Solid Homes, Inc. vs. Spouses Tan

The ten-year prescriptive period for an action for specific performance against a subdivision developer accrues from the date of judicial or extrajudicial demand, not from the execution of the contract of sale, and upon rescission, equity requires the developer to pay the current market value of the lot rather than merely the purchase price, to prevent unjust enrichment.

Petitioner Solid Homes, Inc. is the owner and developer of Loyola Grand Villas Subdivision in Quezon City. Respondents, spouses Ancheta K. Tan and Corazon de Jesus Tan, purchased a subdivision lot from the original buyers, spouses Joe Uy and Myrna Uy, who had bought it from petitioner in 1980. The dispute arises from petitioner's failure to develop the subdivision as required under P.D. No. 957, as amended by P.D. 1216, which obligates subdivision owners and developers to provide adequate roads, alleys, sidewalks, and utility systems within one year from issuance of the license.

On April 7, 1980, petitioner Solid Homes, Inc. sold a subdivision lot—Lot 18, Block 2, with an area of 1,069 square meters at Loyola Grand Villas Subdivision, Quezon City—to spouses Joe Uy and Myrna Uy. The lot was registered in the Uys' name under TCT No. 280963/T-1409 of the Register of Deeds of Quezon City.

Sometime in February 1985, the Uy spouses sold the same lot to respondents, spouses Ancheta K. Tan and Corazon de Jesus Tan. The former title was cancelled and replaced by TCT No. RT-14465 (327754) in respondents' name. From then on, respondents visited their property several times, only to discover that no development had taken place. There were no infrastructure or utility systems for water, sewerage, electricity, and telephone, contrary to the approved plans and advertisements of the subdivision. Squatters also occupied their lot and surrounding areas. In short, there had been no development at all.

On December 18, 1995, respondents sent a written demand to petitioner, requiring it to provide the needed utility systems and clear the area of squatters and other obstructions by the end of January 1996, conformably with P.D. No. 957, which requires an owner or developer to develop a subdivision project within one year from issuance of its license. Petitioner did not reply. On April 1, 1996, respondents filed a complaint for specific performance and damages with the HLURB Field Office, NCR, praying that petitioner be ordered to provide facilities and rid the premises of squatters, or, in the alternative, to replace the lot with another in the same subdivision with available facilities and without squatters.

The Housing and Land Use Arbiter, in a decision dated September 17, 1996, ruled for respondents, directing petitioner to perform its obligation to provide subdivision facilities and rid the premises of squatters, or, at respondents' option, to replace the lot with a similar one with available facilities in the subdivision, and to pay ₱20,000.00 as attorney's fees. The complaint against co-defendant Purita Soliven was dismissed. The HLURB Board of Commissioners affirmed this decision on April 16, 1997. The Office of the President, on June 3, 1999, affirmed with modification, adding that if petitioner fails to replace the lot because it had already sold or transferred all its properties in the subdivision, it shall pay respondents the purchase price with legal interest from February 1985 until fully paid. Respondents' motion for partial reconsideration seeking fair market value instead of purchase price was denied on September 22, 1999.

Both parties elevated the case to the Court of Appeals via separate petitions for review, which were consolidated pursuant to Section 1, Rule 31 of the Rules of Court. On May 23, 2000, the Court of Appeals set aside the OP decision and affirmed the HLURB decision with the modification that petitioner pay respondents the current market value of the lot—not merely the purchase price—if no replacement lot was available. Petitioner's motion for reconsideration was denied on September 12, 2000, prompting the present petition.

• Prescription: Petitioner argued that respondents' right to bring the action had already prescribed, contending that the ten-year prescriptive period should be reckoned from April 7, 1980, when petitioner originally sold the lot to the Uys, or at the latest from February 1985, when respondents acquired the lot from the Uy spouses. Since the complaint was filed with the HLURB only on April 1, 1996, or after more than ten years, it was filed out of time and ought to have been dismissed.
• Equity vs. Positive Law: Petitioner maintained that equity may be availed of only in the absence of, and never against, statutory law or judicial rules of procedure. It invoked Article 1385 of the Civil Code, which provides that rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interests.
• Measure of Recovery: Petitioner submitted as erroneous the appellate court's ruling that it should pay respondents the current market value of the lot, arguing that under Article 1385, only the purchase price plus interest need be returned upon rescission.

