Royal Plains View, Inc. vs. Mejia

A contract to sell involving a commercial or industrial lot is not covered by the buyer-protection provisions of the Maceda Law (R.A. No. 6552), and the seller may unqualifiedly cancel the contract upon the buyer's default — but such cancellation must be made with notice to the defaulting party, and without prior demand for payment, the buyer has not incurred in legal delay (mora). The unilateral cancellation of a contract to sell without demand or notice is invalid, and the contract remains subsisting.

The subject property is a 123,099-square-meter parcel of land in Magdum, Tagum City, Davao del Norte, originally registered under OCT No. (P-1324) P-232 in the name of the late Dominador Ramones and his wife Maria Ramones. During his lifetime, Dominador executed a Contract of Sale in favor of Bias Mejia, father of respondent Nestor C. Mejia, covering the western portion of the land, though the parties agreed to reduce the purchased area to six hectares. The remaining portion was sold to Pablo Benitez on February 17, 1965. Despite these transactions, the title remained in the name of the spouses Ramones. Petitioner Royal Plains View, Inc. is a real estate company represented by its president, Renato Padillo, who entered into dealings with Nestor regarding the subject property.

The subject property is a parcel of land in Magdum, Tagum City, Davao del Norte, known as Lot No. 371, with an original area of 123,099 square meters, covered by OCT No. (P-1324) P-232 and registered in the name of the late Dominador Ramones and his wife Maria Ramones. During his lifetime, Dominador executed a Contract of Sale dated September 17, 1960 in favor of Bias Mejia, covering the western portion consisting of 7,309 square meters, though the parties agreed to reduce the purchased area to six hectares. The remaining portion was sold to Pablo Benitez on February 17, 1965 through a Deed of Absolute Sale. Despite these transactions, the title remained in the name of the spouses Ramones. Bias died and was survived by his son, respondent Nestor C. Mejia.

Sometime in 2005, Nestor met Renato Padillo, president of petitioner Royal Plains View, Inc., a real estate company. At that time, Nestor was in actual physical occupation of the entire 12.3-hectare property covered by OCT No. (P-1324) P-232, and possessed both the 1960 Contract of Sale executed by Dominador in favor of Bias and the 1965 Deed of Sale in favor of Pablo. Renato and Nestor agreed to split the entire lot into two titles, resulting in the issuance of TCT Nos. T-225549 and T-225550, both still under the name of the spouses Ramones. Petitioner Corporation retained TCT No. T-225549 while TCT No. T-225550 was delivered to Casimiro Benitez. On March 23, 2005, Nestor and petitioner Corporation, represented by Rosemarie Padillo, entered into a Deed of Conditional Sale over the property covered by TCT No. T-225549, with a total price of ₱8,000,000.00, of which ₱500,000.00 was for down payment and the balance payable in 36 equal monthly installments of ₱208,333.30 beginning June 30, 2005. This deed was later revoked and a new Deed of Conditional Sale was executed on April 11, 2007 between Nestor and petitioner Corporation, now represented by Renato. Under the new deed, petitioner Corporation had already paid ₱1,972,000.00, with the remaining balance payable in 40 equal monthly installments of ₱150,000.00 starting July 1, 2007 and ending June 2010. It was also alleged that the parties entered into a verbal gentlemen's agreement to divide the 60,000-square-meter lot covered by TCT No. T-225549 into two equal halves.

Nestor later sold the entire property to spouses Harris and Caroline Egina for ₱12,000,000.00, resulting in the issuance of eight TCTs in the name of the spouses Egina. These eight TCTs were subsequently cancelled and the derivative titles (TCT Nos. T-225549 and T-225550) were reinstated; TCT No. T-225549 is now in the custody of the Registry of Deeds of Tagum City due to legal controversies. Renato attempted to contact Nestor but the latter did not respond and instead sent a notarized "Rescission of Deed of Conditional Sale" dated February 5, 2010, rescinding the April 11, 2007 Deed on the ground that petitioners had defaulted in their monthly installments. Petitioner Corporation had stopped its marketing operations because TCT No. T-225549 was no longer in its possession, and no lot buyers had entered the property as they were barred by Nestor. Petitioners consequently faced various cases filed by disgruntled lot buyers.

