Guzman, Bocaling & Co. vs. Bonnevie

A contract of sale over leased property is rescissible when it violates a contractual right of first priority to purchase granted to the lessees, and the buyer who had actual knowledge of the lease cannot claim the status of a purchaser in good faith.

Africa Valdez de Reynoso, as judicial administratrix of the intestate estate of Jose L. Reynoso, leased a 600-square-meter parcel of land with two buildings thereon to Raoul S. Bonnevie and Christopher Bonnevie for one year beginning August 8, 1976, at ₱4,000 monthly rental. The lease contract contained in Paragraph 20 a stipulation granting the lessees a first priority to purchase the leased property "all things and conditions being equal." Reynoso later sold the property to Guzman, Bocaling & Co. on March 7, 1977, prompting the Bonnevies to seek annulment of the sale and enforcement of their priority right.

The subject of the controversy is a parcel of land measuring approximately 600 square meters with two buildings constructed thereon, belonging to the intestate estate of Jose L. Reynoso. Africa Valdez de Reynoso, as administratrix of the estate, leased the property to Raoul S. Bonnevie and Christopher Bonnevie for a period of one year beginning August 8, 1976, at a monthly rental of ₱4,000. The contract of lease contained Paragraph 20, stipulating that should the lessor desire to sell the leased property, the lessees would be given first priority to purchase the same, "all things and considerations being equal."

On November 3, 1976, Reynoso claimed to have notified the Bonnevies by registered mail that she was selling the leased premises for ₱600,000 less a mortgage loan of ₱100,000, and was giving them 30 days from receipt within which to exercise their right of first priority. She stated that if they did not exercise the right, she would expect them to vacate the property not later than March 1977. On January 20, 1977, Reynoso sent another letter advising the Bonnevies that, in view of their failure to exercise their right of first priority, she had already sold the property. Upon receipt of this letter, the Bonnevies wrote Reynoso informing her that neither of them had received her November 3, 1976 letter, that they had advised her agent to inform them officially should she decide to sell the property so negotiations could be initiated, and that they were constrained to refuse her request for termination of the lease. Notably, the registry return card for the November 3 letter was not offered in evidence; only a photocopy of the face of a registry return card was presented, without the reverse side showing the signature of the recipient and the date of receipt.

On March 7, 1977, the leased premises were formally sold to Guzman, Bocaling & Co. The contract of sale provided for immediate payment of ₱137,500 on the purchase price, with the balance of ₱262,500 to be paid only when the premises were vacated. The total selling price to the petitioner was ₱400,000 — substantially lower than the ₱600,000 quoted to the Bonnevies, and under more favorable payment terms, as the Bonnevies were asked to pay fully in cash less only the mortgage lien. On April 12, 1977, Reynoso demanded that the Bonnevies vacate the premises within 15 days for failure to pay rentals for four months. When they refused, she filed an ejectment complaint in the City Court of Manila.

The parties initially submitted a Compromise Agreement on September 25, 1979, under which Raoul Bonnevie would vacate the premises not later than October 31, 1979. This agreement was approved by the City Court and became the basis of its decision, but the Bonnevies failed to comply. Reynoso obtained a writ of execution on November 8, 1979. Bonnevie then moved to set aside the decision and the Compromise Agreement, but the motion was denied and the case was elevated to the Court of First Instance, which remanded it to the City Court for trial on the merits after both parties agreed to set aside the Compromise Agreement. While the ejectment case was pending, the Bonnevies filed a separate action for annulment of the sale and cancellation of the petitioner's transfer certificate of title, asking that Reynoso be required to sell the property to them under the same terms and conditions agreed upon with the petitioner. The City Court eventually decided the ejectment case in favor of Reynoso, and both cases were consolidated on appeal before the Court of First Instance, where Judge Maddela annulled the sale, cancelled the petitioner's title, ordered Reynoso to execute a deed of sale in favor of Bonnevie for ₱400,000, and awarded damages. The Court of Appeals substantially affirmed these conclusions but reduced the damages, prompting the petitioner's appeal to the Supreme Court. Reynoso did not appeal.

