San Lorenzo Development Corp. vs. Court of Appeals

A contract to sell does not constitute a “sale” for purposes of Article 1544 of the Civil Code; the rules on double sale apply only where both transactions are contracts of sale. Even in a double sale, the buyer who first takes possession in good faith prevails over a prior buyer who neither registered nor possessed the property; a subsequent registration with knowledge of a prior claim or after annotation of a lis pendens is a registration in bad faith—deemed no registration at all—and does not retroactively negate the good faith that attended the earlier delivery and possession.

Spouses Miguel Lu and Pacita Zavalla Lu owned two adjoining parcels of land in Sta. Rosa, Laguna, with an aggregate area of 3.1616 hectares under TCT Nos. T-39022 and T-39023. In August 1986, Pacita Lu accepted a P50,000.00 down payment from Pablo Babasanta for the lots at P15.00 per square meter, with the balance payable by end-1987. Babasanta paid a total of P200,000.00 but failed to complete the price. Without Babasanta’s knowledge, the spouses later dealt with SLDC. On 11 February 1989, they executed an Option to Buy in SLDC’s favor; by 3 May 1989, after SLDC had paid more than half the agreed price, they executed a Deed of Absolute Sale with Mortgage and transferred possession. Babasanta demanded a final deed in May 1989, learned of the second transaction, and sued.

The Babasanta Transaction: On 20 August 1986, Pacita Lu signed a memorandum receipt acknowledging a P50,000.00 down payment from Pablo Babasanta for the “3.6 hectares farm lot.” No formal deed was executed, and the receipt did not state the price per square meter. Babasanta made further payments totaling P200,000.00. Pacita Lu later confirmed in a letter that the agreed price was P15.00 per square meter, but claimed Babasanta demanded a reduction and, upon the spouses’ refusal, withdrew from the purchase and declared that the original loan transaction should stand. She alleged that the P50,000.00 was returned through a third party. Babasanta, in his May 1989 letter, insisted on execution of a final deed so he could pay the balance, indicating his understanding that ownership would not pass until then. No tender of payment or consignation of the balance was made.

The SLDC Transaction: On 11 February 1989, the Spouses Lu executed an Option to Buy in SLDC’s favor, receiving P316,160.00 as option money. After SLDC paid a total of P632,320.00—more than half of the P1,264,640.00 purchase price—the spouses executed a Deed of Absolute Sale with Mortgage on 3 May 1989. The owner’s duplicate certificates of title were delivered to SLDC, clean and without any adverse claim, lien, or lis pendens. SLDC immediately took possession of the property and asserted acts of ownership. At no time prior to or during these events did SLDC know of Babasanta’s claim.

Lis Pendens and Registration: Babasanta filed his complaint on 2 June 1989; a notice of lis pendens was annotated on the titles the same day. SLDC learned of the litigation only in early January 1990 and promptly moved to intervene. It registered the Deed of Absolute Sale with the Registry of Deeds on 30 June 1990, after the lis pendens annotation.

Trial Court and Appellate Court Findings: The RTC found that both Babasanta and SLDC had not registered their respective transactions before the suit. Applying Article 1544, it held that symbolic delivery to SLDC via a public instrument amounted to prior possession in good faith, vesting ownership in SLDC. The Court of Appeals, while concurring in the trial court’s factual findings, reversed, holding that SLDC was a buyer in bad faith because it had advanced P200,000.00 to Pacita Lu to pay Babasanta—which allegedly should have put it on inquiry—and because it registered the sale after the lis pendens annotation.

