SECOND DIVISION

[G.R. No. 137290. July 31, 2000]

SAN MIGUEL PROPERTIES PHILIPPINES, INC., petitioner, vs. SPOUSES ALFREDO

HUANG and GRACE HUANG, respondents.

DECISION

MENDOZA, J.:

This is a petition for review of the decision, dated April 8, 1997, of the Court of Appeals
[1]

which reversed the decision of the Regional Trial Court, Branch 153, Pasig City dismissing
the complaint brought by respondents against petitioner for enforcement of a contract of
sale.

The facts are not in dispute.

Petitioner San Miguel Properties Philippines, Inc. is a domestic corporation engaged in the
purchase and sale of real properties. Part of its inventory are two parcels of land totalling
1, 738 square meters at the corner of Meralco Avenue and General Capinpin Street,
Barrio Oranbo, Pasig City, which are covered by TCT Nos. PT-82395 and PT-82396 of the
Register of Deeds of Pasig City.

On February 21, 1994, the properties were offered for sale for P52,140,000.00 in cash.
The offer was made to Atty. Helena M. Dauz who was acting for respondent spouses as
undisclosed principals. In a letter dated March 24, 1994, Atty. Dauz signified her clients
[2]

interest in purchasing the properties for the amount for which they were offered by
petitioner, under the following terms: the sum of P500,000.00 would be given as earnest
money and the balance would be paid in eight equal monthly installments from May to
December, 1994. However, petitioner refused the counter-offer.

On March 29, 1994, Atty. Dauz wrote another letter proposing the following terms for the
[3]

purchase of the properties, viz:

This is to express our interest to buy your-above-mentioned property with an

area of 1, 738 sq. meters. For this purpose, we are enclosing herewith the
sum of P1,000,000.00 representing earnest-deposit money, subject to the
following conditions.

1. We will be given the exclusive option to purchase the property within the 30
days from date of your acceptance of this offer.

2. During said period, we will negotiate on the terms and conditions of the
purchase; SMPPI will secure the necessary Management and Board
approvals; and we initiate the documentation if there is mutual agreement
between us.
 3. In the event that we do not come to an agreement on this transaction, the
said amount of P1,000,000.00 shall be refundable to us in full upon demand. .
..

Isidro A. Sobrecarey, petitioners vice-president and operations manager for corporate real
estate, indicated his conformity to the offer by affixing his signature to the letter and
accepted the "earnest-deposit" of P1 million. Upon request of respondent spouses,
Sobrecarey ordered the removal of the "FOR SALE" sign from the properties.

Atty. Dauz and Sobrecarey then commenced negotiations. During their meeting on April 8,
1994, Sobrecarey informed Atty. Dauz that petitioner was willing to sell the subject
properties on a 90-day term. Atty. Dauz countered with an offer of six months within which
to pay.

On April 14, 1994, the parties again met during which Sobrecarey informed Atty. Dauz that
petitioner had not yet acted on her counter-offer. This prompted Atty. Dauz to propose a
four-month period of amortization.

On April 25, 1994, Atty. Dauz asked for an extension of 45 days from April 29, 1994 to
June 13, 1994 within which to exercise her option to purchase the property, adding that
within that period, "[we] hope to finalize [our] agreement on the matter." Her request was
[4]

granted.

On July 7, 1994, petitioner, through its president and chief executive officer, Federico
Gonzales, wrote Atty. Dauz informing her that because the parties failed to agree on the
terms and conditions of the sale despite the extension granted by petitioner, the latter was
returning the amount of P1 million given as "earnest-deposit." [5]

On July 20, 1994, respondent spouses, through counsel, wrote petitioner demanding the
execution within five days of a deed of sale covering the properties. Respondents
attempted to return the "earnest-deposit" but petitioner refused on the ground that
respondents option to purchase had already expired.

On August 16, 1994, respondent spouses filed a complaint for specific performance
against petitioner before the Regional Trial Court, Branch 133, Pasig City where it was
docketed as Civil Case No. 64660.