• Probate Court Authority: Petitioner asserted that the respondent court erred in ruling that the grant of first priority to purchase the subject property by the judicial administratrix needed no authority from the probate court.
• Nature of the Contract: Petitioner argued that the respondent court erred in holding that the Contract of Sale was not voidable but rescissible, and that assuming it was voidable, only the parties thereto could bring an action to annul it pursuant to Article 1397 of the Civil Code, stressing that the private respondents are strangers to the agreement and therefore have no personality to seek its annulment.
• Good Faith of Purchaser: Petitioner maintained that the respondent court erred in considering it a buyer in bad faith, insisting it was not aware of the right of first priority granted by the Contract of Lease.
• Order of Specific Performance: Petitioner argued that the respondent court erred in ordering Reynoso to execute the deed of sale in favor of the Bonnevies.
• Counterclaim: Petitioner asserted that the respondent court erred in not passing upon the counterclaim.
• Compromise Agreement: Petitioner invoked the Compromise Agreement, contending that it canceled the right of first priority granted to the Bonnevies by the Contract of Lease.

• Probate Court Approval: Whether the grant of first priority to purchase the subject property by the judicial administratrix required authority from the probate court.
• Nature of the Contract of Sale: Whether the Contract of Sale was voidable or rescissible, and whether the Bonnevies, as third persons, had standing to seek its rescission.
• Good Faith of Purchaser: Whether the petitioner was a purchaser in good faith despite its actual knowledge of the lease over the property.
• Effect of Compromise Agreement: Whether the Compromise Agreement canceled the right of first priority granted to the Bonnevies under the Contract of Lease.

• Probate Court Approval: No. Probate court approval was not necessary for the lease contract because it did not involve alienation of real property of the estate and the term did not exceed one year under Article 1878(8) of the Civil Code; such approval would be required only when Paragraph 20 was activated and the property was actually to be sold, pursuant to Rule 89 of the Rules of Court.
• Nature of the Contract of Sale: The Contract of Sale was rescissible, not voidable. Under Articles 1380 and 1381(3) of the Civil Code, a contract otherwise valid may be rescinded by reason of injury to third persons, and the Bonnevies were accorded the status of creditors whose substantial interests were prejudiced by the sale without recognition of their right of first priority.
• Good Faith of Purchaser: No. The petitioner was not a purchaser in good faith because it had actual knowledge of the lease in favor of the Bonnevies, who were occupying the property at the time of sale, and such knowledge should have cautioned it to inquire into the terms of the lease contract, including Paragraph 20.
• Effect of Compromise Agreement: No. The Compromise Agreement was set aside by the parties thereto through a Joint Motion to Remand, resulting in the restoration of the original rights of the private respondents under the Contract of Lease.

• Probate Court Approval: The Court found that the lease contract did not involve an alienation of real property of the estate, nor did its term exceed one year, so as to bring it within Article 1878(8) of the Civil Code requiring probate court approval. Only when Paragraph 20 was activated — that is, when the property was actually intended to be sold — would the administratrix be required to secure probate court approval pursuant to Rule 89 of the Rules of Court. The probate court's order authorizing the sale to the petitioner was valid insofar as it recognized the essential elements of a valid contract of sale, but it did so without regard to the special provision in the Contract of Lease granting the Bonnevies a right of first priority. Even if the probate court order was valid, the Bonnevies retained their right to rescind the sale because Reynoso failed to comply with her duty to give them the first opportunity to purchase the property.

