Republic of the Philippines

SUPREME COURT
Manila
FIRST DIVISION

G.R. No. 118114 December 7, 1995

TEODORO ACAP, petitioner,
vs.
COURT OF APPEALS and EDY DE LOS REYES, respondents.

PADILLA, J.:
This is a petition for review on certiorari of the decision 1 of the Court of Appeals, 2nd Division, in CAG.R. No. 36177, which affirmed the decision 2 of the Regional Trial Court of Himamaylan, Negros
Occidental holding that private respondent Edy de los Reyes had acquired ownership of Lot No. 1130 of
the Cadastral Survey of Hinigaran, Negros Occidental based on a document entitled "Declaration of
Heirship and Waiver of Rights", and ordering the dispossession of petitioner as leasehold tenant of the
land for failure to pay rentals.
The facts of the case are as follows:
The title to Lot No. 1130 of the Cadastral Survey of Hinigaran, Negros Occidental was evidenced by
OCT No. R-12179. The lot has an area of 13,720 sq. meters. The title was issued and is registered
in the name of spouses Santiago Vasquez and Lorenza Oruma. After both spouses died, their only
son Felixberto inherited the lot. In 1975, Felixberto executed a duly notarized document entitled
"Declaration of Heirship and Deed of Absolute Sale" in favor of Cosme Pido.
The evidence before the court a quo established that since 1960, petitioner Teodoro Acap had been
the tenant of a portion of the said land, covering an area of nine thousand five hundred (9,500)
meters. When ownership was transferred in 1975 by Felixberto to Cosme Pido, Acap continued to be
the registered tenant thereof and religiously paid his leasehold rentals to Pido and thereafter, upon
Pido's death, to his widow Laurenciana.
The controversy began when Pido died intestate and on 27 November 1981, his surviving heirs
executed a notarized document denominated as "Declaration of Heirship and Waiver of Rights of Lot
No. 1130 Hinigaran Cadastre," wherein they declared; to quote its pertinent portions, that:
. . . Cosme Pido died in the Municipality of Hinigaran, Negros Occidental, he died
intestate and without any known debts and obligations which the said parcel of land
is (sic) held liable.
That Cosme Pido was survived by his/her legitimate heirs, namely: LAURENCIANA
PIDO, wife, ELY, ERVIN, ELMER, and ELECHOR all surnamed PIDO; children;

That invoking the provision of Section 1, Rule 74 of the Rules of Court, the abovementioned heirs do hereby declare unto [sic] ourselves the only heirs of the late
Cosme Pido and that we hereby adjudicate unto ourselves the above-mentioned
parcel of land in equal shares.
Now, therefore, We LAURENCIANA 3, ELY, ELMER, ERVIN and ELECHOR all
surnamed PIDO, do hereby waive, quitclaim all our rights, interests and participation over
the said parcel of land in favor of EDY DE LOS REYES, of legal age, (f)ilipino, married to
VIRGINIA DE LOS REYES, and resident of Hinigaran, Negros Occidental,
Philippines. . . . 4 (Emphasis supplied)
The document was signed by all of Pido's heirs. Private respondent Edy de los Reyes did not sign
said document.
It will be noted that at the time of Cosme Pido's death, title to the property continued to be registered
in the name of the Vasquez spouses. Upon obtaining the Declaration of Heirship with Waiver of
Rights in his favor, private respondent Edy de los Reyes filed the same with the Registry of Deeds
as part of a notice of an adverse claimagainst the original certificate of title.
Thereafter, private respondent sought for petitioner (Acap) to personally inform him that he (Edy)
had become the new owner of the land and that the lease rentals thereon should be paid to him.
Private respondent further alleged that he and petitioner entered into an oral lease agreement
wherein petitioner agreed to pay ten (10) cavans of palay per annum as lease rental. In 1982,
petitioner allegedly complied with said obligation. In 1983, however, petitioner refused to pay any
further lease rentals on the land, prompting private respondent to seek the assistance of the then
Ministry of Agrarian Reform (MAR) in Hinigaran, Negros Occidental. The MAR invited petitioner to a
conference scheduled on 13 October 1983. Petitioner did not attend the conference but sent his wife
instead to the conference. During the meeting, an officer of the Ministry informed Acap's wife about
private respondent's ownership of the said land but she stated that she and her husband (Teodoro)
did not recognize private respondent's claim of ownership over the land.
On 28 April 1988, after the lapse of four (4) years, private respondent filed a complaint for recovery
of possession and damages against petitioner, alleging in the main that as his leasehold tenant,
petitioner refused and failed to pay the agreed annual rental of ten (10) cavans of palay despite
repeated demands.
During the trial before the court a quo, petitioner reiterated his refusal to recognize private
respondent's ownership over the subject land. He averred that he continues to recognize Cosme
Pido as the owner of the said land, and having been a registered tenant therein since 1960, he never
reneged on his rental obligations. When Pido died, he continued to pay rentals to Pido's widow.
When the latter left for abroad, she instructed him to stay in the landholding and to pay
the accumulated rentals upon her demand or return from abroad.
Petitioner further claimed before the trial court that he had no knowledge about any transfer or sale
of the lot to private respondent in 1981 and even the following year after Laurenciana's departure for
abroad. He denied having entered into a verbal lease tenancy contract with private respondent and
that assuming that the said lot was indeed sold to private respondent without his knowledge, R.A.
3844, as amended, grants him the right to redeem the same at a reasonable price. Petitioner also