Within the period for filing a responsive pleading, petitioner filed a motion to dismiss the
complaint alleging that (1) the alleged "exclusive option" of respondent spouses lacked a
consideration separate and distinct from the purchase price and was thus unenforceable
and (2) the complaint did not allege a cause of action because there was no "meeting of
the minds" between the parties and, therefore, no perfected contract of sale. The motion
was opposed by respondents.

On December 12, 1994, the trial court granted petitioners motion and dismissed the
action. Respondents filed a motion for reconsideration, but it was denied by the trial court.
They then appealed to the Court of Appeals which, on April 8, 1997, rendered a
decision reversing the judgment of the trial court. The appellate court held that all the
[6]

requisites of a perfected contract of sale had been complied with as the offer made on
March 29, 1994, in connection with which the earnest money in the amount of P1 million
was tendered by respondents, had already been accepted by petitioner. The court cited
Art. 1482 of the Civil Code which provides that "[w]henever earnest money is given in a
contract of sale, it shall be considered as part of the price and as proof of the perfection of
the contract." The fact the parties had not agreed on the mode of payment did not affect
the contract as such is not an essential element for its validity. In addition, the court found
that Sobrecarey had authority to act in behalf of petitioner for the sale of the properties.[7]

Petitioner moved for reconsideration of the trial courts decision, but its motion was denied.
Hence, this petition.

Petitioner contends that the Court of Appeals erred in finding that there was a perfected
contract of sale between the parties because the March 29, 1994 letter of respondents,
which petitioner accepted, merely resulted in an option contract, albeit it was
unenforceable for lack of a distinct consideration. Petitioner argues that the absence of
agreement as to the mode of payment was fatal to the perfection of the contract of sale.
Petitioner also disputes the appellate courts ruling that Isidro A. Sobrecarey had authority
to sell the subject real properties.
[8]

Respondents were required to comment within ten (10) days from notice. However,
despite 13 extensions totalling 142 days which the Court had given to them, respondents
failed to file their comment. They were thus considered to have waived the filing of a
comment.

The petition is meritorious.

In holding that there is a perfected contract of sale, the Court of Appeals relied on the
following findings: (1) earnest money was allegedly given by respondents and accepted by
petitioner through its vice-president and operations manager, Isidro A. Sobrecarey; and
(2) the documentary evidence in the records show that there was a perfected contract of
sale.

With regard to the alleged payment and acceptance of earnest money, the Court holds
that respondents did not give the P1 million as "earnest money" as provided by Art. 1482
of the Civil Code. They presented the amount merely as a deposit of what would
eventually become the earnest money or downpayment should a contract of sale be made
by them. The amount was thus given not as a part of the purchase price and as proof of
the perfection of the contract of sale but only as a guarantee that respondents would not
back out of the sale. Respondents in fact described the amount as an "earnest-deposit."
In Spouses Doromal, Sr. v. Court of Appeals, it was held:
[9]

. . . While the P5,000 might have indeed been paid to Carlos in October, 1967,
there is nothing to show that the same was in the concept of the earnest
money contemplated in Art. 1482 of the Civil Code, invoked by petitioner, as
signifying perfection of the sale. Viewed in the backdrop of the factual milieu
 thereof extant in the record, We are more inclined to believe that the
said P5,000.00 were paid in the concept of earnest money as the term was
understood under the Old Civil Code, that is, as a guarantee that the buyer
would not back out, considering that it is not clear that there was already a
definite agreement as to the price then and that petitioners were decided to
buy 6/7 only of the property should respondent Javellana refuse to agree to
part with her 1/7 share.
[10]

In the present case, the P1 million "earnest-deposit" could not have been given as earnest
money as contemplated in Art. 1482 because, at the time when petitioner accepted the
terms of respondents offer of March 29, 1994, their contract had not yet been perfected.
This is evident from the following conditions attached by respondents to their letter, to wit:
(1) that they be given the exclusive option to purchase the property within 30 days from
acceptance of the offer; (2) that during the option period, the parties would negotiate the
terms and conditions of the purchase; and (3) petitioner would secure the necessary
approvals while respondents would handle the documentation.

