Adelfa Properties, Inc. vs. Court of Appeals

A contract denominated as an "Exclusive Option to Purchase" constitutes a contract to sell, not a mere option contract, where the parties have reached a definite agreement on the object, price, and terms of payment, and the initial payment is intended as earnest money forming part of the purchase price. The buyer's right to suspend payment under Article 1590 of the Civil Code is triggered by a vindicatory action that creates a reasonable fear of disturbance, but this right ceases once the litigation ends, and failure to then properly tender payment and consignate allows the seller to rescind the contract.

Private respondents Rosario Jimenez-Castañeda and Salud Jimenez were co-owners of a parcel of land. After selling the eastern half to petitioner Adelfa Properties, Inc., the parties executed an "Exclusive Option to Purchase" for the western half. Before the petitioner could pay the balance, a lawsuit (Civil Case No. 89-5541) was filed by the private respondents' relatives against all parties, seeking recovery of the entire property covered by the title. Citing this vindicatory action, the petitioner suspended payment. The lawsuit was later dismissed, but the petitioner did not immediately pay. The private respondents subsequently sold the same property to a third party, Emylene Chua, leading the petitioner to file an action for specific performance and damages.

• Nature of the Parties and Property: Private respondents were co-owners of a parcel of land (TCT No. 309773). Petitioner purchased the eastern half from two other co-owners.
• The Alleged Contract: On November 25, 1989, petitioner and private respondents executed an "Exclusive Option to Purchase" for the western half (8,655 sq.m.) for P2,856,150.00. Petitioner paid P50,000.00 as "option money," with the balance due on or before November 30, 1989. The contract provided for automatic cancellation and partial forfeiture of the option money upon default.
• The Vindicatory Action: On November 29, 1989, petitioner received summons in Civil Case No. 89-5541, where private respondents' relatives sought recovery of the entire property covered by TCT No. 309773, including the subject western half.
• Suspension of Payment and Subsequent Events: Petitioner informed private respondents it would suspend payment due to the lawsuit. Private respondents rejected petitioner's suggestion to deduct P500,000.00 (later P300,000.00) from the price to settle the case. The lawsuit was dismissed on February 23, 1990. On February 28, 1990, private respondents sold the property to intervenor Emylene Chua via a Deed of Conditional Sale.
• Demand and Refusal: On April 16, 1990, petitioner offered to pay the balance upon execution of a deed of absolute sale, but private respondents ignored this. On July 27, 1990, private respondents sent a check for P25,000.00 (50% of the "option money") and demanded return of the title, effectively cancelling the transaction.

• Nature of the Contract: Petitioner argued the agreement was a contract to sell, not a mere option contract, as there was a perfected meeting of minds on the object, price, and terms.
• Suspension of Payment: Petitioner maintained that Article 1590 of the Civil Code justified suspending payment because the vindicatory action (Civil Case No. 89-5541) created a reasonable fear of disturbance of its prospective ownership over the entire titled property, not just the eastern half.
• Invalid Rescission: Petitioner contended that private respondents could not unilaterally rescind the contract while the option period had not lapsed and while payment was validly suspended.

• Option Contract: Respondents countered that the document was strictly an option contract, as it was titled as such and provided for forfeiture of the option money upon default.
• No Justification for Suspension: Respondents argued that Article 1590 applies only to contracts of sale or contracts to sell, not to option contracts. Furthermore, the vindicatory action only concerned the eastern half of the property, so no disturbance existed regarding the western half subject to their contract.
• Valid Rescission: Respondents argued that petitioner's failure to pay on time constituted a rejection of the option, and their subsequent sale to a third party was valid.

• Nature of the Contract: Whether the "Exclusive Option to Purchase" is an option contract or a contract to sell.
• Suspension of Payment: Whether petitioner was justified in suspending payment of the purchase price under Article 1590 of the Civil Code.
• Effect of Non-Payment: Whether the contract was validly rescinded due to petitioner's failure to pay after the disturbance ceased.

• Nature of the Contract: The agreement is a contract to sell, not an option contract. The parties had a perfected agreement on the object, price, and terms. The P50,000.00 was earnest money (part of the price), not option money for a mere unaccepted offer. The stipulations and subsequent acts of the parties indicated an obligation to pay and sell, not just a privilege to buy.
• Suspension of Payment: The suspension was initially justified. Article 1590 applies to a contract to sell. The vindicatory action (Civil Case No. 89-5541) prayed for recovery of the entire property under TCT No. 309773, creating a reasonable fear of disturbance for the petitioner regarding the western half. Private respondents' verbal assurances were not the security required by law to compel payment.
• Effect of Non-Payment: The contract was validly rescinded. After the lawsuit's dismissal, the justification for suspension ceased. Petitioner's mere letter expressing willingness to pay did not constitute a valid tender of payment and consignation, which are required to extinguish the obligation in a contract to sell. Private respondents' written notice of rescission pursuant to the contract's automatic rescission clause was effective, as petitioner did not impugn it judicially.

• Option Contract vs. Contract to Sell — An option contract is a separate agreement granting a privilege to buy within a certain time, supported by distinct consideration (option money). A contract to sell is a perfected sale where ownership is reserved until full payment of the price, which is a positive suspensive condition. The Court looks at the intent of the parties, the nature of the initial payment (earnest money vs. option money), and the existence of binding obligations, not merely the title of the document.
• Suspension of Payment under Article 1590 — A vendee in a contract to sell may suspend payment if disturbed in possession or ownership, or has reasonable grounds to fear such disturbance from a vindicatory action. This right ceases once the disturbance ends. The vendor's mere assurance is not equivalent to providing security for the return of the price.
• Rescission of a Contract to Sell — Judicial action is not required for the rescission of a contract to sell if it contains an automatic rescission clause. A written notice of rescission is sufficient, and if the defaulting party does not contest it, the extrajudicial rescission is effective.

• "The important task in contract interpretation is always the ascertainment of the intention of the contracting parties and that task is, of course, to be discharged by looking to the words they used to project that intention in their contract, all the words not just a particular word or two, and words in context not words standing alone."
• "The reason of 'lack of word of honor' is to us a clear indication that private respondents considered petitioner already bound by its obligation to pay the balance of the consideration."
• "The mere sending of a letter by the vendee expressing the intention to pay, without the accompanying payment, is not considered a valid tender of payment."
• "Resolution of reciprocal contracts may be made extrajudicially unless successfully impugned in court."

• Pingol vs. Court of Appeals, G.R. No. 102909, September 6, 1993, 226 SCRA 118 — Cited for the distinction between a contract of sale and a contract to sell, emphasizing that in the latter, ownership is reserved until full payment.
• University of the Philippines vs. De los Angeles, L-28602, September 29, 1970, 35 SCRA 102 — Cited for the principle that extrajudicial rescission is provisional and subject to judicial review if contested, but becomes effective if not opposed.
• Albea vs. Inquimboy, 86 Phil. 477 (1950) — Followed for the rule that rescission of a contract to sell does not require judicial action.

• Article 1590, Civil Code — Applied to justify the vendee's suspension of the purchase price due to a vindicatory action creating a reasonable fear of disturbance.
• Article 1592, Civil Code — Cited but held inapplicable to a contract to sell, as judicial or notarial rescission is not required for such contracts.
• Article 1482, Civil Code — Applied to characterize the P50,000.00 payment as earnest money, which is part of the purchase price and proof of the contract's perfection.

• Chief Justice Andres R. Narvasa
• Justice Reynato S. Puno
• Justice Jose A.R. Mendoza