Ayala Corporation vs. Ray Burton Development Corporation

Deed restrictions annotated on a certificate of title and deed of sale are binding on purchasers with actual or constructive notice, and a developer who deliberately violates these restrictions by submitting fraudulent building plans acts in bad faith, precluding the defense of estoppel against the vendor and warranting an award of exemplary damages and substitute performance when specific performance is no longer feasible.

Ayala Corporation developed the Ayala estate in Makati City and sold lots subject to deed restrictions, including a 42-meter building height limit and a requirement for Ayala's approval of building plans. Lot 26 was sold to Karamfil Import-Export Company Ltd., which subsequently sold it to Palmcrest Development and Realty Corporation, and then to Ray Burton Development Corporation (RBDC). Ayala gave its conformity to both resales, expressly conditioning its approval on the vendees' compliance with the original deed restrictions, which were annotated on the respective deeds of sale and certificates of title.

• The Deed Restrictions: Ayala sold Lot 26 to Karamfil under a deed of sale containing special conditions and restrictions. These included a maximum building height of 42 meters, a maximum gross floor area of five times the lot area, a requirement for Ayala's approval of building plans, a prohibition on resale until a building was completed, and a provision for rescission for any breach.
• Subsequent Transfers: Karamfil sold the lot to Palmcrest, and Palmcrest sold it to RBDC. Ayala approved both transfers subject to the vendees' compliance with the original deed restrictions. The restrictions were annotated on the deeds of sale and on the certificates of title, although the Register of Deeds erroneously annotated a 23-meter height limit on RBDC's title.
• Fraudulent Construction: RBDC initially submitted a 5-story building plan (25.85 meters) to Ayala, which was approved. RBDC then secured the release of the owner's duplicate title from Ayala for bank financing by representing it would construct the 5-story building. Subsequently, RBDC submitted a different set of plans for a 26-story building (98.60 meters) to the Makati City Engineer's Office, concealing this from Ayala, and began construction.
• Administrative Proceedings: RBDC and other lot owners filed a complaint with the Housing and Land Use Regulatory Board (HLRB) to nullify the deed restrictions. The HLRB upheld the restrictions. On appeal, the Office of the President ruled that RBDC was bound by the original deed restrictions but had the option to accept the Revised Deed Restrictions.
• Judicial Action: Upon discovering the construction of the 26-story building, Ayala demanded that RBDC cease construction. RBDC refused, prompting Ayala to file a complaint for specific performance or rescission with the Regional Trial Court of Makati City.

• Petitioner Ayala argued that RBDC had actual and constructive notice of the 42-meter height restriction despite the erroneous 23-meter annotation on the title, because the deeds of sale expressly incorporated the original restrictions.
• Petitioner maintained that Ayala was not estopped from enforcing the deed restrictions, as mere tolerance of minor violations by other lot owners did not constitute a waiver of the right to enforce the covenant against material breaches.
• Petitioner argued that the deed restrictions were valid contracts of adhesion, not invalid agreements, and that RBDC, an experienced realty firm, was not a disadvantaged party entitled to the protection of the courts against such contracts.

• Respondent RBDC argued that it had no actual or constructive notice of the 42-meter height restriction due to the erroneous 23-meter annotation on its certificate of title.
• Respondent countered that Ayala was estopped from enforcing the deed restrictions because it had failed to act against other high-rise violators in the area, constituting waiver and discriminatory enforcement.
• Respondent argued that the deed restrictions were invalid contracts of adhesion, not economically viable, and contrary to law, morals, and public policy.
• Respondent contended that the building complied with the minimum requirements of the National Building Code, rendering the deed restrictions unenforceable.

• Procedural Issues: Whether the Supreme Court may review the factual findings of the Court of Appeals in a petition for review on certiorari under Rule 45.
• Substantive Issues: Whether RBDC had actual or constructive notice of the 42-meter height restriction. Whether Ayala is estopped from enforcing the deed restrictions due to its failure to act against other violators. Whether the deed restrictions constitute an invalid contract of adhesion. Whether RBDC is liable for damages for violating the deed restrictions.