The first condition for an option period of 30 days sufficiently shows that a sale was never
perfected. As petitioner correctly points out, acceptance of this condition did not give rise
to a perfected sale but merely to an option or an accepted unilateral promise on the part of
respondents to buy the subject properties within 30 days from the date of acceptance of
the offer. Such option giving respondents the exclusive right to buy the properties within
the period agreed upon is separate and distinct from the contract of sale which the parties
may enter. All that respondents had was just the option to buy the properties which
[11]

privilege was not, however, exercised by them because there was a failure to agree on the
terms of payment. No contract of sale may thus be enforced by respondents.

Furthermore, even the option secured by respondents from petitioner was fatally
defective. Under the second paragraph of Art. 1479, an accepted unilateral promise to buy
or sell a determinate thing for a price certain is binding upon the promisor only if the
promise is supported by a distinct consideration. Consideration in an option contract may
be anything of value, unlike in sale where it must be the price certain in money or its
equivalent. There is no showing here of any consideration for the option. Lacking any
proof of such consideration, the option is unenforceable.

Equally compelling as proof of the absence of a perfected sale is the second condition
that, during the option period, the parties would negotiate the terms and conditions of the
purchase. The stages of a contract of sale are as follows: (1) negotiation, covering the
period from the time the prospective contracting parties indicate interest in the contract to
the time the contract is perfected; (2) perfection, which takes place upon the concurrence
of the essential elements of the sale which are the meeting of the minds of the parties as
to the object of the contract and upon the price; and (3) consummation, which begins
when the parties perform their respective undertakings under the contract of sale,
culminating in the extinguishment thereof. In the present case, the parties never got past
[12]

the negotiation stage. The alleged "indubitable evidence" of a perfected sale cited by the
[13]

appellate court was nothing more than offers and counter-offers which did not amount to
any final arrangement containing the essential elements of a contract of sale. While the
parties already agreed on the real properties which were the objects of the sale and on the
purchase price, the fact remains that they failed to arrive at mutually acceptable terms of
payment, despite the 45-day extension given by petitioner.

The appellate court opined that the failure to agree on the terms of payment was no bar to
the perfection of the sale because Art. 1475 only requires agreement by the parties as to
the price of the object. This is error. In Navarro v. Sugar Producers Cooperative Marketing
Association, Inc., we laid down the rule that the manner of payment of the purchase price
[14]

is an essential element before a valid and binding contract of sale can exist. Although the
Civil Code does not expressly state that the minds of the parties must also meet on the
terms or manner of payment of the price, the same is needed, otherwise there is no sale.
As held in Toyota Shaw, Inc. v. Court of Appeals, agreement on the manner of payment
[15]

goes into the price such that a disagreement on the manner of payment is tantamount to a
failure to agree on the price. In Velasco v. Court of Appeals, the parties to a proposed
[16] [17]

sale had already agreed on the object of sale and on the purchase price. By the buyers
own admission, however, the parties still had to agree on how and when the
downpayment and the installments were to be paid. It was held:

. . . Such being the situation, it can not, therefore, be said that a definite and
firm sales agreement between the parties had been perfected over the lot in
question. Indeed, this Court has already ruled before that a definite agreement
on the manner of payment of the purchase price is an essential element in the
formation of a binding and enforceable contract of sale. The fact, therefore,
that the petitioners delivered to the respondent the sum of P10,000 as part of
the down-payment that they had to pay cannot be considered as sufficient
proof of the perfection of any purchase and sale agreement between the
parties herein under Art. 1482 of the new Civil Code, as the petitioners
themselves admit that some essential matter - the terms of the payment - still
had to be mutually covenanted. [18]

Thus, it is not the giving of earnest money, but the proof of the concurrence of all the
essential elements of the contract of sale which establishes the existence of a perfected
sale.

In the absence of a perfected contract of sale, it is immaterial whether Isidro A.

Sobrecarey had the authority to enter into a contract of sale in behalf of petitioner. This
issue, therefore, needs no further discussion.

WHEREFORE, the decision of the Court of Appeals is REVERSED and respondents

complaint is DISMISSED.

SO ORDERED.

Quisumbing, Buena, and De Leon, Jr., JJ., concur.

Bellosillo, (Chairman), J., on leave.

