In a contract to sell, the Supreme Court ruled that a seller’s act of selling the property to a third party without informing the buyer or obtaining judicial authorization, while constituting bad faith, does not automatically entitle the original buyer to rescind the contract and demand a refund of payments. The court emphasized that non-payment of the full purchase price by the original buyer does not amount to a breach of contract but merely prevents the seller from being obligated to convey the title. This decision clarifies the rights and obligations of parties in contracts to sell, especially when the seller acts in bad faith by selling the property to another party before the original buyer has fully paid the purchase price.

Property Paradox: Can a Seller’s Deceit Undo a Contract to Sell?

This case revolves around a dispute between Atty. Rogelio B. De Guzman, the seller, and Spouses Bartolome and Susan Santos, the buyers, concerning a property in Taytay, Rizal. The parties entered into a Contract to Sell, with the Spouses Santos agreeing to purchase the property for P1,500,000.00, payable in installments. However, the Spouses Santos failed to pay the monthly installments and eventually vacated the property. Subsequently, they filed a complaint for rescission of the contract and recovery of their down payment. During the pendency of the case, De Guzman sold the property to a third party without informing the court or the Spouses Santos. The key legal question is whether this act of selling the property during litigation, without notice, justifies the rescission of the Contract to Sell and the reimbursement of the down payment to the Spouses Santos.

The Regional Trial Court (RTC) initially dismissed the spouses’ complaint, but later, upon learning of the sale to a third party, granted a new trial and rescinded the contract, ordering De Guzman to return the down payment. The Court of Appeals (CA) affirmed this decision, emphasizing that De Guzman’s actions constituted bad faith, warranting rescission in the interest of justice and equity. However, the Supreme Court disagreed, asserting that the CA’s decision was contrary to prevailing law and jurisprudence regarding Contracts to Sell.

The Supreme Court clarified the nature of a Contract to Sell, emphasizing that it is a bilateral agreement where the seller retains ownership of the property until the buyer fully pays the purchase price. Full payment is a positive suspensive condition, and its non-fulfillment does not constitute a breach but merely prevents the seller from being obligated to transfer title. Consequently, remedies like specific performance or rescission are not available because the obligation to sell arises only upon full payment.

The Court cited Spouses Roque v. Aguado and Coronel v. CA to highlight that the seller retains the right to sell the property to a third party until the buyer fully pays the purchase price. In Coronel, the Court explained that such a sale is legal because, before full payment, there is no defect in the seller’s title. The original buyer cannot seek reconveyance but can only demand damages. The Supreme Court underscored that De Guzman’s sale to Algoso was valid because the Spouses Santos had not fulfilled their obligation to fully pay for the property.

While acknowledging that De Guzman’s sale to a third party without notice constituted bad faith, the Court clarified that it was not a legal ground for rescission under Article 1381(4) of the New Civil Code, nor did it nullify the contract under existing laws. Article 1381(4) provides for the rescission of contracts involving things under litigation if entered into by the defendant without the knowledge and approval of the litigants or competent judicial authority. However, the Court focused on the failure of the Spouses Santos to fulfill their payment obligations as the primary factor.

Furthermore, the Supreme Court addressed the CA’s ruling that reimbursement was necessary in the interest of justice and equity. The Court found that the Spouses Santos themselves acted in bad faith by failing to pay any installments despite occupying the property for four months. They unilaterally abandoned the property, demonstrating a disregard for their contractual obligations. Therefore, the Court concluded that the Spouses Santos were not entitled to equitable relief because they came to court with unclean hands.

On the other hand, the Court also denied De Guzman any judicial relief in the form of damages, recognizing his bad faith in selling the property to Algoso without judicial authorization. The Court determined that the parties were in pari delicto, meaning in equal fault, and thus, neither party could seek legal recourse against the other. As a result, the Court decided to leave the parties where it found them.

Ultimately, the Supreme Court turned to the Contract to Sell itself to adjudicate the rights of the parties. The contract stipulated that the dishonor of three checks covering installment payments would result in the automatic cancellation of the contract and forfeiture of all payments made. Because the Spouses Santos admitted their default, the Court held that the automatic cancellation clause should be enforced, leading to the forfeiture of their down payment. The Court emphasized the principle that obligations arising from contracts have the force of law between the parties and must be complied with in good faith, as stipulated in Article 1159 of the Civil Code.

FAQs

What was the key issue in this case?	The primary issue was whether the seller’s act of selling a property to a third party during the pendency of a case, without informing the original buyer or obtaining judicial authorization, justifies the rescission of the Contract to Sell and the reimbursement of the down payment.
What is a Contract to Sell?	A Contract to Sell is a bilateral agreement where the seller reserves ownership of the property until the buyer fully pays the purchase price, with full payment acting as a positive suspensive condition.
Can a buyer demand rescission of a Contract to Sell if the seller sells the property to someone else?	Not automatically. The buyer can demand damages but cannot seek rescission or reconveyance unless they have fully paid the purchase price, as the seller retains the right to sell until full payment is made.
What does “in pari delicto” mean?	“In pari delicto” means “in equal fault.” When parties are in pari delicto, neither can seek legal recourse against the other, and the court leaves them as it finds them.
What happens if a buyer defaults on payments in a Contract to Sell?	The consequences depend on the contract’s terms. In this case, the contract stipulated automatic cancellation and forfeiture of payments upon default, which the Court upheld.
What is the significance of Article 1381(4) of the Civil Code?	Article 1381(4) allows for the rescission of contracts involving things under litigation if entered into by the defendant without the knowledge and approval of the litigants or competent judicial authority.
Did the court find the seller’s actions ethical?	The court acknowledged that selling the Subject Property to Algoso during the trial stage constituted bad faith and a violation of his duties to the court.
Why was the down payment not refunded in this case?	The down payment was not refunded because the contract stipulated forfeiture of payments upon default, and the buyers were also found to be in bad faith for failing to make any payments while occupying the property.
What is the key takeaway from this ruling?	While sellers must act in good faith, buyers must also honor their contractual obligations; failure to do so can result in forfeiture of payments, even if the seller engages in questionable behavior.

This case underscores the importance of fulfilling contractual obligations and acting in good faith. While the seller’s conduct was questionable, the buyers’ prior default and failure to uphold their end of the agreement ultimately led to the forfeiture of their payments. The Supreme Court’s decision reinforces the principle that parties must come to court with clean hands to seek equitable relief.

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: ATTY. ROGELIO B. DE GUZMAN vs. SPOUSES BARTOLOME AND SUSAN SANTOS, G.R. No. 222957, March 29, 2023