• Good Faith: SLDC argued that it was a buyer in good faith and for value, having relied on clean certificates of title; the P200,000.00 manager’s check payable to Babasanta was an advance to Pacita Lu for her personal loan, not notice of a prior sale.
• No Notice of Adverse Claim: SLDC contended that at the time of sale and delivery of possession, no adverse claim, lien, encumbrance, or lis pendens appeared on the titles, and it was not obliged to investigate beyond the face of the Torrens certificates.
• Lack of Evidence of Bad Faith: SLDC stressed that Babasanta never presented evidence that it was aware of his rights or interest in the property before the sale.
• Erroneous Reversal: The Court of Appeals erred in reversing the RTC despite fully concurring in the latter’s factual findings, and improperly imputed bad faith based solely on the payment to Babasanta and the subsequent registration.

• Registration in Bad Faith: Babasanta asserted that SLDC’s registration of the sale on 30 June 1990 was in bad faith because a notice of lis pendens had already been annotated on 2 June 1989, and such registration conferred no right.
• Constructive Notice: The lis pendens constituted constructive notice to the whole world; registration after its annotation did not cure the defect, effectively rendering SLDC a buyer in bad faith.
• Inquiry Notice: SLDC was put on inquiry when it issued a P200,000.00 check payable to Babasanta at Pacita Lu’s request, which should have prompted investigation into the nature of his interest in the property.

• Nature of the Babasanta Agreement: Whether the transaction between Babasanta and the Spouses Lu was a contract of sale or a contract to sell.
• Applicability of Double Sale Rules: Whether Article 1544 of the Civil Code applies where the first transaction is a contract to sell.
• Good Faith of SLDC: Whether SLDC was a purchaser in good faith at the time of the sale and delivery.
• Effect of Lis Pendens: Whether the subsequent annotation of a notice of lis pendens and SLDC’s registration with knowledge thereof retroactively vitiated SLDC’s good faith and defeated its right to the property.
• Superior Right: Assuming a double sale, who between Babasanta and SLDC has a better right under Article 1544.

• Nature of the Babasanta Agreement: The agreement was a contract to sell, not a contract of sale. The receipt signed by Pacita Lu, taken together with the parties’ subsequent conduct, showed that ownership was reserved until full payment of the price. Babasanta’s own letter recognized that a final deed would be executed only upon full payment. Because no tender of payment or consignation was made, the vendors’ obligation to convey title never became effective.
• Applicability of Double Sale Rules: Article 1544 does not apply where one contract is a mere contract to sell. Under Dichoso v. Roxas, the rules on double sale govern only when both transactions are contracts of sale; here, the second transaction with SLDC was a consummated sale while the first was a promise to sell.
• Good Faith of SLDC: SLDC was a purchaser in good faith. At the time of the Option to Buy (11 February 1989) and the Deed of Absolute Sale with Mortgage (3 May 1989), SLDC had no knowledge of Babasanta’s claim. The titles were clean. The P200,000.00 check was issued after the sale and for an avowed loan obligation, not as notice of a prior sale. A person dealing with registered land is not required to go beyond the certificate of title.
• Effect of Lis Pendens: The lis pendens annotation on 2 June 1989 did not retroact to destroy SLDC’s good faith. The constructive notice under Section 52 of P.D. No. 1529 operates only from the time of registration. At that point, the sale to SLDC was already consummated as to the obligation to transfer ownership. Even assuming SLDC’s registration was in bad faith due to the prior lis pendens, under Abarquez v. Court of Appeals, a registration in bad faith is deemed no registration at all. In the absence of a valid registration in good faith, priority under Article 1544 shifts to the buyer who first took possession in good faith—SLDC. Babasanta never possessed the property.
• Superior Right: SLDC’s right is superior. Under the second criterion of Article 1544 (priority of possession in good faith), SLDC’s prior possession in good faith prevails over Babasanta’s unregistered and unperfected contract to sell.

