The Supreme Court clarified that in a Contract to Sell, the seller’s act of selling the property to a third party before full payment by the original buyer does not constitute a breach that warrants rescission. Instead, such action may only entitle the original buyer to damages, reinforcing the principle that ownership transfer is contingent upon full payment as stipulated in the contract.

Property Promise or Binding Pact? Unraveling a Disputed Contract to Sell

This case revolves around a property dispute between Atty. Rogelio B. De Guzman (seller) and Spouses Bartolome and Susan Santos (buyers) concerning a house and lot in Rizal. The spouses Santos entered into a Contract to Sell with De Guzman, agreeing to purchase the property for P1,500,000.00. They made a down payment and took possession but failed to pay subsequent monthly installments. Later, they filed a case seeking to rescind the contract and recover their down payment, which led to further complications when De Guzman sold the property to a third party during the pendency of the litigation. The central legal question is whether De Guzman’s sale to a third party warranted rescission of the Contract to Sell and the return of the down payment to the spouses Santos.

The heart of the matter lies in understanding the distinction between a **Contract to Sell** and a **Contract of Sale**. The Supreme Court emphasized that a Contract to Sell is a bilateral agreement where the seller reserves ownership until the buyer fully pays the purchase price. This full payment is a **positive suspensive condition**. Until this condition is met, the seller is not obligated to transfer ownership, and the buyer’s failure to pay does not constitute a breach but merely prevents the obligation to convey title from arising.

Building on this principle, the Court referenced key precedents such as Spouses Roque v. Aguado and Coronel v. CA to highlight the seller’s right to sell the property to a third party before full payment is made by the original buyer. In Coronel v. CA, the Court articulated:

In a contract to sell, there being no previous sale of the property, a third person buying such property despite the fulfillment of the suspensive condition such as the full payment of the purchase price, for instance, cannot be deemed a buyer in bad faith and the prospective buyer cannot seek the relief of reconveyance of the property. There is no double sale in such case. Title to the property will transfer to the buyer after registration because there is no defect in the owner-seller’s title per se, but the latter, of course, may be sued for damages by the intending buyer.

This perspective clarifies that prior to full payment, the seller’s title remains unencumbered, thus allowing for a valid sale to another party. However, the seller may still be liable for damages to the original buyer.

In the present case, the Court found that De Guzman’s sale to Algoso was legally permissible, as the spouses Santos had not fulfilled their obligation to fully pay the purchase price. As a result, the rescission of the Contract to Sell ordered by the lower courts was deemed erroneous. While De Guzman’s action of selling the property during the trial was considered bad faith, it did not provide legal grounds for rescission under Article 1381(4) of the New Civil Code. The Court explained that the spouses Santos’ remedy was not rescission but a claim for damages against De Guzman.

Further complicating matters, the Court also considered the conduct of the spouses Santos. They had occupied the property for four months without making any installment payments and later abandoned it, demonstrating a lack of intent to honor their contractual obligations. The Court invoked the principle that parties who come to court with unclean hands are not entitled to equitable relief.

The Court determined that both parties were in pari delicto—in equal fault. As such, neither party was entitled to judicial relief. The Court then turned to the Contract to Sell itself, which stipulated that the dishonor of three checks for installment payments would result in automatic cancellation of the contract and forfeiture of all payments made. Given that the spouses Santos defaulted on their payments, the Court applied this provision, effectively cancelling the contract and forfeiting the down payment.

This decision underscores the importance of adhering to contractual terms and the consequences of failing to do so. The Court emphasized that obligations arising from contracts have the force of law between the parties and should be complied with in good faith, as mandated by Article 1159 of the Civil Code. Here are Article 1159 states:

Article 1159. Obligations arising from contracts have the force of law between the contracting parties and should be complied with in good faith.

In conclusion, the Supreme Court reversed the Court of Appeals’ decision, reaffirming the principles governing Contracts to Sell. The ruling serves as a reminder that contractual obligations must be fulfilled in good faith and that parties cannot seek relief from their own breaches of contract. The decision provides clarity on the remedies available in cases involving Contracts to Sell and the rights and obligations of both buyers and sellers.

FAQs

What is a Contract to Sell?	A Contract to Sell is an agreement where the seller reserves ownership of the property until the buyer fully pays the purchase price. Full payment is a suspensive condition, meaning the obligation to transfer ownership only arises upon completion of payments.
Can a seller sell the property to someone else if there’s a Contract to Sell?	Yes, the seller retains the right to sell the property to a third party as long as the original buyer has not fully paid the purchase price. The seller’s title remains unencumbered until full payment is received.
What happens if the buyer fails to make payments in a Contract to Sell?	If the buyer fails to make payments, it does not constitute a breach but rather prevents the obligation to convey title from arising. The contract may be rendered ineffective, and any remedies for breach are not applicable.
What remedy does the original buyer have if the seller sells to a third party?	The original buyer cannot seek rescission but can demand damages from the seller for selling the property before full payment was made. This remedy aims to compensate the buyer for any losses incurred due to the seller’s actions.
What does “in pari delicto” mean?	“In pari delicto” means “in equal fault.” It is a principle that prevents parties who are equally at fault from seeking legal remedies against each other.
What is the effect of an “automatic cancellation” clause in a Contract to Sell?	An automatic cancellation clause stipulates that the contract is automatically cancelled upon the occurrence of a specific event, such as the failure to pay installments. In such cases, the contract is terminated without further action needed.
What is the significance of “good faith” in contract law?	Good faith requires parties to act honestly and fairly in their dealings. Obligations arising from contracts must be performed in good faith, and parties cannot benefit from their own bad faith or wrongdoing.
What is the meaning of rescission in the context of contracts?	Rescission is the cancellation of a contract, restoring the parties to their original positions as if the contract never existed. It is typically available when there is a breach of contract or other valid grounds for termination.

This case offers essential guidance for understanding property rights and contractual obligations in the Philippines. It clarifies the distinctions between contracts and underscores the need for both buyers and sellers to act in good faith. The Supreme Court’s ruling provides a framework for resolving disputes arising from property transactions and enforcing contractual agreements.

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