Communities Cagayan, Inc. vs. Nanol

In a Contract to Sell of real estate on installment, the seller cannot effectively cancel the contract without complying with the twin mandatory requirements of the Maceda Law: (1) sending a notarized notice of cancellation to the buyer, and (2) refunding the cash surrender value (50% of total payments if at least two years paid). Additionally, Article 448 of the Civil Code applies to builders who construct improvements with the owner's knowledge and consent, even if the builders know they do not yet own the land, giving the landowner the statutory options to either appropriate the improvements or oblige the builder to purchase the land.

In 1994, the respondent-spouses entered into a Contract to Sell with petitioner for a house and lot in Camella Homes Subdivision. To facilitate a loan from a sister company of petitioner, a simulated sale was executed and titles were transferred to the respondents, but the bank collapsed before releasing the loan. In 1997, the parties executed a second Contract to Sell with in-house financing. In 2000, the respondent-husband demolished the original house and constructed a three-story replacement. He died in 2001, leaving his wife to continue payments. Petitioner sent a notarized Notice of Delinquency and Cancellation in 2003 and subsequently filed an unsuccessful unlawful detainer action before filing the main case for cancellation of title and recovery of possession in 2005.

• Filed in RTC: Complaint for Cancellation of Title, Recovery of Possession, Reconveyance and Damages filed before RTC Cagayan de Oro City, Branch 18, docketed as Civil Case No. 2005-158
• Decision of lower court: December 29, 2006 — RTC declared the Deed of Absolute Sale void for lack of consideration, ordered cancellation of TCTs, and directed respondents to turn over possession subject to petitioner paying total monthly installments and the value of the new house minus the cost of the original house
• Appealed to CA: N/A — Petitioner directly filed a Petition for Review on Certiorari under Rule 45 with the SC, bypassing the CA on the ground that only pure questions of law were raised
• Elevated to SC: G.R. No. 176791, decided November 14, 2012

• Nature of Action: Civil case for Cancellation of Title, Recovery of Possession, Reconveyance and Damages arising from a Contract to Sell of real property on installment
• Parties: Petitioner Communities Cagayan, Inc. (formerly Masterplan Properties, Inc.), a subdivision developer; Respondents Spouses Arsenio (deceased) and Angeles Nanol, buyers
• Contract to Sell (1994): Initial agreement for house and Lots 17 & 19, Block 16, Camella Homes, Cagayan de Oro City, for P368,000.00; respondents did not avail in-house financing
• Simulated Sale: To facilitate a loan from Capitol Development Bank (petitioner's sister company), petitioner executed a simulated sale and transferred titles (TCT Nos. 105202 and 105203) to respondents as collateral; the bank collapsed before releasing the loan
• Contract to Sell (1997): Second agreement for same property and price; respondents availed in-house financing with four-year payment terms (1997-2001)
• Improvements: In 2000, respondent Arsenio demolished the original house and constructed a three-story house valued at approximately P3.5 million, allegedly with permits from petitioner as subdivision developer
• Default and Cancellation: Respondent Arsenio died in July 2001; respondent Angeles continued paying but allegedly defaulted beginning January 2000; on September 10, 2003, petitioner sent a notarized Notice of Delinquency and Cancellation of Contract to Sell
• Prior Litigation: Petitioner filed an unlawful detainer case in the MTC in December 2003 (C3-Dec-2160), which was dismissed after petitioner withdrew upon learning the titles were registered in respondents' names
• Current Case Filing: On July 27, 2005, petitioner filed the instant case before the RTC; parties agreed to submit the case for decision based on pleadings and exhibits without trial
• RTC Ruling: Declared the Deed of Absolute Sale invalid for lack of consideration; ordered mutual restitution including reimbursement of all monthly installments and improvement value
• Procedural Posture: Respondent Angeles did not appeal the RTC decision; petitioner filed a Rule 45 petition directly with the SC

• The RTC erred in ordering petitioner to reimburse the total monthly installments and the value of the new house minus the cost of the old house
• There is no legal basis to reimburse the cost of the new house because respondents were builders in bad faith—they renovated and improved a house that was not yet theirs under the Contract to Sell
• The RTC should have applied Republic Act No. 6552 (Maceda Law) instead of ordering mutual restitution
• Instead of awarding a full refund of monthly amortizations, the RTC should have ordered respondents to pay monthly rentals for the use of the property

• (Respondent Angeles did not file an appeal; therefore, she is bound by the RTC decision and cannot seek its modification)
• In her Answer before the RTC, she maintained that the Deed of Absolute Sale was valid and that petitioner lacked standing (claiming petitioner was different from Masterplan Properties, Inc.)
• She prayed for damages by way of compulsory counterclaim

• Procedural Issues: N/A (Petitioner filed a Rule 45 Petition for Review on Certiorari directly with the SC, bypassing the CA, on the basis that the case raised pure questions of law; the SC entertained the petition)
• Substantive Issues:
  • Whether petitioner is obliged to refund to respondent-spouses all monthly installments paid, or only the cash surrender value under the Maceda Law
  • Whether petitioner is obliged to reimburse respondent-spouses the value of the new house minus the cost of the original house (i.e., whether Article 448 of the Civil Code applies)

