Gaboya vs. Cui

A usufruct reserved by a vendor over vacant land sold to vendees does not extend to the rentals of a building subsequently constructed by the vendees with their own funds on the land; the usufructuary is entitled only to the reasonable rental value of the land occupied by the building, and absent liquidation of that value, the vendees cannot be held in default nor the sale rescinded.

Don Mariano Cui, a widower, owned three commercial lots in Cebu City—Nos. 2312, 2313, and 2319—with a total area of 2,658 square meters, the improvements on which had been destroyed during the Pacific War, leaving the land vacant. On March 8, 1946, he sold these lots pro indiviso to three of his children—Rosario, Mercedes, and Antonio—for P64,000, retaining a life usufruct over the property in the deed of sale. Rosario's share was subsequently cancelled for non-payment, rendering Don Mariano, Mercedes, and Antonio co-owners in equal thirds. The transaction thus involved a father as vendor-usufructuary and two of his children as vendees who later borrowed funds to construct a commercial building on the land, with the father's share also mortgaged to secure the loan.

Don Mariano Cui, a widower, owned three commercial lots—Nos. 2312, 2313, and 2319—situated in Cebu City, with areas of 152, 144, and 2,362 square meters respectively, totaling 2,658 square meters. The improvements on these lots had been destroyed during the Pacific War, so that at the time of the sale in 1946 the land was vacant and unoccupied. On March 8, 1946, Don Mariano sold the three lots pro indiviso to three of his children—Rosario C. de Encarnacion, Mercedes C. de Ramas, and Antonio Ma. Cui—for P64,000. In the deed of sale, the vendor retained for himself the usufruct of the property, stipulating that he "shall enjoy the fruits and rents of the same, as long as my natural life shall last," while granting the vendees "the full rights as owners to enjoy the constructive possession of the same, improve, construct and erect a building in the lot, or do whatever they believe to be proper and wise."

Because Rosario lacked funds to pay her corresponding share, the sale to her was cancelled and her one-third was returned to the vendor. Don Mariano, Mercedes, and Antonio thus became co-owners of the entire mass in equal portions. A building was later erected on a portion facing Calderon Street and was occupied by a Chinese businessman who paid Don Mariano P600 a month as rental; the date of construction and the builder do not appear in the record. Sometime after the sale, Mercedes and Antonio applied to the Rehabilitation Finance Corporation (RFC) for a P130,000 loan to construct a 12-door commercial building, presumably on the portion corresponding to their share. To facilitate the loan, Don Mariano on January 7, 1947 executed an authority to mortgage (Annex U), authorizing his two co-owner children to mortgage his share, expressly providing "that the rents of the said land shall not be impaired and will always be received by me." The loan was granted and secured by a mortgage on all three lots, with Don Mariano included as one of three mortgagors and signing the corresponding promissory note. He did not, however, join in the construction of the 12-door building, as reflected in the "Convenio de Asignacion de Parte" (Annex V), wherein the co-owners agreed to assign to Don Mariano the one-third portion facing Calderon Street—approximately 900 square meters—on which the earlier building occupied by the Chinese businessman already stood. The 12-door commercial building was eventually constructed, and Mercedes and Antonio received and continued to receive the rentals therefrom, amounting to P4,800 a month, from which they paid the installments due on the RFC loan.

On March 25, 1948, two other children of Don Mariano, Jesus and Jorge, brought Civil Case No. 599-R in the CFI of Cebu to annul the deed of sale on the ground that the lots belonged to the conjugal partnership of Don Mariano and his deceased wife Antonia Perales. On March 19, 1949, Rosario C. Encarnacion filed a petition in Special Proceeding No. 481-R to have Don Mariano declared incompetent; the petition was granted in May 1949, and Victorino Reynes was appointed guardian of his property. On May 22, 1951, Judge Saguin rendered decision in Civil Case No. 599-R, finding the lots to be exclusively Don Mariano's and upholding the sale of two-thirds to Antonio and Mercedes, a ruling ultimately affirmed by the Supreme Court on February 21, 1957, in Cui vs. Cui, 100 Phil. 914.