bewailed private respondent's ejectment action as a violation of his right to security of tenure under
P.D. 27.
On 20 August 1991, the lower court rendered a decision in favor of private respondent, the
dispositive part of which reads:
WHEREFORE, premises considered, the Court renders judgment in favor of the
plaintiff, Edy de los Reyes, and against the defendant, Teodoro Acap, ordering the
following, to wit:
1. Declaring forfeiture of defendant's preferred right to issuance of a Certificate of
Land Transfer under Presidential Decree No. 27 and his farmholdings;
2. Ordering the defendant Teodoro Acap to deliver possession of said farm to
plaintiff, and;
3. Ordering the defendant to pay P5,000.00 as attorney's fees, the sum of P1,000.00
as expenses of litigation and the amount of P10,000.00 as actual damages. 5
In arriving at the above-mentioned judgment, the trial court stated that the evidence had established
that the subject land was "sold" by the heirs of Cosme Pido to private respondent. This is clear from
the following disquisitions contained in the trial court's six (6) page decision:
There is no doubt that defendant is a registered tenant of Cosme Pido. However,
when the latter died their tenancy relations changed since ownership of said land
was passed on to his heirs who, by executing a Deed of Sale, which defendant
admitted in his affidavit, likewise passed on their ownership of Lot 1130 to herein
plaintiff (private respondent). As owner hereof, plaintiff has the right to demand
payment of rental and the tenant is obligated to pay rentals due from the time
demand is made. . . . 6
xxx xxx xxx

Certainly, the sale of the Pido family of Lot 1130 to herein plaintiff does not of itself
extinguish the relationship. There was only a change of the personality of the lessor
in the person of herein plaintiff Edy de los Reyes who being the purchaser or
transferee, assumes the rights and obligations of the former landowner to the tenant
Teodoro Acap, herein defendant. 7
Aggrieved, petitioner appealed to the Court of Appeals, imputing error to the lower court when it
ruled that private respondent acquired ownership of Lot No. 1130 and that he, as tenant, should pay
rentals to private respondent and that failing to pay the same from 1983 to 1987, his right to a
certificate of land transfer under P.D. 27 was deemed forfeited.
The Court of Appeals brushed aside petitioner's argument that the Declaration of Heirship and
Waiver of Rights (Exhibit "D"), the document relied upon by private respondent to prove his
ownership to the lot, was excluded by the lower court in its order dated 27 August 1990. The order
indeed noted that the document was not identified by Cosme Pido's heirs and was not registered
with the Registry of Deeds of Negros Occidental. According to respondent court, however, since the

Declaration of Heirship and Waiver of Rights appears to have been duly notarized, no further proof
of its due execution was necessary. Like the trial court, respondent court was also convinced that the
said document stands as prima facie proof of appellee's (private respondent's) ownership of the land
in dispute.
With respect to its non-registration, respondent court noted that petitioner had actual knowledge of
the subject saleof the land in dispute to private respondent because as early as 1983, he (petitioner)
already knew of private respondent's claim over the said land but which he thereafter denied, and
that in 1982, he (petitioner) actually paid rent to private respondent. Otherwise stated, respondent
court considered this fact of rental payment in 1982 as estoppel on petitioner's part to thereafter
refute private respondent's claim of ownership over the said land. Under these circumstances,
respondent court ruled that indeed there was deliberate refusal by petitioner to pay rent for a
continued period of five years that merited forfeiture of his otherwise preferred right to the issuance
of a certificate of land transfer.
In the present petition, petitioner impugns the decision of the Court of Appeals as not in accord with
the law and evidence when it rules that private respondent acquired ownership of Lot No. 1130
through the aforementioned Declaration of Heirship and Waiver of Rights.
Hence, the issues to be resolved presently are the following:
1. WHETHER OR NOT THE SUBJECT DECLARATION OF HEIRSHIP AND
WAIVER OF RIGHTS IS A RECOGNIZED MODE OF ACQUIRING OWNERSHIP BY
PRIVATE RESPONDENT OVER THE LOT IN QUESTION.
2. WHETHER OR NOT THE SAID DOCUMENT CAN BE CONSIDERED A DEED
OF SALE IN FAVOR OF PRIVATE RESPONDENT OF THE LOT IN QUESTION.
Petitioner argues that the Regional Trial Court, in its order dated 7 August 1990, explicitly excluded
the document marked as Exhibit "D" (Declaration of Heirship, etc.) as private respondent's evidence
because it was not registered with the Registry of Deeds and was not identified by anyone of the
heirs of Cosme Pido. The Court of Appeals, however, held the same to be admissible, it being a
notarized document, hence, a prima facie proof of private respondents' ownership of the lot to which
it refers.
Petitioner points out that the Declaration of Heirship and Waiver of Rights is not one of the
recognized modes of acquiring ownership under Article 712 of the Civil Code. Neither can the same
be considered a deed of sale so as to transfer ownership of the land to private respondent because
no consideration is stated in the contract (assuming it is a contract or deed of sale).
Private respondent defends the decision of respondent Court of Appeals as in accord with the
evidence and the law. He posits that while it may indeed be true that the trial court excluded his
Exhibit "D" which is the Declaration of Heirship and Waiver of Rights as part of his evidence, the trial
court declared him nonetheless owner of the subject lot based on other evidence adduced during the
trial, namely, the notice of adverse claim (Exhibit "E") duly registered by him with the Registry of
Deeds, which contains the questioned Declaration of Heirship and Waiver of Rights as an integral
part thereof.
We find the petition impressed with merit.