• Contract to Sell vs. Contract of Sale — In a contract of sale, title passes upon delivery; in a contract to sell, ownership is reserved in the vendor until full payment, which operates as a positive suspensive condition. Non-payment is not a breach but an event that prevents the obligation to convey title from becoming effective. The rules on double sale in Article 1544 apply only to contracts of sale, not to contracts to sell (Dichoso v. Roxas; Ong v. Court of Appeals; Odyssey Park, Inc. v. Court of Appeals).
• Double Sale Rules (Art. 1544, Civil Code) — For immovable property, ownership belongs to the person who in good faith first records the sale. If no inscription, to the person who in good faith was first in possession; failing that, to the person presenting the oldest title, provided there is good faith. Registration must be coupled with good faith: the registrant must not have known of the defect in the vendor’s title or of facts that should have prompted inquiry (Balatbat v. Court of Appeals; Nuguid v. Court of Appeals).
• Registration in Bad Faith is No Registration — If a buyer registers after learning of a prior sale, the registration is in bad faith and confers no right; it is as if there is no registration at all. In such a case, the buyer who first took possession in good faith is preferred (Abarquez v. Court of Appeals).
• Good Faith Purchaser Defined — A purchaser in good faith buys property without notice that another has a right or interest in it, pays a full and fair price, and acquires the property before receiving notice of the other’s claim. A person dealing with registered land is not bound to go beyond the certificate of title and is charged only with notice of burdens annotated on the face of the register (Bautista v. Court of Appeals; Viray v. Court of Appeals).
• Nature and Effect of Lis Pendens — A notice of lis pendens serves as a warning that the property is in litigation and that a prospective purchaser should keep hands off unless willing to gamble on the outcome. It operates as constructive notice from the time of its registration and does not retroact to defeat rights acquired in good faith before annotation (Nataño v. Esteban; Sec. 52, P.D. No. 1529).

• “In a contract of sale, title passes to the vendee upon the delivery of the thing sold; whereas in a contract to sell, by agreement the ownership is reserved in the vendor and is not to pass until the full payment of the price.”
• “A registration in bad faith … does not confer upon him any right. If the registration is done in bad faith, it is as if there is no registration at all, and the buyer who has taken possession first of the property in good faith shall be preferred.”
• “A notice of lis pendens … serves as a warning to a prospective purchaser or incumbrancer that the particular property is in litigation; and that he should keep his hands off the same, unless he intends to gamble on the results of the litigation.”
• “The juridical relationship between the parties in a double sale is primarily governed by Article 1544 which lays down the rules of preference between the two purchasers of the same property.”

• Dichoso v. Roxas, 11 Phil. 768 (1908) — Applied; Article 1544 does not apply where one transaction is not a sale but merely a promise to sell.
• Abarquez v. Court of Appeals, G.R. No. 95843, 2 September 1992 — Followed; registration in bad faith is void, and priority shifts to the prior possessor in good faith.
• Balatbat v. Court of Appeals, 329 Phil. 858 (1996) — Cited for the rule that good faith in registration requires absence of knowledge of defects in the vendor’s title.
• Bautista v. Court of Appeals, G.R. No. 106042, 28 February 1994 — Used to define a purchaser in good faith and to state the good faith requirement in double sales.
• Nataño v. Esteban, 124 Phil. 1067 (1966) — Cited on the purpose and effect of a notice of lis pendens.

• Article 1544, Civil Code — Rules on double sale of immovable property; examined but held inapplicable because the Babasanta transaction was a contract to sell. Even if applicable, the second criterion (priority of possession in good faith) favored SLDC.
• Articles 1495, 1497-1501, Civil Code — Modes of delivery and transfer of ownership; applied to establish that no delivery occurred for Babasanta, while constructive delivery via public instrument and actual possession was effected for SLDC.
• Article 712, Civil Code — Ownership is acquired by delivery (tradition) as a mode, while sale is merely a title; cited to distinguish title from mode of acquiring ownership.
• Section 52, Presidential Decree No. 1529 (Property Registration Decree) — Constructive notice takes effect upon registration of an instrument; the lis pendens annotated on 2 June 1989 could not retroact to the date of the earlier consummated sale to SLDC.

Puno (Chairman), Austria-Martinez, Callejo, Sr., and Chico-Nazario, JJ., concurred.