 Republic of the Philippines
SUPREME COURT
Manila

FIRST DIVISION

G.R. No. L-36902 January 30, 1982

LUIS PICHEL, petitioner,

vs.
PRUDENCIO ALONZO, respondent.

GUERRERO, J.:

This is a petition to review on certiorari the decision of the Court of First Instance of Basilan City dated January 5,
1973 in Civil Case No. 820 entitled "Prudencio Alonzo, plaintiff, vs. Luis Pichel, defendant."

This case originated in the lower Court as an action for the annulment of a "Deed of Sale" dated August 14, 1968
and executed by Prudencio Alonzo, as vendor, in favor of Luis Pichel, as vendee, involving property awarded to the
former by the Philippine Government under Republic Act No. 477. Pertinent portions of the document sued upon
read as follows:

That the VENDOR for and in consideration of the sum of FOUR THOUSAND TWO HUNDRED
PESOS (P4,200.00), Philippine Currency, in hand paid by the VENDEE to the entire satisfaction of
the VENDOR, the VENDOR hereby sells transfers, and conveys, by way of absolute sale, all the
coconut fruits of his coconut land, designated as Lot No. 21 - Subdivision Plan No. Psd- 32465,
situated at Balactasan Plantation, Lamitan, Basilan City, Philippines;

That for the herein sale of the coconut fruits are for all the fruits on the aforementioned parcel of land
presently found therein as well as for future fruits to be produced on the said parcel of land during
the years period; which shag commence to run as of SEPTEMBER 15,1968; up to JANUARY 1,
1976 (sic);

That the delivery of the subject matter of the Deed of Sale shall be from time to time and at the
expense of the VENDEE who shall do the harvesting and gathering of the fruits;

That the Vendor's right, title, interest and participation herein conveyed is of his own exclusive and
absolute property, free from any liens and encumbrances and he warrants to the Vendee good title
thereto and to defend the same against any and all claims of all persons whomsoever. 1

After the pre-trial conference, the Court a quo issued an Order dated November 9, 1972 which in part read thus:

The following facts are admitted by the parties:

Plaintiff Prudencio Alonzo was awarded by the Government that parcel of land designated as Lot
No. 21 of Subdivision Plan Psd 32465 of Balactasan, Lamitan, Basilan City in accordance with
Republic Act No. 477. The award was cancelled by the Board of Liquidators on January 27, 1965 on
the ground that, previous thereto, plaintiff was proved to have alienated the land to another, in
violation of law. In 197 2, plaintiff's rights to the land were reinstated.

On August 14, 1968, plaintiff and his wife sold to defendant an the fruits of the coconut trees which
may be harvested in the land in question for the period, September 15, 1968 to January 1, 1976, in
consideration of P4,200.00. Even as of the date of sale, however, the land was still under lease to
one, Ramon Sua, and it was the agreement that part of the consideration of the sale, in the sum of
P3,650.00, was to be paid by defendant directly to Ramon Sua so as to release the land from the
 clutches of the latter. Pending said payment plaintiff refused to snow the defendant to make any
harvest.

In July 1972, defendant for the first time since the execution of the deed of sale in his favor, caused
the harvest of the fruit of the coconut trees in the land.

xxx xxx xxx

Considering the foregoing, two issues appear posed by the complaint and the answer which must
needs be tested in the crucible of a trial on the merits, and they are:

First.— Whether or nor defendant actually paid to plaintiff the full sum of P4,200.00 upon execution
of the deed of sale.

Second.— Is the deed of sale, Exhibit 'A', the prohibited encumbrance contemplated in Section 8 of
Republic Act No. 477? 2

Anent the first issue, counsel for plaintiff Alonzo subsequently 'stipulated and agreed that his client ... admits fun
payment thereof by defendant. 3 The remaining issue being one of law, the Court below considered the case submitted
for summary judgment on the basis of the pleadings of the parties, and the admission of facts and documentary evidence
presented at the pre-trial conference.

