Gustilo vs. Maravilla

A purchaser of registered land who has actual knowledge of an existing unregistered lease and its terms is bound to respect the lease, and the purchaser’s failure to do so is a sufficient breach of the contract of sale to justify rescission; upon rescission, the purchaser is entitled to restitution under article 1303 of the Civil Code.

The Malago or Mercedes plantation in Sarabia, Occidental Negros was registered under Torrens transfer certificates of title Nos. 719 and 720 and was encumbered by a mortgage in favor of the Philippine National Bank. The property was also subject to a lease and sublease. The dispute required application of the Land Registration Act and the Civil Code provisions on rescission and restitution.

Antonia Gustilo originally owned the Malago or Mercedes plantation in the municipality of Sarabia, Occidental Negros, under Torrens transfer certificates of title Nos. 719 and 720. These certificates bore a memorandum of a mortgage executed on April 30, 1918, in favor of the Philippine National Bank for P8,000, with interest at 8 per cent per annum and for a term of ten years. On August 3, 1918, Antonia Gustilo leased the property for seven years to Vicente Ardosa at an annual rent of P1,000. The lease was evidenced by notarial document Exhibit G, which recited that Ardosa had paid the rent in advance for the whole term, or a total of P7,000. By notarial document Exhibit D, executed on the 10th of the same month, Ardosa subleased the plantation to Felix Montinola Celis for three agricultural years, or until June 30, 1921. On August 15, 1921, by a private document or “receipt,” the sublease was extended to embrace the full term of the original lease.

On August 8, 1920, Antonia Gustilo executed a deed of sale for the property in favor of Mercedes Gustilo, with a consideration of P30,000, the purchaser assuming the mortgage debt to the Philippine National Bank. On November 24, 1920, Antonia and Mercedes Gustilo executed a second mortgage on the same property in favor of Herminio Maravilla for P25,000, for a term of one year from the date of the document. Upon expiration of the term, the debt secured by the mortgage was paid with money alleged to have been furnished by Jose Maravilla, a cousin of the defendant, and another mortgage was executed on January 4, 1922, in Jose’s favor for P28,000, representing the original debt of P25,000 with interest.

When the debt secured by the last mortgage fell due, Herminio Maravilla, in the name of Jose Maravilla, demanded payment, which Mercedes Gustilo was unable to make. The parties finally agreed that the title to the plantation was to be transferred to the defendant in full satisfaction of the debt, with the defendant assuming the debt to the National Bank. A deed to that effect was executed by Mercedes Gustilo and her husband, Leopoldo Jereza, in favor of the defendant on August 9, 1922. In the meantime, Felix Montinola remained in possession of the plantation by virtue of his sublease. In a letter dated September 21, 1922, the defendant notified him that he would be required to pay 12 per cent of the total sugar production of the plantation as rent. Relying on the lease from Antonia Gustilo to Ardosa and his own sublease, Montinola refused to pay rent to the defendant. In December 1922, jointly with Mercedes Gustilo and Vicente Ardosa, he brought the present action.

In the complaint, the plaintiffs alleged the facts hereinbefore set forth and, in addition, averred that although the deed from Mercedes Gustilo and Leopoldo Jereza to the defendant made no mention of the lease to Ardosa and Montinola, the defendant by false statements led Mercedes Gustilo to believe that he would nevertheless respect the lease, and that in this belief she and her husband executed the deed. The plaintiffs prayed for judgment declaring that the defendant had no right to the crop growing on the hacienda and to collect rents during the duration of the lease to Ardosa; that the lease be declared an incumbrance upon the property which the defendant had bound himself to respect; and that the lease be noted on the transfer certificate of title issued in favor of the defendant. The defendant denied the allegations and, by way of cross-complaint and counterclaim, alleged that at the time of his purchase he had no knowledge of the existence of a lease on the property; that if he had such knowledge, he would not have made the purchase; that the plaintiffs fraudulently concealed the existence of the lease; that he had paid the Philippine National Bank P1,253.19 on the mortgage assumed by him; and that he had paid P573.74 in back taxes. He asked that the contract of sale be declared rescinded and that judgment be rendered against the plaintiffs for those sums.