In the first place, an asserted right or claim to ownership or a real right over a thing arising from a
juridical act, however justified, is not per se sufficient to give rise to ownership over the res. That
right or title must be completed by fulfilling certain conditions imposed by law. Hence, ownership and
real rights are acquired only pursuant to a legal mode or process. While title is the juridical
justification, mode is the actual process of acquisition or transfer of ownership over a thing in
question. 8
Under Article 712 of the Civil Code, the modes of acquiring ownership are generally classified into
two (2) classes, namely, the original mode (i.e., through occupation, acquisitive prescription, law or
intellectual creation) and thederivative mode (i.e., through succession mortis causa or tradition as a
result of certain contracts, such as sale, barter, donation, assignment or mutuum).
In the case at bench, the trial court was obviously confused as to the nature and effect of the
Declaration of Heirship and Waiver of Rights, equating the same with a contract (deed) of sale. They
are not the same.
In a Contract of Sale, one of the contracting parties obligates himself to transfer the ownership of
and to deliver a determinate thing, and the other party to pay a price certain in money or its
equivalent. 9
Upon the other hand, a declaration of heirship and waiver of rights operates as a public instrument
when filed with the Registry of Deeds whereby the intestate heirs adjudicate and divide the estate
left by the decedent among themselves as they see fit. It is in effect an extrajudicial settlement
between the heirs under Rule 74 of the Rules of Court. 10
Hence, there is a marked difference between a sale of hereditary rights and a waiver of hereditary
rights. The first presumes the existence of a contract or deed of sale between the parties. 11 The
second is, technically speaking, a mode of extinction of ownership where there is an abdication or
intentional relinquishment of a known right with knowledge of its existence and intention to relinquish it, in
favor of other persons who are co-heirs in the succession. 12 Private respondent, being then a stranger to
the succession of Cosme Pido, cannot conclusively claim ownership over the subject lot on the sole basis
of the waiver document which neither recites the elements of either a sale, 13 or a donation, 14 or any other
derivative mode of acquiring ownership.
Quite surprisingly, both the trial court and public respondent Court of Appeals concluded that a "sale"
transpired between Cosme Pido's heirs and private respondent and that petitioner acquired actual
knowledge of said sale when he was summoned by the Ministry of Agrarian Reform to discuss
private respondent's claim over the lot in question. This conclusion has no basis both in fact and in
law.
On record, Exhibit "D", which is the "Declaration of Heirship and Waiver of Rights" was excluded by
the trial court in its order dated 27 August 1990 because the document was neither registered with
the Registry of Deeds nor identified by the heirs of Cosme Pido. There is no showing that private
respondent had the same document attached to or made part of the record. What the trial court
admitted was Annex "E", a notice of adverse claim filed with the Registry of Deeds which contained
the Declaration of Heirship with Waiver of rights and was annotated at the back of the Original
Certificate of Title to the land in question.

