In real estate transactions, failing to pay as agreed can have severe consequences. This Supreme Court case clarifies that a significant failure to meet payment obligations, like not paying the agreed price for a property, is a substantial breach. This breach entitles the seller to rescind the contract. Rescission essentially cancels the contract from the beginning, requiring both parties to return what they received. The buyer must return the property, and the seller must refund payments made, ensuring neither party is unjustly enriched.

Buying a Home, Breaking a Promise: Can a Seller Cancel the Deal?

The case of Spouses Velarde v. Court of Appeals, G.R. No. 108346, July 11, 2001, revolves around a real estate transaction gone sour. David Raymundo agreed to sell his property to Spouses Velarde through a Deed of Sale with Assumption of Mortgage. The Velardes paid an initial amount of P800,000 and agreed to assume Raymundo’s existing mortgage with the Bank of the Philippine Islands (BPI) for P1.8 million. The agreement stipulated that if the bank disapproved the mortgage assumption, the Velardes would pay the P1.8 million balance directly to Raymundo. When BPI rejected the mortgage assumption, the Velardes did not pay the balance. Instead, they offered to pay only if Raymundo fulfilled new conditions not originally part of the agreement. Raymundo, frustrated by the non-payment, sent a notice of rescission. The Velardes then sued, seeking specific performance, but Raymundo argued that the non-payment justified the rescission. The key legal question is whether the Velardes’ failure to pay the balance constituted a substantial breach of contract, entitling Raymundo to rescind the sale.

The Supreme Court tackled this issue, referencing Article 1191 of the Civil Code, which 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 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 emphasized that rescission is a remedy available when one party fails to fulfill their reciprocal obligation. A reciprocal obligation means that each party’s duty is the consideration for the other’s. In a sale, the seller must deliver the property, and the buyer must pay the price. The Court found that Raymundo had fulfilled his obligation by executing the Deed of Sale, which constructively transferred ownership to the Velardes. However, the Velardes failed to pay the balance of P1.8 million after the mortgage assumption was rejected, thereby breaching their primary obligation.

The Court distinguished this case from others where rescission was deemed inappropriate for minor breaches. Unlike cases involving slight delays or insignificant irregularities, the Velardes’ failure to pay a substantial portion of the purchase price was a fundamental breach that undermined the very purpose of the contract. The Court noted that the Velardes’ offer to pay was conditional and imposed new obligations on Raymundo, which essentially amounted to a repudiation of their original agreement. This repudiation justified Raymundo’s decision to rescind the contract to protect his interests. It is important to note that the Court highlighted that the non-payment of the balance of P1.8 million was the primary cause for the rescission of the contract.

The Supreme Court also addressed the issue of mutual restitution. Since the rescission was based on Article 1191 of the Civil Code, rather than a specific forfeiture clause in the contract, the Court ordered mutual restitution. This means that Raymundo had to return the initial P800,000 payment and the subsequent mortgage payments made by the Velardes, totaling P874,150. This order ensured that Raymundo was not unjustly enriched by the failed transaction. The concept of unjust enrichment prevents a party from retaining a benefit received at the expense of another without just cause. Essentially, the goal of rescission with mutual restitution is to restore both parties to their positions before the contract was made, as if the agreement never existed.

Furthermore, the Court clarified that the Velardes could not impose new conditions on Raymundo before fulfilling their payment obligation. By attempting to introduce new terms, the Velardes were essentially trying to modify the original contract without Raymundo’s consent. This attempt to unilaterally alter the agreement further supported Raymundo’s right to rescind the contract. The Court underscored that parties are bound by the terms they initially agreed upon and cannot unilaterally change those terms without the other party’s agreement. The importance of adhering to agreed-upon contractual terms is paramount in ensuring fairness and predictability in commercial transactions.

FAQs

What was the key issue in this case?	The key issue was whether the Spouses Velarde’s failure to pay the balance of the purchase price for a property justified the rescission of the sale by David Raymundo.
What is rescission under Article 1191 of the Civil Code?	Rescission under Article 1191 is a remedy available to a party when the other party fails to comply with their reciprocal obligation in a contract, allowing the injured party to cancel the contract.
What are reciprocal obligations?	Reciprocal obligations are those where the obligations of one party are dependent upon the obligations of the other; in a sale, the seller’s obligation to deliver the property is tied to the buyer’s obligation to pay.
What is mutual restitution in the context of rescission?	Mutual restitution requires both parties to return what they received under the contract to restore them to their original positions as if the contract never existed.
Why was the Spouses Velarde’s breach considered substantial?	The Velardes’ breach was considered substantial because they failed to pay a significant portion of the purchase price (P1.8 million), which was a fundamental element of the contract.
What was the significance of the Spouses Velarde offering to pay under new conditions?	The Court found that offering to pay under new conditions was an attempt to modify the original contract without the seller’s consent, reinforcing the seller’s right to rescind the contract.
What payments were the respondents required to return?	The respondents were required to return the initial P800,000 payment and subsequent mortgage payments made by the petitioners, totaling P874,150, with legal interest from the date of rescission.
What happens to ownership of the property when a contract of sale is rescinded?	When a contract of sale is rescinded, ownership of the property reverts back to the seller, and the buyer loses any claim to the property.

This case underscores the importance of fulfilling contractual obligations, particularly in real estate transactions. Buyers must be prepared to meet their payment obligations as agreed, and sellers have the right to rescind the contract if a buyer fails to do so substantially. Understanding these principles can help both buyers and sellers protect their interests and avoid costly legal disputes.

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: Velarde vs. Court of Appeals, G.R No. 108346, July 11, 2001