Olympia Housing, Inc. vs. Panasiatic Travel Corporation

A seller cannot validly cancel a contract to sell under R.A. 6552 absent compliance with the twin requirements of a notarial act of rescission and full payment of the cash surrender value to the buyer. Moreover, an action for recovery of possession predicated on extrajudicial rescission cannot be converted into an action for judicial rescission on appeal, as this constitutes an impermissible change of theory that prejudices the opposing party.

On August 8, 1984, Olympia Housing, Inc. and Ma. Nelida Galvez-Ycasiano executed a Contract to Sell for a condominium unit priced at P2,340,000.00, payable in monthly installments. Ycasiano made several payments, often delayed or partial, utilizing cash and credit memos offsetting plane tickets purchased by Olympia from Ycasiano's agency. Disagreements over the computation of the balance led Ycasiano to halt payments. Olympia sent a demand letter on June 2, 1988, threatening cancellation if the arrearages were not settled within 30 days. Subsequently, Olympia filed a complaint for recovery of possession, attaching a notarial act of rescission to the pleading.

• The Contract: On August 8, 1984, Olympia Housing, Inc. and Ma. Nelida Galvez-Ycasiano entered into a Contract to Sell for Condominium Unit No. D-12 at Olympia Condominium, Makati, for P2,340,000.00. The terms required a P100,000.00 reservation deposit, a P1,070,000.00 down payment, and the balance payable in 60 monthly installments of P33,657.40, commencing September 17, 1984. Past due amortizations were to bear 2% monthly interest plus a 2% monthly penalty charge.
• Default and Demand: Ycasiano made several payments via cash and credit memos, the latter offsetting plane tickets purchased by Olympia from Ycasiano's travel agency. Payments were frequently delayed or insufficient, leading to escalating outstanding balances due to interest and penalties. By June 2, 1988, Olympia computed the total due and demandable at P1,924,345.52. Olympia sent a letter on that date demanding payment within 30 days, threatening that the contract would be cancelled or rescinded if the demand was ignored.
• The Attempted Rescission: Upon Ycasiano's failure to pay, Olympia claimed to have rescinded the contract via a Notarial Act of Rescission. However, this notarial act was not sent to Ycasiano prior to the filing of the complaint; it was merely attached to the complaint for recovery of possession when served.
• Consignation: The RTC dismissed the complaint for being prematurely filed but ordered Ycasiano to pay P4,007,473.49 within 60 days. Ycasiano tendered payment via a cashier's check, which Olympia refused. Ycasiano subsequently consigned the amount with the trial court and deposited it with the Land Bank of the Philippines pursuant to court orders.

• Effect of Notarial Act: Petitioner argued that the Court of Appeals failed to rule on the effect of the filing of the complaint and the attached notarial act of rescission vis-à-vis the requirements of R.A. 6552.
• Cash Surrender Value: Petitioner maintained that the failure to pay the cash surrender value prior to the filing of the complaint should not preclude the decreeing of rescission.
• Judicial Rescission Alternative: Relying on Layug v. IAC, petitioner asserted that the complaint for recovery of possession should be considered a case for judicial rescission, rendering prior notarial rescission and payment of the cash surrender value superfluous.

• Factual Nature of Issues: Respondent countered that the petition raises factual questions beyond the province of a petition for review on certiorari.
• Invalid Rescission: Respondent argued that no valid rescission occurred due to the seller's failure to send a notice of rescission by notarial act as mandated by R.A. 6552.
• Inapplicability of Layug: Respondent distinguished Layug v. IAC as an action for annulment of contract, not one for recovery of possession.
• Non-payment of Cash Surrender Value: Respondent asserted that the failure to pay the cash surrender value rendered the rescission ineffective.
• Subsisting Contract: Respondent maintained that absent valid rescission, the contract remained valid and subsisting, obligating the buyer to pay the outstanding balance.

• Validity of Rescission: Whether the contract to sell was validly cancelled or rescinded given the seller's failure to comply with the requirements of R.A. 6552.
• Change of Theory: Whether an action for recovery of possession based on extrajudicial rescission can be treated as an action for judicial rescission on appeal.

• Validity of Rescission: The rescission was invalid. R.A. 6552 requires both a notarial act of rescission and full payment of the cash surrender value for actual cancellation to occur. The June 2, 1988 letter was a mere demand with a threat of future cancellation, not a notice of rescission by notarial act. The notarial act attached to the complaint was not served prior to the institution of the action. Furthermore, the seller failed to refund the cash surrender value, a mandatory prerequisite for cancellation under the law.
• Change of Theory: The action cannot be converted to judicial rescission. An accion publiciana based on extrajudicial rescission is conceptually distinct from an action for judicial rescission. Judicial rescission gives rise to mutual restitution and allows courts to fix a grace period, effects that do not necessarily arise in an action for reconveyance predicated on extrajudicial rescission. Changing the theory on appeal would put the opposing party at an undue disadvantage by depriving them of accurate and timely notice of the issues to be met.

• Requirements for Valid Cancellation under R.A. 6552 (Maceda Law) — Actual cancellation of a contract under the Maceda Law requires: (1) receipt by the buyer of a notice of cancellation or demand for rescission by a notarial act, and (2) full payment of the cash surrender value to the buyer. Cancellation takes effect after 30 days from receipt of the notice and upon full payment of the cash surrender value.
• Prohibition against Changing Theory on Appeal — A party cannot freely and substantially change the theory or cause of action on appeal. The character of an action is determined from the allegations in the complaint, and altering it on appeal prejudices the opposing party, who is not accurately and timely apprised of the case they must defend against.

• "The actual cancellation of the contract can only be deemed to take place upon the expiry of a 30-day period following the receipt by the buyer of the notice of cancellation or demand for rescission by a notarial act and the full payment of the cash surrender value."
• "Not only is an action for reconveyance conceptually different from an action for rescission but that, also, the effects that flow from an affirmative judgment in either case would be materially dissimilar in various respects."

• Layug v. IAC, 167 SCRA 627 — Distinguished. In Layug, the action was for annulment of contract, making a prior notarial act of rescission superfluous. In the present case, the action was for recovery of possession based on extrajudicial rescission, which requires strict compliance with R.A. 6552.
• Leano v. Court of Appeals, G.R. No. 129018, 15 November 2001 — Followed regarding the principle that the seller's right to cancel the contract must be done in conformity with the requirements prescribed by R.A. 6552.
• Rillo v. Court of Appeals, 274 SCRA 461 — Followed regarding the requirement that the seller must refund the cash surrender value to the buyer.
• Arroyo v. HRET, 246 SCRA 384 — Followed regarding the prohibition against a party freely and substantially changing the theory or cause of action on appeal.

• Section 3, Republic Act No. 6552 (Realty Installment Buyer Protection Act) — Applied to determine the invalidity of the rescission. The provision mandates that if the contract is cancelled, the seller must refund the cash surrender value and actual cancellation takes place after 30 days from receipt of the notice of cancellation by notarial act and upon full payment of the cash surrender value.
• Article 1191, Civil Code — Cited in relation to judicial rescission, which allows the court to decree rescission or authorize the fixing of a period, a remedy distinct from an action for reconveyance based on extrajudicial rescission.

Davide, Jr., C.J., Ynares-Santiago, Carpio, and Azcuna, JJ.