A notice of adverse claim, by its nature, does not however prove private respondent's ownership
over the tenanted lot. "A notice of adverse claim is nothing but a notice of a claim adverse to the
registered owner, the validity of which is yet to be established in court at some future date, and is no
better than a notice of lis pendenswhich is a notice of a case already pending in court." 15
It is to be noted that while the existence of said adverse claim was duly proven, there is no evidence
whatsoever that a deed of sale was executed between Cosme Pido's heirs and private respondent
transferring the rights of Pido's heirs to the land in favor of private respondent. Private respondent's
right or interest therefore in the tenanted lot remains an adverse claim which cannot by itself be
sufficient to cancel the OCT to the land and title the same in private respondent's name.
Consequently, while the transaction between Pido's heirs and private respondent may be
binding on both parties, the right of petitioner as a registered tenant to the land cannot be
perfunctorily forfeited on a mere allegation of private respondent's ownership without the
corresponding proof thereof.
Petitioner had been a registered tenant in the subject land since 1960 and religiously paid lease
rentals thereon. In his mind, he continued to be the registered tenant of Cosme Pido and his family
(after Pido's death), even if in 1982, private respondent allegedly informed petitioner that he had
become the new owner of the land.
Under the circumstances, petitioner may have, in good faith, assumed such statement of private
respondent to be true and may have in fact delivered 10 cavans of palay as annual rental for 1982 to
private respondent. But in 1983, it is clear that petitioner had misgivings over private respondent's
claim of ownership over the said land because in the October 1983 MAR conference, his wife
Laurenciana categorically denied all of private respondent's allegations. In fact, petitioner even
secured a certificate from the MAR dated 9 May 1988 to the effect that he continued to be the
registered tenant of Cosme Pido and not of private respondent. The reason is that private
respondent never registered the Declaration of Heirship with Waiver of Rights with the Registry of
Deeds or with the MAR. Instead, he (private respondent) sought to do indirectly what could not be
done directly, i.e., file anotice of adverse claim on the said lot to establish ownership thereover.
It stands to reason, therefore, to hold that there was no unjustified or deliberate refusal by petitioner
to pay the lease rentals or amortizations to the landowner/agricultural lessor which, in this case,
private respondent failed to establish in his favor by clear and convincing evidence. 16
Consequently, the sanction of forfeiture of his preferred right to be issued a Certificate of Land
Transfer under P.D. 27 and to the possession of his farmholdings should not be applied against
petitioners, since private respondent has not established a cause of action for recovery of
possession against petitioner.
WHEREFORE, premises considered, the Court hereby GRANTS the petition and the decision of the
Court of Appeals dated 1 May 1994 which affirmed the decision of the RTC of Himamaylan, Negros
Occidental dated 20 August 1991 is hereby SET ASIDE. The private respondent's complaint for
recovery of possession and damages against petitioner Acap is hereby DISMISSED for failure to
properly state a cause of action, without prejudice to private respondent taking the proper legal steps
to establish the legal mode by which he claims to have acquired ownership of the land in question.
SO ORDERED.

Davide, Jr., Bellosillo, Kapunan and Hermosisima, Jr., JJ., concur.

Footnotes

Republic of the Philippines

SUPREME COURT
Manila
THIRD DIVISION
G.R. No. 108346

July 11, 2001

Spouses MARIANO Z. VELARDE and AVELINA D. VELARDE, petitioners,

vs.
COURT OF APPEALS, DAVID A. RAYMUNDO and GEORGE RAYMUNDO, respondents.
PANGANIBAN, J.:
A substantial breach of a reciprocal obligation, like failure to pay the price in the manner prescribed
by the contract, entitled the injured party to rescind the obligation. Rescission abrogates the contract
from its inception and requires a mutual restitution of benefits received.
The Case
Before us is a Petition for Review on Certiorari1 questioning the Decision2 of the Court of Appeals
(CA) in CA-GR CV No. 32991 dated October 9, 1992, as well as its Resolution 3 dated December 29,
1992 denying petitioner's motion for reconsideration. 4
The dispositive portion of the assailed Decision reads:
"WHEREFORES the Order dated May 15, 1991 is hereby ANNULLED and SET ASIDE and
the Decision dated November 14, 1990 dismissing the [C]omplaint is RESINSTATED. The
bonds posted by plaintiffs-appellees and defendants-appellants are hereby RELEASED." 5
The Facts
The factual antecedents of the case, as found by the CA, are as follows:
"x x x. David Raymundo [herein private respondent] is the absolute and registered owner of
a parcel of land, together with the house and other improvements thereon, located at 1918
Kamias St., Dasmarias Village, Makati and covered by TCT No. 142177. Defendant George
Raymundo [herein private petitioners] is David's father who negotiated with plaintiffs Avelina
and Mariano Velarde [herein petitioners] for the sale of said property, which was, however,
under lease (Exh. '6', p. 232, Record of Civil Case No. 15952).

"On August 8, 1986, a Deed of Sale with Assumption of Mortgage (Exh. 'A'; Exh. '1', pp. 1112, Record) was executed by defendant David Raymundo, as vendor, in favor of plaintiff
Avelina Velarde, as vendee, with the following terms and conditions:
'x x x

xxx

xxx

'That for and in consideration of the amount of EIGHT HUNDRED THOUSAND

PESOS (P800,000.00), Philippine currency, receipt of which in full is hereby
acknowledged by the VENDOR from the VENDEE, to his entire and complete
satisfaction, by these presents the VENDOR hereby SELLS, CEDES, TRANSFERS,
CONVEYS AND DELIVERS, freely and voluntarily, with full warranty of a legal and
valid title as provided by law, unto the VENDEE, her heirs, successors and assigns,
the parcel of land mentioned and described above, together with the house and other
improvements thereon.
'That the aforesaid parcel of land, together with the house and other improvements
thereon, were mortgaged by the VENDOR to the BANK OF THE PHILIPPINE
ISLANDS, Makati, Metro Manila to secure the payment of a loan of ONE MILLION
EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, as
evidenced by a Real Estate Mortgage signed and executed by the VENDOR in favor
of the said Bank of the Philippine Islands, on _____ and which Real Estate Mortgage
was ratified before Notary Public for Makati, _____, as Doc. No. ______, Page No.
_____, Book No. ___, Series of 1986 of his Notarial Register.
'That as part of the consideration of this sale, the VENDEE hereby assumes to pay
the mortgage obligations on the property herein sold in the amount of ONE MILLION
EIGHT HUNDRED THOUSAND PESOS (P1,800,000.00), Philippine currency, in
favor of Bank of Philippine Islands, in the name of the VENDOR, and further agrees
to strictly and faithfully comply with all the terms and conditions appearing in the Real
Estate Mortgage signed and executed by the VENDOR in favor of BPI, including
interests and other charges for late payment levied by the Bank, as if the same were
originally signed and executed by the VENDEE.
'It is further agreed and understood by the parties herein that the capital gains tax
and documentary stamps on the sale shall be for the account of the VENDOR;
whereas, the registration fees and transfer tax thereon shall be the account of the
VENDEE.' (Exh. 'A', pp. 11-12, Record).'
"On the same date, and as part of the above-document, plaintiff Avelina Velarde, with the
consent of her husband, Mariano, executed an Undertaking (Exh. 'C', pp. 13-14, Record).'
'x x x

