J.M. Tuason & Co., Inc. vs. Court of Appeals

A buyer who purchases real estate with knowledge of a defect or lack of title in the vendor, or with knowledge of facts that should put a reasonable person upon inquiry, cannot claim the rights of a purchaser in good faith and is therefore not entitled to the vendor's warranty against eviction. The buyer knowingly assumes the risk of eviction when purchasing property with a known third-party occupant, and the vendor's good faith in dealing with the buyer negates a claim for damages based on fraud or bad faith.

Petitioner J.M. Tuason & Co., Inc. is a corporation that owned and sold lots in the Sta. Mesa Heights Subdivision. Private respondents Alfonso and Rosario de Leon are the parents of Ricardo de Leon, the original buyer of the lot in question. The dispute arose from a contract to sell executed in 1952, and the subsequent eviction of the De Leons from a portion of the lot due to the prior rights of a third-party occupant, Ramon Rivera. The case involves the application of the Civil Code provisions on the vendor's warranty against eviction.

On January 31, 1952, petitioner J.M. Tuason & Co., Inc. executed a contract to sell Lot No. 15, Block 460 of the Sta. Mesa Heights Subdivision, containing 1,703.6 square meters, in favor of Ricardo de Leon, at an agreed price of P24.60 per square meter, totaling P41,908.56. Ricardo de Leon paid a down-payment of P4,190.86 and agreed to pay the balance in monthly installments of P498.63, including 10% annual interest. At the time of the execution of the contract to sell, both parties knew that a portion of the lot was occupied by Ramon Rivera, but it was understood that petitioner would eject him from the premises.

On April 10, 1953, petitioner signed a compromise agreement with the Deudors in another case (Civil Case No. Q-135, Florencio Deudor, et al. vs. J.M. Tuason, et al.). On July 19, 1965, with petitioner's consent, Ricardo de Leon transferred all his rights to the lot to his parents, private respondents Alfonso and Rosario de Leon. On the same date, private respondents paid the outstanding balance of the purchase price. On August 5, 1965, petitioner executed a deed of sale over the lot in favor of private respondents, and upon registration, the Register of Deeds issued Transfer Certificate of Title No. 96143 to them.

On May 13, 1958, petitioner filed a complaint for ejectment against Ramon Rivera before the Court of First Instance of Rizal (Civil Case No. Q-2989), later joined by Ricardo de Leon and respondents as necessary parties. The lower court dismissed the complaint, principally based on the compromise agreement, and ordered petitioner to allow Rivera to purchase 1,050 square meters of the lot at the prevailing cost in 1958, which the court placed at P60.00 per square meter, plus attorney's fees. The Court of Appeals affirmed this decision, and it became final and executory in September 1971, when the De Leons were evicted from the premises.

Following the Court of Appeals' suggestion, respondents filed an action for warranty against eviction on December 5, 1972, before the Court of First Instance of Manila, seeking to recover the value of the land amounting to P315,000.00, plus damages. The trial court ruled in favor of respondents, ordering petitioner to pay P210,000.00 for the value of the 1,050 square meters at P200.00 per square meter, plus moral damages of P25,000.00, exemplary damages of P10,000.00, attorney's fees of P15,000.00, and costs. The Court of Appeals affirmed with the sole modification of reducing moral damages to P5,000.00.

• Proximate Cause: Petitioner argued that the compromise agreement was not the proximate cause of its failure to comply with its contract to sell, as the agreement was sanctioned by the court and merely recognized Rivera's prior right to purchase the lot.
• Good Faith: Petitioner argued that it entered into the compromise agreement in the honest belief that lots already sold, like the lot in question, were excluded from its coverage, and that it did not commit fraud against Ricardo de Leon.
• Buyer's Bad Faith: Petitioner argued that Ricardo de Leon was guilty of bad faith in entering into the contract to sell, knowing of Rivera's prior occupancy, and therefore was not entitled to the warranty against eviction.
• Damages: Petitioner argued that the grant of moral and exemplary damages was improper, given its good faith in dealing with the respondents.

• Warranty Against Eviction: Respondents argued that they were entitled to the vendor's warranty against eviction because petitioner failed to comply with its obligation to transfer ownership over the lot due to the compromise agreement it entered with the Deudors.
• Fraud and Deception: Respondents argued that petitioner was guilty of "wilful deception, intentional forsaking of one to whom defendant was bound in a contract to convey, and worse yet, even at that, after the compromise, defendant still continued to collect installments from buyer."

• Warranty Against Eviction: Whether respondents De Leon are entitled to the vendor's warranty against eviction and damages.
• Good Faith of the Buyer: Whether respondents, who knew of a third party's prior occupancy at the time of the sale, can be considered buyers in good faith entitled to the warranty.
• Good Faith of the Vendor: Whether petitioner acted in bad faith or committed fraud in executing the compromise agreement and continuing to collect installments.

• Warranty Against Eviction: No. Respondents are not entitled to the warranty against eviction because they were not shown to be vendees in good faith, having known of the third-party occupant's presence at the time of the sale. However, for equity and to prevent unjust enrichment, petitioner was ordered to compensate respondents P126,000.00.
• Good Faith of the Buyer: No. Respondents were lacking in good faith for knowing beforehand, at the time of the sale, the presence of an obstacle to their taking possession of the land, which would amount to eviction, and still they bought the land without first removing that obstacle.
• Good Faith of the Vendor: Yes. Petitioner acted in good faith, having believed that the compromise agreement excluded lots already sold, and its continued collection of installments only proved its honest belief that there was no barrier to the enforceability of the contract to sell.

