Tan vs. Benolirao

An annotation made pursuant to Section 4, Rule 74 of the Rules of Court on a certificate of title covering real property is considered a legal encumbrance on the property, which justifies the buyer's refusal to pay the balance of the purchase price in a contract to sell and precludes the forfeiture of the down payment.

Spouses Lamberto and Erlinda Benolirao and Spouses Reynaldo and Norma Taningco were co-owners of a parcel of land in Tagaytay City covered by TCT No. 26423. On October 6, 1992, they executed a Deed of Conditional Sale over the property in favor of Delfin Tan. Lamberto Benolirao died intestate shortly after, leading to an extrajudicial settlement of his estate and the issuance of a new title with an annotation pursuant to Section 4, Rule 74 of the Rules of Court.

Spouses Lamberto and Erlinda Benolirao and the Spouses Reynaldo and Norma Taningco were co-owners of a 689-square meter parcel of land in Tagaytay City covered by TCT No. 26423. On October 6, 1992, the co-owners executed a Deed of Conditional Sale over the property in favor of Delfin Tan for ₱1,378,000.00. The deed required an initial down-payment of ₱200,000.00 upon signing, with the remaining balance of ₱1,178,000.00 payable within 150 days. It provided a 60-day grace period with 15% per annum interest if the buyer failed to pay the balance on time, and stipulated that should the buyer fail to comply within the grace period, the sellers had the right to forfeit the down payment and rescind the conditional sale without judicial action. It further stated that if the buyer complied with the terms, the sellers would execute and deliver the appropriate Deed of Absolute Sale. Pursuant to the deed, Tan issued a Metrobank check for ₱200,000.00 as down payment.

On November 6, 1992, Lamberto Benolirao died intestate. His widow Erlinda and her children executed an extrajudicial settlement of his estate on January 20, 1993. A new certificate of title, TCT No. 27335, was issued on March 26, 1993, in the names of the Taningco spouses and Erlinda Benolirao and her children. Pursuant to Section 4, Rule 74 of the Rules of Court, an annotation was made on TCT No. 27335 regarding liability to creditors, excluded heirs, and other persons having a right to the property for a period of two years with respect to the shares of the Benolirao heirs.

Tan had until March 15, 1993 to pay the balance, but by agreement this was extended by two months to May 15, 1993. When Tan failed to pay, he asked for another extension, which was granted. He still failed to pay the balance due on May 21, 1993. The vendors demanded payment within five days, failing which they would rescind the sale and forfeit the down payment. Tan refused, claiming in a letter dated May 28, 1993, that the Section 4, Rule 74 annotation constituted an encumbrance preventing the vendors from delivering a clean title, thereby excusing him from paying the balance and entitling him to a refund of his down payment.

When the vendors refused to refund the down payment, Tan filed a complaint for specific performance in the RTC of Pasay City, alleging a novation of the deed without his consent due to the encumbrance. He later amended his complaint to seek reformation of the contract if the vendors insisted on forfeiting the down payment. He also caused the annotation of a notice of lis pendens on the title. On August 21, 1993, the vendors executed a Deed of Absolute Sale over the property in favor of Hector de Guzman. The RTC subsequently ordered the cancellation of the lis pendens, finding Tan's action to be personal and not involving title or possession of real property. The RTC eventually ruled that the forfeiture of the down payment was proper, a decision affirmed by the CA.

• Lis Pendens and Reformation: Petitioner argued that the CA erred in canceling the lis pendens annotation and disregarding his alternative remedy of reformation of contract due to the unauthorized novation of the agreement.
• Forfeiture of Down Payment: Petitioner contended that the forfeiture clause should not apply because his failure to pay the balance was not due to his own fault or negligence, but was justified by the vendors' inability to deliver a clean title due to the Section 4, Rule 74 annotation.
• Attorney's Fees: Petitioner maintained that the award of attorney's fees against him was erroneous since he filed the action in good faith.