xxx

xxx

'Whereas, as per deed of Sale with Assumption of Mortgage, I paid Mr. David A.
Raymundo the sum of EIGHT HUNDRED THOUSAND PESOS (P800,000.00),
Philippine currency, and assume the mortgage obligations on the property with the
Bank of the Philippine Islands in the amount of ONE MILLION EIGHT HUNDRED
THOUSAND PESOS (P1,800,000.00), Philippine currency, in accordance with the
terms and conditions of the Deed of Real Estate Mortgage dated _____, signed and
executed by Mr. David A. Raymundo with the said Bank, acknowledged before
Notary Public for Makati, _____, as Doc. No. _____, Page No. _____, Book No.
_____, Series of 1986 of his Notarial Register.

'WHEREAS, while my application for the assumption of the mortgage obligations on

the property is not yet approved by the mortgagee Bank, I have agreed to pay the
mortgage obligations on the property with the Bank in the name of Mr. David A.
Raymundo, in accordance with the terms and conditions of the said Deed of Real
Estate Mortgage, including all interests and other charges for late payment.
'WHEREAS, this undertaking is being executed in favor of Mr. David A. Raymundo,
for purposes of attesting and confirming our private understanding concerning the
said mortgage obligations to be assumed.
'NOW, THEREFORE, for and in consideration of the foregoing premises, and the
assumption of the mortgage obligations of ONE MILLION EIGHT HUNDRED
THOUSAND PESOS (P1,800,000.00), Philippine currency, with the bank of the
Philippine Islands, I, Mrs, Avelina D, Velarde with the consent of my husband,
Mariano Z. Velardo, do hereby bind and obligate myself, my heirs, successors and
assigns, to strictly and faithfully comply with the following terms and conditions:
'1. That until such time as my assumption of the mortgage obligations on the property
purchased is approved by the mortgagee bank, the Bank of the Philippine Islands, I
shall continue to pay the said loan in accordance with the terms and conditions of the
Deed of Real Estate Mortgage in the name of Mr. David A. Raymundo, the original
Mortgagor.
'2. That, in the event I violate any of the terms and conditions of the said Deed of
Real Estate Mortgage, I hereby agree that my downpayment of P800,000.00, plus all
payments made with the Bank of the Philippine Islands on the mortgage loan, shall
be forfeited in favor of Mr. David A. Raymundo, as and by way of liquidated
damages, without necessity of notice or any judicial declaration to that effect, and Mr.
David A. Raymundo shall resume total and complete ownership and possession of
the property sold by way of Deed of Sale with Assumption of Mortgage, and the
same shall be deemed automatically cancelled and be of no further force or effect, in
the same manner as it (the) same had never been executed or entered into.
'3. That I am executing the Undertaking for purposes of binding myself, my heirs,
successors and assigns, to strictly and faithfully comply with the terms and conditions
of the mortgage obligations with the Bank of the Philippine Islands, and the
covenants, stipulations and provisions of this Undertaking.
'That, David A. Raymundo, the vendor of the property mentioned and identified
above, [does] hereby confirm and agree to the undertakings of the Vendee pertinent
to the assumption of the mortgage obligations by the Vendee with the Bank of the
Philippine Islands. (Exh. 'C', pp. 13-14, Record).'
"This undertaking was signed by Avelina and Mariano Velarde and David Raymundo.
"It appears that the negotiated terms for the payment of the balance of P1.8 million was from
the proceeds of a loan that plaintiffs were to secure from a bank with defendant's help.
Defendants had a standing approved credit line with the Bank of the Philippine Islands (BPI).
The parties agreed to avail of this, subject to BPI's approval of an application for assumption
of mortgage by plaintiffs. Pending BPI's approval o[f] the application, plaintiffs were to
continue paying the monthly interests of the loan secured by a real estate mortgage.

