Equatorial Realty Development, Inc. vs. Mayfair Theater, Inc.

A buyer in a rescinded sale cannot claim rentals or civil fruits of the property if delivery was never effected due to a legally sufficient impediment, or if the buyer acted in bad faith.

Carmelo & Bauermann, Inc. leased property to Mayfair Theater, Inc. under contracts containing a right of first refusal. Without offering the property to Mayfair, Carmelo sold it to Equatorial Realty Development, Inc. on July 30, 1978. Mayfair promptly objected and filed suit, resulting in the judicial rescission of the sale. Equatorial subsequently claimed back rentals from Mayfair for the period after the lease expired, asserting ownership by virtue of the rescinded contract of sale.

• The Lease Contracts: Carmelo & Bauermann, Inc. leased portions of a building to Mayfair Theater, Inc. in 1967 and 1969, both for 20 years and containing a right of first refusal should Carmelo desire to sell.
• The Violated Sale: On July 30, 1978, Carmelo sold the property to Equatorial Realty Development, Inc. for P11,300,000 without offering it to Mayfair.
• The Mother Case: Mayfair filed a complaint for annulment of sale and specific performance. The RTC ruled for Carmelo and Equatorial, but the CA reversed, and the Supreme Court in G.R. No. 106063 deemed the sale rescinded, ordering Carmelo to return the purchase price and allow Mayfair to buy the property.
• Execution of the Mother Case: Mayfair deposited the purchase price with the court as Carmelo could no longer be located. Titles were canceled and reissued in Mayfair's name.
• The Present Action: On September 18, 1997, Equatorial filed a complaint for collection of a sum of money against Mayfair for back rentals, claiming ownership from the time of the sale until rescission. The RTC dismissed the complaint, holding the rescinded sale was void from inception and Equatorial had no right to demand rentals.

• Validity of Rescissible Contract: Petitioner argued that a rescissible contract is valid until rescinded; thus, Equatorial was the owner during the interim period and entitled to the fruits or rentals of the property.
• Right to Fruits: Petitioner maintained that under Article 1164 of the Civil Code, the buyer acquires a right to the fruits from the time the obligation to deliver arises, which was upon the perfection of the contract.
• Procedural Error: Petitioner contended that the RTC erred in dismissing the case on a ground not raised in the Motion to Dismiss and not provided under Rule 16 of the Rules of Court.

• Effects of Rescission: Respondent countered that the rescission of the sale means Equatorial is not the owner and has no right to demand back rentals.
• Bad Faith: Respondent argued that Equatorial's bad faith in purchasing the property with full knowledge of Mayfair's right of first refusal precludes it from claiming benefits from the rescinded contract.
• Prior Judgment: Respondent maintained that the claim is barred by prior judgment (res judicata), as the issue of ownership and entitlement to fruits was already settled in the mother case.

• Entitlement to Rentals: Whether Equatorial is entitled to back rentals from the subject property.
• Procedural Propriety: Whether the RTC erred in dismissing the complaint on a ground not raised in the Motion to Dismiss or not provided under Rule 16.

• Entitlement to Rentals: No entitlement to rentals exists. Ownership is acquired by tradition or delivery, not by mere agreement. While the execution of a public instrument presumes delivery, this legal fiction yields to reality when an impediment prevents the passing of property. Mayfair's timely objection to the sale constituted a legally sufficient impediment, negating delivery. Additionally, Equatorial's bad faith in purchasing the property with full knowledge of Mayfair's right of first refusal bars the grant of civil fruits like rentals; otherwise, bad faith would be rewarded instead of punished.
• Procedural Propriety: No procedural error was committed. The RTC ruled on the ground of bar by prior judgment (res judicata), which was raised in the Motion to Dismiss. Although the RTC erred in declaring the sale "void at its inception" rather than merely rescinded, the dismissal was correctly disposed.