The present case was initiated by guardian Victorino Reynes in 1951, while Don Mariano was still alive, to recover P126,344.91 plus legal interest from Antonio and Mercedes, apparently as fruits due to his ward by virtue of the usufruct. Don Mariano died on July 29, 1952, some nine months after the case was filed. In 1957, the other compulsory heirs filed a complaint in intervention, alleging that the usufruct extended to the rentals of the building constructed by Antonio and Mercedes, that the defendants had retained those rentals for themselves, and that the violation of the usufructuary rights entitled the vendor to rescind the sale. The defendants admitted the reserved usufruct and their collection of the building rentals but denied that the usufruct extended to those rentals or was of the essence of the sale; they contended that Don Mariano had waived the usufruct, that they had given him P400 a month by way of aid, and that the action was barred by res judicata and extinctive prescription. The trial court found that the usufruct did not include the building rentals but entitled the usufructuary to a reasonable rental for the land occupied by the building, fixed at P1,858.00 per month, totaling P100,088.80 from November 1947, when the building was rented, to July 29, 1952, when Don Mariano died. No adequate proof of waiver of the usufruct was found, and the defense of res judicata was overruled.

• Extent of Usufruct Under Article 571: Petitioners argued that the usufructuary right reserved in favor of Don Mariano extended to and included the rentals of the building constructed by Antonio and Mercedes on the land sold to them, by virtue of Article 571 of the Civil Code, which grants the usufructuary the right to enjoy any increase the thing in usufruct may acquire through accession, the building being an accession to the land.
• Rescission for Breach: Petitioners maintained that the usufructuary rights were of the essence of the sale, and the vendees' failure to pay over the building rentals constituted a breach entitling the vendor to rescind or resolve the contract under the tacit resolutory condition established by Article 1191 of the Civil Code, with Article 1592 providing additional support.
• Usufruct as Condition Precedent: Petitioners urged that the usufruct was a condition precedent to the conveyance of ownership over the land, and the vendees' failure to comply with their obligations under the usufruct prevented the vesting of title to the property in said vendees.

• Limited Scope of Usufruct: Respondents admitted the reserved usufruct and their collection of the building rentals but denied that the usufruct included or extended to the said rentals, or that such usufruct was of the essence of the sale.
• Waiver of Usufruct: Respondents contended that the vendor, Don Mariano Cui, had waived and renounced the usufruct, and that the defendants vendees gave the vendor P400 a month by way of aid.
• Bar by Prior Adjudication and Prescription: Respondents argued that the action was barred by res judicata on account of the two previous decisions of the Supreme Court, and by extinctive prescription. They further contended that the original complaint having sought fulfillment of the contract, plaintiff could not thereafter seek rescission.
• Counterclaim: Respondents counterclaimed for actual and moral damages and attorney's fees.

• Extent of Usufruct: Whether the usufruct reserved by the vendor over the vacant lots sold extended to and included the rentals of the commercial building subsequently constructed by the vendees with their own borrowed funds on the land.
• Right to Rescind: Whether the vendees' failure to pay over the rentals of the building to the usufructuary entitled the latter to rescind or resolve the contract of sale under Article 1191 of the Civil Code.
• Default and Prescription: Whether the action for rescission was still enforceable and not yet barred by prescription or res judicata.

• Extent of Usufruct: No. The reserved usufruct was limited to the rentals of the land alone and did not extend to the rentals of the building constructed by the vendees with their own funds; the usufructuary was entitled only to the reasonable rental value of the land occupied by the building.
• Right to Rescind: No. The vendees were not in default prior to the judicial liquidation of the rental value of the land, since no demand had been made and the amount owed was unliquidated; absent default, the tacit resolutory condition under Article 1191 could not operate.
• Default and Prescription: No. The defense of res judicata failed because the prior decisions had expressly refused to adjudicate the usufructuary rights in view of the pendency of the present case, and the action was not barred by prescription because default could not occur before liquidation of the usufructuary's credit.

