E.

Lease With Option to Purchase

The Court has recognized that sellers who do not wish to enter into conditional
contracts of sale have often resorted to lease with options to purchase, but that
nevertheless the underlying contract would not prevent the transfer of ownership of
the subject matter to the buyer-lessee upon ful llment of the condition of the full
payment of the rents, thus:
Sellers desirous of making conditional sales of their goods, but who do not wish
openly to make a bargain in that form, for one reason or another, have frequently resorted
to the device of making contracts in the form of leases either with options to the buyer to
purchase for a small consideration at the end of term, provided the so-called rent has
been duly paid, or with stipulations that if the rent throughout the term is paid, title shall
thereupon vest in the lessee. The so-called rent must necessarily be regarded as payment
of the price in installments since the due payment of the agreed amount results, by the
terms of the bargain, in the transfer of title to the lessee.

The provision of the Recto Law may be to apply to lease arrangements over
moveables which do not expressly provide for an option on the part of the lessee to
purchase.
1. What is the Barring Effect on Such contracts?
The issue that arises when it comes to purported contracts of lease with option to
purchase is whether the taking back of possession or enjoyment of the property
leased as treated by Article 1485 carries the concept of rescission or foreclosure. The
distinction is critical, because if the taking back of possession or enjoyment of the
leased movable is treated as a rescission, then the barring effect of rescission is
applicable, which means that even after taking back possession or enjoyment, and
forfeiting all rentals previously paid, the lessor-seller will be able to collect damages
as may be warranted by the circumstances. On the other hand, if the taking back of
possession or enjoyment of the leased movable is equivalent to foreclosure, then
although the seller-lessor may forfeit in his favor all rentals previously paid, if such
has been stipulated, he can no longer collect any further amounts against the buyerlessee, whether in the form of damages, attorneys fees, or even unpaid but accrued
rentals, and not even the expenses incurred in repairing the movable.
In Elisco Tool Manufacturing Corp. v. Court of Appeals,123 the Court held that
under a purported contract of lease with option to purchase which is covered under
Articles 1484 and 1485, the condition that the lessor has deprived the lessee of
possession or enjoyment of the thing for the purpose of applying Article 1485 which
would be ful lled by the ling by the lessor of a complaint for replevin to recover
possession of movable property and its enforcement by the sheriff, and barred all
action to recover any amount from the lessee. However, the Court also held that if
the main purpose for seeking recovery of the personal property under a writ of
replevin was merely to ensure enforcement of the remedy of speci c performance
under Article 1484(1), there would be no barring effect by reason of the enforcement
of the writ. Therefore, not every deprivation of possession would result in producing
the barring effect under Article 1485 of the Civil Code.
Lately, in PCI Leasing and Finance, Inc. v. Giraffe-X Creative Imaging, Inc.,124 the
Court held that when the lessor in a lease with option to purchase, in choosing,
through replevin, to deprive the lessee of possession of the leased equipment,
waived its right to bring an action to recover unpaid rentals, since the remedies
provided for in Article 1484 are alternative, not cumulative the exercise of one bar
the exercise of the others.
By and large, it seems to be the thinking of the Court that a sale of movables on
installment, when structured as a lease with option to purchase is equivalent to a
security arrangement whereby the subject movables are mortgaged by the buyer to
the seller. Consequently, when the purported lessor takes possession of the subject
movable, the same is treated legally as a foreclosure and the barring effect

applicable to foreclosure remedy, not rescission, is given application.

Remedies in cases of Immovables
A. Remedies of Seller
1. Anticipatory Breach
Article 1591. Should the vendor have reasonable grounds to fear the loss of
immovable property sold and its price, he may immediately sue for the rescission of
the sale.
Should such ground not exist, the provisions of article 1191 shall be observed.
Article 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 the fulllment and the rescission of the
obligation, with the payment of damages in either case. He may also seek rescission,
even after he has chosen fulllment, if the latter should become impossible.
The court shall decree the rescission claimed, unless there be just cause authorizing
the xing of a period.
This is understood to be without prejudice to the rights of third persons who have
acquired the thing, in accordance with articles 1385 and 1388 and the Mortgage Law.
2. Failure of Buyer to Pay Price
a. Rescission under Article 1952
Article 1592. In the sale of immovable property, even though it may have been
stipulated that upon failure to pay the price at the time agreed upon the rescission of
the contract shall of right take place, the vendee may pay, even after the expiration
of the period, as long as no demand for rescission of the contract has been made
upon him either judicially or by a notarial act. After the demand, the court may not
grant him a new term.
b. Contracts to Sell not covered by Article 1592
In J.M. Tuason & Co., Inc. v. Javier,127 despite the rescission clause provided
for in the contract to sell a residential lot in a subdivision project, the Court
refused to rule on the proper application of Article 1592 to the case, nor to allow
either a rescission or cancellation on the part of the seller in spite of clear default
on the part of the buyer holding:

