Rillo vs. Court of Appeals

In a contract to sell real property on installments, full payment of the purchase price is a positive suspensive condition; non-payment is not a breach subject to rescission under Article 1191 of the Civil Code but an event that prevents the vendor's obligation to convey title from acquiring obligatory force, and the cancellation of such contract is governed by Republic Act No. 6552 (the Maceda Law), under which a buyer who has paid less than two years of installments is not entitled to the 50% cash surrender value refund.

Petitioner Emiliano Rillo and private respondent Corb Realty Investment Corporation were parties to a "Contract to Sell of Condominium Unit" covering a 61.5-square-meter unit in Mandaluyong, Metro Manila. The transaction was an installment sale of a condominium unit, a type of conditional sale of real estate governed by an interlocking statutory framework: the Condominium Act (Republic Act No. 4726, as amended by R.A. 7899), Presidential Decree No. 957 (the Subdivision and Condominium Buyers Protective Decree), and Republic Act No. 6552 (the Realty Installment Buyer Protection Act, or the Maceda Law). The relationship between the parties was that of seller and installment buyer, with the vendor retaining title until full payment of the purchase price.

On June 18, 1985, petitioner Emiliano Rillo signed a "Contract to Sell of Condominium Unit" with private respondent Corb Realty Investment Corporation. Under the contract, Corb Realty agreed to sell to Rillo a 61.5-square-meter condominium unit located in Mandaluyong, Metro Manila. The contract price was ₱150,000.00, one half of which was paid upon execution, while the balance of ₱75,000.00 was to be paid in twelve equal monthly installments of ₱7,092.00 beginning July 18, 1985. The outstanding balance would bear interest of 24% per annum, and installments in arrears would be subject to a liquidated penalty of 1.5% for every month of default. The parties further agreed that should Rillo default in the payment of three or four monthly installments, forfeiture proceedings would be governed by existing laws, particularly the Condominium Act.

Rillo immediately fell into default. He failed to pay the initial monthly amortization on July 18, 1985, and again defaulted on August 18, 1985. On September 20, 1985, he paid the first monthly installment of ₱7,092.00, and on October 2, 1985, he paid the second. His third payment came on February 2, 1986, but he paid only ₱5,000.00 instead of the stipulated ₱7,092.00. On July 20, 1987, seventeen months after Rillo's last payment, Corb Realty informed him by letter that it was cancelling their contract due to his failure to settle his accounts on time and expressed willingness to refund his money. Corb Realty, however, did not actually cancel the contract, for on September 28, 1987, it received ₱60,000.00 from Rillo.

Rillo again defaulted in his monthly installment payments. Corb Realty informed him through another letter that it was proceeding to rescind their contract, and in a letter dated August 29, 1988, requested him to come to its office and withdraw ₱102,459.35, less the rentals of the unit from July 1, 1985 to February 28, 1989. The threatened rescission again did not materialize. Instead, the parties entered into a "compromise" on March 12, 1989, stipulating that the outstanding balance would be restructured down to ₱50,000.00, payable at ₱2,000.00 per month at 18% interest, with installments to start April 15, 1989, and that Rillo would pay titling costs plus any real estate tax due. Rillo once more failed to honor the agreement, managing to pay only ₱2,000.00 on April 25, 1989 and ₱2,000.00 on May 15, 1989.

On April 3, 1990, Corb Realty sent Rillo a statement of accounts fixing his total arrears, including interests and penalties, at ₱155,129.00. When Rillo failed to pay this amount, Corb Realty filed a complaint for cancellation of the contract to sell with the Regional Trial Court of Pasig. In his answer, Rillo averred that he had already paid a total of ₱149,000.00, that Corb Realty could not deliver his individual title to the property, that the previous agreement had been novated by the new agreement for him to pay ₱50,000.00 representing interest charges and penalties spread over twenty-five months beginning April 1989, and that Corb Realty's claim of ₱155,129.99 over and above what he had already paid had no legal basis. At pre-trial, the parties stipulated that Rillo's principal outstanding obligation as of March 12, 1989 was ₱50,000.00, that he had paid only ₱4,000.00 thereof, and that the monthly amortization of ₱2,000.00 was to bear 18% interest per annum on the unpaid balance.

• Improper Application of Rescission: Petitioner contended that the Court of Appeals seriously erred in holding and deciding that rescission is the proper remedy on a perfected and consummated contract, arguing that the contract had already been substantially complied with through his total payments of ₱154,184.00.
• Novation of the Contract: Petitioner maintained that the old consummated contract had been superseded by a new, separate, independent, and subsequent contract by novation, referring to the March 12, 1989 compromise agreement, and that Corb Realty could no longer claim rights under the previous agreement.
• No Legal Basis for Arrears Claim: Petitioner argued that Corb Realty's claim of ₱155,129.99 over and above the amount he had already paid had no legal basis, and that Corb Realty could not deliver his individual title to the subject property.