In answer to the cross-complaint and counterclaim, the plaintiffs alleged that at the time of his purchase, the defendant was fully informed of all incumbrances on the Mercedes plantation and that he assumed the payment and fulfillment of those incumbrances and obligations; that he had not complied with the terms and conditions under which the sale was made; and that through his failure to comply, the plaintiffs had suffered damages in the sum of P20,000. They asked that the sale be declared rescinded through the fault of the defendant and that judgment be rendered against him for P20,000 and costs. Upon trial, the court below found that when the defendant purchased the property from Mercedes Gustilo, he had full knowledge that the property had been leased to Vicente Ardosa, as well as of the terms of the lease, and that he had failed to fulfill his obligations under the contract of sale. The plaintiffs’ claim for damages was disallowed. Mercedes Gustilo and Leopoldo Jereza appealed, and the defendant also appealed.

• Notice and Binding Effect of Lease: Defendant-appellant Herminio Maravilla argued that the trial court erred in holding that he had notice at the time of purchase that the land was leased for seven years to Vicente Ardosa and sublet by Ardosa to Felix Montinola, and that the lease became part of the contract of sale.
• Right to Terminate Lease: He argued that the trial court erred in holding that he had no right to terminate the lease and was not entitled to receive any amount for the lease, because the lease came within the exceptions or provisos of article 1571 of the Civil Code.
• Registerability: He argued that the assignment of the lease by Ardosa to Montinola did not appear in a notarial instrument, so the trial court erred in ordering the lease entered upon the certificate of title.
• Rescission and Reimbursement: He argued that the trial court erred in rescinding the sale due to his failure to perform while denying him repayment for amounts he had spent or paid under the contract.
• Crop Deposit: He argued that the trial court erred in ordering that the amount of the price of the sale of 12 per cent of the crop placed in Felix Montinola’s possession as depositary be delivered to Montinola.

• Notice and Binding Effect of Lease: Whether the trial court erred in holding that the defendant had notice at the time of purchase of the seven-year lease to Vicente Ardosa and the sublease to Felix Montinola, and that the lease became part of the contract of sale.
• Right to Terminate Lease: Whether the defendant had no right to terminate the lease and was not entitled to receive any amount for the occupation of the land by the lessee under article 1571 of the Civil Code.
• Registerability and Notation: Whether the lease was registerable and whether the trial court erred in ordering its registration and notation on the transfer certificate of title.
• Rescission and Reimbursement: Whether the trial court erred in rescinding the sale due to the defendant’s failure to perform while denying the defendant reimbursement for payments made to the Philippine National Bank and for taxes.
• Delivery of Crop: Whether the trial court erred in ordering that the amount of the price of the sale of 12 per cent of the crop placed in Felix Montinola’s possession as depositary be delivered to Montinola.
• Plaintiffs’ Damages: Whether plaintiffs Mercedes Gustilo and Leopoldo Jereza were entitled to damages.

• Notice and Binding Effect of Lease: No. The trial court did not err; the evidence established that Maravilla had full knowledge of the Ardosa lease and its terms, including advance payment of rent, so he was bound to respect it and the lease became part of the contract of sale.
• Right to Terminate Lease: No. The findings of fact sustained the conclusion that Maravilla had no right to terminate the lease or receive any amount for the occupation of the land by the lessee; his failure to respect the lease also justified rescission.
• Registerability and Notation: Partly. The lack of a notarial instrument for the assignment did not defeat registerability, but the notation was unnecessary because the lease had expired, and the entry should have been sought in the original registration case under section 112 of the Land Registration Act.
• Rescission and Reimbursement: Yes. The fourth assignment was well taken; while rescission was proper, the denial of reimbursement was reversed because article 1303 of the Civil Code entitled Maravilla to recover payments made to the National Bank and taxes.
• Delivery of Crop: No. The fifth assignment was principally factual, and the findings sustaining the award to Felix Montinola of the sugar produced during receivership or the money from its sale were affirmed.
• Plaintiffs’ Damages: No. The appeal of Mercedes Gustilo and Leopoldo Jereza on their damages claim was entirely without merit and required no discussion.

