Reyes vs. Tuparan

In a contract to sell where title is reserved until full payment, the buyer's failure to pay the purchase price is not a breach of contract under Article 1191 of the Civil Code, but merely an event that prevents the suspensive condition from being fulfilled and the seller's obligation to convey title from arising.

Petitioner owned a 1,274-square meter lot with commercial and residential buildings in Valenzuela City, mortgaged to Farmers Savings Bank and Loan Bank, Inc. (FSL Bank). Seeking to liquidate her loan, petitioner verbally agreed to sell the property to respondent for ₱4,200,000.00, payable in installments without interest, with respondent assuming the mortgage. A Deed of Conditional Sale of Real Properties with Assumption of Mortgage was executed on November 26, 1990, containing stipulations that title would remain with petitioner until full payment and that petitioner would execute a deed of absolute sale only upon such payment. Respondent assumed the mortgage and paid a substantial portion of the purchase price but defaulted on the final installment of ₱800,000.00, leaving a balance of ₱805,000.00. Petitioner subsequently demanded rescission, alleging respondent collected rentals, failed to renew fire insurance, and refused to cancel the sale despite petitioner finding another buyer.

• The Mortgaged Properties: Petitioner was the registered owner of a lot with buildings, mortgaged to FSL Bank for a ₱2,000,000.00 loan. She decided to sell the property to liquidate the loan and finance her businesses.
• The Agreement: Respondent offered to buy the property for ₱4,200,000.00, assuming the mortgage and paying the balance in installments. On November 26, 1990, a Deed of Conditional Sale of Real Properties with Assumption of Mortgage was executed among petitioner, respondent, and FSL Bank. The contract stipulated that title and ownership would remain with petitioner until full payment, and that respondent would not encumber the property without petitioner's consent.
• Partial Payment and Default: Respondent paid ₱3,400,000.00 of the total purchase price, including the assumed mortgage. She defaulted on the last installment of ₱800,000.00 due December 31, 1991, leaving an unpaid balance of ₱805,000.00.
• Subsequent Events: Petitioner found a prospective buyer for the property but respondent refused to cancel the deed. A fire gutted the residential building, and respondent failed to renew the fire insurance. Respondent collected rentals from the property without sharing them with petitioner.
• The Lawsuit: On September 2, 1992, respondent offered to pay ₱751,000.00 as full settlement, which petitioner rejected. Petitioner filed a complaint for rescission, while respondent maintained she had paid more than the purchase price due to improvements and mortgage interest.

• Rescission under Article 1191: Petitioner argued the contract involved reciprocal obligations, and respondent's failure to pay the ₱805,000.00 balance constituted a substantial breach justifying rescission under Article 1191 of the Civil Code.
• Unjust Enrichment: Petitioner maintained respondent unjustly enriched herself by collecting rentals despite the unpaid balance.
• Stipulated Interest: Petitioner asserted respondent committed to pay 6% monthly interest on the unpaid balance from the date of delinquency.
• Damages: Petitioner claimed entitlement to actual damages (lost rentals), moral and exemplary damages, and attorney's fees due to respondent's fraudulent and malicious acts.

• Nature of the Contract: Respondent countered the agreement was a contract to sell, not a contract of sale, because title remained with petitioner until full payment.
• Slight Breach: Respondent argued her inability to pay the full balance was not a substantial breach, noting she had already paid a substantial amount and demonstrated sincerity by offering to pay ₱751,000.00.
• Contractual Interest: Respondent maintained the contract expressly stipulated that installments would not bear interest.

• Nature of the Contract: Whether the Deed of Conditional Sale with Assumption of Mortgage is a contract of sale or a contract to sell.
• Availability of Rescission: Whether rescission under Article 1191 is proper given the buyer's failure to fully pay the purchase price.
• Interest Rate: Whether the 6% monthly interest on unpaid installments applies.
• Damages: Whether moral, exemplary damages, and attorney's fees are proper.

• Nature of the Contract: The contract was classified as a contract to sell. The express stipulations reserving title with the seller until full payment and requiring the execution of an absolute deed of sale only upon such payment demonstrate that full payment was a suspensive condition, not a resolutory condition.
• Availability of Rescission: Rescission under Article 1191 was denied. In a contract to sell, full payment is a positive suspensive condition; failure to pay is not a breach of an existing obligation but merely an event preventing the obligation to convey title from arising. Even assuming rescission was applicable, the breach was slight rather than substantial, as respondent had already paid ₱3,400,000.00 of the ₱4,200,000.00 purchase price and showed willingness to settle the balance.
• Interest Rate: The 6% monthly interest was rejected. The contract expressly provided that "all the installments shall not bear any interest." Legal interest of 6% per annum from the filing of the complaint, and 12% per annum from the finality of the judgment, was properly imposed.
• Damages: Moral and exemplary damages were denied. Contracts are not a source of moral damages under Article 2219, and no bad faith was proven. In a contract to sell, non-payment is not a breach but a failure of a suspensive condition, precluding damages under Article 2220. Exemplary damages require an award of moral, temperate, liquidated, or compensatory damages.

• Contract to Sell vs. Contract of Sale — In a contract of sale, title passes upon delivery, and non-payment is a negative resolutory condition. In a contract to sell, ownership is reserved by the seller until full payment, which acts as a positive suspensive condition. Failure of this condition is not a breach but an event preventing the obligation to convey title from arising; thus, Article 1191 rescission does not apply.

• "The breach contemplated in Article 1191 of the New Civil Code is the obligor’s failure to comply with an obligation already extant, not a failure of a condition to render binding that obligation."
• "In a contract to sell, upon the fulfillment of the suspensive condition which is the full payment of the purchase price, ownership will not automatically transfer to the buyer although the property may have been previously delivered to him. The prospective seller still has to convey title to the prospective buyer by entering into a contract of absolute sale."

• Nabus v. Joaquin & Julia Pacson, G.R. No. 161318, November 25, 2009 — Followed. Established that in a contract to sell, failure to pay the purchase price is not a breach under Article 1191 but a failure of a suspensive condition.
• Heirs of Atienza v. Espidol, G.R. No. 180665, August 11, 2010 — Followed. Reiterated that non-payment in a contract to sell is not a breach, precluding moral damages under Article 2220.
• Chua v. Court of Appeals — Cited in Nabus. Distinguished contract of sale from contract to sell regarding the passing of title.
• GG Sportswear Mfg. Corp. v. World Class Properties, Inc., G.R. No. 182720, March 2, 2010 — Followed. Stated that rescission is allowed only when the breach is substantial and fundamental.

• Article 1191, Civil Code — Interpreted to apply only to breaches of existing obligations, not to the failure of a suspensive condition in a contract to sell.
• Article 1458, Civil Code — Defined the contract of sale.
• Article 1479, Civil Code — Discussed in relation to the demandability of a promise to buy and sell upon fulfillment of the suspensive condition.
• Articles 2219 and 2220, Civil Code — Applied to deny moral damages, as contracts are not a source thereof unless breached in bad faith, and no breach existed in a contract to sell.

Antonio T. Carpio (Chairperson), Antonio Eduardo B. Nachura, Diosdado M. Peralta, Roberto A. Abad.