Plaintiff maintains that this provision governs contracts of sale, not contracts to
sell, such as the one entered into by the parties in this case. Regardless, however, of
the propriety of applying said Art. 1592 thereto, We nd that plaintiff herein has not
been denied substantial justice, for, according to Art. 1234 of said Code: If the
obligation has been substantially performed in good faith, the obligor may recover as
though there has been a strict and complete ful llment, less damages suffered by
the obligee. ... accordingly, the trial court sentenced the defendant to pay all such
installments, interests, fees and costs. Thus, plaintiff will thereby recover everything
due thereto, pursuant to its contract with the defendant, including such damages as
the former may have suffered in consequence of the latters default. Under these
circumstances, We feel that, in the interest of justice and equity, the decision appeal
from may be upheld upon the authority of Art. 1234 of the Civil Code.

The Court also held that in any event Article 1592 of the Civil Code has no
application to a contract to sell; the said article applies only to ordinary sale
transferring ownership simultaneously with the delivery of the real property sold, but
not to one in which the seller retained ownership of the immovable object of the sale,
merely undertaking to convey it provided the buyer strictly complied with the terms
of the contract.
c. Resort to Equitable Resolutions

In Legarda Hermanos v. Saldana,130 the contract between the parties

covering the purchase of two residential lots clearly provided that in case of
default on the part of the buyer, all amounts paid in accordance with the
agreement together with the improvements on the premises shall be considered
as rents and as payment for damages suffered by reason of such breach.
Nevertheless, the Court held that the buyer of the two small residential lots on
installment contracts on a ten-year basis who has faithfully paid for eight
continuous years on the principal alone already more than the value of one lot,
besides the larger stipulated interests on both lots, was entitled to the
conveyance of one fully paid lot of his choice. In upholding such ruling, the Court
held that the judgment is fair and just and in accordance with law and equity.
B. Remedies of Buyer
1. Suspension of Payment
Article 1590. Should the vendee be disturbed in the possession or ownership of
the thing acquired, or should he have reasonable grounds to fear such
disturbance, by a vindicatory action or a foreclosure of mortgage, he may
suspend the payment of the price until the vendor has caused the disturbance or
danger to cease, unless the latter gives security for the return of the price in a
proper case, or it has been stipulated that, notwithstanding any such
contingency, the vendee shall be bound to make the payment. A mere act of
trespass shall not authorize the suspension of the payment of the price.
2. In case of Subdivision or Condominium Projects
Sections 23 and 24 of Pres. Decree 957, provide that no installment
payments made by the buyer in a subdivision or condominium project for the lot
or unit he contracts to buy shall be forfeited in favor of the owner or developer
when the buyer, after due notice to the owner or developer desists from further
payment due to the failure of the owner or developer to develop the subdivision
or condominium project according to the approved plans and within the time limit
for complying with the same. The sections also grant to the buyer the option to
be reimbursed the total amount paid.
Yet, in Cho Chien v. Sta Lucia Realty & Dev., Inc.,141 it was held that nothing
in P.D. 957 provides for the nulli cation of a contract to sell in the event that the
seller, at the time the contract was entered into did not posses a certi cate of
registration and a license to sell.
a. Notice Required under Section 23 of PD 957
Section 23 of Pres. Decree 957 does not require that a notice be given rst
by the buyer to the seller before a demand for refund can be made as the notice
and demand can be made in the same letter or communication.
b. Retroactive Application of PD 957
In Eugenio v. Drilon,143 the Court held that the failure to develop a
subdivision constitute legal justi cation for the nonpayment of amortization by
the buyer on installment under the land purchase agreements entered into prior
to the enactment of Pres. Decree 957: P.D. 957 did not expressly provide for
retroactivity in its entirety, but such can be plainly inferred from the
unmistakable intent of the law. The intent of the law, as culled from its preamble
and from the situation, circumstances and conditions it sought to remedy, must
be enforced.144 x x x It goes without saying that, as an instrument of social
justice, the law must favor the weak and the disadvantaged, including, in this
instance, small lot buyers and aspiring homeowners. P.D. 957 was enacted with
no other end in view than to provide a protective mantle over helpless citizens