• Extent of Usufruct: The terms of the 1946 deed of sale and the 1947 authority to mortgage both expressly contemplated the construction of buildings on the land, yet limited the vendor's reserved right to "the fruits and rents" of the land and stipulated that "the rents of the said land shall not be impaired and will always be received by me." Had the parties intended the usufruct to include building rentals, an express provision to that effect would have been included, since in both documents the possibility of construction was clearly envisaged and mentioned. Petitioners' reliance on Article 571 (accession) was rejected because the Civil Code's rules on industrial accession (Articles 445-456) apply only to buildings erected on the land of another or buildings constructed by the landowner with materials owned by someone else—not to a landowner building on his own land with his own materials, which is the case of Mercedes and Antonio Cui. Recourse to accession rules is unnecessary where ownership of land and materials is concentrated in the same person. Scaevola's commentary, consistent with Article 595 of the Civil Code, supports the view that the usufructuary of land on which the naked owner constructs buildings with his own materials is entitled at most to the rental value of the land so occupied. To hold otherwise would discourage landowners from improving vacant usufructuary property, as no owner would build if the income went to the usufructuary while depreciation and amortization burdens remained with the owner—a result contrary to public policy. The fact that the RFC loan was secured by a mortgage over Don Mariano's share was irrelevant to the ownership of the building, because the loan proceeds belonged exclusively to Mercedes and Antonio, who were primarily responsible for repayment; a mortgagor does not acquire ownership of loan proceeds merely by providing security.

• Right to Rescind: The alleged breach consisted only in the vendees' failure to pay the rental value of the land occupied by their building. Since that rental value had not been ascertained or fixed by the parties or the court prior to the lower court's decision of October 31, 1961, and no previous demand for its payment had been made by Don Mariano or anyone on his behalf, the vendees could not be considered in default (mora). The principle "ab illiquido non fit mora"—no default arises from an unliquidated obligation—barred a finding of default, as repeatedly declared by the Spanish Supreme Court and supported by Manresa's commentaries. Without default, Article 1191's tacit resolutory condition could not operate, and Article 1592 (a variant of Article 1191) was inapplicable since it presupposes default of the purchaser. The initial complaint filed in 1951 did not place the vendees in default because it proceeded on the legally untenable theory that the usufructuary was entitled to all building rentals. The 1957 complaint in intervention seeking rescission was interposed after Don Mariano's death and the consequent extinction of the usufruct under Article 603(1) of the Civil Code. The theory that the usufruct was a condition precedent to the vesting of title was also rejected, since Don Mariano could not simultaneously be owner and usufructuary of the same property—usufruct being essentially jus in re aliena, a right in another's property, making the concept of being a usufructuary of one's own property a conceptual absurdity.

• Default and Prescription: The prior decisions of the Supreme Court, including the resolution denying reconsideration in Cui vs. Cui (100 Phil. 914), had expressly refused to adjudicate the usufructuary rights because the present case was already pending in the Court of First Instance, thus negating res judicata. The defense of extinctive prescription likewise failed because no default could occur before liquidation of the rental value, and the time for paying the unliquidated claim did not accrue until the lower court fixed the rental value of the land occupied by the building.

• Extent of Usufruct Over Vacant Land — A usufruct reserved by a vendor over vacant land does not automatically extend to buildings subsequently constructed by the vendees with their own funds; the usufructuary is entitled only to the reasonable rental value of the land occupied by the building. The Court applied this by examining the deed's express terms, which contemplated construction but limited the reserved right to "rents of the land," and by holding that Article 571 on accession does not apply where the landowner builds on his own land with his own materials.

• Ab Illiquido Non Fit Mora — No default (mora) arises from an obligation to pay an unliquidated amount; the debtor cannot be in default until the amount due has been ascertained and demanded. The Court applied this principle to hold that the vendees were not in default for failing to pay the rental value of the land occupied by their building, since that value had not been liquidated until the lower court rendered judgment, and no prior demand had been made.

• Industrial Accession Limited to Different Owners — The Civil Code's rules on industrial accession (Articles 445-456) apply only to buildings erected on the land of another or buildings constructed by the landowner with materials belonging to a third person; they do not apply where the landowner builds on his own land with his own materials, since ownership of the building follows naturally from ownership of both land and materials, rendering recourse to accession rules unnecessary.

• Usufruct as Jus In Re Aliena — Usufruct is essentially a right in another's property; one cannot be a usufructuary of one's own property, as this is a conceptual absurdity. The Court used this principle to reject the argument that the usufruct was a condition precedent to the vesting of title in the vendees, since Don Mariano's reservation of usufructuary rights necessarily imported that he was no longer the owner.

• "clearly prove that the reserved usufruct in favor of the vendor, Mariano Cui, was limited to the rentals of the land alone. Had it been designed to include also the rents of the buildings intended to be raised on the land, an express provision would have been included to the effect, since in both documents (heretofore quoted) the possibility of such construction was clearly envisaged and mentioned." — This passage states the ratio decidendi on the extent of the usufruct, anchoring the holding on the express terms of the deed of sale and the authority to mortgage.

