In Sacobia Hills Development Corporation v. Allan U. Ty, the Supreme Court clarified the distinction between a contract to sell and a contract of sale, particularly concerning the right to rescind. The Court ruled that when a contract is deemed a contract to sell, the buyer’s failure to fully pay the purchase price is not a breach but prevents the seller’s obligation to transfer ownership from arising. Therefore, the buyer cannot demand rescission under Article 1191 of the Civil Code. This distinction is critical for understanding the rights and obligations of parties in real estate and similar transactions, where payment of the full price is a condition precedent to the transfer of ownership.

Golf Shares and Broken Promises: Can a Buyer Rescind?

The case began when Allan U. Ty sought to purchase a Class A share of True North Golf and Country Club from Sacobia Hills Development Corporation. Ty paid a reservation fee and received assurances from Sacobia regarding the project’s progress. However, Ty later sought to rescind the contract, claiming Sacobia failed to complete the project on time. Sacobia argued that the contract did not specify a completion date and that delays were due to factors beyond their control, such as obtaining the Environmental Clearance Certificate (ECC) from the DENR. The central legal question was whether Ty had the right to rescind the contract and demand a refund, given the circumstances.

The Regional Trial Court (RTC) initially ruled in favor of Sacobia, stating the contract did not guarantee completion within a specific timeframe. The Court of Appeals (CA), however, reversed this decision, finding Sacobia in delay and entitling Ty to rescind. The Supreme Court disagreed with the CA, focusing on the nature of the agreement as a **contract to sell** rather than a **contract of sale**. In a contract of sale, ownership transfers upon delivery of the object of the sale. Conversely, in a contract to sell, ownership is retained by the seller until the buyer fully pays the purchase price. This distinction is crucial because it affects the remedies available to the parties.

The Supreme Court emphasized that the notice of approval outlining the terms and conditions of the agreement indicated Sacobia’s intention to retain ownership until full payment. The Court highlighted several key provisions supporting this interpretation:

1. Approval of an application to purchase golf/country club shares is subjected to the full payment of the total purchase price. Should the buyer opt for the deferred payment scheme, approval is subject to our receipt of a down payment of at least 30% and the balance payable in installments over a maximum of eleven (11) months from the date of application, and covered by postdated cheques.
2. Your reserved share shall be considered withdrawn and may be deemed cancelled should you fail to settle your obligation within fifteen (15) days from due date, or failure to cover the value of the postdated cheques upon their maturity, or your failure to issue the required postdated cheques. In which case, we shall reserve the right to offer the said shares to other interested parties. This also means forfeiture of 50% of the total amount you have already paid.
3. We shall undertake to execute the corresponding sales documents/Deed of Absolute Sale covering the reserved shares upon full payment of the total purchase price. The Certificate of Membership shall be issued thereafter.

These conditions clearly demonstrated that full payment was a prerequisite for the transfer of ownership. Sacobia reserved the right to cancel the agreement if Ty failed to meet his payment obligations and could offer the shares to other interested parties. The execution of the deed of absolute sale was contingent upon full payment, further solidifying the agreement’s nature as a contract to sell. The absence of a formal deed of conveyance at the outset underscored Sacobia’s intent to retain title until full compliance with the payment terms.

Since the agreement was a contract to sell, Ty’s full payment of the purchase price was a **suspensive condition**. The non-fulfillment of this condition prevented the obligation to sell from arising, with ownership remaining with Sacobia. The Supreme Court cited Cheng v. Genato, to explain the implications of a contract to sell:

In a Contract to Sell, the payment of the purchase price is a positive suspensive condition, the failure of which is not a breach, casual or serious, but a situation that prevents the obligation of the vendor to convey title from acquiring an obligatory force. It is one where the happening of the event gives rise to an obligation.  Thus, for its non-fulfillment there will be no contract to speak of, the obligor having failed to perform the suspensive condition which enforces a juridical relation. In fact with this circumstance, there can be no rescission of an obligation that is still non-existent, the suspensive condition not having occurred as yet. Emphasis should be made that the breach contemplated in Article 1191 of the New Civil Code is the obligor’s failure to comply with an obligation already extant, not a failure of a condition to render binding that obligation.

The Court explained that in a contract to sell, the seller does not consent to transfer ownership until the full purchase price is paid. The seller’s obligation is to fulfill the promise to sell when the entire amount is received. Upon fulfilling the suspensive condition, ownership does not automatically transfer; the seller must still convey title through a contract of absolute sale. The failure to pay the full purchase price, therefore, is not a breach but a failure to trigger the seller’s obligation to transfer ownership.