• Measure of Recovery: Respondents argued that it would be more in accord with equity and fair play if they were paid the fair market value of the lot, not merely the purchase price, should there be no available lot with facilities in the area, as the value of the property had escalated after almost two decades.

• Prescription: Whether respondents' right to bring the instant case against petitioner has already prescribed.
• Measure of Recovery upon Rescission: Whether petitioner should pay respondents merely the price they paid for the lot plus interest, or the current market value thereof.

• Prescription: No. The ten-year prescriptive period under Article 1144 commenced to run only from December 18, 1995, the date of respondents' written demand, not from the date of the original sale in 1980 or respondents' purchase in 1985. The complaint filed on April 1, 1996 was therefore timely.
• Measure of Recovery upon Rescission: The current market value. Equity and justice dictate that the injured party be paid the market value of the lot, as requiring payment of only the purchase price plus interest would result in unjust enrichment of the developer who reneged on its obligations.

• Prescription: Article 1144 of the Civil Code provides that actions upon a written contract must be brought within ten years from the time the right of action accrues. The cause of action accrues only when all three requisites concur: (1) a right in favor of the plaintiff; (2) an obligation on the part of the defendant to respect such right; and (3) an act or omission by the defendant violative of that right. It is only upon the happening of the last element that a cause of action arises. Petitioner's obligation to provide subdivision facilities arises not only from contract but also from law—P.D. 957, as amended by P.D. 1216, Section 31 of which requires subdivision owners or developers to provide adequate roads, alleys, and sidewalks. This obligation is in the nature of an obligation to do, and under Article 1169, a party obliged to do something incurs delay only from the time the obligee demands fulfillment, either judicially or extrajudicially. Absent demand, the obligor does not incur delay, cannot be said to be guilty of an omission violative of the obligee's rights, and consequently the prescriptive period does not commence. As established in Banco Filipino Savings and Mortgage Bank vs. CA, the prescriptive period is reckoned from the date the cause of action accrued, not necessarily from the date of execution of the contract. Since respondents made their written demand only on December 18, 1995, and filed their complaint on April 1, 1996—less than four months later—the action was timely.

• Measure of Recovery upon Rescission: While Article 1385 of the Civil Code provides that rescission creates the obligation to return the price with its interests, a literal application would lead to unjust and absurd results. Courts have refused to apply the literal import of a statutory provision when doing so would operate unjustly or lead to absurd consequences, as held in Commissioner of Internal Revenue vs. Solidbank Corporation. Applying only the purchase price plus interest would allow subdivision developers who reneged on their obligations to profit from their own wrongdoing, as the value of the property had escalated after almost two decades. This would constitute unjust enrichment, contrary to equity and reason. Moreover, P.D. 957 was enacted precisely as a measure against subdivision owners and developers who reneged on their obligations to provide utility systems and facilities, as expressed in its whereas clauses. The Court affirmed the CA's ruling requiring payment of current market value, finding no reason to alter the appellate court's disposition.

• Accrual of Cause of Action and Commencement of Prescription — A cause of action arises when three requisites concur: (1) a right in favor of the plaintiff; (2) an obligation on the part of the defendant to respect such right; and (3) an act or omission on the part of the defendant violative of the plaintiff's right. The prescriptive period commences to run only upon the happening of the last element. In obligations to do, the obligor incurs delay (mora) only upon demand by the obligee; absent demand, no delay, no violation, no cause of action, and prescription does not run. Applied to hold that the ten-year prescriptive period for specific performance against a subdivision developer commenced from the date of written demand, not from the date of the contract of sale.

• Equity Against Literal Application of Statutory Law — Courts may refuse to apply the literal import of a statutory provision when doing so would lead to unjust, unfair, or absurd results. A literal application of Article 1385 (rescission requiring return of purchase price with interest) was rejected in favor of requiring payment of current market value, to prevent unjust enrichment of a defaulting subdivision developer whose property had appreciated over two decades.