On October 12, 2011, petitioners filed a Complaint for Declaration of Nullity of the Instrument denominated as Rescission of Conditional Sale, Specific Performance, Sums of Money, etc. against Nestor and the heirs of the spouses Ramones, docketed as Civil Case No. 4263. Nestor did not file an Answer and was declared in default on May 31, 2012. The heirs of the spouses Ramones were dropped as defendants on November 20, 2012, and petitioners presented evidence ex parte. The RTC dismissed the complaint with prejudice, finding the transaction tainted with badges of fraud and holding that petitioners did not come to court with clean hands. The CA reversed, ruling the contract was a contract to sell and applying the Maceda Law, ordering petitioners to pay the balance within 60 days. The CA denied reconsideration on February 7, 2017.

• Defaulted Party's Appellate Rights: Petitioners argued that the CA erred in requiring respondent Nestor, who had been declared in default in the trial court, to file and admit his Appellee's Brief, and in giving full faith and credence to his version of the case.
• Maceda Law Application: Petitioners contended that the CA erred in applying the provisions of R.A. No. 6552 (Maceda Law) in resolving the main issue of nullification of the rescission instrument.
• Specific Performance and Damages: Petitioners argued that the CA failed to consider the entirety of the original complaint, in which they also prayed for specific performance and damages.
• Equitable Disposition: Petitioners maintained that the CA erred in not accepting an alternative equitable disposition given their inability to pay the ₱4.4 million balance, and in not sustaining the gentlemen's agreement to divide the property covered by TCT No. T-225549.

• Defaulted Party's Appellate Standing: Whether the CA properly required respondent Nestor, who had been declared in default in the trial court, to file an Appellee's Brief.
• Nature of the Contract: Whether the April 11, 2007 Deed of Conditional Sale is a contract of sale or a contract to sell.
• Applicability of the Maceda Law: Whether the buyer-protection provisions of R.A. No. 6552 (Maceda Law) apply to the subject transaction.
• Validity of the Unilateral Rescission: Whether the notarized "Rescission of Deed of Conditional Sale" executed by respondent Nestor validly cancelled the contract.
• Specific Performance and Refund: Whether petitioners are entitled to specific performance (delivery of title), refund of payments, and enforcement of the gentlemen's agreement to split the property.

• Defaulted Party's Appellate Standing: Yes. A party declared in default in the trial court retains the right to appeal and to file an appellee's brief; the effect of default is limited to the stages of the case in the trial court and does not extend to appellate proceedings.
• Nature of the Contract: Contract to sell. The stipulation that the vendor shall execute a deed of absolute sale only upon full payment of the purchase price evinces the parties' intention to reserve ownership in the seller until full payment, which is the defining characteristic of a contract to sell.
• Applicability of the Maceda Law: No. The Maceda Law's buyer-protection provisions (grace period and cash surrender value) apply only to residential real estate; a six-hectare lot purchased by a real estate corporation engaged in reselling portions to individual buyers is commercial, not residential.
• Validity of the Unilateral Rescission: No. The cancellation was invalid because respondent Nestor made no prior demand for payment and no notice of cancellation was sent to petitioners; without demand, petitioners had not incurred in legal delay, and without notice, the cancellation was unjustified.
• Specific Performance and Refund: No to all. Petitioners are not entitled to specific performance (delivery of title) because they have not fully paid; refund is not proper because the contract remains valid and subsisting; the gentlemen's agreement was not sufficiently established by clear and competent evidence, and the amount paid is insufficient to cover the portion prayed for.

