Sikatuna vs. Guevara

A sale of registered land to a third-party purchaser who takes title in good faith and for value, without recorded notice of a pending action affecting the land, cannot be rescinded under Article 1291(4) of the Civil Code as a “thing in litigation” because rescission is barred by Article 1295(2) when the property is lawfully in the possession of a third person who has not acted in bad faith, and because the unrecorded suit does not bind the title under Section 79 of Act No. 496. The registered owner’s title remains superior to unregistered claims.

Potenciana Guevara leased a portion of land on Calle Bilbao, Manila, from Jacinto, Palma y Hermanos under a contract containing a reciprocal option: the lessor could buy Guevara’s house within one year; failing that, Guevara could purchase the leased land. The lease and option were never annotated on the certificate of title. After the lessor failed to exercise its option and refused to sell, Guevara sued to compel the sale in April 1918 (civil case No. 16060). No notice of that suit was filed with the registry of deeds. While the case was pending, Jacinto, Palma y Hermanos sold the entire property, including the disputed portion, to Sikatuna on May 25, 1918. The sale was duly registered under Act No. 496 and Transfer Certificate of Title No. 8651 was issued, bearing no encumbrance other than a mortgage to the National Bank. Guevara later obtained a final and executory judgment in her favor, but execution proved impossible because the land had passed to Sikatuna. Guevara remained on the premises.

• The Lease and Option: Potenciana Guevara leased a 100-square-meter portion of land on Calle Bilbao, Manila, from Jacinto, Palma y Hermanos under a contract that gave the lessor a one-year option to purchase the house Guevara built on the land. If the lessor failed to exercise the option within the period, Guevara would have the right to purchase the leased land. The contract was never noted on the owner’s certificate of title.
• Suit to Compel the Sale: The option period expired without the lessor exercising its right. When Guevara attempted to buy the land, Jacinto, Palma y Hermanos refused. In April 1918, Guevara filed civil case No. 16060 to compel the sale. No notice of the commencement of that action was filed with the registry of deeds.
• The Sale to Sikatuna: While civil case No. 16060 was pending, Jacinto, Palma y Hermanos sold all the land, including the leased portion, to Sikatuna, a corporation. The sale was registered under Act No. 496, and Transfer Certificate of Title No. 8651 was issued to Sikatuna on May 25, 1918. Neither the original certificate nor the new transfer certificate bore any encumbrance except a mortgage to the National Bank.
• The Unenforceable Judgment: On July 15, 1918, the trial court in civil case No. 16060 ordered Jacinto, Palma y Hermanos to sell the disputed parcel to Guevara; the judgment was affirmed by the Supreme Court. Execution failed because the land had already been sold to Sikatuna.
• Demand to Vacate and Present Action: Guevara remained in possession of the leased portion but did not pay rent to Sikatuna. Sikatuna, needing the land for its own purposes, notified Guevara on January 28, 1920, to vacate and pay rents. Guevara refused. Sikatuna then commenced the present action for unlawful detainer and recovery of rents. The parties stipulated that the reasonable rent from February 1920 was P20 per month.

• Rescission Barred by Lawful Third-Party Possession: Petitioner argued that rescission under Article 1291(4) was unavailable because the land was lawfully in the possession of Sikatuna, a third person who had not acted in bad faith, and Article 1295(2) expressly prohibited rescission under such circumstances.
• Unrecorded Claim Unenforceable Against Torrens Title: Petitioner maintained that Sikatuna was an innocent purchaser for value whose registered Torrens title could not be defeated by Guevara’s unrecorded claim, especially since no notice of lis pendens was annotated, and Section 79 of Act No. 496 confined the effects of the pending suit to the original parties.
• Rental Rate: Petitioner contended that the trial court erred in setting rent at P6 per month instead of the stipulated reasonable rate of P20 from February 1920 and in not awarding the full back rents demanded.

• Sale as a Thing in Litigation: Respondents invoked Article 1291(4) of the Civil Code, arguing that the land Sikatuna bought was a “thing in litigation” because Guevara’s suit to compel the sale preceded the transfer, and the subsequent sale could therefore be rescinded.
• Superior Right from Final Judgment: Respondents asserted that Guevara’s right to purchase the land had been conclusively established by the final judgment in civil case No. 16060, and that Sikatuna’s purchase should be set aside to give effect to that superior right.

