State Investment Trust, Inc. vs. Baculo

For a valid unilateral cancellation of a contract to sell where the buyer has paid less than two years of installments, the seller must strictly comply with Section 4 of the Maceda Law: (1) grant a 60-day grace period from the due date; (2) send a notice of cancellation or demand for rescission via notarial act if the buyer fails to pay after the grace period; and (3) the cancellation takes effect only 30 days after the buyer's receipt of said notarial notice.

SITI, a corporation, owned two parcels of land and entered into separate Contracts to Sell with the Spouses Baculo in 1997. The spouses took possession but defaulted on payments after the downpayment and a few amortizations. A prior reconveyance case filed by a third party against SITI and the spouses led to suspended payments. After that case was dismissed, SITI demanded payment, but the spouses refused, citing lingering concerns over the titles. SITI then attempted to rescind the contracts and filed an ejectment suit.

• Filed in MeTC (Ejectment) – Ruled in favor of SITI.
• Appealed to RTC (Branch 221, then Branch 96) – RTC Branch 96 ruled the contracts were rescinded and ordered the spouses to vacate.
• Elevated to CA – CA reversed the RTC, dismissed the complaint, holding the rescission invalid under the Maceda Law.
• Elevated to SC via Petition for Review on Certiorari.

• SITI (seller) and Spouses Baculo (buyers) entered into two Contracts to Sell for two lots on March 25, 1997.
• Buyers paid the downpayment and only eight monthly amortizations each before defaulting.
• Payments were restructured and later suspended due to a third-party reconveyance case against the properties.
• After the reconveyance case was dismissed in 2004, SITI demanded resumption of payments.
• Buyers refused, demanding further suspension until all "clouds" on the titles were removed.
• SITI sent a letter on November 16, 2005, withdrawing concessions and demanding full payment within 5 days, stating failure would result in contract cancellation.
• SITI later sent another letter on January 4, 2006, reiterating the cancellation and demanding vacation.
• SITI filed an ejectment complaint when buyers did not vacate.

• Buyers acted in bad faith by repeatedly adding new conditions to avoid payment.
• SITI's demand letters substantially complied with the notice requirement for rescission.
• The MeTC decision ordering vacation effectively served as the notice of cancellation under the Maceda Law.
• Assuming no valid rescission, the CA should have ordered buyers to pay the balance within 60 days or vacate.
• (Raised for the first time in its Reply) SITI is not covered by the Maceda Law as it is an investment house, not a real estate developer, and the properties are used commercially.

• SITI's unilateral rescission under the contract is void for non-compliance with the Maceda Law.
• They were justified in suspending payments due to the reconveyance case that questioned SITI's title.

• Procedural Issues: N/A
• Substantive Issues:
  1. Whether the CA erred in holding that the Contracts to Sell were not validly cancelled or rescinded.
  2. What are the proper rights and obligations of the parties given the invalid rescission?

• Procedural: N/A
• Substantive:
  1. The CA did not err. The SC upheld the finding that SITI's attempted rescission was invalid for failure to comply with Section 4 of the Maceda Law.
  2. The SC modified the CA's outright dismissal. Since the contracts remain valid but the dispute has lasted 17 years, the SC ordered the buyers to pay the outstanding balance within 60 days from the finality of the decision. If they pay, SITI must execute a Deed of Absolute Sale. If they fail to pay, they must vacate, and all payments are forfeited as rentals.

• Maceda Law (R.A. 6552), Section 4 — Provides the mandatory procedure for cancelling a contract to sell when the buyer has paid less than two years of installments. The SC applied it strictly, enumerating the three requisites:
  1. The seller must give a 60-day grace period from the due date.
  2. If the buyer fails to pay, the seller must send a notice of cancellation/demand for rescission by a notarial act.
  3. The cancellation is effective only 30 days after the buyer's receipt of the notarial notice.
  4. Unconscionable Interest Rate — Following Lara's Gifts and Decors, Inc. v. Midtown Industrial Sales, the SC reduced the stipulated 3% per month penalty interest to 12% per annum (the legal rate at the time of contracting), deeming the original rate unconscionable.

• "The cancellation must still be in accordance with Section 4 of Republic Act No. 6552, which requires a notarial act of cancellation."
• "Basic rules of fair play, justice, and due process dictate that an issue not raised before the lower court will not ordinarily be considered by a reviewing court, inasmuch as they cannot be raised for the first time on appeal." (On SITI's new argument about not being covered by the Maceda Law).

• Orbe v. Filinvest Land, Inc. — Cited to define the proper "notarial act" required under the Maceda Law as an acknowledgment before a notary public, which converts a private document into a public one.
• Olympia Housing v. Panasiatic Travel Corp. and Pagtalunan v. Vda. De Manzano — Cited as precedents where, despite an invalid rescission under the Maceda Law, the Court ordered the buyer to pay the balance within a final period or vacate, with payments converted to rentals.
• Lara's Gifts and Decors, Inc. v. Midtown Industrial Sales — Cited for the recalibrated rules on interest, specifically that stipulated penalty interest rates must not be unconscionable.

• Republic Act No. 6552 (Maceda Law), Section 4 — The core provision governing cancellation when less than two years of installments are paid.
• Civil Code, Article 1592 — (Mentioned in the lower court's reasoning) Requires judicial or notarial demand for rescission in sales of immovable property; however, the SC's ruling was ultimately based on the special law (Maceda Law).
• Civil Code, Article 2212 — Provides that interest due shall earn legal interest from the time it is judicially demanded.