The lower court rendered its decision now under review, holding that although the agreement in question is
denominated by the parties as a deed of sale of fruits of the coconut trees found in the vendor's land, it actually is,
for all legal intents and purposes, a contract of lease of the land itself. According to the Court:

... the sale aforestated has given defendant complete control and enjoyment of the improvements of
the land. That the contract is consensual; that its purpose is to allow the enjoyment or use of a thing;
that it is onerous because rent or price certain is stipulated; and that the enjoyment or use of the
thing certain is stipulated to be for a certain and definite period of time, are characteristics which
admit of no other conclusion. ... The provisions of the contract itself and its characteristics govern its
nature. 4

The Court, therefore, concluded that the deed of sale in question is an encumbrance prohibited by Republic Act No.
477 which provides thus:

Sec. 8. Except in favor of the Government or any of its branches, units, or institutions, land acquired
under the provisions of this Act or any permanent improvements thereon shall not be thereon and for
a term of ten years from and after the date of issuance of the certificate of title, nor shall they
become liable to the satisfaction of any debt contracted prior to the expiration of such period.

Any occupant or applicant of lands under this Act who transfers whatever rights he has acquired on
said lands and/or on the improvements thereon before the date of the award or signature of the
contract of sale, shall not be entitled to apply for another piece of agricultural land or urban,
homesite or residential lot, as the case may be, from the National Abaca and Other Fibers
Corporation; and such transfer shall be considered null and void. 5

The dispositive portion of the lower Court's decision states:

WHEREFORE, it is the judgment of this Court that the deed of sale, Exhibit 'A', should be, as it is,
hereby declared nun and void; that plaintiff be, as he is, ordered to pay back to defendant the
consideration of the sale in the sum of P4,200.00 the same to bear legal interest from the date of the
filing of the complaint until paid; that defendant shall pay to the plaintiff the sum of P500.00 as
attorney's fees.

Costs against the defendant. 6

Before going into the issues raised by the instant Petition, the matter of whether, under the admitted facts of this case, the
respondent had the right or authority to execute the "Deed of Sale" in 1968, his award over Lot No. 21 having been
cancelled previously by the Board of Liquidators on January 27, 1965, must be clarified. The case in point is Ras vs.
Sua 7 wherein it was categorically stated by this Court that a cancellation of an award granted pursuant to the provisions
of Republic Act No. 477 does not automatically divest the awardee of his rights to the land. Such cancellation does not
result in the immediate reversion of the property subject of the award, to the State. Speaking through Mr. Justice J.B.L.
Reyes, this Court ruled that "until and unless an appropriate proceeding for reversion is instituted by the State, and its
reacquisition of the ownership and possession of the land decreed by a competent court, the grantee cannot be said to
have been divested of whatever right that he may have over the same property." 8

There is nothing in the record to show that at any time after the supposed cancellation of herein respondent's award
on January 27, 1965, reversion proceedings against Lot No. 21 were instituted by the State. Instead, the admitted
fact is that the award was reinstated in 1972. Applying the doctrine announced in the above-cited Ras case,
therefore, herein respondent is not deemed to have lost any of his rights as grantee of Lot No. 21 under Republic
Act No. 477 during the period material to the case at bar, i.e., from the cancellation of the award in 1965 to its
reinstatement in 1972. Within said period, respondent could exercise all the rights pertaining to a grantee with
respect to Lot No. 21.

This brings Us to the issues raised by the instant Petition. In his Brief, petitioner contends that the lower Court erred:

1. In resorting to construction and interpretation of the deed of sale in question where the terms
thereof are clear and unambiguous and leave no doubt as to the intention of the parties;

2. In declaring — granting without admitting that an interpretation is necessary — the deed of sale in
question to be a contract of lease over the land itself where the respondent himself waived and
abandoned his claim that said deed did not express the true agreement of the parties, and on the
contrary, respondent admitted at the pre-trial that his agreement with petitioner was one of sale of
the fruits of the coconut trees on the land;

3. In deciding a question which was not in issue when it declared the deed of sale in question to be a
contract of lease over Lot 21;

4. In declaring furthermore the deed of sale in question to be a contract of lease over the land itself
on the basis of facts which were not proved in evidence;

5. In not holding that the deed of sale, Exhibit "A" and "2", expresses a valid contract of sale;

6. In not deciding squarely and to the point the issue as to whether or not the deed of sale in
question is an encumbrance on the land and its improvements prohibited by Section 8 of Republic
Act 477; and

7. In awarding respondent attorney's fees even granting, without admitting, that the deed of sale in
question is violative of Section 8 of Republic Act 477.

