Spouses Ramos vs. Spouses Heruela, et al.

A contract to sell real estate on installment, where ownership remains with the vendor until full payment of the purchase price, is governed by Republic Act No. 6552 (the Maceda Law), not Articles 1191 and 1592 of the Civil Code; the vendor cannot cancel the contract or recover ownership through an action for reconveyance without complying with the statutory grace period and the required notice or demand for rescission by notarial act or judicial rescission.

The spouses Gomer and Leonor Ramos owned a parcel of land in Cagayan de Oro City covered by Transfer Certificate of Title No. 16535, of which 306 square meters became the subject of an agreement with the spouses Santiago and Minda Heruela. The Heruelas’ daughter Cherry and son-in-law Raymond Pallori were joined as respondents. The dispute implicated Republic Act No. 6552, the Realty Installment Buyer Protection Act, which governs installment sales of real estate and conditions a seller’s cancellation of a contract to sell.

The spouses Gomer and Leonor Ramos owned a parcel of land consisting of 1,883 square meters covered by Transfer Certificate of Title No. 16535 of the Register of Deeds of Cagayan de Oro City. On 18 February 1980, they entered into an agreement with the spouses Santiago and Minda Heruela covering 306 square meters of that land. The spouses Ramos characterized the agreement as a contract of conditional sale, while the spouses Heruela alleged that it was a sale on installment basis. The agreement was embodied in a one-page handwritten document that provided a price of ₱50 per square meter for 306 square meters, or ₱15,300; a ₱2,000 down payment; and a balance of ₱13,300 payable at a minimum of ₱200 per month until fully paid. The original document was torn in part, with only the words “LMENT BASIS” legible on the title, and the names and addresses of the parties and the identity of the property could not be ascertained from it.

The spouses Heruela alleged that they paid the ₱2,000 down payment and made installment payments: ₱200 on 31 March 1980; ₱400 on 2 May 1980 for April and May 1980; ₱200 on 20 June 1980 for June 1980; ₱500 on 8 October 1980 for July, August, and part of September 1980; ₱400 on 5 March 1981 for October and November 1980; and ₱300 on 18 December 1981 for December 1980 and part of January 1981. The spouses Ramos alleged that of the ₱15,300 consideration, the spouses Heruela paid only ₱4,000, with the last installment paid on 18 December 1981. The spouses Heruela further alleged that the 306 square meters specified in the contract was reduced to 282 square meters because, upon subdivision of the land, 24 square meters became part of the road; they claimed that in March 1982 they expressed willingness to pay the ₱11,300 balance, but the spouses Ramos refused their offer.

Possession of the land was disputed. According to the spouses Ramos, in March 1981 they allowed the niece of the spouses Heruela to occupy a portion of the land, and they discovered only in June 1982 that the spouses Heruela were already occupying the land. The spouses Heruela and the spouses Pallori alleged in their answer that their occupation was lawful because, having made partial payments of the purchase price, “they already considered themselves owners” of the land. Cherry and Raymond Pallori, the daughter and son-in-law of the spouses Heruela, erected another house on the land. In 1995, the spouses Heruela allowed the spouses Pallori to construct a house on the land. The spouses Heruela and the spouses Pallori refused to vacate despite demand by the spouses Ramos.

On 27 January 1998, the spouses Ramos filed a complaint for Recovery of Ownership with Damages against the spouses Heruela, docketed as Civil Case No. 98-060. They alleged that the spouses Heruela’s unjust refusal to pay the balance of the purchase price caused the cancellation of the Deed of Conditional Sale. The complaint did not specify when the spouses Ramos made a demand for payment. The trial court found that the spouses Heruela offered once to pay the balance of the purchase price but did not consign the payment during the pendency of the case, while they enjoyed the use of the land. The trial court also found that Santiago Heruela expressed willingness to pay for the 306 square meters agreed upon despite the reduction of the land area, so there was no dispute as to the amount of the purchase price.

• Nature of the Contract: Petitioners maintained that the trial court’s ruling that the contract was a sale on installment effectively declared it an absolute sale, to which RA 6552 is not applicable.
• Applicable Law: Petitioners argued that Articles 1191 and 1592 of the Civil Code, not RA 6552, govern the transaction.
• Right to Cancel: Petitioners asserted a right to cancel the sale because the spouses Heruela unjustly refused to pay the balance of the purchase price.
• Damages: Petitioners raised whether the spouses Heruela have a right to damages, challenging the award in their favor.