• Procedural: The Court may review factual issues in a Rule 45 petition when the findings of the Court of Appeals are devoid of support by the evidence on record or are based on a misapprehension of facts. Because the Court of Appeals overlooked relevant facts that would justify a different conclusion, a review of the factual issues was warranted.
• Substantive: RBDC had actual and constructive notice of the 42-meter restriction. The restrictions were annotated on the deeds of sale and the certificate of title, and RBDC's submission of a 5-story plan to Ayala demonstrated its awareness of the height limit. Ayala is not estopped from enforcing the restrictions. Estoppel requires a false representation or concealment relied upon, which Ayala did not make. Non-objection to trivial breaches of a restrictive covenant does not result in the loss of the right to enforce the covenant against material breaches. The deed restrictions are valid contracts of adhesion. Contracts of adhesion are not invalid per se and are binding when the adhering party is free to reject the contract. RBDC, an experienced realty firm, was not an unwary or disadvantaged party. Because the building was fully constructed and tenanted, specific performance through demolition was infeasible; thus, RBDC is liable for substitute performance measured by the development charges under the Revised Deed Restrictions, exemplary damages for acting in bad faith by submitting two sets of building plans, and attorney's fees.

• Contracts of Adhesion — Contracts of adhesion, wherein one party imposes a ready-made form of contract on the other, are not invalid per se and are as binding as mutually executed transactions. The adhering party is free to reject the contract entirely. Courts must exercise greater vigilance to protect the weaker party from abuse, but this protection does not extend to experienced business entities that cannot claim to be unwary or disadvantaged.
• Estoppel in the Enforcement of Restrictive Covenants — Under the doctrine of estoppel, an admission or representation is rendered conclusive upon the person making it and cannot be denied as against the person relying thereon. Mere acquiescence in trivial or immaterial violations of a restrictive covenant does not result in the loss of the right to enforce the covenant against material violations that cause damage. A waiver in favor of one person for a limited purpose is not a waiver as to all persons generally.
• Substitute Performance — When specific performance, such as the demolition of a building constructed in violation of deed restrictions, is no longer feasible due to the completion and tenancy of the structure, the breaching party may be held liable for substitute performance. The measure of compensatory damages may be based on development charges imposed under revised deed restrictions, which represent the contribution to a trust fund for improving facilities burdened by the disproportionate construction.

• "A contract of adhesion in itself is not an invalid agreement. This type of contract is as binding as a mutually executed transaction. x x x The one who adheres to the contract is in reality free to reject it entirely; if he adheres he gives his consent." — Emphasizing the validity and binding nature of contracts of adhesion when the adhering party has the freedom to reject the contract.
• "As a rule, non-objection to trivial breaches of a restrictive covenant does not result in loss of the right to enforce the covenant by injunction, and acquiescence in violations of a restrictive covenant which are immaterial and do not affect or injure one will not preclude him from restraining violations thereof which would so operate as to cause him to be damaged." — Articulating the principle that tolerance of minor breaches does not waive the right to enforce restrictive covenants against major violations.
• "Under the doctrine of estoppel, an admission or representation is rendered conclusive upon the person making it, and cannot be denied or disproved as against the person relying thereon. A party may not go back on his own acts and representations to the prejudice of the other party who relied upon them." — Defining the doctrine of estoppel and explaining its inapplicability to Ayala, which made no false representation or concealment relied upon by RBDC.

• Ong Yiu vs. Court of Appeals, et al. — Followed. Held that contracts of adhesion are not entirely prohibited and the adhering party is free to reject the contract.
• Philippine American General Insurance Co., Inc. vs. Sweet Lines, Inc., et al. — Followed. Reiterated that ignorance of a contract of adhesion's provisions does not excuse non-compliance.
• Qua Chee Gan vs. Law Union and Rock Insurance Co., Ltd. — Followed. Enunciated the principle that courts must exercise greater strictness and vigilance over contracts of adhesion to protect the weaker party from deceptive schemes.
• Rosa-Diana Realty and Development Corporation vs. Land Registration Authority and Ayala Corporation — Distinguished. The Court held that the CA's finding of estoppel in this prior case was improper because it went beyond the sole issue of lis pendens annotation and was immaterial. Furthermore, the decision was not binding on RBDC because it involved different parties not litigating for the same thing or under the same title.

• Section 1, Rule 45, Revised Rules of Court — Provides that in a petition for review on certiorari, only errors of law may be reviewed by the Supreme Court. The Court applied exceptions, reviewing factual findings due to misapprehension of facts.
• Section 47 (formerly 49), Rule 39, Rules of Court — Provides that a final judgment is conclusive only between the parties and their successors in interest. The Court applied this to hold that the Rosa-Diana decision was not binding on RBDC.
• Article 24, Civil Code — Mandates that courts must be vigilant for the protection of parties at a disadvantage in contractual relations. The Court applied this to justify scrutiny of contracts of adhesion but found it inapplicable to RBDC, an experienced realty firm.

Regalado, Melo, Puno, and Mendoza, JJ.