who may fall prey to the manipulations and machinations of unscrupulous

subdivisions and condominium sellers.
3. Right to Grace Period Stipulated
When a grace period is provided for in the contract of sale, it should be
construed as a right, not an obligation of the debtor, and when unconditionally
conferred, the grace period is effective without further need of demand either calling
for the payment of the obligation or for honoring the right.
C. MACEDA LAW: Sales of Real Estate On Installments
Republic Act 6552, entitled the Realty Installment Buyer Protection Act (also
the Maceda Law), provides for certain protection to particular buyers of real estate
payable on installments. The law declares as public policy to protect buyers of real
estate on installment payments against onerous and oppressive conditions.
a. Role of Maceda Law
It would seem that more than just providing for a substantial and procedural
setting for the rescission and cancellation of contracts covered therein, the
Maceda Law in whole is relied upon and used by the courts, including the
Supreme Court, as a policy statement of the State in protecting the interests of
buyers of residential real estate on installments.
Take for example the case of Palay, Inc. v. Clave,159 which involved a
contract to sell entered into by the parties in 1965 (the Maceda Law took effect in
1972), which provided for automatic extrajudicial rescission upon default in
payment of any monthly installment after the lapse of 90 days from the
expiration of the grace period of one month, without need of notice and with
forfeiture of all installments paid. Although the Maceda Law was inapplicable, the
Court took into consideration Section 3 of the Law which provided for the
indispensability of notice of cancellation to the buyer and declared it is a matter
of public policy to protect buyers of real estate on installment payments against
onerous and oppressive conditions. Waiver of notice is one such onerous and
oppressive condition to buyers of real estate on installment payments.
b. Retroactive Application of Law
In Siska Dev. Corp. v. Of ce of the President,161 the Court extended the
formal requirements of rescission under the Maceda Law to apply even to
contracts entered into prior to the effectivity of the Maceda Law.
However, in one case, the Court refused to apply retroactively the terms of
the Maceda Law, thus: As with Presidential Decrees Nos. 9576 and 1344,
Republic Act No. 6552 does not expressly provide for its retroactive application
and, therefore, it could not have encompass(ed) the cancellation of the contracts
to sell pursuant to an automatic cancellation clause which had become
operational long before the approval of the law.
1. Transactions Covered
It should be noted that the Maceda Law does not cover all sales of realty on
installments, but primarily residential real estate. But unlike the Recto Law on
movables, the Maceda Law covers not only sales on installments of real estate, but
also nancing of such acquisitions. It expressly covers all transactions or
contracts involving the sale or nancing of real estate on installment payments,
including residential condominium apartments.
sale by installments- for sales of movables by installments, which should involve at
least two (2) installments to be paid in the future at the time of the perfection of the
contract. (held by Levy Hermanos, Inc.)

a. Maceda Law Covers Contracts to Sell

The reasoning in Mortel is defective for the following reasons: First, there is
no doubt under the provisions of the Maceda Law that it covers both contracts of
sale and contracts to sell on installments condominium units, and the coverage is
based on the nature of the contract and subject matter at the time of perfection,
and not what happens at consummation. Secondly, precisely when the conditions
attaching to the contract to sell (such as non-payment of the installments) is not
ful lled which have the effect of extinguishing the contract, the Maceda Law
governs the effective remedies and consequences available to the parties (i.e.,
notarial rescission and return of cash surrender value, etc.). Therefore, the nonful llment of condition under a contract to sell does not take it out of the Maceda
Law.
2. Transactions excluded from Coverage
The following transactions, although involving sales on installments, are
expressly excluded from the coverage of the Law, thus:
(a) Sales covering industrial lots;
(b) Sales covering commercial buildings (and commercial lots by implication);
and
(c) Sales to tenants under agrarian reform laws.
The enumeration of the transactions not covered by the Maceda Law is not
exclusive, since other transactions over immovables, although not within the
enumerated exclusions are to be considered as excluded because they are not within
the clearly expressed coverage. An example would be the sale on installment of
commercial or of ce condominium units.
a. Maceda Law cannot be Invoked by Highest Bidder in Foreclosure Proceedings
The Court has ruled that the terms of the Maceda Law cannot be invoked by
a person or entity who acquired the subdivision lots in a foreclosure sale on the
mortgaged constituted thereon by the developer. Such person or entity, although
binding itself to the terms of the contracts of sale, is not the real party to the
original installment sales, and more importantly, does not have any rights
promoted under the Maceda Law which contains provisions for the bene ts of
real estate buyers on installments.
3. Rights Granted
a. At least Two (2) Years Installments Paid
Where the buyer has paid at least two (2) years of installments, he is entitled
to the following rights in case he defaults in the payments of succeeding
installments:
(a) To pay, without additional interest, the unpaid installments due within the
total grace periodearned by him, which is xed at the rate of one (1) month
grace period for every one (1) year of installment payments;
(b) If the contract is cancelled, the seller shall refund to the buyer the cash
surrender value of the payments on the property equivalent to 50% of the total
payments made and, after ve (5) years of installments, an additional 5% every
year but not to exceed 90% of the total payments made.
i. Exercise of Grace Period
The right to make use of the grace period can be exercised by the buyer
only once in every ve (5) years of the life of the contract and its extensions,
if any.
Down payments, deposits or options on the contract shall be included in
the computation of the total number of installments made.