• Rescission of Sale: Whether the sale of the registered land to Sikatuna can be rescinded under Article 1291(4) as a thing in litigation, in light of Sikatuna’s status as a third-party purchaser in lawful possession without bad faith and the absence of a recorded notice of lis pendens.
• Order to Transfer Title: Whether Sikatuna can be ordered to execute a deed of transfer of the disputed portion to Guevara.
• Rental Liability and Rate: Whether Guevara is liable for rents at P20 per month from February 1920, and for unpaid back rents prior to that date.

• Rescission of Sale: The rescission of the sale was not warranted. Sikatuna was a third person who had acquired the property lawfully and without any showing of bad faith, squarely falling within the prohibition of Article 1295, paragraph 2, of the Civil Code: “Neither shall rescission take place when the things which are the subject-matter of the contract are lawfully in the possession of third persons who have not acted in bad faith.” Additionally, the land was registered under Act No. 496. Section 79 of that Act provides that actions concerning registered property affect only the litigating parties unless a notice of the commencement of the action is recorded. No such notice was filed, so there was no legal obstacle to the transfer of title to Sikatuna, and the sale could not be rescinded on that ground.
• Order to Transfer Title: Because rescission was impermissible, the order directing Sikatuna to convey the land to Guevara was rendered baseless and erroneous. The second error was a necessary consequence of the first and was sustained.
• Rental Liability and Rate: With the sale to Sikatuna standing and Guevara wrongfully retaining possession, Guevara was required to pay the agreed reasonable rent of P20 per month from February 1920 until the property was vacated, plus back rents of ₱132 covering April 1918 to January 1920, inclusive.

• Rescission Barred by Third-Party Possession in Good Faith (Art. 1295[2], Civil Code): Rescission of a contract under Article 1291, including rescission of contracts involving things in litigation, is absolutely barred when the subject matter is lawfully in the possession of third persons who did not act in bad faith. Here, Sikatuna was such a third person, having purchased the land, paid value, and registered its title without knowledge of the unrecorded option or suit, and without acting in bad faith. The existence of a prior, unregistered adverse claim did not taint its good faith.
• Unrecorded Lis Pendens Does Not Bind Torrens Title (Sec. 79, Act No. 496): Under the Land Registration Act, actions concerning registered land are binding only on the parties to the litigation and do not affect the rights of subsequent transferees unless a notice of lis pendens is registered. This rule is absolute: the unrecorded suit creates no legal impediment to the transfer, and a transferee who registers title free of such notice takes the property unencumbered by the claim. The failure to annotate Guevara’s action meant the property passed to Sikatuna unburdened, and the sale could not be rescinded.

• “The rescission of the said sale does not lie in the present case because the property is now in the legal possession of a third person who has not acted in bad faith. The second paragraph of article 1295 of the Civil Code provides as follows: ‘Neither shall rescission take place when the things which are the subject-matter of the contract are lawfully in the possession of third persons who have not acted in bad faith.’”
• “This case has a special circumstance in that it deals with property registered under the Land Registration Act, No. 496, section 79 of which provides that actions concerning properties registered under the law shall affect only the parties litigant, unless a notice of the commencement of the action is recorded, which does not appear to have been done in the case before us. There was, therefore, no legal obstacle to the transfer of the title of the said property, and for this special reason the said transfer cannot be rescinded.”

N/A — The decision does not rely on prior judicial precedents; it rests directly on the Civil Code and the Land Registration Act.

• Article 1291, paragraph 4, Civil Code: Allows rescission of contracts entered into with respect to things in litigation without the knowledge and approval of the litigants or competent judicial authority. Invoked by respondents but found inapplicable due to the statutory bars.
• Article 1295, paragraph 2, Civil Code: Provides that rescission shall not take place when the things which are the subject-matter of the contract are lawfully in the possession of third persons who have not acted in bad faith. Directly applied to shield Sikatuna’s title from rescission.
• Section 79, Act No. 496 (Land Registration Act): States that actions concerning registered land shall affect only the parties to the litigation, and no third party, unless a notice of the commencement of the action is filed and registered. Applied to hold that the unrecorded suit did not impede the sale to Sikatuna nor justify its rescission.

Araullo, C.J., Malcolm, Avanceña, Villamor, and Ostrand, JJ., concur.

N/A — The decision was unanimous without recorded dissents.