State Investment Trust, Inc. vs. Baculo

A seller's unilateral cancellation of a contract to sell real property on installment, where less than two years of installments have been paid, is invalid unless it strictly complies with the procedural safeguards of Section 4 of the Maceda Law, which requires a 60-day grace period and a notice of cancellation or demand for rescission by notarial act.

State Investment Trust, Inc. (SITI) owned two parcels of land in Quezon City. On March 25, 1997, SITI entered into two Contracts to Sell with the Spouses Carlos and Victoria Baculo for these properties. The spouses paid the downpayment and eight monthly amortizations but subsequently defaulted. Their payment history was complicated by a third-party reconveyance case that annotated lis pendens on the titles, leading to a series of payment suspension agreements and demands between the parties. After the reconveyance case was dismissed and SITI demanded resumption of payments, the spouses refused, citing concerns over the titles. SITI then purported to rescind the contracts and filed an ejectment complaint.

• Nature of the Action: The case originated from a complaint for ejectment filed by SITI, which was treated by the courts as an action involving the rescission of Contracts to Sell.
• The Contracts and Default: SITI and the Spouses Baculo executed two Contracts to Sell on March 25, 1997. The spouses paid the downpayment and eight monthly amortizations but subsequently defaulted. SITI granted several concessions, including a restructured payment schedule and a suspension of payments pending the resolution of a third-party reconveyance case.
• Post-Reconveyance Case Demands: After the reconveyance case was dismissed with finality in 2004, SITI demanded the spouses resume payments. The spouses refused, requesting further suspension until the lis pendens annotations were cancelled and expressing doubts about the validity of the dismissal.
• Alleged Rescission and Ejectment Suit: On November 16, 2005, SITI sent a letter withdrawing all concessions and demanding full payment of the balance within five days, stating the letter would serve as a notice of cancellation. After another demand letter on January 4, 2006, and the spouses' continued refusal to pay or vacate, SITI filed the ejectment case.
• Respondents' Defense: The Spouses Baculo argued they were justified in suspending payments due to the cloud on the titles and that SITI's unilateral rescission was invalid for not being executed via a notarial act as required by the Maceda Law.

• Substantial Compliance & Bad Faith: SITI argued that its demand letters substantially complied with the Maceda Law's notice requirement. It contended the spouses acted in bad faith by repeatedly adding new conditions to avoid payment.
• Effect of MeTC Decision: SITI maintained that the MeTC decision ordering ejectment effectively operated as the required notice of cancellation under the Maceda Law.
• Inapplicability of Maceda Law: In its Reply, SITI belatedly argued that the Maceda Law did not apply because it is an investment house, not a real estate developer, and the properties were used commercially.

• Invalid Unilateral Rescission: Respondents countered that SITI's unilateral rescission under the contract was void because it did not comply with the mandatory notarial rescission procedure under Section 4 of the Maceda Law.
• Justification for Non-Payment: Respondents argued they were justified in suspending amortization payments because the reconveyance case constituted a valid threat to SITI's title, which was the basis of their contract.

• Validity of Rescission: Whether the Court of Appeals erred in holding that the Contracts to Sell were not validly cancelled or rescinded by SITI.
• Applicability of Maceda Law: Whether the Maceda Law applies to the subject Contracts to Sell.

• Validity of Rescission: The rescission was invalid. SITI failed to comply with the mandatory requisites under Section 4 of the Maceda Law. It did not grant the required 60-day grace period from the installment due date, and its demand letters were not notarial acts of cancellation. The contractual stipulation allowing unilateral rescission cannot override these statutory safeguards.
• Applicability of Maceda Law: The Maceda Law applies. The Court declined to rule on SITI's belated claim of non-coverage, as it was raised for the first time in a reply before the Supreme Court, violating procedural fairness and the prohibition against changing the theory of the case on appeal.

• Maceda Law (R.A. 6552) Rescission Procedure — For contracts where less than two years of installments have been paid, the seller must: (1) give a 60-day grace period from the due date; (2) send a notice of cancellation or demand for rescission by notarial act if the buyer fails to pay after the grace period; and (3) actually cancel the contract only after 30 days from the buyer's receipt of said notarial notice. Non-compliance renders the cancellation void.
• Unconscionable Interest Rate — A stipulated penalty interest of 3% per month was held unconscionable and reduced to the prevailing legal interest rate of 12% per annum at the time the contracts were entered into, pursuant to the guidelines in Lara's Gifts and Decors, Inc. v. Midtown Industrial Sales.

• "Although the Court agrees that the cancellation of the contract may be done out of the court, or without the necessity of judicial declaration, as provided in paragraph 5, 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."

• Orbe v. Filinvest Land, Inc., 817 Phil. 934 (2017) — Controlling precedent that defined the "notarial act" required under the Maceda Law as an acknowledgment before a notary public pursuant to the Rules on Evidence.
• Olympia Housing v. Panasiatic Travel Corp., 443 Phil. 385 (2003) & Pagtalunan v. Vda. De Manzano, 559 Phil. 658 (2007) — Applied by analogy to fashion the final remedy, giving the buyer a judicially-set period to pay the balance after a finding of invalid rescission.
• Lara's Gifts and Decors, Inc. v. Midtown Industrial Sales, G.R. No. 225433, September 20, 2022 — The en banc decision that recalibrated the rules on interest, providing the framework for determining the conscionability of stipulated interest rates.

• Section 4, Republic Act No. 6552 (Maceda Law) — The governing provision applied in this case, mandating the 60-day grace period and notarial act requirement for cancellation when less than two years of installments are paid.
• Article 2212, Civil Code of the Philippines — Cited to support the imposition of legal interest on accrued interest from the time of judicial demand.

• Justice Alfredo Benjamin S. Caguioa (Chairperson)
• Justice Henri Jean Paul B. Inting
• Justice Rodil V. Zalameda
• Justice Japar B. Dimaampao