• Warranty Against Eviction: The Court held that the warranty against eviction under Article 1555 of the Civil Code is only available to buyers in good faith. Since respondents knew of Ramon Rivera's prior occupancy and the distinct possibility of not being able to possess and own the land, they knowingly assumed the risk when they bought the land. The Court noted that Ricardo de Leon was even branded a "buyer in bad faith" by the Court of Appeals in the ejectment case. Therefore, respondents, not being vendees in good faith, are not entitled to the warranty against eviction nor to recover damages.

• Good Faith of the Buyer: The Court applied the principle that one who purchases real estate with knowledge of a defect or lack of title in his vendor cannot claim that he has acquired title thereto in good faith. A purchaser cannot close his eyes to facts which should put a reasonable man upon his guard and then claim that he acted in good faith. Respondents knew of Rivera's occupancy and the potential for eviction, yet they proceeded with the purchase without first removing that obstacle.

• Good Faith of the Vendor: The Court found that petitioner's execution of the compromise agreement was not of its own making, as it was sanctioned by the court after the Deudors filed an action. The compromise agreement merely recognized Rivera's prior right, which was based on his prior occupancy since 1949. The Court found support for petitioner's claim of good faith in paragraph "SEVENTH" of the compromise agreement, which provided that buyers of lots from the Deudors may acquire lots "whenever possible," implying that lots already sold to third parties were excluded. The Court also noted that respondents themselves had stated in their brief in the earlier case that it was not the intention of the signatories to include lots already sold. Petitioner's continued collection of installments and its execution of the deed of sale upon full payment were further evidence of its honesty and good faith.

• Good Faith in Purchasing Real Property — One who purchases real estate with knowledge of a defect or lack of title in his vendor cannot claim that he has acquired title thereto in good faith, as against the true owner of the land or of an interest therein. The same rule applies to one who has knowledge of facts which should have put him upon such inquiry and investigation as might be necessary to acquaint him with the defects in the title of his vendor. A purchaser cannot close his eyes to facts which should put a reasonable man upon his guard and then claim that he acted in good faith under the belief that there was no defect in the title of the vendor. The Court applied this doctrine to hold that respondents, who knew of Rivera's prior occupancy, were not buyers in good faith and thus not entitled to the warranty against eviction.

• Warranty Against Eviction — Under Article 1555 of the Civil Code, the vendor's warranty against eviction is only available to a buyer in good faith. A buyer who knowingly purchases property with a known defect or obstacle to possession, such as a third-party occupant, assumes the risk of eviction and cannot claim the warranty. The Court applied this doctrine to deny respondents' claim for the full value of the evicted portion of the lot.

• Good Faith Presumption — Good faith is always presumed, and it consists in an honest intention to abstain from taking any unconscientious advantage of another. Good faith is the opposite of fraud and bad faith, and its non-existence must be established by competent proof. The Court applied this doctrine to find that petitioner acted in good faith in executing the compromise agreement and in its dealings with respondents.

• "One who purchases real estate with knowledge of a defect or lack of title in his vendor cannot claim that he has acquired title thereto in good faith, as against the true owner of the land or of an interest therein; and the same rule must be applied to one who has knowledge of facts which should have put him upon such inquiry and investigation as might be necessary to acquaint him with the defects in the title of his vendor. A purchaser cannot close his eyes to facts which should put a reasonable man upon his guard and then claim that he acted in good faith under the belief that there was no defect in the title of the vendor." — This passage articulates the controlling doctrine on good faith in purchasing real property, which the Court applied to deny respondents' claim to the warranty against eviction.

• "Good faith consists in an honest intention to abstain from taking any unconscientious advantage of another. Good faith is an opposite of fraud and of bad faith and its non-existence must be established by competent proof." — This passage defines the standard of good faith applied to petitioner, supporting the Court's finding that petitioner acted in good faith in its dealings with respondents.

• "Without being shown to be vendees in good faith, herein respondents are not entitled to the warranty against eviction nor are they entitled to recover damages (Article 1555 of the Civil Code). However, for justice and equity sake, and in consonance with the salutary principle of non-enrichment at another's expense, herein petitioner J.M. Tuason & Co., Inc. should compensate respondents De Leons in the total sum of ONE HUNDRED TWENTY SIX THOUSAND (P126,000.00) PESOS." — This passage states the Court's ratio decidendi, denying the warranty but awarding a reduced amount based on equity to prevent unjust enrichment.

• Leung Yee vs. Strong Machinery Company, 37 Phil. 645 — Cited as controlling precedent for the definition of good faith and the rule that a purchaser with knowledge of a defect in title cannot claim to be a purchaser in good faith.
• Angelo vs. Pacheco, 56 Phil. 70 — Cited in support of the principle that a buyer who knows of an obstacle to possession at the time of sale and still buys the land without removing that obstacle is lacking in good faith.
• Andaya vs. Manansala, 107 Phil. 1151 — Cited in support of the same principle regarding a buyer's knowledge of an obstacle to possession.
• People vs. Pantoja, 25 SCRA 468 (1968) — Cited as a basis for increasing the indemnity amount from P60.00 to P120.00 per square meter, following the principle of adjusting awards due to the reduced purchasing power of the peso.

• Article 1555, Civil Code — This provision governs the vendor's warranty against eviction. The Court applied it to hold that respondents, not being buyers in good faith, were not entitled to the warranty against eviction nor to recover damages.

Teehankee, Fernandez, and Guerrero, JJ., concurred. Makasiar, J., concurred in the result. Melencio-Herrera, J., took no part.