• Unjust Enrichment in Subdivision Development — A subdivision developer who reneges on its statutory and contractual obligations to provide facilities cannot profit from its own wrongdoing by paying back only the original purchase price when property values have escalated. Equity requires payment of current market value upon rescission, consistent with the protective purpose of P.D. 957.

• "And a cause of action arises when that which should have been done is not done, or that which should not have been done is done." — Quoted from Banco Filipino Savings and Mortgage Bank vs. CA, this passage defines when a cause of action accrues, which is critical to determining the commencement of the prescriptive period under Article 1144.

• "In fine, the ten-year prescriptive period is to be reckoned from the accrual of the Appellee's right of action, not necessarily on the very date of the execution of the contracts subject of the action." — This formulation, quoted with approval from the Court of Appeals, directly refutes petitioner's argument that prescription should be reckoned from the date of the contract of sale.

• "A literal application of any part of a statute is to be rejected if it will operate unjustly, lead to absurd results, or contradict the evident meaning of the statute taken as a whole." — Quoted from Commissioner of Internal Revenue vs. Solidbank Corporation, this principle justified the Court's refusal to apply Article 1385 literally, supporting the equity-based award of current market value instead of purchase price.

• Banco Filipino Savings and Mortgage Bank vs. CA, 388 Phils. 27 (2000) — Followed. Established that the prescriptive period is reckoned from the date the cause of action accrued, not from the date of contract execution, and that a cause of action arises when that which should have been done is not done, or that which should not have been done is done.

• Social Security System vs. Moonwalk Development and Housing Corporation, 221 SCRA 119 (1993) — Followed. Held that an obligor violates his obligation from the time demand for performance is made, which also marks when the obligor incurs mora or delay; absent demand, no delay occurs and prescription does not run.

• Commissioner of Internal Revenue vs. Solidbank Corporation, 416 SCRA 436 (2003) — Followed. Established that a literal application of a statute is to be rejected if it operates unjustly, leads to absurd results, or contradicts the evident meaning of the statute as a whole. Applied to justify departure from the literal terms of Article 1385.

• Lee vs. CA, 419 Phils. 392 (2001) — Cited for the definition of the three requisites of a cause of action: a right in favor of the plaintiff, an obligation on the defendant to respect such right, and an act or omission by the defendant violative of that right.

• Article 1144, Civil Code — Provides that actions upon a written contract, upon an obligation created by law, and upon a judgment must be brought within ten years from the time the right of action accrues. Applied to determine that respondents' action for specific performance was timely, as the prescriptive period commenced from demand on December 18, 1995, not from the 1980 or 1985 sale.

• Article 1169, Civil Code — Provides that those obliged to deliver or to do something incur in delay from the time the obligee judicially or extrajudicially demands fulfillment of the obligation. Applied to establish that petitioner's obligation to provide subdivision facilities, being an obligation to do, incurred delay only upon respondents' demand.

• Article 1385, Civil Code — Provides that rescission creates the obligation to return the things which were the object of the contract, together with their fruits, and the price with its interests. The Court declined to apply this provision literally, holding that doing so would lead to unjust enrichment of the defaulting developer.

• Section 31, P.D. 957 (as amended by P.D. 1216) — Requires subdivision owners or developers to provide adequate roads, alleys, and sidewalks, and to reserve thirty percent (30%) of the gross area for open space for projects one hectare or more. Identified as the statutory source of petitioner's obligation to develop the subdivision, independent of the contract of sale.

• P.D. 957 (Subdivision and Condominium Buyer's Protective Decree) — Enacted as a measure against subdivision owners, developers, operators, and/or sellers who renege on their obligations to provide utility systems and facilities. Its whereas clauses were cited to underscore the legislative intent to protect home and lot buyers from non-developing subdivision owners.

Panganiban (Chairman), Sandoval-Gutierrez, and Carpio-Morales, JJ., concurred. Corona, J., was on official leave.