The Perils of Relying on Verbal Agreements: A Philippine Case Study

G.R. No. 121200, September 26, 1996

Imagine agreeing to buy a property based on a handshake, only to find out later that the seller sold it to someone else. This scenario highlights the importance of formalizing agreements, especially when dealing with real estate. The case of Gloria A. Samedra Lacanilao and Plutarco Cadurnigara vs. Court of Appeals, Eusebio C. Encarnacion and SPS. Ramon and Teresita A. Acebo delves into the enforceability of verbal contracts to sell property and underscores the risks of relying on them.

This case revolves around a verbal agreement to sell a property, the subsequent sale of the same property to another party, and the legal battle that ensued. The central legal question is whether a verbal agreement to sell real estate can override a formal, written deed of sale to a third party.

Understanding the Statute of Frauds and Contracts to Sell

The legal framework governing this case hinges on the Statute of Frauds, as embodied in Article 1403 of the Civil Code of the Philippines. This provision requires certain contracts, including agreements for the sale of real property or an interest therein, to be in writing and signed by the party charged, or by his agent; otherwise, they are unenforceable. This means that a court will not compel a party to perform their obligations under the contract.

“Article 1403. The following contracts are unenforceable, unless they are ratified: (2) Those that do not comply with the Statute of Frauds as set forth in this number. In the following cases an agreement hereafter made shall be unenforceable by action, unless the same, or some note or memorandum, thereof, be in writing, and subscribed by the party charged, or by his agent; evidence, therefore, of the agreement cannot be received without the writing, or a secondary evidence of its contents:
(e) An agreement for the sale of real property or of an interest therein.”

A contract to sell is distinct from a contract of sale. In a contract of sale, ownership is transferred to the buyer upon delivery of the property. In contrast, a contract to sell is an agreement where the seller promises to execute a deed of absolute sale upon the buyer’s full payment of the purchase price. Ownership remains with the seller until full payment is made. If the buyer fails to pay, the seller is not obligated to transfer ownership.

For example, consider a situation where Maria verbally agrees to sell her land to Juan for PHP 1,000,000, payable in monthly installments. Until Juan completes the payments, Maria retains ownership. If Juan defaults on his payments, Maria can legally sell the land to Pedro, provided Pedro acts in good faith and is unaware of the prior agreement with Juan.

The Story of the Quezon City Property

Eusebio Encarnacion owned a piece of land in Quezon City. Gloria Lacanilao and Plutarco Cadurnigara were leasing portions of this land. In 1988, Encarnacion verbally offered to sell the entire property to Lacanilao and Cadurnigara for PHP 120,000. They requested an extension to pay, which Encarnacion granted, setting a new deadline of June 15, 1988.

Unfortunately, the Quezon City Hall, including the Register of Deeds, was hit by a fire, destroying many land titles, including Encarnacion’s. Lacanilao and Cadurnigara failed to meet the extended payment deadline. Subsequently, Encarnacion sold the property to Ramon and Teresita Acebo for PHP 145,000. The Acebos paid earnest money and eventually the full amount, receiving a Deed of Absolute Sale, which was provisionally recorded.

Upon learning of the sale, Lacanilao and Cadurnigara filed a complaint, claiming they had a prior right to purchase the property. The case wound its way through the courts:

• Regional Trial Court (RTC): Dismissed the complaint, finding the verbal agreement unenforceable under the Statute of Frauds.
• Court of Appeals (CA): Affirmed the RTC’s decision but removed the award of damages and attorney’s fees.
• Supreme Court: Upheld the CA’s decision, emphasizing the unenforceability of the verbal contract and the Acebos’ right as buyers in good faith.

The Supreme Court highlighted the petitioners’ failure to fulfill their part of the verbal agreement. As the court stated, “The Court upholds the findings of the Court of Appeals that private respondent Encarnacion verbally agreed to sell the lot to petitioners for P120,000.00 to be paid on 15 June, 1988 and that petitioners failed to pay on said date through no fault of Encarnacion who thereupon proceeded to extrajudicially terminate the oral contract.”

The Court also noted that even though the contract was unenforceable, the respondents, by not invoking the Statute of Frauds initially, allowed the petitioners to present evidence of the verbal agreement. However, the petitioners still failed to prove they were ready to fulfill the condition of full payment.

The Court emphasized the importance of adhering to legal principles, stating, “This Court, while aware of its equity jurisdiction, is first and foremost, a court of law. Hence, while equity might tilt on the side of the petitioners, the same cannot be enforced so as to overrule a positive provision of law in favor of private respondents.”

Practical Implications for Property Transactions

This case serves as a critical reminder of the importance of written contracts in real estate transactions. Verbal agreements, while sometimes convenient, are difficult to enforce and can lead to significant legal disputes. Buyers and sellers should always formalize their agreements in writing, with the assistance of legal counsel.

The ruling underscores that even if a verbal agreement exists, a subsequent written sale to a buyer in good faith can supersede it, especially when the first buyer fails to fulfill their obligations. This highlights the importance of due diligence for potential buyers to ensure there are no prior claims or encumbrances on the property.

Key Lessons

• Always put it in writing: Ensure all real estate agreements are in writing to comply with the Statute of Frauds.
• Act promptly: If you have a verbal agreement, formalize it as soon as possible.
• Due diligence: Conduct thorough checks on the property to uncover any prior claims before purchasing.
• Seek legal advice: Consult with a lawyer to draft or review real estate contracts.

Consider another example: Jose verbally agrees to sell his condo to Elena. Before Elena pays, Jose receives a better offer from Carlos, who is unaware of the agreement with Elena. Jose sells the condo to Carlos via a written contract. Elena cannot enforce her verbal agreement against Carlos because Carlos acted in good faith and the verbal agreement is unenforceable under the Statute of Frauds.

Frequently Asked Questions

Q: What is the Statute of Frauds?

A: The Statute of Frauds requires certain contracts, including those for the sale of real property, to be in writing to be enforceable.

Q: Why are verbal agreements for real estate risky?

A: Verbal agreements are difficult to prove in court and are subject to the Statute of Frauds, making them generally unenforceable.

Q: What is a contract to sell?

A: A contract to sell is an agreement where the seller promises to execute a deed of absolute sale upon the buyer’s full payment of the purchase price, retaining ownership until then.

Q: What does it mean to be a buyer in good faith?

A: A buyer in good faith is someone who purchases property without knowledge of any prior claims or encumbrances on the property.

Q: What should I do if I have a verbal agreement to buy property?

A: Immediately formalize the agreement in writing and seek legal advice to protect your interests.

Q: Can I enforce a verbal agreement if the other party admits it exists?

A: Even if the other party admits the verbal agreement, it may still be unenforceable under the Statute of Frauds unless there is a written memorandum or partial performance that takes it out of the statute’s scope.

ASG Law specializes in Real Estate Law, Contract Law, and Property Disputes. Contact us or email hello@asglawpartners.com to schedule a consultation.