The first five assigned errors are interrelated, hence, We shall consider them together. To begin with, We agree with
petitioner that construction or interpretation of the document in question is not called for. A perusal of the deed fails
to disclose any ambiguity or obscurity in its provisions, nor is there doubt as to the real intention of the contracting
parties. The terms of the agreement are clear and unequivocal, hence the literal and plain meaning thereof should
be observed. Such is the mandate of the Civil Code of the Philippines which provides that:

Art. 1370. If the terms of a contract are clear and leave no doubt upon the intention of the contracting
parties, the literal meaning of its stipulation shall control ... .

Pursuant to the afore-quoted legal provision, the first and fundamental duty of the courts is the application of the
contract according to its express terms, interpretation being resorted to only when such literal application is
impossible. 9
Simply and directly stated, the "Deed of Sale dated August 14, 1968 is precisely what it purports to be. It is a document
evidencing the agreement of herein parties for the sale of coconut fruits of Lot No. 21, and not for the lease of the land
itself as found by the lower Court. In clear and express terms, the document defines the object of the contract thus: "the
herein sale of the coconut fruits are for an the fruits on the aforementioned parcel of land during the years ...(from)
SEPTEMBER 15, 1968; up to JANUARY 1, 1976." Moreover, as petitioner correctly asserts, the document in question
expresses a valid contract of sale. It has the essential elements of a contract of sale as defined under Article 1485 of the
New Civil Code which provides thus:

Art. 1458. By the contract of sale one of the contracting parties obligates himself to transfer the
ownership of and to deliver a determinate thing, and the other to pay therefor a price certain in
money or its equivalent.

A contract of sale may be absolute or conditional.

The subject matter of the contract of sale in question are the fruits of the coconut trees on the land during the years
from September 15, 1968 up to January 1, 1976, which subject matter is a determinate thing. Under Article 1461 of
the New Civil Code, things having a potential existence may be the object of the contract of sale. And in Sibal vs.
Valdez, 50 Phil. 512, pending crops which have potential existence may be the subject matter of the sale. Here, the
Supreme Court, citing Mechem on Sales and American cases said which have potential existence may be the
subject matter of sale. Here, the Supreme Court, citing Mechem on Sales and American cases said:

Mr. Mechem says that a valid sale may be made of a thing, which though not yet actually in
existence, is reasonably certain to come into existence as the natural increment or usual incident of
something already in existence, and then belonging to the vendor, and the title will vest in the buyer
the moment the thing comes into existence. (Emerson vs. European Railway Co., 67 Me., 387;
Cutting vs. Packers Exchange, 21 Am. St. Rep. 63) Things of this nature are said to have a potential
existence. A man may sell property of which he is potentially and not actually possess. He may
make a valid sale of the wine that a vineyard is expected to produce; or the grain a field may grow in
a given time; or the milk a cow may yield during the coming year; or the wool that shall thereafter
grow upon sheep; or what may be taken at the next case of a fisherman's net; or fruits to grow; or
young animals not yet in existence; or the goodwill of a trade and the like. The thing sold, however,
must be specific and Identified. They must be also owned at the time by the vendor. (Hull vs. Hull 48
Conn. 250 (40 Am. Rep., 165) (pp. 522-523).

We do not agree with the trial court that the contract executed by and between the parties is "actually a contract of
lease of the land and the coconut trees there." (CFI Decision, p. 62, Records). The Court's holding that the contract
in question fits the definition of a lease of things wherein one of the parties binds himself to give to another the
enjoyment or use of a thing for a price certain and for a period which may be definite or indefinite (Art. 1643, Civil
Code of the Philippines) is erroneous. The essential difference between a contract of sale and a lease of things is
that the delivery of the thing sold transfers ownership, while in lease no such transfer of ownership results as the
rights of the lessee are limited to the use and enjoyment of the thing leased.