• Nature of the Contract: Respondents alleged that the agreement was a sale on installment basis.
• Payments: Respondents alleged that they paid ₱2,000 as down payment and made installment payments totaling ₱4,000, with the last payment on 18 December 1981.
• Willingness to Pay: Respondents claimed that in March 1982 they expressed willingness to pay the ₱11,300 balance but the spouses Ramos refused.
• Reduction of Area: Respondents alleged that the 306 square meters was reduced to 282 square meters because 24 square meters became part of the road.
• Lawful Occupation: Respondents alleged that their occupation was lawful because, having made partial payments, they already considered themselves owners.

• Applicability of RA 6552: Whether Republic Act No. 6552 is applicable to an absolute sale of land.
• Applicability of Civil Code Articles 1191 and 1592: Whether Articles 1191 and 1592 of the Civil Code are applicable to the present case.
• Right to Cancel the Sale: Whether the spouses Ramos have a right to cancel the sale.
• Right to Damages: Whether the spouses Heruela have a right to damages.

• Applicability of RA 6552: No as to an absolute sale; RA 6552 governs contracts to sell. The agreement here was a contract to sell, so RA 6552 applies.
• Applicability of Civil Code Articles 1191 and 1592: No. Those provisions apply to contracts of sale; contracts to sell are governed by RA 6552.
• Right to Cancel the Sale: No. No valid rescission occurred because no notice of cancellation or demand for rescission by notarial act was given, and an action for reconveyance is not an action for rescission; the action was premature.
• Right to Damages: No. The award of attorney’s fees and litigation expenses in favor of the spouses Heruela and the spouses Pallori was deleted under Article 2208, and no damages were awarded to them; the unpaid balance bears 6% interest in favor of the spouses Ramos.

• Applicability of RA 6552: Article 1458 of the Civil Code provides that a contract of sale may be absolute or conditional. A sale is absolute when title to the property passes to the vendee upon delivery of the thing sold, when there is no stipulation that title remains with the seller until full payment, and when there is no stipulation giving the vendor the right to cancel unilaterally the moment the vendee fails to pay. In a conditional sale, as in a contract to sell, ownership remains with the vendor and does not pass to the vendee until full payment of the purchase price; full payment is a suspensive condition, and non-fulfillment prevents the obligation to sell from arising. The agreement here was a one-page handwritten document, torn in part, with only “LMENT BASIS” legible on the title and with the names, addresses, and identity of the property not ascertainable. Under Manuel vs. Rodriguez and Alfonso vs. Court of Appeals, a contract partly in writing and partly oral is in legal effect an oral contract; the absence of a formal deed of conveyance indicates that the parties did not intend immediate transfer of title but only a transfer after full payment. The spouses Heruela did not immediately take actual, physical possession; the spouses Ramos allowed the niece of the spouses Heruela to occupy a portion in March 1981 and discovered the spouses Heruela’s occupation only in June 1982. The spouses Heruela claimed they considered themselves owners after partial payments, but no title was transferred and the spouses Ramos retained ownership. The parties therefore did not intend the transfer of ownership until full payment, making the agreement a contract to sell. RA 6552 applies to contracts to sell; Rillo vs. Court of Appeals recognized that the Maceda Law governs conditional sales of real estate and the seller’s right to cancel upon non-payment and the buyer’s rights upon default. The trial court did not err in applying RA 6552.
• Applicability of Civil Code Articles 1191 and 1592: Articles 1191 and 1592 of the Civil Code are applicable to contracts of sale. In contracts to sell, RA 6552 applies. Article 1592 is inapplicable to a contract to sell or promise to sell where title remains with the vendor until fulfillment of a positive suspensive condition, such as full payment of the price. Because the agreement was a contract to sell, the Civil Code provisions on rescission of contracts of sale did not govern the dispute.
• Right to Cancel the Sale: The spouses Heruela paid less than two years of installments, so Section 4 of RA 6552 applies. Under that provision, 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 at the expiration of 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 of the contract by a notarial act. No notice of cancellation or demand for rescission by notarial act was given to the spouses Heruela. Olympia Housing, Inc. vs. Panasiatic Travel Corp. allows the vendor to go to court to demand judicial rescission in lieu of a notarial act, but an action for reconveyance is not an action for rescission. Judicial resolution gives rise to mutual restitution, while reconveyance predicated on extrajudicial rescission does not necessarily produce the same effects; in rescission, the court may instead fix a period for compliance. There being no valid rescission, the action for reconveyance was premature, and the spouses Heruela had not lost the statutory grace period within which to pay. The trial court should have fixed the grace period to sixty days conformably with Section 4 of RA 6552. The spouses Heruela were not entirely fault-free; they were remiss, offered once to pay the balance but did not consign payment during the pendency of the case, and enjoyed the use of the land. For the breach, Article 2209 of the Civil Code allows interest at 6% per annum on the balance of the purchase price. The records do not show when the spouses Ramos demanded payment; the complaint only alleged unjust refusal to pay. For computing legal interest, the reckoning period is the filing on 27 January 1998 of the complaint for reconveyance, which the spouses Ramos erroneously considered an action for rescission. The reduction of the land area from 306 square meters to 282 square meters did not create a dispute on the purchase price because Santiago Heruela expressed willingness to pay for the 306 square meters agreed upon.
• Right to Damages: The trial court ordered the spouses Ramos to pay the spouses Heruela and the spouses Pallori ₱20,000 as attorney’s fees and ₱10,000 as litigation expenses. Article 2208 of the Civil Code provides that, subject to certain exceptions, attorney’s fees and expenses of litigation, other than judicial costs, cannot be recovered in the absence of stipulation. None of the enumerated exceptions applies, and the policy of the law is to put no premium on the right to litigate. The award of attorney’s fees and litigation expenses was therefore deleted. The spouses Heruela were not entirely fault-free; they were remiss in performing their obligation and did not consign payment while enjoying the use of the land. For the breach of obligation, Article 2209 allows interest at 6% per annum on the balance of the purchase price, reckoned from the filing of the complaint on 27 January 1998. Thus, no damages were awarded in favor of the spouses Heruela; instead, the unpaid balance bears legal interest in favor of the spouses Ramos.