ii. How cancellation of Contract Can be Effected

The actual cancellation of the contract shall take place after thirty (30)
days from receipt by the buyer of the notice of cancellation or the demand
for rescission of the contract by a notarial act and upon full payment of the
cash surrender value to the buyer.
b. Less than Two (2) Years Installments Paid
In case where less than two (2) years of installments were paid, the buyer
shall still be entitled to a grace period of sixty (60) days from the date the
installment became due.
If the buyer fails to pay the installments due at the expiration of the grace
period, the seller may cancel the contract after thirty (30) days from receipt by
the buyer of the notice of cancellation or the demand for rescission of the
contract by a notarial act.
c. Compensation Rule on Amortization Payments
In case where less than two (2) years of installments were paid, the buyer
shall still be entitled to a grace period of sixty (60) days from the date the
installment became due. If the buyer fails to pay the installments due at the
expiration of the grace period, the seller may cancel the contract after thirty (30)
days from receipt by the buyer of the notice of cancellation or the demand for
rescission of the contract by a notarial act.
d. Formula to Compute the Installment Mode
In Jestra Dev. and Mgt. Corp. v. Paci co,173 the Court clari ed that the
proper formula to apply in determining how many installments have been made
is to include any payment made as downpayment or reservation fee as part of
the installments made, and then to divide them by the stipulated mode of
payment, i.e., whether it is monthly, quarterly, semi-annual or annual.
4. Interpretation of Grace Period and Mode of Cancellation
McLaughlin ruling therefore clearly provides for two basic doctrines applicable to
the Maceda Law. First, although the Law seem to require rescission and cancellation
to be both by notarial act, McLaughlin would hold notarial act as merely applicable to
rescission, whereas notice of cancellation need not be by notarial act. Second,
McLaughlin would hold that even after the expiration of the grace period provided by
the Law, the buyer still can prevent rescission or cancellation of the contract within
the 30-day period when rescission or cancellation is to take effect.
In other words, McLaughlin would provide for two grace periods: the rst grace
period is the one provided for expressly by the Law, which is a minimum of 60 days;
and the other would be the period before rescission or cancellation actually takes
effect.
The principle was reiterated in Active Realty & Dev. Corp. v. Daroya,177 which
held that the refund of the cash surrender value is one of the mandatory twin
requriements for a valid and effective cancellation under the Maceda Law, and
absence of which would mean that the contract remains valid and subsisting.
Olympia Housing v. Panasiatic Travel Corp.,178 held that the Maceda law
recognizes the right of the seller to cancel the contract but any such cancellation
must be done in conformity with the requirements therein prescribed. The Court held
that In addition to the notarial act of rescission, the seller is required to refund to the
buyer the cash surrender value of the payments on the property; and that the actual
cancellation of the contract can only be deemed to take place upon the expiration of
a 30day period following the receipt by the buyer of the notice of cancellation or
demand for rescission by a notarial act and the full payment of the cash surrender
value.

5. Other Rights Granted to Buyer

In addition, the Maceda Law provides for the following rights to the buyer:
(a) To sell his rights or assign the same to another person or to reinstate the
contract by updating the account during the grace period and before actual
cancellation of the contract. The deed of sale assignment shall be done by notarial
act.
(b) To pay in advance any installment or the full unpaid balance of the purchase
price any time without interest and to have such full payment of the purchase price
annotated in the certi cate of title covering the property.
6. Effect of Contrary
Stipulations Under Section 7 of the Maceda Law, any stipulation in any contract
entered into contrary to the provisions of the Law, shall be null and void.
7. Maceda Law Cannot be Availed by Developer
In Lagandaon v. Court of Appeals,181 the Court held that the Maceda Law has no
application to protect the developer or one who succeeds the developer, since the
policy of that law, as embodied in its title, is to provide protection to buyers of real
estate on installment payments.
Cancellation of Judicial Sale
Where a judicial sale is voided without fault of the purchaser, the latter is entitled
to reimbursement of the purchase money paid by him. A judicial sale can only be set
aside upon the return to the buyer of the purchase price with simple interest,
together with all sums paid out by him in improvements introduced on the property,
taxes, and other expenses by him.