• Notice and Binding Effect of Lease: The first, second, and fifth assignments of error were treated as principally factual, and the trial court’s findings were fully sustained by the evidence. Testimony of Mercedes Gustilo and Leopoldo Jereza, corroborated by the notary before whom the deed was acknowledged, established that Maravilla had full knowledge of the lease to Ardosa at the time of purchase. The evidence also showed he was informed of the lease terms and that rent had been paid in advance. A purchaser with such knowledge is bound to respect the lease, and the lease became part of the contract of sale. The Court found support in T. de Winkleman and Winkleman vs. Veluz, 43 Phil. 604, and held that the fact the land was registered while the Winkleman land was unregistered did not affect the legal principles involved. The Land Registration Act protects only a holder in good faith and cannot be used as a shield for frauds; while strong and convincing evidence is required to establish encumbrances not appearing on the certificate, such evidence was present.

• Right to Terminate Lease: The Court sustained the trial court’s findings of fact on the second assignment. Because Maravilla knew of the lease and its terms, he had no right to terminate it or to receive any amount for the occupation of the land by the lessee. The trial court’s reliance on the exceptions in article 1571 of the Civil Code was not disturbed on the facts found. Additionally, Maravilla’s failure to respect the Ardosa lease was itself a sufficient breach of the terms of the contract of sale to justify rescission. The Court also noted that while the action was pending, Aquiles M. Sajo, a near relative of Maravilla, sued upon the P28,000 promissory note and mortgage assigned by Jose Maravilla one week after the sale; because the sale was made with the understanding and purpose of canceling that debt, the plaintiffs were also entitled to rescission on that ground.

• Registerability and Notation: The defendant’s argument that the assignment of the lease to Montinola was not in a notarial instrument lacked force. If the court had jurisdiction, the judgment itself would be sufficient warrant for the entry of the corresponding memorandum. However, because the term of the lease had already expired, the entry was unnecessary and the judgment had to be modified accordingly. The Court also observed that under the last paragraph of section 112 of the Land Registration Act, a petition for amendments or alterations of certificates of title, including the entry of a memorandum, must be filed and entitled in the original case in which the degree of registration was entered; on that ground it may have been error to order the entry in the present proceedings.

• Rescission and Reimbursement: The fourth assignment was well taken. The trial court may have been misled by paragraph 2 of article 1306 of the Civil Code, but that paragraph applies only where the nullity arises from illegality of the consideration or the purpose of the contract under article 1305. The applicable provision was article 1303, which provides that when an obligation has been adjudged void, the contracting parties shall restore to each other the things which have been the subject-matter of the contract, together with their fruits, and the price paid, together with interest, without prejudice to the following articles. The trial court therefore erred in holding that Maravilla was not entitled to reimbursement for his payment to the National Bank and for taxes.

• Delivery of Crop: The fifth assignment was among those treated as principally factual, and the findings of the court below were fully sustained by the evidence. The judgment was affirmed insofar as it awarded to Felix Montinola the sugar produced on the plantation during his receivership or the money received from the sale of such sugar.

• Plaintiffs’ Damages: The appeal of Mercedes Gustilo and Leopoldo Jereza related to their claim for damages and was entirely without merit, requiring no discussion. The Court noted that Maravilla never had possession of the property and received no benefit from it.