• Contract to Sell vs. Contract of Sale — In a contract of sale, title to the property passes to the vendee upon delivery of the thing sold. In a contract to sell, ownership remains with the vendor and does not pass to the vendee until full payment of the purchase price; full payment is a suspensive condition, and non-fulfillment prevents the obligation to sell from arising. The Court applied this distinction to hold that the handwritten agreement was a contract to sell because no title was transferred, the spouses Ramos retained ownership, and the parties did not intend immediate transfer of ownership until full payment.
• Maceda Law (Republic Act No. 6552) Governs Contracts to Sell of Real Estate on Installment — RA 6552, the Realty Installment Buyer Protection Act, recognizes in conditional sales of real estate the seller’s right to cancel the contract upon non-payment of an installment and the buyer’s rights upon default. Section 3 grants rights to a buyer who has paid at least two years of installments. Section 4 governs cases where less than two years of installments were paid: the seller must give a grace period of not less than sixty days from the date the installment became due, and cancellation may occur only after thirty days from receipt by the buyer of the notice of cancellation or demand for rescission by a notarial act. The Court applied Section 4 because the spouses Heruela paid less than two years of installments.
• Judicial Rescission in Lieu of Notarial Act; Reconveyance Is Not Rescission — A vendor may go to court to demand judicial rescission in lieu of a notarial act of rescission. However, an action for reconveyance is conceptually different from an action for rescission. Judicial resolution gives rise to mutual restitution, while reconveyance predicated on extrajudicial rescission does not necessarily produce the same effects; in rescission, the court may instead fix a period for compliance. Because no valid rescission had taken place, the action for reconveyance was premature.
• Attorney’s Fees and Litigation Expenses Under Article 2208 — In the absence of stipulation, attorney’s fees and expenses of litigation, other than judicial costs, cannot be recovered except in the enumerated cases under Article 2208 of the Civil Code. None of the exceptions applied, and the policy of the law is to put no premium on the right to litigate. The award of attorney’s fees and litigation expenses in favor of the spouses Heruela and the spouses Pallori was deleted.
• Legal Interest Under Article 2209 — If the obligation consists in the payment of a sum of money and the debtor incurs delay, the indemnity for damages, absent stipulation, is the legal interest at six percent per annum. The Court applied this to the unpaid balance of ₱11,300, reckoned from the filing of the complaint on 27 January 1998.