• Contract to Sell, Not Absolute Conveyance: Respondent Corb Realty argued, through the Court of Appeals' ruling, that rescission under Article 1191 of the Civil Code does not apply because the contract between the parties is not an absolute conveyance of real property but a contract to sell, where full payment is a suspensive condition.
• Applicability of the Maceda Law: Respondent contended that the Condominium Act does not provide for forfeiture proceedings in installment sales of condominium units, and that Presidential Decree No. 957 and Republic Act No. 6552 (the Maceda Law) should govern, giving the seller the right to cancel the contract upon the buyer's non-payment of installments.
• Reciprocal Obligations Under Novated Contract: Respondent argued that the trial court erred in disregarding other facts of the case, including the fact that the contract to sell, as novated, created reciprocal obligations on both parties, and that the trial court erred in disregarding Article 1191 of the Civil Code and in failing to indicate the applicable law.

• Applicability of Rescission: Whether rescission under Articles 1191 and 1592 of the Civil Code is the proper remedy for the cancellation of a contract to sell real property on installments.
• Governing Law: Whether Republic Act No. 6552 (the Maceda Law) properly governs the cancellation of the contract to sell and the rights of the parties upon default.
• Novation: Whether the original Contract to Sell was novated by the March 12, 1989 compromise agreement.
• Entitlement to Refund: Whether the buyer is entitled to a 50% cash surrender value refund under the Maceda Law when he has paid less than two years of installments.

• Applicability of Rescission: No. Articles 1191 and 1592 of the Civil Code on rescission do not apply to a contract to sell, because full payment of the purchase price is a positive suspensive condition whose non-occurrence prevents the vendor's obligation to convey title from acquiring obligatory force; there can be no rescission of an obligation that is still non-existent.
• Governing Law: Yes. Republic Act No. 6552 (the Maceda Law) correctly governs the cancellation, as it recognizes the right of the seller to cancel a conditional sale of real estate upon the buyer's non-payment of installments, and prescribes the grace periods and notice requirements applicable to such cancellation.
• Novation: No. The March 12, 1989 compromise agreement did not novate the original Contract to Sell, because novation is never presumed and the compromise merely clarified the outstanding balance to facilitate compliance with the original contract; the two agreements can stand together.
• Entitlement to Refund: No. Under R.A. 6552, the right of the buyer to a 50% cash surrender value refund accrues only when he has paid at least two years of installments; since Rillo paid less than two years, he is not entitled to any refund.

• Applicability of Rescission: The contract between the parties is not an absolute conveyance of real property but a contract to sell. In a contract to sell real property on installments, the full payment of the purchase price is a positive suspensive condition. The failure of this condition is not considered a breach, casual or serious, but simply an event which prevented the obligation of the vendor to convey title from acquiring any obligatory force. Citing Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc., the Court reiterated that there can be no rescission of an obligation that is still non-existent, the suspensive condition not having happened. Articles 1191 and 1592 of the Civil Code, which govern rescission of reciprocal obligations, are therefore inapplicable.

• Governing Law: The respondent court correctly applied Republic Act No. 6552, known as the Maceda Law, which recognizes in conditional sales of all kinds of real estate the right of the seller to cancel the contract upon non-payment of an installment by the buyer. Under Section 4 of R.A. 6552, where the buyer has paid less than two years of installments, the seller shall give the buyer a grace period of not less than sixty days from the date the installment became due. If the buyer fails to pay after the grace period, the seller may cancel the contract after thirty days from receipt by the buyer of the notice of cancellation or the demand for rescission by a notarial act. Since Rillo paid less than two years of installments, he was entitled only to this grace period, and Corb Realty had the right to cancel the contract after thirty days from his receipt of the notice of cancellation. The Court of Appeals therefore did not err in upholding Corb Realty's right to cancel the contract upon Rillo's repeated defaults.

• Novation: Petitioner's contention that the Contract to Sell was novated by the March 12, 1989 compromise agreement cannot be sustained. Article 1292 of the Civil Code provides that in order that an obligation may be extinguished by another which substitutes the same, it is imperative that it be so declared in unequivocal terms, or that the old and the new obligations be on every point incompatible with each other. Novation is never presumed. Parties must expressly agree that they are abrogating their old contract in favor of a new one; in the absence of such express agreement, novation takes place only when the old and new obligations are incompatible on every point. The compromise agreement was executed precisely to give life to the Contract to Sell, merely clarifying the total sum owed by Rillo to Corb Realty with the view that he would find it easier to comply with his obligations. The compromise agreement can stand together with the Contract to Sell, and there is no incompatibility between them.

• Entitlement to Refund: The Court disagreed with the Court of Appeals insofar as it ordered Corb Realty to refund 50% of ₱158,184.00 (₱79,092.00) to Rillo. Under R.A. 6552, the right of the buyer to a cash surrender value refund equivalent to 50% of total payments made accrues only when he has paid at least two years of installments. Since Rillo had paid less than two years of installments, he fell under the provision granting only a grace period, not the provision granting a refund. The refund was accordingly deleted.