• Defaulted Party's Appellate Standing: Section 3(a), Rule 9 of the 1997 Rules of Court provides that a party in default is entitled to notice of subsequent proceedings but cannot take part in the trial. The effect of a default judgment is limited to the stages of the case in the trial court terminated by and included in the judgment on the merits. A defaulted party may appeal from the default judgment on the ground that the plaintiff failed to prove material allegations or that the decision is contrary to law, even without prior filing of a motion to set aside the order of default. Concomitant with the right to appeal is the right to file an appellant's brief; by the same logic, a defaulting party who is the appellee may file an appellee's brief. The trial court cannot, by its default order, control procedure in the appellate court. However, a defaulting party is proscribed from seeking modification or reversal based on evidence submitted in the CA, as this would allow the party to regain the right to adduce evidence lost in the trial court.

• Nature of the Contract: The distinction between a contract of sale and a contract to sell is well established: in a contract of sale, title passes to the buyer upon delivery, and non-payment is a negative resolutory condition; in a contract to sell, ownership is reserved in the seller until full payment, and full payment is a positive suspensive condition. The April 11, 2007 Deed of Conditional Sale expressly stipulated that "upon full payment of the agreed consideration the Vendor shall execute the deed of absolute sale in favor of the Vendee." This stipulation demonstrates the parties' intention for the vendor to reserve ownership until the remaining balance (payable in 40 monthly installments) has been fully paid, which is the hallmark of a contract to sell, as reinforced in Diego vs. Diego and Reyes vs. Tuparan.

• Applicability of the Maceda Law: Section 3 of R.A. No. 6552 expressly excludes industrial lots, commercial buildings, and sales to tenants from its buyer-protection coverage. A purchase by a real estate corporation of a six-hectare lot for resale to individual buyers can hardly be considered residential, consistent with Spouses Garcia vs. Court of Appeals, where five parcels aggregating 69,028 square meters were held not to comprise residential real estate. However, the Maceda Law recognizes the vendor's right to cancel contracts to sell of all kinds of real estate (industrial, commercial, and residential) upon non-payment; the distinction lies only in the added protection (grace period and cash surrender value refund) given to residential buyers, which is not enjoyed by commercial and industrial lot buyers. As stated in Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc., the Act recognizes and reaffirms the vendor's right unqualifiedly to cancel the sale upon the buyer's default in the case of industrial and commercial properties.

• Validity of the Unilateral Rescission: While the seller in a contract to sell of commercial property may unqualifiedly cancel upon the buyer's default, such cancellation must be made with notice to the defaulting party, giving the latter the opportunity to question the cancellation. The word "rescission" as used by respondent Nestor is technically misplaced, because the remedies of rescission under Articles 1191 and 1592 of the Civil Code are not available in contracts to sell — non-payment in a contract to sell is not a breach but an event that prevents the obligation of the vendor to convey title from acquiring obligatory force. Nevertheless, the cancellation was unjustified for two reasons. First, there was no showing that respondent made a demand (judicially or extrajudicially) to pay the remaining balance when petitioners failed to pay the December 2009 installment; under Article 1169 of the Civil Code, one incurs in delay only from the time the obligee demands fulfillment, and no waiver of demand was stipulated. Second, there was no showing that respondent sent a notice of cancellation or intent to cancel, which would have given petitioners the opportunity to agree or object. Following University of the Philippines vs. De Los Angeles, unilateral rescission proceeds at the risk of the party taking it and remains subject to judicial validation; without notice, the cancellation is contestable and subject to judicial invalidation. Since the contract was not validly cancelled, it subsists and remains effective.

• Specific Performance and Refund: Petitioners are not entitled to specific performance because they have not fully paid the purchase price, and respondent is under no obligation to convey title until full payment. The remedy of refund is improper because the contract remains valid and subsisting, and refund was not part of the parties' stipulation. The gentlemen's agreement to split the property cannot be granted because it was not sufficiently established by clear and competent evidence, the amount paid is insufficient to cover the portion prayed for, and mere inability to pay is not a justifiable reason to renege on a contractual obligation. However, for equitable considerations, given that petitioners had already paid ₱3,567,500.00 — almost half of the ₱8,000,000.00 purchase price — the Court granted them 60 days from finality to pay the remaining balance of ₱4,432,500.00, following Reyes vs. Tuparan. No interest or damages were awarded because petitioners had not incurred in delay (no demand having been made) and there was no breach of contract in a contract to sell where non-fulfillment of the suspensive condition is not a breach but an event preventing the obligation from acquiring obligatory force.