• “In a conditional sale, as in a contract to sell, ownership remains with the vendor and does not pass to the vendee until full payment of the purchase price. The full payment of the purchase price partakes of a suspensive condition, and non-fulfillment of the condition prevents the obligation to sell from arising.” — This passage states the Court’s core distinction between a contract of sale and a contract to sell, which controlled the classification of the handwritten agreement.
• “Articles 1191 and 1592 of the Civil Code are applicable to contracts of sale. In contracts to sell, RA 6552 applies.” — This is the Court’s concise holding on the applicable law, rejecting the petitioners’ reliance on the Civil Code rescission provisions.
• “In the present case, there being no valid rescission of the contract to sell, the action for reconveyance is premature. Hence, the spouses Heruela have not lost the statutory grace period within which to pay. The trial court should have fixed the grace period to sixty days conformably with Section 4 of RA 6552.” — This passage supplies the ratio decidendi on why the complaint for recovery of ownership could not prosper and why a 60-day grace period was required.
• “Article 2208 of the Civil Code provides that subject to certain exceptions, attorney’s fees and expenses of litigation, other than judicial costs, cannot be recovered in the absence of stipulation. None of the enumerated exceptions applies to this case. Further, the policy of the law is to put no premium on the right to litigate.” — This passage explains the deletion of the trial court’s award of attorney’s fees and litigation expenses.

• Manuel vs. Rodriguez, 109 Phil. 1 (1960) — The Court relied on this case to hold that a contract partly in writing and partly oral is in legal effect an oral contract, and that the absence of a formal deed of conveyance indicates the parties did not intend immediate transfer of title but only a transfer after full payment.
• Alfonso vs. Court of Appeals, G.R. No. 63745, 8 June 1990, 186 SCRA 400 — The Court reiterated Manuel and held Article 1592 of the Civil Code inapplicable to a contract to sell or promise to sell where title remains with the vendor until fulfillment of the suspensive condition of full payment.
• Rillo vs. Court of Appeals, G.R. No. 125347, 19 June 1997, 274 SCRA 461 — The Court cited this case for the rule that Republic Act No. 6552, the Maceda Law, recognizes in conditional sales the seller’s right to cancel upon non-payment and the buyer’s rights upon default.
• Olympia Housing, Inc. vs. Panasiatic Travel Corp., 443 Phil. 385 (2003) — The Court cited this case for the rule that a vendor may seek judicial rescission in lieu of a notarial act, but an action for reconveyance is not an action for rescission.
• Consing vs. Court of Appeals, G.R. No. 143584, 10 March 2004, 425 SCRA 192; Eastern Shipping Lines, Inc. vs. Court of Appeals, G.R. No. 97412, 12 July 1994, 234 SCRA 78 — The Court cited these cases in awarding legal interest at 6% per annum under Article 2209.
• Liu vs. Loy, Jr., 453 Phil. 232 (2003) — The Court cited this case for the policy that the law puts no premium on the right to litigate, supporting deletion of attorney’s fees.
• Universal Robina Sugar Milling Corp. vs. Heirs of Teves, 438 Phil. 26 (2002); Adelfa Properties, Inc. vs. CA, 310 Phil. 623 (1995); Chua vs. Court of Appeals, 449 Phil. 25 (2003) — The Court cited these cases for the rules distinguishing absolute sale from conditional sale and treating full payment as a suspensive condition in a contract to sell.

• Article 1458, Civil Code — Provides that a contract of sale may be absolute or conditional; used to classify the agreement as a contract to sell.
• Article 1191, Civil Code — Provides for the implied power to rescind reciprocal obligations; held applicable to contracts of sale, not to the contract to sell here, which is governed by RA 6552.
• Article 1592, Civil Code — Governs the sale of immovable property and the vendee’s right to pay after expiration until demand for rescission; held inapplicable to a contract to sell where title remains with the vendor until full payment.
• Article 2208, Civil Code — Provides that attorney’s fees and litigation expenses cannot be recovered absent stipulation except in enumerated cases; none applied, so the award was deleted.
• Article 2209, Civil Code — Provides for legal interest at 6% per annum in the absence of stipulation when the debtor incurs delay; applied to the unpaid balance from 27 January 1998.
• Sections 3 and 4, Republic Act No. 6552 (Realty Installment Buyer Protection Act / Maceda Law) — Section 3 grants rights to a buyer who has paid at least two years of installments; Section 4 governs cases where less than two years were paid, requiring a grace period of not less than 60 days and cancellation only after 30 days from receipt of notice of cancellation or demand for rescission by notarial act. The Court applied Section 4 because the spouses Heruela paid less than two years of installments.
• Rule 45, 1997 Rules of Civil Procedure — The petition for review was filed under this Rule.

Hilario G. Davide, Jr., Chief Justice and Chairman; Leonardo A. Quisumbing; Consuelo Ynares-Santiago; Adolfo S. Azcuna.