should the spouses fail to pay the monthly interest or to exercise the right to
repurchase within the stipulated period, the conveyance would be deemed an absolute sale. In
the succeeding months, the wife Myrna Ramos tendered to Sarao payment in the form of two
manager’s checks, which the latter refused to accept for being allegedly insufficient. Myrna filed
a complaint for the redemption of the property. She deposited with the RTC two checks that
Sarao refused to accept. Is the contract a Pacto De Retro sale or an equitable mortgage? Decide.

Answer: The contract shall be presumed to be an equitable mortgage, in any of the following
cases:

(1) When the price of a sale with right to repurchase is unusually inadequate;

(2) When the vendor remains in possession as lessee or otherwise;

(3) When upon or after the expiration of the right to repurchase another instrument extending
the period of redemption or granting a new period is executed;

(4) When the purchaser retains for himself a part of the purchase price;

(5) When the vendor binds himself to pay the taxes on the thing sold;

(6) In any other case where it may be fairly inferred that the real intention of the parties is that
the transaction shall secure the payment of a debt or the performance of any other obligation.
(Article 1602, New Civil Code)

Furthermore, a contract purporting to be a pacto de retro is construed as an equitable mortgage

when the terms of the document and the surrounding circumstances so require. The law
discourages the use of a pacto de retro, because this scheme is frequently used to circumvent a
contract known as a pactum commissorium. Jurisprudence has consistently declared that the
presence of even just one of the circumstances set forth in the foregoing Civil Code provision
suffices to convert a contract to an equitable mortgage. Article 1602 specifically states that the
equitable presumption applies to any of the cases therein enumerated. In the present factual
milieu, the vendor retained possession of the property allegedly sold. Petitioner and her
children continued to use it as their residence, even after Jonas Ramos had abandoned them. In
fact, it remained as her address for the service of court orders and copies of Respondent Sarao’s
pleadings (Ramos v. Sarao, G.R. No. 149756, Feb. 11, 2005).

Question: Respondent Dizon mortgaged to Monte de Piedad a parcel of land including the two-
storey apartment built thereon to secure a loan. Respondent failed to settle the loan, drawing
Monte de Piedad to foreclose the mortgage, consolidate its ownership of the property, and
register it in its name. Monte de Piedad nevertheless gave respondent until May 28, 1987 to
purchase back the property. On the day of the expiration itself, one of the petitioners on behalf
of respondent paid for the property. Monte de Piedad thereupon executed a deed of sale in
favor of respondent who, the following day, executed a deed of sale in favor of petitioners.
Also, respondent and petitioners executed an agreement giving respondent repurchase within
three months from the date of this agreement. Failure to repurchase shall result to respondent
vacating the premises and turn over possession thereof to petitioners. Three months passed
without respondent repurchasing the property. Petitioners registered the Deed of Sale executed
by Monte de Piedad in favor of respondent, as well as the Deed of Sale of the property executed
by respondent in favor of petitioners. Notwithstanding this, respondent failed to vacate the
property. An ejectment case was filed against respondent. Is the agreement a contract of sale or
an equitable mortgage?

Answer: It is a contract of sale. The presumption of equitable mortgage created in Article 1602
of the Civil Code is not conclusive. It may be rebutted by competent and satisfactory proof of
the contrary. In the case at bar, ample evidence supports petitioners’ claim that the transaction
between them and respondent was one of sale with option to repurchase. While after the sale of
the property respondent remained therein, her stay was not in the concept of an owner.
Contrary to respondent’s claim that after the sale of the property in 1987, the tax declarations
remained in her name and she continued to pay realty taxes thereon, the record shows that the
1987 tax declarations were in the names of Monte de Piedad and petitioners (Spouses Cristobal,
et. al v. Dizon, G.R. No. 172771, Jan. 31, 2008).

Question: Ceballos was able to borrow from Mercado certain sum of money and as security, she
executed a Deed of Real Estate Mortgage over the subject property. The said mortgage was not
registered. Ceballos defaulted. Thereafter, a Deed of Absolute Sale was executed by Ceballos
and her husband whereby the mortgaged property was sold to Mercado for the price of
P16,500.00. Ceballos offered to redeem the property from Mercado for the price of P30, 000.00
but the latter's wife refused since the same was already transferred in their names by virtue of
the Deed of Absolute Sale. As a consequence, Ceballos filed the case contending that the
Contract should be declared as an equitable mortgage. Is the contention of Ceballos correct?

Answer: No. The instances when a contract, regardless of its nomenclature, may be presumed
to be an equitable mortgage are enumerated in Art. 1602 of the Civil Code. Here, none of those
circumstances were present. The original transaction was a loan. Ceballos failed to pay the loan;
consequently, the parties entered into another agreement — the assailed, duly notarized Deed
of Absolute Sale, which superseded the loan document. Ceballos had the burden of proving that
she did not intend to sell the property and that Mercado did not intend to buy it; and that the
new agreement did not embody the true intention of the parties (Ceballos v. Intestate Estate of
the Late Emigdio Mercado, G.R. No. 155856, May 28, 2004).