• Jurisdiction: Respondents asserted that the petition should be dismissed for raising pure questions of fact, which are prohibited under Rule 45 of the Rules of Court.

• Nature of the Action: Whether the annotation of a notice of lis pendens was proper in an action for rescission or reformation of a contract.
• Nature of the Contract: Whether the Deed of Conditional Sale was a contract of sale or a contract to sell.
• Effect of Section 4, Rule 74 Annotation: Whether an annotation made pursuant to Section 4, Rule 74 of the Rules of Court constitutes an encumbrance on the property justifying the buyer's refusal to pay the balance.
• Remedy and Forfeiture: Whether the forfeiture of the down payment was proper given the supervening encumbrance on the title.
• Attorney's Fees and Interest: Whether the award of attorney's fees and legal interest was proper.

• Nature of the Action: No. The notice of lis pendens is not proper in personal actions; Tan's complaint was an in personam action seeking to enforce personal rights, not an action affecting title or right of possession of real property.
• Nature of the Contract: The Deed of Conditional Sale was a mere contract to sell, as the vendors reserved ownership until full payment of the purchase price, evidenced by the provision requiring the execution of a Deed of Absolute Sale only upon full compliance by the buyer.
• Effect of Section 4, Rule 74 Annotation: Yes. An annotation made pursuant to Section 4, Rule 74 of the Rules of Court is a legal encumbrance on the property that prevents the vendors from delivering a clean title, justifying the buyer's refusal to pay the balance.
• Remedy and Forfeiture: No. The contract to sell was terminated, not rescinded, due to the supervening encumbrance; the forfeiture of the down payment was unwarranted because the buyer's refusal to pay was justified and not due to his own fault.
• Attorney's Fees and Interest: Yes, in favor of the petitioner. The respondents must return the down payment with 6% legal interest from the date of first demand, and pay ₱50,000.00 as attorney's fees, with 12% interest on all monetary awards from the finality of the judgment until satisfaction.

• Nature of the Action: Under Section 14, Rule 13 of the Rules, a notice of lis pendens may be recorded only in an action affecting the title or the right of possession of real property. Tan's complaint sought rescission or reformation of the contract, which are in personam actions to enforce personal rights and obligations against the respondents, not claims of ownership or title to the property. Since the contract was a contract to sell, Tan had no claim of ownership yet, precluding the annotation of lis pendens.
• Nature of the Contract: The true nature of a contract is determined by its essential elements, not its title. Paragraph D of the Deed of Conditional Sale stated that the sellers shall execute and deliver the Deed of Absolute Sale only if the buyer complies with the terms. This reservation of title until full payment is the defining characteristic of a contract to sell, distinguishing it from a conditional contract of sale where consent is present but conditioned upon a contingent event.
• Effect of Section 4, Rule 74 Annotation: Section 4, Rule 74 allows the court to settle debts or lawful participation and issue execution against the real estate belonging to the deceased within two years after the settlement. The annotation serves to warn third persons of the possible interests of excluded heirs or unpaid creditors, creating a legal encumbrance or lien. Since the new title with this annotation was issued before Tan's obligation to pay the balance arose, the vendors could not compel Tan to pay because they could not fulfill their obligation to transfer a clean title.
• Remedy and Forfeiture: The remedy of rescission under Article 1191 does not apply to contracts to sell. In a contract to sell, full payment is a positive suspensive condition; failure to pay prevents the vendor's obligation to convey title from acquiring obligatory force. Since the vendors could not legally compel Tan to pay due to the supervening encumbrance, the contract was terminated, not rescinded. Tan's refusal to pay was justified by the encumbrance and not due to his fault, making the forfeiture of his down payment unwarranted.
• Attorney's Fees and Interest: Because Tan had a valid reason for refusing to pay, the award of attorney's fees against him was baseless. Conversely, he was compelled to litigate due to the respondents' refusal to return his down payment despite their inability to convey a clean title, justifying the award of ₱50,000.00 as attorney's fees. Pursuant to Eastern Shipping Lines, Inc. vs. Court of Appeals, the ₱200,000.00 down payment should bear 6% interest from the date of the first demand on May 28, 1993, and 12% interest from the finality of the judgment until satisfaction.