"Pursuant to said agreements, plaintiffs paid BPI the monthly interest on the loan secured by
the aforementioned mortgage for three (3) months as follows: September 19, 1986 at
P27,225.00; October 20, 1986 at P23,000.00; and November 19, 1986 at P23,925.00 (Exh.
'E', 'H' & 'J', pp. 15, 17and 18, Record).
"On December 15, 1986, plaintiffs were advised that the Application for Assumption of
Mortgage with BPI, was not approved (Exh. 'J', p. 133, Record). This prompted plaintiffs not
to make any further payment.
"On January 5, 1987, defendants, thru counsel, wrote plaintiffs informing the latter that their
non-payment to the mortgage bank constitute[d] non-performance of their obligation (Exh. '3',
p. 220, Record).
"In a Letter dated January 7, 1987, plaintiffs, thru counsel, responded, as follows:
'This is to advise you, therefore, that our client is willing to pay the balance in cash
not later than January 21, 1987 provided: (a) you deliver actual possession of the
property to her not later than January 15, 1987 for her immediate occupancy; (b) you
cause the re- lease of title and mortgage from the Bank of P.I. and make the title
available and free from any liens and encumbrances; and (c) you execute an
absolute deed of sale in her favor free from any liens or encumbrances not later than
January 21, 1987.' (Exhs. 'k', '4', p. 223, Record).
"On January 8, 1987 defendants sent plaintiffs a notarial notice of cancellation/rescission of
the intended sale of the subject property allegedly due to the latter's failure to comply with
the terms and conditions of the Deed of Sale with Assumption of Mortgage and the
Undertaking (Exh. '5', pp. 225-226, Record)."6
Consequently, petitioners filed on February 9, 1987 a Complaint against private respondents for
specific performance, nullity of cancellation, writ of possession and damages. This was docketed as
Civil Case No. 15952 at the Regional Trial Court of Makati, Branch 149. The case was tried and
heard by then Judge Consuelo Ynares-Santiago (now an associate justice of this Court), who
dismissed the Complaint in a Decision dated November 14, 1990. 7 Thereafter, petitioners filed a
Motion for Reconsideration.8
Meanwhile, then Judge Ynares-Santiago was promoted to the Court of Appeals and Judge Salvador
S. A. Abad Santos was assigned to the sala she vacated. In an Order dated May 15, 1991, 9 Judge
Abad Santos granted petitioner's Motion for Reconsideration and directed the parties to proceed with
the sale. He instructed petitioners to pay the balance of P1.8 million to private respondents who, in
turn, were ordered to execute a deed of absolute sale and to surrender possession of the disputed
property to petitioners.
Private respondents appealed to the CA.
Ruling of the Court of Appeal
The CA set aside the Order of Judge Abad Santos and reinstated then Judge Ynares-Santiago's
earlier Decision dismissing petitioners' Complaint. Upholding the validity of the rescission made by
private respondents, the CA explained its ruling in this wise:

"In the Deed of Sale with Assumption of Mortgage, it was stipulated that 'as part of the
consideration of this sale, the VENDEE (Velarde)' would assume to pay the mortgage
obligation on the subject property in the amount of P 1.8 million in favor of BPI in the name of
the Vendor (Raymundo). Since the price to be paid by the Vendee Velarde includes the
downpayment of P800,000.00 and the balance of Pl.8 million, and the balance of Pl.8 million
cannot be paid in cash, Vendee Velarde, as part of the consideration of the sale, had to
assume the mortgage obligation on the subject property. In other words, the assumption of
the mortgage obligation is part of the obligation of Velarde, as vendee, under the contract.
Velarde further agreed 'to strictly and faithfully comply with all the terms and conditions
appearing in the Real Estate Mortgage signed and executed by the VENDOR in favor of BPI
x x x as if the same were originally signed and executed by the Vendee. (p. 2, thereof, p. 12,
Record). This was reiterated by Velarde in the document entitled 'Undertaking' wherein the
latter agreed to continue paying said loan in accordance with the terms and conditions of the
Deed of Real Estate Mortgage in the name of Raymundo. Moreover, it was stipulated that in
the event of violation by Velarde of any terms and conditions of said deed of real estate
mortgage, the downpayment of P800,000.00 plus all payments made with BPI or the
mortgage loan would be forfeited and the [D]eed of [S]ale with [A]ssumption of [M]ortgage
would thereby be Cancelled automatically and of no force and effect (pars. 2 & 3, thereof, pp
13-14, Record).
"From these 2 documents, it is therefore clear that part of the consideration of the sale was
the assumption by Velarde of the mortgage obligation of Raymundo in the amount of Pl.8
million. This would mean that Velarde had to make payments to BPI under the [D]eed of
[R]eal [E]state [M]ortgage the name of Raymundo. The application with BPI for the approval
of the assumption of mortgage would mean that, in case of approval, payment of the
mortgage obligation will now be in the name of Velarde. And in the event said application is
disapproved, Velarde had to pay in full. This is alleged and admitted in Paragraph 5 of the
Complaint. Mariano Velarde likewise admitted this fact during the hearing on September 15,
1997 (p. 47, t.s.n., September 15, 1987; see also pp. 16-26, t.s.n., October 8, 1989). This
being the case, the non-payment of the mortgage obligation would result in a violation of the
contract. And, upon Velarde's failure to pay the agreed price, the[n] Raymundo may choose
either of two (2) actions - (1) demand fulfillment of the contract, or (2) demand its rescission
(Article 1191, Civil Code).
"The disapproval by BPI of the application for assumption of mortgage cannot be used as an
excuse for Velarde's non-payment of the balance of the purchase price. As borne out by the
evidence, Velarde had to pay in full in case of BPI's disapproval of the application for
assumption of mortgage. What Velarde should have done was to pay the balance of P1.8
million. Instead, Velarde sent Raymundo a letter dated January 7, 1987 (Exh. 'K', '4') which
was strongly given weight by the lower court in reversing the decision rendered by then
Judge Ynares-Santiago. In said letter, Velarde registered their willingness to pay the balance
in cash but enumerated 3 new conditions which, to the mind of this Court, would constitute a
new undertaking or new agreement which is subject to the consent or approval of
Raymundo. These 3 conditions were not among those previously agreed upon by Velarde
and Raymundo. These are mere offers or, at most, an attempt to novate. But then again,
there can be no novation because there was no agreement of all the parties to the new
contract (Garcia, Jr. vs. Court of Appeals, 191 SCRA 493).
"It was likewise agreed that in case of violation of the mortgage obligation, the Deed of Sale
with Assumption of Mortgage would be deemed 'automatically cancelled and of no further
force and effect, as if the same had never been executed or entered into.' While it is true that
even if the contract expressly provided for automatic rescission upon failure to pay the price,
the vendee may still pay, he may do so only for as long as no demand for rescission of the