Question: Eulalia was engaged in the business of buying and selling large cattle. In order to
secure the financial capital she advanced for her employees (biyaheros) she required them to
surrender TCT of their properties and to execute the corresponding Deeds of Sale in her favor.
Domeng Bandong was not required to post any security but when Eulalia discovered that he
incurred shortage in cattle procurement operation, he was required to execute a deed of sale
over a parcel of land in favor of Eulalia. She sold the property to her grandniece Jocelyn who
thereafter instituted an action for ejectment against the Spouses Bandong. To assert their right,
Spouses Bandong filed an action for annulment of sale against Eulalia and Jocelyn alleging that
there was no sale intended but only equitable mortgage for the purpose of securing the shortage
incurred by Domeng in the amount of P70, 000.00 while employed as “biyahero” by Eulalia.
Was the deed of sale between Domeng and Eulalia a contract of sale or an equitable mortgage?
Answer: It is an equitable mortgage. In executing the said deed of sale, Domeng and Eulalia
never intended the transfer of ownership of the subject property but to burden the same with an
encumbrance to secure the indebtedness incurred by Domeng on the occasion of his
employment with Eulalia. The agreement between Dominador and Eulalia was not avoided in
its entirety so as to prevent it from producing any legal effect at all. Instead, the said transaction
is an equitable mortgage, thereby merely altering the relationship of the parties from seller and
buyer, to mortgagor and mortgagee, while the subject property is not transferred but subjected
to a lien in favor of the latter (Sps. Raymundo, et al. v. Sps. Bandong, G.R. No. 171250, Jul. 4,
2007).

Effects when sale is adjudged as an equitable mortgage

1. The apparent seller may ask for the reformation of the instrument (Art. 1605, NCC).

2. Money, fruit or other benefit to be received by the buyer as rent or otherwise shall be
considered as interest (Art. 1602, NCC).

3. The court may decree that “vendor” pay his outstanding loan to the “vendee” (Banga v. Bello,
G.R. No. 156705, September 30, 2005).

4. A remand of the case to the trial court where the latter did not pass upon the mortgagor’s
claim that he had paid his mortgage obligation, for the purpose of the determining whether said
obligation has been paid, and if not, how much should still be paid (Banga v. Bello, G.R. No.
156705, September 30, 2005).

Period of redemption

1. No period agreed upon – 4 years from date of contract

2. When there is agreement – should not exceed 10 years; but if it exceeded, valid only for the
first 10 years.

3. When period to redeem has expired & there has been a previous suit on the nature of the
contract – seller still has 30 days from final judgment on the basis that contract was a sale with
pacto de retro:

4. When period has expired & seller allowed the period of redemption to expire – seller is at
fault for not having exercised his rights so should not be granted a new period

1.3.7 Apply Legal Redemption on sales

Legal redemption - it is the right to be subrogated upon the same terms and conditions
stipulated in the contract, in the place of one who acquires the thing by purchase or by dation in
payment or by other transaction whereby ownership is transmitted by onerous title.

Instances of legal redemption

1. Sale of a co-owner of his share to a stranger (Art. 1620, NCC)

2. When a credit or other incorporeal right in litigation is sold (Art. 1634, NCC)

3. Sale of an heir of his hereditary rights to a stranger (Art. 1088, NCC)

4. Sale of adjacent rural lands not exceeding 1 hectare (Art. 1621, NCC)

5. Sale of adjacent small urban lands bought merely for speculation (Art. 1622, NCC)

Other instances when the right of legal redemption is also granted

1. Redemption of homesteads

2. Redemption in tax sales

3. Redemption by judgment debtor

4. Redemption in extrajudicial foreclosure

5. Redemption in judicial foreclosure of mortgage

Basis of legal redemption

It is created partly for reason of public policy and partly for the benefit and convenience of the
redemptioner to afford him a way out of what might be a disagreeable or inconvenient
association into which he has been in trust. It is intended to minimize co-ownership (Pineda,
2010). Running of period of legal redemption

Running of period of legal redemption

The right of legal redemption shall not be exercised except within 30 days from the notice in
writing by the prospective seller, or seller, as the case may be. The deed of sale shall not be
recorded in the Registry of Property unless accompanied by an affidavit of the seller that he has
given written notice thereof to all possible redemptioners (Art. 1623, NCC).

Written notice indispensable

The right of legal pre-emption or redemption shall not be exercised except within thirty days
from the notice in writing by the prospective vendor, or by the vendor, as the case may be (Art.
1623, NCC).

NOTE: Knowledge is insufficient – the mere fact that the redemptioner – the person who has
the right to redeem – is already aware of the existence of the sale will not excuse the written
notice. Mere knowledge does not satisfy the requirement; there must still be written notice
despite such knowledge (Barcellano v. Banas, et al., G.R. No. 165287, September 14, 2011).
Pre-emption

Redemption presupposes that the property was already sold or transferred to another. In pre-
emption, the right is present before the sale; there is a right to purchase ahead of or before it can
be sold or transferred to other persons.

Example: Whenever a piece of urban land which is so small and so situated that a major portion
thereof cannot be used for any practical purpose within a reasonable time, having been bought
merely for speculation, is about to be re-sold, the owner of any adjoining land has a right of
preemption at a reasonable price (Art. 1620, NCC).