In the Philippines, the Constitution strictly limits land ownership to Filipino citizens and corporations with significant Filipino equity. The Supreme Court’s decision in Jacobus Bernhard Hulst v. PR Builders, Inc. clarifies that contracts intending to transfer land to foreigners are void from the beginning. However, the Court also recognized exceptions to the in pari delicto rule, allowing recovery of payments made under a void contract when the illegal purpose hasn’t been fully accomplished, ensuring fairness and preventing unjust enrichment.

Dutch Dreams and Constitutional Barriers: Can Foreigners Own Land Through a Contract to Sell?

The case began with Jacobus Bernhard Hulst, a Dutch national, and his former spouse, who entered into a Contract to Sell with PR Builders, Inc. for a townhouse in Batangas. Disputes arose when the developer failed to complete the project as promised, leading the Hulsts to file a complaint for rescission. However, the Supreme Court, in reviewing the case, raised a fundamental issue: whether foreign nationals could validly enter into contracts to purchase real property in the Philippines, given constitutional restrictions. This query became central to the entire legal battle.

Section 7 of Article XII of the 1987 Constitution explicitly restricts land ownership to Filipino citizens or corporations with at least 60% Filipino ownership. This provision reflects a long-standing policy aimed at preserving the nation’s natural resources and ensuring that Filipinos primarily benefit from the ownership and development of land. The Constitution states:

“Save in cases of hereditary succession, no private lands shall be transferred or conveyed except to individuals, corporations, or associations qualified to acquire or hold lands of the public domain.”

The capacity to acquire private land is directly linked to the capacity to acquire or hold public lands. Since aliens are disqualified from acquiring public lands, they are similarly disqualified from acquiring private lands, unless through hereditary succession. Because Hulst was a Dutch national, the Supreme Court found that the Contract to Sell was void from the beginning under Article 1409 (1) and (7) of the Civil Code, which states that contracts with a cause, object, or purpose contrary to law or public policy are inexistent and void from the outset. A void contract produces no civil effect and cannot create, modify, or extinguish a juridical relation.

The general rule is that parties to a void agreement cannot seek legal remedies, as they are considered in pari delicto, or in equal fault. This doctrine prevents either party from obtaining affirmative relief in court. However, the law also recognizes exceptions to this rule, allowing for the return of what was given under a void contract to prevent unjust enrichment or when public interest is involved. These exceptions are articulated in Articles 1411-1419 of the Civil Code, which include situations where an innocent party is involved, when a debtor pays usurious interest, or when a party repudiates the void contract before the illegal purpose is accomplished.

In Hulst’s case, the Court emphasized that the agreement was a Contract to Sell, not a contract of sale. This distinction is crucial. In a contract of sale, ownership transfers upon delivery of the thing sold, whereas in a Contract to Sell, the transfer of ownership is contingent upon a future event, typically the full payment of the purchase price. Until that event occurs, ownership remains with the seller. Since Hulst filed for rescission before the final deed transferring ownership was executed, the constitutional proscription against alien land ownership had not yet been fully breached.

Applying Article 1414 of the Civil Code, the Court ruled that Hulst was entitled to recover the purchase price he had paid because he repudiated the agreement before the illegal act of transferring ownership to a foreign national had occurred. However, the Court also clarified that Hulst was not entitled to damages or attorney’s fees, as these could not arise from a void contract. This approach balances the need to uphold constitutional restrictions with the principle of fairness, preventing PR Builders from unjustly retaining the funds paid by Hulst.

Despite the finality of the HLURB decision favoring Hulst, the Supreme Court noted that the decision resulted in unjust enrichment. Hulst had received more than he was entitled to recover, specifically amounts awarded as damages and interest. The Court invoked Article 22 of the Civil Code, which states that “every person who through an act of performance by another, or any other means, acquires or comes into possession of something at the expense of the latter without just or legal ground, shall return the same to him.”

The Court then addressed whether the HLURB erred in setting aside the levy made by the sheriff on PR Builders’ properties. The Court found that the HLURB’s actions were improper because the auction sale had already taken place, rendering the motion to quash the levy moot. The sheriff had followed the proper procedure under Rule 39 of the Revised Rules of Court, levying on the properties and selling them at auction to satisfy the judgment. The Court also noted that the HLURB’s reliance on previous cases, such as Barrozo v. Macaraeg and Buan v. Court of Appeals, was misplaced as they did not directly apply to the facts of this case.

FAQs

What was the key issue in this case?	The central issue was whether a foreign national could enforce a Contract to Sell for real property in the Philippines, considering constitutional restrictions on land ownership. The Court also examined the validity of the sheriff’s levy on the property and the HLURB’s decision to set it aside.
What does the Constitution say about land ownership?	The 1987 Philippine Constitution reserves the right to acquire and own land to Filipino citizens and corporations with at least 60% Filipino ownership. This provision aims to protect the nation’s natural resources and ensure Filipinos primarily benefit from land ownership.
What is the 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 only transfers upon the fulfillment of a condition, usually full payment. This distinction is important because the Court can intervene before the transfer is complete.
What is the in pari delicto doctrine?	The in pari delicto doctrine states that parties equally at fault in an illegal contract cannot seek legal remedies from each other. However, there are exceptions to this rule, particularly when public interest is at stake.
What is unjust enrichment?	Unjust enrichment occurs when one party benefits at the expense of another without just or legal ground. The Civil Code requires that the enriched party return the benefit to prevent unfairness.
What was the outcome of the case?	The Supreme Court declared the Contract to Sell void but allowed Hulst to recover the purchase price he paid. The Court also reversed the HLURB’s decision to set aside the sheriff’s levy and ordered Hulst to return the excess amount he received beyond the purchase price.
Why was the sheriff’s levy initially set aside by the HLURB?	The HLURB set aside the levy because it believed the value of the levied properties significantly exceeded the judgment debt. However, the Supreme Court found that the HLURB’s decision was made in error, as the auction sale had already taken place, rendering the motion to quash the levy moot.
What is the significance of repudiating the contract before the illegal act?	Repudiating the contract before the illegal act of transferring ownership to a foreigner allows the party to recover payments made. This is because the constitutional restriction on alien land ownership had not yet been fully breached.

The Supreme Court’s decision balances the constitutional restrictions on foreign land ownership with principles of fairness and equity. By allowing the recovery of the purchase price while invalidating the contract, the Court ensures that no party is unjustly enriched and upholds the integrity of the Constitution. This case underscores the importance of understanding Philippine laws regarding property ownership, especially when dealing with foreign nationals.

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: Jacobus Bernhard Hulst, vs. PR Builders, Inc., G.R. NO. 156364, September 03, 2007