• Actual Knowledge of Unregistered Lease Binds Purchaser of Registered Land — A purchaser of registered land who has actual knowledge of an existing unregistered lease and its terms is bound to respect the lease; the lease becomes part of the contract of sale. The Land Registration Act protects only a holder in good faith and cannot be used as a shield for frauds. Strong and convincing evidence is required to establish encumbrances not appearing on the certificate of title. The Court applied this because Maravilla knew of the Ardosa lease and its terms, including advance rent.

• Breach of Contract of Sale by Failure to Respect Lease — A purchaser’s failure to respect a lease that he is bound to honor is itself a sufficient breach of the terms of the contract of sale to justify rescission. The Court applied this to affirm rescission of the sale to Maravilla.

• Restitution Upon Rescission or Void Obligation Under Article 1303 — When an obligation has been adjudged void, the contracting parties must restore to each other the things subject-matter of the contract, together with their fruits, and the price paid, together with interest, without prejudice to the provisions of the following articles. The Court applied this to require reimbursement to Maravilla for payments made to the Philippine National Bank and for taxes, reversing the trial court’s denial.

• Procedure for Amendment or Alteration of Torrens Certificate Under Section 112, Land Registration Act — A petition for amendments or alterations of certificates of title, including the entry of a memorandum, must be filed and entitled in the original case in which the degree of registration was entered. The Court noted that ordering the notation of the lease in the present proceedings may have been error, but because the lease had expired, the entry was unnecessary and the judgment was modified.

• Inapplicability of Article 1306(2), Civil Code — The second paragraph of article 1306 applies only where the nullity arises from illegality of the consideration or the purpose of the contract under article 1305. The Court held it did not apply; article 1303 governed restitution.

• "The Land Registration Act only protects the holder in good faith, and cannot be used as a shield for frauds." — States the principle that registration does not protect a purchaser with actual knowledge of an unregistered lease; supports the holding that Maravilla was bound by the lease.
• "The defendant's failure to respect the Ardosa lease is in itself a sufficient breach of the terms of the contract of sale to justify its rescission" — States the ratio for affirming rescission: failure to respect the lease is a sufficient breach of the contract of sale.
• "When an obligation has been adjudged void, the contracting parties shall restore to each other the things which have been the subject-matter of the contract, together with their fruits, and the price paid therefore, together with interest, without prejudice to the provisions of the following articles." — Quotes article 1303, the basis for reversing the denial of reimbursement for payments to the National Bank and taxes.
• "The fact that the land in question in this case is registered land while the land in the Winkleman case was unregistered, does not affect the legal principles involved." — Explains why the registered status of the land did not distinguish the Winkleman precedent; the same rule applies to registered and unregistered land.

• T. de Winkleman and Winkleman vs. Veluz, 43 Phil. 604 — Cited and followed; the Court held that the principles on a purchaser’s knowledge of a lease are the same whether the land is registered or unregistered, and that the Land Registration Act protects only a good-faith holder.

• Article 1303, Civil Code — Quoted and applied; requires restitution of things, fruits, price paid, and interest when an obligation is adjudged void. Basis for reimbursing Maravilla.
• Article 1305, Civil Code — Cited to define when nullity arises from illegality of consideration or purpose, limiting article 1306(2).
• Article 1306, paragraph 2, Civil Code — The trial court may have been misled by this provision, but it applies only where nullity arises from illegality of consideration or purpose; not applicable here.
• Article 1571, Civil Code — The trial court held that under its exceptions or provisos, Maravilla had no right to terminate the lease and was not entitled to receive any amount for the occupation of the land by the lessee; the Supreme Court sustained the factual findings on this point.
• Section 112, last paragraph, Land Registration Act — Petitions for amendments or alterations of certificates of title, including entry of a memorandum, must be filed and entitled in the original case in which the degree of registration was entered. The Court noted it may have been error to order the notation in the present proceedings; because the lease had expired, the entry was unnecessary.

Avanceña, C.J., Johnson, Street, Malcolm, Johns, Romualdez, and Villa-Real, JJ., concur.