• Contract to Sell vs. Contract of Sale — In a contract of sale, title passes to the buyer upon delivery and non-payment is a negative resolutory condition; in a contract to sell, ownership is reserved in the seller until full payment, and full payment is a positive suspensive condition. A stipulation that the vendor shall execute a deed of absolute sale only upon or after full payment of the purchase price is the defining indicator of a contract to sell. The Court applied this doctrine to hold that the April 11, 2007 Deed of Conditional Sale was a contract to sell, because it expressly required full payment before the vendor would execute the deed of absolute sale.

• Inapplicability of Rescission under Articles 1191 and 1592 to Contracts to Sell — The remedies of rescission under Articles 1191 and 1592 of the Civil Code are not available in contracts to sell. Non-payment in a contract to sell is not a breach (casual or serious) but simply an event that prevents the obligation of the vendor to convey title from acquiring obligatory force. Strictly speaking, there can be no rescission or resolution of an obligation that is still non-existent due to the non-happening of the suspensive condition. The Court applied this doctrine to clarify that respondent Nestor's use of the word "rescission" was technically misplaced, though his right to cancel was recognized in principle.

• Maceda Law Exclusions — R.A. No. 6552's buyer-protection provisions (grace period and cash surrender value refund) apply only to residential real estate, expressly excluding industrial lots, commercial buildings, and sales to tenants. The vendor's right to cancel upon buyer's default is recognized for all types of real estate, but only residential buyers are entitled to the added protections of grace period and refund. The Court applied this doctrine to hold that the subject six-hectare lot purchased by a real estate corporation for resale was commercial, and therefore the Maceda Law's buyer-protection provisions did not apply.

• Notice Requirement in Unilateral Cancellation of Contracts to Sell — While a seller may unqualifiedly cancel a contract to sell of commercial or industrial property upon the buyer's default, such cancellation must be made with notice to the defaulting party, giving the latter the opportunity to question the cancellation before the courts. Unilateral rescission or cancellation proceeds at the risk of the party taking it and remains subject to judicial validation. The Court applied this doctrine to hold that respondent Nestor's cancellation was invalid because he made no prior demand for payment and sent no notice of cancellation.

• Defaulted Party's Appellate Rights — A party declared in default in the trial court retains the right to appeal and to file an appellee's brief. The effect of a default judgment is limited to the stages of the case in the trial court; it does not extend to appellate proceedings. However, a defaulting party may not seek modification or reversal based on evidence submitted in the appellate court. The Court applied this doctrine to uphold the CA's requirement that respondent Nestor file an Appellee's Brief.

• "It is settled jurisprudence, to the point of being elementary, that an agreement which stipulates that the seller shall execute a deed of sale only upon or after full payment of the purchase price is a contract to sell, not a contract of sale." — This passage, quoted from Diego vs. Diego, articulates the canonical test for distinguishing a contract to sell from a contract of sale, and is frequently cited in subsequent jurisprudence.

• "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 states the ratio decidendi for why rescission under Articles 1191 and 1592 does not apply to contracts to sell, and defines the legal character of non-payment in such contracts.

• "The Act recognizes and reaffirms the vendor's right to cancel the contract to sell upon breach and [nonpayment] of the stipulated installments but requires a grace period after at least two years of regular installment payments … In case of industrial and commercial properties, as in the case at bar, the Act recognizes and reaffirms the Vendor's right unqualifiedly to cancel the sale upon the buyer's default." — This passage, quoted from Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc., defines the scope and distinction of the Maceda Law's coverage, confirming the vendor's unqualified right to cancel contracts to sell of commercial and industrial properties.