• Delivery as a Requirement for Transfer of Ownership — Ownership of the thing sold is acquired by the buyer only upon delivery, actual or constructive. The execution of a public instrument gives rise only to a prima facie presumption of delivery, which is destroyed when a third person is actually in possession of the thing and objects to the transfer, constituting a legally sufficient impediment.
• Bad Faith as a Bar to Civil Fruits — A buyer in bad faith cannot claim the civil fruits of ownership, such as rentals, from a rescinded contract. Bad faith precludes the grant of such benefits to prevent rewarding the wrongdoer.

• "General propositions do not decide specific cases. Rather, laws are interpreted in the context of the peculiar factual situation of each proceeding. Each case has its own flesh and blood and cannot be ruled upon on the basis of isolated clinical classroom principles."
• "And there is said to be delivery if and when the thing sold 'is placed in the control and possession of the vendee.' Thus, it has been held that while the execution of a public instrument of sale is recognized by law as equivalent to the delivery of the thing sold, such constructive or symbolic delivery, being merely presumptive, is deemed negated by the failure of the vendee to take actual possession of the land sold."
• "When there is such impediment, 'fiction yields to reality — the delivery has not been effected.'"

• Vda. de Sarmiento v. Lesaca, 108 Phil. 900 (1960) — Followed. Established that the legal fiction of constructive delivery via public instrument holds true only when there is no impediment preventing the passing of the property from the vendor to the vendee.
• Ocampo v. Court of Appeals, G.R. No. 97442 (June 30, 1994) — Cited regarding the definition of "rescind" as declaring a contract void in its inception, although the majority clarified this applies to resolution of reciprocal obligations under Art. 1191, not rescission of rescissible contracts under Art. 1381.

• Article 1498, Civil Code — Provides that the execution of a public instrument of sale is equivalent to delivery, unless the contrary appears or is clearly inferable from the deed. Applied to show that the presumption of delivery was negated by the impediment of Mayfair's objection.
• Article 1385, Civil Code — States that rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interest. Applied to support the conclusion that not only the land but also the rental payments had to be returned.
• Article 1164, Civil Code — Provides that the creditor has a right to the fruits of the thing from the time the obligation to deliver it arises. Discussed and subordinated to the rule that ownership—and the right to fruits—requires effective delivery.

Davide Jr., C.J., Quisumbing, Pardo, Buena, Ynares-Santiago, Carpio, Melo, Puno, Mendoza. - Melo, J. — Wrote a separate concurring opinion emphasizing that the issue was squarely resolved in the 1996 En Banc decision. Petitioner's bad faith and the multiplicity of suits filed over 23 years bar the unconscionable claim for increased rentals. A rescissible contract may be valid between the contracting parties, but as far as the injured third party (Mayfair) is concerned, the fraudulent contract, once rescinded, is legally non-existent. - Puno, J. and Mendoza, J. — Joined the concurring opinion of Melo, J.

• Vitug, J. — Argued that a rescissible contract is valid, binding, and effective until rescinded. The contract between Carmelo and Equatorial validly transferred ownership from the execution of the deed in 1978 until the decision in the mother case became final in 1997. Being the owner during this period, Equatorial was entitled to the incidents of ownership, including rentals. Bad faith does not negate ownership or the right to its fruits.
• Sandoval-Gutierrez, J. — Maintained that both actual and constructive delivery occurred, as evidenced by Equatorial collecting rentals from Mayfair. Receiving rentals is an exercise of actual possession. Mayfair's possession as a mere lessee could not prevent the consummation of the sale. A rescissible contract remains valid until rescinded, entitling the owner to rentals accruing prior to the finality of the rescission.
• Bellosillo, J. — Joined the dissent of Sandoval-Gutierrez, J.
• Kapunan, J. — Joined the dissenting opinions of Vitug, J. and Sandoval-Gutierrez, J.
• De Leon, Jr., J. — Joined the dissenting opinion of Vitug, J.