• Procedural: N/A
• Substantive:
  • On the Refund of Installments: Petitioner is not obliged to refund all monthly installments paid. Under Section 3(b) of the Maceda Law (RA 6552), where the buyer has paid at least two years of installments (as respondents did), the seller is only required to refund the cash surrender value equivalent to 50% of the total payments made upon cancellation of the contract. The Maceda Law imposes twin mandatory requirements for valid cancellation: (1) sending a notarized notice of cancellation to the buyer, and (2) full payment of the cash surrender value. Until both requirements are satisfied, the Contract to Sell remains valid and subsisting. Petitioner only complied with the first requirement (notarized notice) but failed to refund the cash surrender value; thus, the cancellation was not yet effective. However, since respondent Angeles did not appeal the RTC decision ordering her to vacate, that portion of the judgment became final.
• On the Improvements: Petitioner is obliged to reimburse the value of the improvements under Article 448 of the Civil Code. Respondent-spouses are presumed to be builders in good faith because petitioner failed to rebut this presumption and failed to prove it objected to the construction. Article 448 applies even to builders who know they do not own the land when they constructed the improvements with the knowledge and consent of the owner (citing Spouses Macasaet). As the subdivision developer, petitioner presumably gave the necessary construction permits, indicating consent. Under Article 453, a landowner who knows of the construction without opposition is in bad faith. Consequently, petitioner has two options under Article 448 (per Tuatis v. Escol):
  1. Appropriate the new house by paying respondent Angeles the current market value of the new house minus the cost of the old house; or
  2. Oblige respondent Angeles to pay the current fair value of the lots—unless the value of the lots is considerably more than the value of the new house (minus old house cost), in which case respondent Angeles can only be obliged to pay reasonable rent (with lease terms fixed by the court if the parties cannot agree). The case is remanded to the RTC to determine the current values and for petitioner to exercise its option.

• Twin Mandatory Requirements for Cancellation under the Maceda Law (RA 6552) — Before a Contract to Sell of real estate on installment can be validly and effectively cancelled, the seller must comply with: (1) sending a notarized notice of cancellation to the buyer, and (2) refunding the cash surrender value to the buyer. Until and unless the seller complies with both requirements, the contract remains valid and subsisting, and the buyer retains the right to possess the property and may reinstate the contract by updating the account during the grace period.
• Cash Surrender Value Computation — Under Section 3(b) of the Maceda Law, if the buyer has paid at least two years of installments, the cash surrender value is equivalent to 50% of the total payments made; after five years of installments, an additional 5% per year (but not to exceed 90% of total payments).
• Applicability of Article 448 to Builders with Owner's Consent — Article 448 of the Civil Code applies not only when the builder believes he is the owner or has a claim of title, but also when the builder constructs improvements with the knowledge and consent of the landowner, even if the builder knows he is not the owner. Good faith is presumed and the landowner's failure to object constitutes bad faith under Article 453.
• Landowner's Options under Article 448 (Tuatis Doctrine) — The landowner has two exclusive options: (1) Appropriate the improvements by paying the builder the necessary and useful expenses (current market value of the improvement) under Articles 546 and 548, after which the builder has a right of retention until indemnified; or (2) Oblige the builder to purchase the land at its current fair value, unless the land's value is considerably more than the improvements, in which case the builder can only be obliged to pay reasonable rent (with lease terms fixed by the court if parties disagree). The landowner must exercise one of these options; he cannot refuse both and compel removal of the improvements.

• "Laws fill the gap in a contract."
• "Before a contract to sell can be validly and effectively cancelled, the seller has (1) to send a notarized notice of cancellation to the buyer and (2) to refund the cash surrender value to the buyer. Until and unless the seller complies with these twin mandatory requirements, the contract to sell between the parties remains valid and subsisting."
• "Article 448 applies to the present factual milieu. The established facts of this case show that respondents fully consented to the improvements introduced by petitioners."
• "The choice of options is for [the landowner], not [the builder], to make."
• "The landowner cannot refuse to exercise either option and compel instead the owner of the building to remove it from the land."

• Tuatis v. Escol, G.R. No. 175399 — Controlling precedent establishing the two options available to a landowner under Article 448 and the procedure for their exercise; cited for the principle that the landowner must choose between appropriating the improvement or selling the land, and that the builder cannot demand to purchase the land if the landowner chooses the first option.
• Spouses Macasaet v. Spouses Macasaet, 482 Phil. 853 — Applied to extend the definition of "good faith" under Article 448 to builders who know they are not owners but built with the owner's consent (familial consent cases); controlling precedent for applying Article 448 beyond cases where the builder claims title.
• Pagtalunan v. Dela Cruz Vda. de Manzano, G.R. No. 147695 — Cited for the rule that actual cancellation under the Maceda Law takes place only after 30 days from receipt of the notarized notice and upon full payment of the cash surrender value.
• Raquel-Santos v. Court of Appeals, G.R. Nos. 174986, 175071 & 181415 — Cited for the procedural rule that a party who does not appeal from a judgment can no longer seek its modification or reversal, and may only oppose the appeal of the other party on grounds consistent with the judgment.
• Active Realty & Development Corp. v. Daroya, 431 Phil. 753 — Cited for the principle that the contract remains valid until the seller refunds the cash surrender value.

• Republic Act No. 6552 (Maceda Law), Sections 3, 4, and 5 — Governs sales of real estate on installment payments; establishes the rights of a defaulting buyer, grace periods, and the cash surrender value entitlement.
• Civil Code, Article 448 — Determines the rights of a landowner when improvements are built on his land in good faith.
• Civil Code, Article 453 — Presumes bad faith on the part of the landowner whenever improvements are made with his knowledge and without opposition.
• Civil Code, Articles 546 and 548 — Provide for the refund of necessary and useful expenses to the possessor in good faith and the right of retention until reimbursement.
• Rules of Court, Rule 45 — Mode of appeal (Petition for Review on Certiorari) to the SC from the RTC on questions of law only.

N/A (Carpio, Brion, Perez, and Perlas-Bernabe, JJ., concurred without separate opinions)