In Rodriguez vs. Borromeo, 43 Phil. 479, 490, the Supreme Court held:

Since according to article 1543 of the same Code the contract of lease is defined as the giving or the
concession of the enjoyment or use of a thing for a specified time and fixed price, and since such
contract is a form of enjoyment of the property, it is evident that it must be regarded as one of the
means of enjoyment referred to in said article 398, inasmuch as the terms enjoyment, use, and
benefit involve the same and analogous meaning relative to the general utility of which a given thing
is capable. (104 Jurisprudencia Civil, 443)

In concluding that the possession and enjoyment of the coconut trees can therefore be said to be the possession
and enjoyment of the land itself because the defendant-lessee in order to enjoy his right under the contract, he
actually takes possession of the land, at least during harvest time, gather all of the fruits of the coconut trees in the
land, and gain exclusive use thereof without the interference or intervention of the plaintiff-lessor such that said
plaintiff-lessor is excluded in fact from the land during the period aforesaid, the trial court erred. The contract was
clearly a "sale of the coconut fruits." The vendor sold, transferred and conveyed "by way of absolute sale, all the
coconut fruits of his land," thereby divesting himself of all ownership or dominion over the fruits during the seven-
year period. The possession and enjoyment of the coconut trees cannot be said to be the possession and
enjoyment of the land itself because these rights are distinct and separate from each other, the first pertaining to the
accessory or improvements (coconut trees) while the second, to the principal (the land). A transfer of the accessory
or improvement is not a transfer of the principal. It is the other way around, the accessory follows the principal.
Hence, the sale of the nuts cannot be interpreted nor construed to be a lease of the trees, much less extended
further to include the lease of the land itself.

The real and pivotal issue of this case which is taken up in petitioner's sixth assignment of error and as already
stated above, refers to the validity of the "Deed of Sale", as such contract of sale, vis-a-vis the provisions of Sec. 8,
R.A. No. 477. The lower Court did not rule on this question, having reached the conclusion that the contract at bar
was one of lease. It was from the context of a lease contract that the Court below determined the applicability of
Sec. 8, R.A. No. 477, to the instant case.

Resolving now this principal issue, We find after a close and careful examination of the terms of the first paragraph
of Section 8 hereinabove quoted, that the grantee of a parcel of land under R.A. No. 477 is not prohibited from
alienating or disposing of the natural and/or industrial fruits of the land awarded to him. What the law expressly
disallows is the encumbrance or alienation of the land itself or any of the permanent improvements thereon.
Permanent improvements on a parcel of land are things incorporated or attached to the property in a fixed manner,
naturally or artificially. They include whatever is built, planted or sown on the land which is characterized by fixity,
immutability or immovability. Houses, buildings, machinery, animal houses, trees and plants would fall under the
category of permanent improvements, the alienation or encumbrance of which is prohibited by R.A. No. 477. While
coconut trees are permanent improvements of a land, their nuts are natural or industrial fruits which are meant to be
gathered or severed from the trees, to be used, enjoyed, sold or otherwise disposed of by the owner of the land.
Herein respondents, as the grantee of Lot No. 21 from the Government, had the right and prerogative to sell the
coconut fruits of the trees growing on the property.

By virtue of R.A. No. 477, bona fide occupants, veterans, members of guerilla organizations and other qualified
persons were given the opportunity to acquire government lands by purchase, taking into account their limited
means. It was intended for these persons to make good and productive use of the lands awarded to them, not only
to enable them to improve their standard of living, but likewise to help provide for the annual payments to the
Government of the purchase price of the lots awarded to them. Section 8 was included, as stated by the Court a
quo, to protect the grantees from themselves and the incursions of opportunists who prey on their misery and
poverty." It is there to insure that the grantees themselves benefit from their respective lots, to the exclusion of other
persons.

The purpose of the law is not violated when a grantee sells the produce or fruits of his land. On the contrary, the aim
of the law is thereby achieved, for the grantee is encouraged and induced to be more industrious and productive,
thus making it possible for him and his family to be economically self-sufficient and to lead a respectable life. At the
same time, the Government is assured of payment on the annual installments on the land. We agree with herein
petitioner that it could not have been the intention of the legislature to prohibit the grantee from selling the natural
and industrial fruits of his land, for otherwise, it would lead to an absurd situation wherein the grantee would not be
able to receive and enjoy the fruits of the property in the real and complete sense.