• Nature of the Contract of Sale: The Court agreed with the respondent court that the Contract of Sale was not voidable but rescissible. Under Articles 1380 and 1381(3) of the Civil Code, a contract otherwise valid may be rescinded by reason of injury to third persons, such as creditors. The Bonnevies were properly accorded the status of creditors because they had substantial interests prejudiced by the sale to the petitioner without recognition of their right of first priority. Citing Tolentino, the Court explained that rescission is a remedy granted by law to contracting parties and even to third persons to secure reparation for damages caused by a contract, even if valid, through restoration of things to their condition prior to the celebration of the contract. Rescission implies a contract which, even if initially valid, produces a lesion or pecuniary damage justifying its invalidation for reasons of equity. The petitioner's argument that only parties to a voidable contract could seek annulment under Article 1397 was therefore inapplicable, as the proper remedy was rescission, not annulment, and third persons may bring an action for rescission.

• Good Faith of Purchaser: The Court found that the petitioner could not be deemed a purchaser in good faith. The record showed that the petitioner categorically admitted it was aware of the lease in favor of the Bonnevies, who were actually occupying the subject property at the time of sale. Although the Contract of Lease was not annotated on the transfer certificate of title, the petitioner could not deny actual knowledge of the lease, which was equivalent to and indeed more binding than presumed notice by registration. A purchaser in good faith and for value is one who buys property without notice that some other person has a right to or interest in such property and pays a full and fair price at the time of purchase. The petitioner's knowledge of the lease should have cautioned it to look deeper into the agreement to determine if it contained stipulations prejudicial to its interests. Even assuming the petitioner was unaware of Paragraph 20 specifically, the Court agreed with the respondent court's observation that if it failed to inquire about the terms of the lease contract, it had only itself to blame, as a prudent person buying leased property should have required the seller or broker to produce the lease contract. The Court further noted that the acquisition by a third person of property subject to a contract is an obstacle to rescission only where such person is in lawful possession and acted in good faith — conditions not satisfied here, as the petitioner was the vendee in the Contract of Sale and could not be considered a third party, nor could its possession be regarded as acquired lawfully and in good faith.

• Effect of Compromise Agreement: The Court held that the Compromise Agreement could not be invoked to cancel the right of first priority. The agreement had been set aside by the parties through a Joint Motion to Remand, which explicitly declared that the parties agreed to set aside the Compromise Agreement dated September 24, 1979 and remand the case for trial on the merits. This resulted in the restoration of the original rights of the private respondents under the Contract of Lease, including Paragraph 20's grant of first priority to purchase.

• Rescissible Contracts (Articles 1380–1381, Civil Code) — A contract otherwise valid may be rescinded by reason of injury to third persons, such as creditors. Rescission is a remedy granted by law to contracting parties and even to third persons to secure reparation for damages caused by a contract, even if valid, through restoration of things to their prior condition. Rescission implies a contract which, even if initially valid, produces a lesion or pecuniary damage to someone that justifies its invalidation for reasons of equity. In this case, the Bonnevies were accorded the status of creditors whose substantial interests were prejudiced by the sale of the leased property to the petitioner without recognizing their contractual right of first priority, warranting rescission of the Contract of Sale.

• Purchaser in Good Faith — A purchaser in good faith and for value is one who buys property of another without notice that some other person has a right to or interest in such property and pays a full and fair price at the time of purchase or before notice of the claim of another. Good faith connotes an honest intention to abstain from taking unconscientious advantage of another. Actual knowledge of a lease over property being purchased is equivalent to and more binding than presumed notice by registration, and such knowledge should caution the buyer to inquire into the terms of the lease to determine if it contains stipulations prejudicial to the buyer's interests. The petitioner was held not a purchaser in good faith because it admitted awareness of the lease and the Bonnevies' occupation of the property at the time of sale.

• Right of First Priority to Purchase ("All Things and Conditions Being Equal") — A stipulation granting a lessee first priority to purchase leased property "all things and conditions being equal" requires identity of the terms and conditions offered to the lessee and all other prospective buyers, with the lessee enjoying the priority. The lessor cannot quote a higher price and less favorable terms to the lessee and then sell to another at a lower price under more favorable conditions. Only if the lessee fails to exercise the right of first priority may the lessor lawfully sell to others, and even then only under the same terms and conditions offered to the lessee. Financial difficulties of the lessee do not justify denying the right of first priority.