The Supreme Court noted that Ty’s checks were marked as stale, and he issued a stop payment order. This effectively prevented the perfection of the contract, as perfection only occurs when the suspensive condition is fulfilled. Since Ty did not fulfill his obligation to pay the full purchase price, Sacobia was not in breach. No obligations arose on Sacobia’s part because Ty’s non-compliance rendered the contract ineffective. Therefore, **rescission under Article 1191 of the Civil Code** was not applicable.

Article 1191 of the Civil Code states:

Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him.

The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible.

The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This is understood to be without prejudice to the rights of third persons who have acquired the thing, in accordance with Articles 1385 and 1388 and the Mortgage Law.

The Court clarified that Article 1191 applies to existing obligations, not to situations where a suspensive condition has not been met. The payment of the reservation fee and issuance of postdated checks were conditional upon Sacobia reserving title until full payment, which is characteristic of a contract to sell. Perfecting this type of contract creates two obligations: the buyer’s obligation to fulfill the suspensive condition (full payment) and the seller’s obligation to convey ownership upon compliance. Ty’s failure to fulfill the suspensive condition prevented the contract’s perfection, leaving him as a prospective investor rather than a shareholder.

Even if the delay in completing the golf course was attributable to Sacobia, Ty’s claim was deemed premature. Sacobia had informed investors, including Ty, that the project was expected to be completed by mid-1999. Ty sought rescission as early as January 1998, well before the anticipated completion date. Furthermore, Ty was aware of potential delays due to the late issuance of necessary documents.

Ultimately, the Supreme Court granted Sacobia’s petition, reversing the Court of Appeals’ decision. Ty’s complaint for rescission and damages was dismissed. He was ordered to pay the remaining balance within 30 days; otherwise, he would forfeit 50% of his payments, per the terms of the notice of approval. The Court acknowledged that Sacobia had not been intent on cancelling Ty’s reservation and had attempted to resolve the issue. Therefore, the trial court’s order for Ty to pay the balance or forfeit a portion of his payments was upheld.

FAQs

What is the main difference between a contract to sell and a contract of sale?	In a contract of sale, ownership transfers upon delivery, while in a contract to sell, ownership remains with the seller until full payment. This distinction affects the remedies available to the parties in case of non-compliance.
What was the suspensive condition in this case?	The suspensive condition was Allan Ty’s full payment of the purchase price for the golf share. Until he fulfilled this condition, Sacobia was not obligated to transfer ownership.
Why was rescission not applicable in this case?	Rescission under Article 1191 of the Civil Code applies to existing obligations. Since Ty failed to fulfill the suspensive condition, Sacobia’s obligation to transfer ownership never arose, making rescission inapplicable.
What was the effect of Ty’s stop-payment order on his checks?	Ty’s stop-payment order effectively prevented the perfection of the contract. With the checks not being honored, Ty failed to meet his payment obligations, a condition precedent for the transfer of ownership.
What did the Supreme Court ultimately rule?	The Supreme Court ruled in favor of Sacobia, reversing the Court of Appeals’ decision. Ty’s complaint for rescission and damages was dismissed, and he was ordered to pay the remaining balance or forfeit a portion of his payments.
What is the significance of the Environmental Clearance Certificate (ECC) in this case?	The ECC was a factor contributing to the delay in the project’s completion. Sacobia argued that the delay in obtaining the ECC was beyond their control, affecting their ability to meet the initial project timelines.
What happens if a buyer in a contract to sell fails to make full payment?	If the buyer fails to make full payment in a contract to sell, the seller is not obligated to transfer ownership. The buyer may lose any payments already made, depending on the terms of the contract.
What was the reason for Ty’s initial attempt to rescind the contract?	Ty initially attempted to rescind the contract due to the perceived delay in completing the golf course and clubhouse. He believed that Sacobia had not met its obligations regarding the project’s timeline.
What should buyers in contracts to sell be aware of?	Buyers should be fully aware of the terms and conditions of the contract, especially the payment schedule and the consequences of non-payment. They should also understand that ownership will not transfer until all conditions are met.

The Sacobia Hills case serves as a crucial reminder of the importance of understanding the specific terms and conditions of contracts, particularly those involving the sale of property. Distinguishing between contracts to sell and contracts of sale is essential for determining the rights and obligations of both buyers and sellers. The implications of this ruling should be carefully considered in any transaction where the transfer of ownership is contingent upon the full payment of the purchase price.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Sacobia Hills Development Corporation v. Allan U. Ty, G.R. No. 165889, September 20, 2005