• Contract to Sell vs. Absolute Sale — In a contract to sell, the full payment of the purchase price is a positive suspensive condition. The failure of this condition is not a breach but an event that prevents the vendor's obligation to convey title from acquiring obligatory force. There can be no rescission under Article 1191 of an obligation that is still non-existent because the suspensive condition has not occurred. The Court applied this doctrine to hold that Articles 1191 and 1592 of the Civil Code do not govern the cancellation of a contract to sell, and that the Maceda Law is the proper governing statute.

• Maceda Law (R.A. 6552) — Buyer's Rights Upon Default — The Maceda Law recognizes the right of the seller to cancel a conditional sale of real estate upon the buyer's non-payment of installments. It provides two tiers of buyer protection: (1) Where the buyer has paid at least two years of installments, he is entitled to a grace period of one month per year of installment payments made, and to a cash surrender value refund of 50% of total payments made (plus 5% per year after five years, not exceeding 90%) if the contract is cancelled; and (2) Where the buyer has paid less than two years of installments, the seller must give a grace period of not less than sixty days, and may cancel the contract after thirty days from the buyer's receipt of the notice of cancellation by notarial act. The Court applied the second tier to Rillo's case, holding that he was entitled only to the grace period and not to any refund.

• Novation is Never Presumed — Under Article 1292 of the Civil Code, novation requires either an express declaration in unequivocal terms that the old obligation is extinguished by a new one, or that the old and new obligations be incompatible on every point. Novation is never presumed. The Court applied this principle to reject the claim that the March 12, 1989 compromise agreement novated the original Contract to Sell, since the compromise was executed to give life to the original contract and merely clarified the outstanding balance; the two agreements were not incompatible and could stand together.

• "In a contract to sell real property on installments, the full payment of the purchase price is a positive suspensive condition, the failure of which is not considered a breach, casual or serious, but simply an event which prevented the obligation of the vendor to convey title from acquiring any obligatory force." — This passage articulates the ratio decidendi distinguishing a contract to sell from an absolute sale and explains why Article 1191 rescission does not apply.

• "Novation is never presumed. Parties to a contract must expressly agree that they are abrogating their old contract in favor of a new one. In the absence of an express agreement, novation takes place only when the old and the new obligations are incompatible on every point." — This passage restates the canonical formulation of the novation doctrine under Article 1292 and its application to the compromise agreement in this case.

• "Under Republic Act No. 6552, the right of the buyer to a refund accrues only when he has paid at least two (2) years of installments." — This passage defines the threshold for the cash surrender value refund under the Maceda Law and was the basis for deleting the Court of Appeals' award of ₱79,092.00 to Rillo.

• Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc., 46 SCRA 381 (1972) — Cited for the proposition that there can be no rescission of an obligation that is still non-existent because the suspensive condition has not happened. Followed as controlling precedent on the nature of contracts to sell.
• Roque vs. Lapuz, 96 SCRA 741 (1980) — Cited in footnote 14 alongside Bricktown Development Corporation vs. Amor Tierra Development Corp., 239 SCRA 126 (1994), for the doctrine that rescission under Article 1191 does not apply to contracts to sell where the suspensive condition of full payment has not occurred.
• Pacific Mills, Inc. vs. Court of Appeals, 206 SCRA 317 (1992) — Cited for the rule that novation is never presumed.
• Ajar Marketing and Development Corporation vs. Court of Appeals, 248 SCRA 222 (1995) — Cited for the principle that parties must expressly agree to abrogate the old contract in favor of a new one for novation to occur.
• Nyco Sales Corporation vs. BA Finance Corporation, 200 SCRA 637 (1991) — Cited for the rule that in the absence of express agreement, novation takes place only when the old and new obligations are incompatible on every point.

• Article 1191, Civil Code of the Philippines — Governs rescission of reciprocal obligations. The Court held it inapplicable to a contract to sell because the vendor's obligation to convey title does not arise until full payment, which is a suspensive condition, not a reciprocal obligation whose breach triggers rescission.
• Article 1292, Civil Code of the Philippines — Provides that novation requires an express declaration in unequivocal terms or total incompatibility between the old and new obligations. Applied to reject the claim that the March 12, 1989 compromise agreement novated the original Contract to Sell.
• Republic Act No. 6552 (Realty Installment Buyer Protection Act / Maceda Law), Section 4 — Governs the rights of buyers and sellers in installment sales of real estate. Applied to determine that Rillo, having paid less than two years of installments, was entitled only to a grace period of not less than sixty days and not to the 50% cash surrender value refund.
• Presidential Decree No. 957 (Subdivision and Condominium Buyers Protective Decree) — Provides that the rights of a buyer in the event of failure to pay installments due, other than the failure of the owner or developer to develop the project, shall be governed by Republic Act No. 6552. Applied as the bridge statute directing the application of the Maceda Law to condominium installment sales.
• Republic Act No. 4726 (Condominium Act), as amended by R.A. 7899 — The Court noted that the Condominium Act does not provide anything on forfeiture proceedings in cases involving installment sales of condominium units, which is why P.D. 957 and R.A. 6552 govern instead.

Regalado, Romero, Mendoza, and Torres, Jr., JJ., concurred.