• "The Court reads this mean that there should be identity of the terms and conditions to be offered to the Bonnevies and all other prospective buyers, with the Bonnevies to enjoy the right of first priority." — This passage defines the Court's interpretation of the "all things and conditions being equal" clause in a right of first priority stipulation, establishing that the lessor must offer identical terms to all buyers and the lessee enjoys priority among equal offers.

• "Under Article 1380 to 1381 (3) of the Civil Code, a contract otherwise valid may nonetheless be subsequently rescinded by reason of injury to third persons, like creditors. The status of creditors could be validly accorded the Bonnevies for they had substantial interests that were prejudiced by the sale of the subject property to the petitioner without recognizing their right of first priority under the Contract of Lease." — This passage articulates the ratio decidendi for treating the Contract of Sale as rescissible rather than voidable, establishing that lessees with a contractual right of first priority qualify as third persons whose injury warrants rescission.

• "Although the Contract of Lease was not annotated on the transfer certificate of title in the name of the late Jose Reynoso and Africa Reynoso, the petitioner cannot deny actual knowledge of such lease which was equivalent to and indeed more binding than presumed notice by registration." — This passage establishes that actual knowledge of a lease is more binding than constructive notice through registration, defeating a claim of purchaser in good faith even absent annotation on the title.

• Aquino vs. Tañedo, 39 Phil. 517 — Cited as authority for the principle that rescission is a relief allowed for the protection of one of the contracting parties and even third persons from injury and damage a contract may cause, or to protect some incompatible and preferent right created by the contract. Followed in this case to support the Bonnevies' standing to seek rescission as third persons prejudiced by the sale.

• Cordovero and Alcazar vs. Villaruz and Borromeo, 46 Phil. 473 — Cited for the rule that acquisition by a third person of property subject to a contract is an obstacle to rescission only where such person is in lawful possession and acted in good faith. Distinguished in this case because the petitioner was the vendee in the Contract of Sale and was not in good faith, so the rule did not apply.

• De Santos vs. IAC, 157 SCRA 295 — Cited for the definition of a purchaser in good faith and for value as one who buys property without notice that another has a right to or interest in such property and pays a full and fair price at the time of purchase. Applied to find that the petitioner did not qualify as such a purchaser.

• De la Cruz, IAC, 157 SCRA 660; Cui and Joven vs. Henson, 51 Phil. 606 — Cited for the definition of good faith as connoting an honest intention to abstain from taking unconscientious advantage of another. Applied to test the petitioner's conduct in purchasing property it knew was under lease.

• Articles 1380 and 1381(3), Civil Code — Govern rescissible contracts, providing that a contract otherwise valid may be rescinded by reason of injury to third persons, such as creditors. Applied to hold the Contract of Sale rescissible because the Bonnevies, as parties with a contractual right of first priority, were third persons whose substantial interests were prejudiced by the sale.

• Article 1397, Civil Code — Provides that the action for annulment of contracts may be brought only by the parties thereto. The Court found this provision inapplicable because the proper remedy was rescission, not annulment, and third persons may bring an action for rescission under Articles 1380–1381.

• Article 1878(8), Civil Code — Provides that a lease for a period exceeding one year requires judicial authority when entered into by a guardian or administrator. Applied to hold that probate court approval was unnecessary for the lease because its term did not exceed one year.

• Rule 89, Rules of Court — Governs the sale of property of an estate by an executor or administrator, requiring court approval. Applied to hold that probate court approval would be required only when Paragraph 20 of the lease was activated and the property was actually intended to be sold.

Narvasa, C.J., Griño-Aquino, and Medialdea, JJ., concurred.