• "Nowhere in these articles on industrial accession is there any mention of the case of landowner building on his own land with materials owned by himself (which is the case of appellees Mercedes and Antonio Cui). The reason for the omission is readily apparent: recourse to the rules of accession are totally unnecessary and inappropriate where the ownership of land and of the, materials used to build thereon are concentrated on one and the same person." — This passage defines the limitation of industrial accession rules and explains why Article 571 does not extend the usufruct to buildings constructed by the landowner-vendees with their own funds.

• "Ab illiquido non fit mora" — This Latin maxim, cited with approval from Spanish Supreme Court jurisprudence and Manresa's commentaries, establishes that no default arises from an unliquidated obligation, precluding rescission under Article 1191 until the amount due is judicially ascertained.

• Cui vs. Cui, 100 Phil. 914 (1957) — Controlling precedent in related litigation; the Supreme Court affirmed the validity of the sale of two-thirds of the lots to Antonio and Mercedes, and in denying reconsideration, expressly refused to adjudicate the usufructuary rights because the present case was pending, thus negating the defense of res judicata.

• Antonio and Mercedes Cui vs. Judge Piccio, et al., 91 Phil. 712 (1952) — Prior decision of the Supreme Court stating the antecedents of the case, referenced for background.

• Banahaw, Inc. vs. Dejarme, 55 Phil. 338 — Followed for the proposition that the right to rescind or resolve a contract for non-performance is not absolute, and that the court has discretionary power to allow a period within which a person in default may perform the stipulation upon which the claim for resolution is based.

• Song Fo & Co. vs. Hawaiian Philippine Co., 47 Phil. 821 — Cited alongside Banahaw for the standard that breach must be "so substantial and fundamental as to defeat the object of the parties in making the agreement" to justify the radical remedy of rescission.

• Article 571, Civil Code of the Philippines — Provides that the usufructuary has the right to enjoy any increase the thing in usufruct may acquire through accession, servitudes established in its favor, and all benefits inherent therein. Petitioners invoked this to argue that the building was an accession passing to the usufructuary; the Court rejected this argument because accession rules do not apply where the landowner builds on his own land with his own materials.

• Articles 445-456, Civil Code of the Philippines — Govern industrial accession by modification on principal land. The Court held these provisions are limited to buildings erected on the land of another or buildings constructed with materials owned by someone else, and do not cover the case of a landowner building with his own materials.

• Article 595, Civil Code of the Philippines — Allows the owner to construct works and make improvements on immovable property under usufruct, provided they do not diminish the value of the usufruct or prejudice the usufructuary's rights. The Court relied on this article to support the conclusion that the usufructuary is entitled to the rental value of the land occupied by the owner's constructions, not the income from the constructions themselves.

• Article 1191, Civil Code of the Philippines — Establishes the tacit resolutory condition for breach of contract. The Court held it could not operate because the vendees were not in default, the rental value of the land being unliquidated.

• Article 1592, Civil Code of the Philippines — A variant of Article 1191 applicable to sales of immovable property; presupposes default of the purchaser. The Court held it inapplicable because no default existed prior to liquidation of the rental value.

• Article 603(1), Civil Code of the Philippines — Provides that usufruct is extinguished by the death of the usufructuary. Don Mariano's death on July 29, 1952 extinguished the usufruct, rendering the 1957 complaint in intervention's prayer for rescission untimely in that respect.

• Article 1953, Civil Code of the Philippines — Provides that a person who receives a loan of money or any other fungible thing acquires ownership thereof. Cited to support the conclusion that the loan proceeds and the building constructed therewith belonged exclusively to Mercedes and Antonio, not to Don Mariano merely because his share was mortgaged.

• Articles 2208(11), 2210, and 2213, Civil Code of the Philippines — Govern attorney's fees, interest on damages for breach of contract, and interest on unliquidated claims. The Court relied on these to sustain the award of legal interest on P100,088.80 and P5,000 attorney's fees, considering that the defendants had enjoyed the rental value of the land during all the years in question.

Concepcion, C.J., Dizon, Makalintal, Zaldivar, Teehankee, Barredo, Villamor, and Makasiar, JJ., concurred. No separate concurring opinions were written.