contract has been made upon him either judicially or by a notarial act (Article 1592, Civil
Code). In the case at bar, Raymundo sent Velarde notarial notice dated January 8, 1987 of
cancellation/rescission of the contract due to the latter's failure to comply with their
obligation. The rescission was justified in view of Velarde's failure to pay the price (balance)
which is substantial and fundamental as to defeat the object of the parties in making the
agreement. As adverted to above, the agreement of the parties involved a reciprocal
obligation wherein the obligation of one is a resolutory condition of the obligation of the other,
the non-fulfillment of which entitles the other party to rescind the contract (Songcuan vs. IAC,
191 SCRA 28). Thus, the non-payment of the mortgage obligation by appellees Velarde
would create a right to demand payment or to rescind the contract, or to criminal prosecution
(Edca Publishing & Distribution Corporation vs. Santos, 184 SCRA 614). Upon appellee's
failure, therefore, to pay the balance, the contract was properly rescinded (Ruiz vs. IAC, 184
SCRA 720). Consequently, appellees Velarde having violated the contract, they have lost
their right to its enforcement and hence, cannot avail of the action for specific performance
(Voysaw vs. Interphil Promotions, Inc., 148 SCRA 635)." 10
Hence, this appeal. 11
The Issues
Petitioners, in their Memorandum,12 interpose the following assignment of errors:
"I.
The Court of Appeals erred in holding that the non-payment of the mortgage obligation
resulted in a breach of the contract.
"II
The Court of Appeals erred in holding that the rescission (resolution) of the contract by
private respondents was justified.
"III
The Court of Appeals erred in holding that petitioners' January 7, 1987 letter gave three 'new
conditions' constituting mere offers or an attempt to novate necessitating a new agreement
between the parties."
The Court's Ruling
The Petition is partially meritorious.
First Issue:
Breach of Contract
Petitioner aver that their nonpayment of private respondents' mortgage obligation did not constitute a
breach of contract, considering that their request to assume the obligation had been disapproved by
the mortgagee bank. Accordingly, payment of the monthly amortizations ceased to be their obligation
and, instead, it devolved upon private respondents again.

However, petitioners did not merely stop paying the mortgage obligations; they also failed to pay the
balance of the purchase price. As admitted by both parties, their agreement mandated that
petitioners should pay the purchase price balance of P1.8 million to private respondents in case the
request to assume the mortgage would be disapproved. Thus, on December 15, 1986, when
petitioners received notice of the bank's disapproval of their application to assume respondents'
mortgage, they should have paid the balance of the P1.8 million loan.
Instead of doing so, petitioners sent a letter to private respondents offering to make such payment
only upon the fulfillment of certain conditions not originally agreed upon in the contract of sale. Such
conditional offer to pay cannot take the place of actual payment as would discharge the obligation of
a buyer under a contract of sale.
In a contract of sale, the seller obligates itself to transfer the ownership of and deliver a determinate
things, and the buyer to pay therefor a price certain in money or its equivalent. 13
Private respondents had already performed their obligation through the execution of the Deed of
Sale, which effectively transferred ownership of the property to petitioner through constructive
delivery. Prior physical delivery or possession is not legally required, and the execution of the Deed
of Sale is deemed equivalent to delivery.14
Petitioners, on the other hand, did not perform their correlative obligation of paying the contract price
in the manner agreed upon. Worse, they wanted private respondents to perform obligations beyond
those stipulated in the contract before fulfilling their own obligation to pay the full purchase price.
Second Issue
Validity of the Rescission
Petitioners likewise claim that the rescission of the contract by private respondents was not justified,
inasmuch as the former had signified their willingness to pay the balance of the purchase price only
a little over a month from the time they were notified of the disapproval of their application for
assumption of mortgage. Petitioners also aver that the breach of the contract was not substantial as
would warrant a rescission. They cite several cases15 in which this Court declared that rescission of a
contract would not be permitted for a slight or casual breach. Finally, they argue that they have
substantially performed their obligation in good faith, considering that they have already made the
initial payment of P800,000 and three (3) monthly mortgage payments.
As pointed out earlier, the breach committed by petitioners was not so much their nonpayment of the
mortgage obligations, as their nonperformance of their reciprocal obligation to pay the purchase
price under the contract of sale. Private respondents' right to rescind the contract finds basis in
Article 1191 of the Civil Code, which explicitly provides as follows:
"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 right of rescission of a party to an obligation under Article 1191 of the Civil Code is predicated on
a breach of faith by the other party who violates the reciprocity between them. 16 The breach