• "The party who deems the contract violated may consider it resolved or rescinded, and act accordingly, without previous court action, but it proceeds at its own risk. For it is only the final judgment of the corresponding court that will conclusively and finally settle whether the action taken was or was not correct in law." — This passage, quoted from University of the Philippines vs. De Los Angeles, articulates the doctrine of unilateral extrajudicial rescission subject to judicial validation, which the Court applied to require notice in the cancellation of contracts to sell.

• Lim vs. Court of Appeals, 182 SCRA 564 (1990) — Controlling precedent distinguishing contract of sale from contract to sell; followed by the Court in characterizing the April 11, 2007 Deed of Conditional Sale as a contract to sell.
• Diego vs. Diego, 704 Phil. 373 (2013) — Followed; cited for the elementary rule that a stipulation requiring execution of a deed of sale only upon full payment indicates a contract to sell, and that Article 1592 does not apply to contracts to sell.
• Reyes vs. Tuparan, 665 Phil. 425 (2011) — Followed; cited for the rule that a contract to sell with a stipulation for deed of sale upon completion of payment is a contract to sell, and for the equitable remedy of allowing the buyer a reasonable period to pay the balance where substantial payment has been made.
• Luzon Brokerage Co., Inc. vs. Maritime Building Co., Inc., 175 Phil. 476 (1978) — Controlling precedent on the Maceda Law's exclusions; followed for the proposition that the vendor's right to cancel contracts to sell of industrial and commercial properties is unqualified, while residential buyers receive added protections.
• Spouses Garcia vs. Court of Appeals, 633 Phil. 294 (2010) — Followed; cited for the holding that large parcels of land aggregating tens of thousands of square meters do not constitute residential real estate within the contemplation of the Maceda Law.
• University of the Philippines vs. De Los Angeles, 146 Phil. 108 (1970) — Followed; cited for the doctrine that unilateral extrajudicial rescission proceeds at the risk of the rescinding party and remains subject to judicial validation, and for the necessity of notice in unilateral cancellation.
• Lina vs. Court of Appeals, 220 Phil. 311 (1985) — Followed; cited for the remedies available to a defendant declared in default, including the right to appeal from a default judgment.
• Rural Bank of Sta. Catalina, Inc. vs. Land Bank of the Philippines, 479 Phil. 43 (2004) — Followed; cited for the proposition that a defaulting party is proscribed from seeking modification or reversal based on evidence submitted in the appellate court.

• Section 3, Rule 9, 1997 Rules of Court — Governs default; provides that a party in default is entitled to notice of subsequent proceedings but cannot take part in the trial. Applied to hold that respondent Nestor, though declared in default, retained the right to file an appellee's brief in the CA.
• Section 3, Republic Act No. 6552 (Maceda Law) — Provides buyer-protection rights (grace period and cash surrender value refund) for buyers of real estate on installment payments who have paid at least two years of installments, but expressly excludes industrial lots, commercial buildings, and sales to tenants. Applied to hold that the subject transaction, being commercial, was outside the Maceda Law's buyer-protection coverage.
• Article 1169, Civil Code — Provides that one incurs in delay (mora) from the time the obligee demands fulfillment of the obligation. Applied to hold that petitioners had not incurred in delay because respondent made no demand for payment.
• Article 1191, Civil Code — Governs rescission of reciprocal obligations. Discussed and held inapplicable to contracts to sell, where non-payment is not a breach but an event preventing the obligation from acquiring obligatory force.
• Article 1592, Civil Code — Governs rescission of sale of immovable property for non-payment, allowing the vendee to pay even after expiration of the period until demand for rescission is made judicially or by notarial act. Held inapplicable to contracts to sell where the seller reserves ownership until full payment.
• Article 2209, Civil Code — Governs legal interest as indemnity for damages arising from delay in payment of a sum of money. Applied to deny interest because petitioners had not incurred in delay, no demand having been made.

Peralta (Chairperson) and Leonen, JJ., concurred. Hernando and Gesmundo, JJ., were on wellness leave.