• Nature of Contracts to Sell — A contract to sell is a bilateral contract whereby the prospective seller expressly reserves ownership of the property despite delivery, binding himself to sell exclusively to the prospective buyer upon full payment of the purchase price. The Court applied this to classify the Deed of Conditional Sale as a contract to sell because the vendors promised to execute a Deed of Absolute Sale only upon the buyer's full payment.
• Rescission vs. Termination in Contracts to Sell — The remedy of rescission under Article 1191 cannot apply to mere contracts to sell. In a contract to sell, payment of the purchase price is a positive suspensive condition; failure to pay prevents the vendor's obligation to convey title from acquiring obligatory force. The Court held that the contract was terminated, not rescinded, when the vendors could no longer compel the buyer to pay due to a supervening legal encumbrance.
• Legal Encumbrance under Section 4, Rule 74 — An annotation made pursuant to Section 4, Rule 74 of the Rules of Court on a certificate of title creates a legal encumbrance or lien on the real property in favor of excluded heirs or creditors. The Court applied this to justify the buyer's refusal to pay the balance, as the vendors could not deliver a clean title.

• "An annotation is placed on new certificates of title issued pursuant to the distribution and partition of a decedent’s real properties to warn third persons on the possible interests of excluded heirs or unpaid creditors in these properties. The annotation, therefore, creates a legal encumbrance or lien on the real property in favor of the excluded heirs or creditors." — This passage defines the nature and effect of a Section 4, Rule 74 annotation, establishing it as a legal encumbrance that affects the vendor's ability to transfer clean title.
• "[I]n a contract to sell, title remains with the vendor and does not pass on to the vendee until the purchase price is paid in full. Thus, in a contract to sell, the payment of the purchase price is a positive suspensive condition. Failure to pay the price agreed upon is not a mere breach, casual or serious, but a situation that prevents the obligation of the vendor to convey title from acquiring an obligatory force." — This quotation, drawn from Santos vs. Court of Appeals, articulates the fundamental distinction between a contract of sale and a contract to sell, explaining why rescission under Article 1191 does not apply to the latter.

• Domagas vs. Jensen, G.R. No. 158407 — Cited to explain the nature of in personam actions and how the aim and object of an action determine its character, supporting the cancellation of the lis pendens.
• Santos vs. Court of Appeals, G.R. No. 120820 — Cited to establish that rescission under Article 1191 does not apply to contracts to sell, and that failure to pay the price is a positive suspensive condition preventing the vendor's obligation from acquiring obligatory force.
• Eastern Shipping Lines, Inc. vs. Court of Appeals, G.R. No. 97412 — Cited as the controlling precedent for the imposition of legal interest, directing 6% per annum from the date of demand and 12% per annum from the finality of judgment until satisfaction.

• Section 4, Rule 74, Rules of Court — Governs the liability of distributees and estate in extrajudicial settlements, allowing claims by excluded heirs or creditors within two years. The Court held that an annotation made under this provision constitutes a legal encumbrance on the property.
• Section 14, Rule 13, Rules of Court — Enumerates the instances when a notice of lis pendens can be annotated, limiting it to actions affecting title or right of possession of real property. The Court used this to justify the cancellation of the lis pendens in Tan's personal action.
• Article 1458, Civil Code — Defines a contract of sale as the obligation to transfer ownership and deliver a determinate thing in exchange for a price certain. The Court contrasted this with a contract to sell to determine the true nature of the Deed of Conditional Sale.
• Article 1191, Civil Code — Provides the remedy of rescission for breached obligations. The Court held this provision inapplicable to contracts to sell.

Leonardo A. Quisumbing, Conchita Carpio Morales, Antonio Eduardo B. Nachura, Roberto A. Abad.