contemplated in the said provision is the obligor's failure to comply with an existing
obligation.17 When the obligor cannot comply with what is incumbent upon it, the obligee may seek
rescission and, in the absence of any just cause for the court to determine the period of compliance,
the court shall decree the rescission.18
In the present case, private respondents validly exercised their right to rescind the contract, because
of the failure of petitioners to comply with their obligation to pay the balance of the purchase price.
Indubitably, the latter violated the very essence of reciprocity in the contract of sale, a violation that
consequently gave rise to private respondent's right to rescind the same in accordance with law.
True, petitioners expressed their willingness to pay the balance of the purchase price one month
after it became due; however, this was not equivalent to actual payment as would constitute a faithful
compliance of their reciprocal obligation. Moreover, the offer to pay was conditioned on the
performance by private respondents of additional burdens that had not been agreed upon in the
original contract. Thus, it cannot be said that the breach committed by petitioners was merely slight
or casual as would preclude the exercise of the right to rescind.
Misplaced is petitioners' reliance on the cases19 they cited, because the factual circumstances in
those cases are not analogous to those in the present one. In Song Fo there was, on the part of the
buyer, only a delay of twenty (20) days to pay for the goods delivered. Moreover, the buyer's offer to
pay was unconditional and was accepted by the seller.
In Zepeda, the breach involved a mere one-week delay in paying the balance of 1,000 which was
actually paid.
In Tan, the alleged breach was private respondent's delay of only a few days, which was for the
purpose of clearing the title to the property; there was no reference whatsoever to the nonpayment
of the contract price.
In the instant case, the breach committed did not merely consist of a slight delay in payment or an
irregularity; such breach would not normally defeat the intention of the parties to the contract. Here,
petitioners not only failed to pay the P1.8 million balance, but they also imposed upon private
respondents new obligations as preconditions to the performance of their own obligation. In effect,
the qualified offer to pay was a repudiation of an existing obligation, which was legally due and
demandable under the contract of sale. Hence, private respondents were left with the legal option of
seeking rescission to protect their own interest.
Mutual Restitution
Required in Rescission
As discussed earlier, the breach committed by petitioners was the nonperformance of a reciprocal
obligation, not a violation of the terms and conditions of the mortgage contract. Therefore, the
automatic rescission and forfeiture of payment clauses stipulated in the contract does not apply.
Instead, Civil Code provisions shall govern and regulate the resolution of this controversy.
Considering that the rescission of the contract is based on Article 1191 of the Civil Code, mutual
restitution is required to bring back the parties to their original situation prior to the inception of the
contract. Accordingly, the initial payment of P800,000 and the corresponding mortgage payments in
the amounts of P27,225, P23,000 and P23,925 (totaling P874,150.00) advanced by petitioners

should be returned by private respondents, lest the latter unjustly enrich themselves at the expense
of the former.
Rescission creates the obligation to return the object of the contract. It can be carried out only when
the one who demands rescission can return whatever he may be obliged to restore. 20 To rescind is to
declare a contract void at its inception and to put an end to it as though it never was. It is not merely
to terminate it and release the parties from further obligations to each other, but to abrogate it from
the beginning and restore the parties to their relative positions as if no contract has been made. 21

Third Issue
Attempt to Novate
In view of the foregoing discussion, the Court finds it no longer necessary to discuss the third issue
raised by petitioners. Suffice it to say that the three conditions appearing on the January 7, 1987
letter of petitioners to private respondents were not part of the original contract. By that time, it was
already incumbent upon the former to pay the balance of the sale price. They had no right to
demand preconditions to the fulfillment of their obligation, which had become due.
WHEREFORE, the assailed Decision is hereby AFFIRMED with the MODIFICATION that private
respondents are ordered to return to petitioners the amount of P874,150, which the latter paid as a
consequence of the rescinded contract, with legal interest thereon from January 8, 1987, the date of
rescission. No pronouncement as to costs.
SO ORDERED.

1wphi1.nt

Melo, Vitug, and Sandoval-Gutierrez, JJ., concur.