Aludos vs. Suerte

A contract denominated as a sale of improvements and assignment of leasehold rights is not an equitable mortgage where the attendant circumstances do not demonstrate an intent to secure a debt, and the sale of improvements on leased property is valid even if the assignment of leasehold rights is void for lack of lessor consent, provided no proof establishes the lessor's ownership of such improvements.

Lomises Aludos held a permit from the Baguio City Government to occupy two market stalls. On September 8, 1984, Lomises agreed to transfer all improvements and rights over the stalls to Johnny M. Suerte for ₱260,000.00, receiving a ₱68,000.00 down payment. Before full payment could be made, Lomises backed out of the agreement and returned the ₱68,000.00 to Johnny's parents. Johnny protested the rescission and demanded the enforcement of the agreement.

• Acquisition of Rights: In January 1969, Lomises acquired the right to occupy two stalls in the Hangar Market in Baguio City, as evidenced by a permit issued by the City Treasurer.
• The Agreement: On September 8, 1984, Lomises and Johnny executed a receipt acknowledging a ₱45,000.00 partial down payment for the transfer of improvements and rights over the stalls for ₱260,000.00, payable over 16 months. A subsequent payment brought the total given to ₱68,000.00.
• Rescission and Return: Before full payment, Lomises backed out and returned the ₱68,000.00 to Johnny's parents, as evidenced by a handwritten receipt dated October 9, 1985.
• Protest and Action: Through a letter dated October 15, 1985, Johnny protested the return of his money and insisted on the agreement's enforcement. Upon Lomises' refusal, Johnny filed a complaint for specific performance with damages.

• Nature of Contract: Petitioner argued that the agreement was an equitable mortgage or loan, not a sale, claiming Johnny was a mere student acting as a dummy for his mother, the real lender.
• Extinguishment of Obligation: Petitioner maintained that the loan was fully paid and extinguished when the ₱68,000.00 was returned to Johnny's parents, who had inherited his rights upon his death.
• Invalidity of Sale of Improvements: Petitioner contended that the sale of improvements was void because the 1985 lease contract provided that improvements ipso facto belong to the lessor, and the stalls themselves were the only improvements, making their transfer impossible without transferring the leasehold rights.

• Nature of Contract: Respondent countered that the receipt clearly evidenced a contract of sale, not a loan.
• Validity of Sale of Improvements: Respondent argued that while the sale of leasehold rights was void for lack of lessor consent, the sale of improvements should be upheld as valid.

• Nature of the Contract: Whether the agreement between the parties was an equitable mortgage or a contract of sale of improvements and assignment of leasehold rights.
• Validity of the Sale of Improvements: Whether the sale of improvements on the leased property is valid despite the void assignment of leasehold rights and the alleged lessor ownership of the improvements.

• Nature of the Contract: The agreement was a sale of improvements and assignment of leasehold rights, not an equitable mortgage. The circumstances invoked—Johnny's status as a student, the alleged retention of ₱20,000.00 as interest, and the retention of possession—do not prove an intent to secure a debt. Johnny had 16 months to pay and access to loan funds; the return of the full ₱68,000.00 negates the claim that ₱20,000.00 was prepaid interest; and retention of possession was proper pending full payment.
• Validity of the Sale of Improvements: The sale of improvements was valid. The assignment of leasehold rights was void for lack of lessor consent under Article 1649 of the Civil Code, but the improvements were the lessee's private property. The 1985 lease contract allegedly transferring ownership of improvements to the city was not formally offered in evidence and thus had no probative weight. The case was properly remanded to determine the value of the improvements as of September 8, 1984.

• Equitable Mortgage — Defined as a contract lacking the proper formality but revealing the parties' intention to charge real property as security for a debt. Article 1602 of the Civil Code enumerates circumstances indicating equitable mortgage. The presumption was not triggered because the attendant circumstances—the buyer's capacity to pay, the return of the full down payment negating interest deductions, and the seller's justified retention of possession—did not demonstrate an intent to secure a debt.
• Formal Offer of Evidence — A court shall consider no evidence which has not been formally offered. The purpose is to allow the court to rest its findings strictly upon the evidence presented by the parties. A document not formally offered is merely a scrap of paper barren of probative weight, regardless of its inclusion in the records or attachment to pleadings.

• "The offer of evidence is necessary because it is the duty of the court to rest its findings of fact and its judgment only and strictly upon the evidence offered by the parties. Unless and until admitted by the court in evidence for the purpose or purposes for which such document is offered, the same is merely a scrap of paper barren of probative weight."

• Rockville Excel International Exim Corporation v. Culla, G.R. No. 155716, October 2, 2009 — Cited as controlling precedent for the definition of equitable mortgage.
• Heirs of the Deceased Carmen Cruz-Zamora v. Multiwood International, Inc., G.R. No. 146428, January 19, 2009 — Followed for the rule that evidence not formally offered has no probative weight.

• Article 1602, Civil Code — Enumerates the circumstances under which a contract is presumed to be an equitable mortgage. Applied to determine if the agreement secured a debt; the circumstances did not support the presumption.
• Article 1604, Civil Code — Provides that the provisions on equitable mortgage shall apply to contracts purporting to be an absolute sale. Cited in relation to Article 1602.
• Article 1649, Civil Code — Prohibits the lessee from assigning the lease without the consent of the lessor. Applied to void the assignment of leasehold rights due to lack of consent from the Baguio City Government.
• Section 34, Rule 132, Rules of Court — Mandates that the court shall consider no evidence which has not been formally offered. Applied to exclude the 1985 lease contract that petitioner relied upon to claim the lessor owned the improvements.

Antonio T. Carpio, Jose Portugal Perez, Maria Lourdes P. A. Sereno, Bienvenido L. Reyes.