Respondent through counsel, in his Answer to the Petition contends that even granting arguendo that he executed a
deed of sale of the coconut fruits, he has the "privilege to change his mind and claim it as (an) implied lease," and
he has the "legitimate right" to file an action for annulment "which no law can stop." He claims it is his "sole
construction of the meaning of the transaction that should prevail and not petitioner. (sic). 10 Respondent's counsel
either misapplies the law or is trying too hard and going too far to defend his client's hopeless cause. Suffice it to say that
respondent-grantee, after having received the consideration for the sale of his coconut fruits, cannot be allowed to impugn
the validity of the contracts he entered into, to the prejudice of petitioner who contracted in good faith and for a
consideration.

The issue raised by the seventh assignment of error as to the propriety of the award of attorney's fees made by the
lower Court need not be passed upon, such award having been apparently based on the erroneous finding and
conclusion that the contract at bar is one of lease. We shall limit Ourselves to the question of whether or not in
accordance with Our ruling in this case, respondent is entitled to an award of attorney's fees. The Civil Code
provides that:
 Art. 2208. In the absence of stipulation, attorney's fees and expenses of litigation, other than judicial
costs, cannot be recovered, except:

(1) When exemplary damages are awarded;

(2) When the defendant's act or omission has compelled the plaintiff to litigate with third persons or
to incur expenses to protect his interest;

(3) In criminal cases of malicious prosecution against the plaintiff;

(4) In case of a clearly unfounded civil action or proceeding against the plaintiff;

(5) Where the defendant acted in gross and evident bad faith in refusing to satisfy the plaintiff's
plainly valid, just and demandable claim;

(6) In actions for legal support;

(7) In actions for the recovery of wages of household helpers, laborers and skilled workers;

(8) In actions for indemnity under workmen's compensation and employer's liability laws;

(9) In a separate civil action to recover civil liability arising from a crime;

(10) When at least double judicial costs are awarded;

(11) In any other case where the court deems it just and equitable that attorney's fees and expenses
of litigation should be recovered.

In all cases, the attorney's fees and expenses of litigation must be reasonable.

We find that none of the legal grounds enumerated above exists to justify or warrant the grant of attorney's fees to
herein respondent.

IN VIEW OF THE FOREGOING, the judgment of the lower Court is hereby set aside and another one is entered
dismissing the Complaint. Without costs.

SO ORDERED.
 Republic of the Philippines
Supreme Court
Manila

SECOND DIVISION

MILA A. REYES , G.R. No. 188064

Petitioner,
Present:

CARPIO, J., Chairperson,

NACHURA,
- versus - PERALTA,
ABAD, and
MENDOZA, JJ.

VICTORIA T. TUPARAN, Promulgated:

Respondent. June 1, 2011

X -----------------------------------------------------------------------------------------------------X

DECISION

MENDOZA, J.:

Subject of this petition for review is the February 13, 2009 Decision[1] of the Court of
Appeals (CA) which affirmed with modification the February 22, 2006 Decision [2] of the
Regional Trial Court, Branch 172, Valenzuela City (RTC), in Civil Case No. 3945-V-92, an
action for Rescission of Contract with Damages.

On September 10, 1992, Mila A. Reyes (petitioner) filed a complaint for Rescission of
Contract with Damages against Victoria T. Tuparan (respondent) before the RTC. In her
Complaint, petitioner alleged, among others, that she was the registered owner of a 1,274 square
meter residential and commercial lot located in Karuhatan, Valenzuela City, and covered by TCT
No. V-4130; that on that property, she put up a three-storey commercial building known as RBJ
Building and a residential apartment building; that since 1990, she had been operating a drugstore
and cosmetics store on the ground floor of RBJ Building where she also had been residing while
the other areas of the buildings including the sidewalks were being leased and occupied by tenants
and street vendors.

In December 1989, respondent leased from petitioner a space on the ground floor of
the RBJ Building for her pawnshop business for a monthly rental of ₱4,000.00. A close friendship
developed between the two which led to the respondent investing thousands of pesos in petitioners
financing/lending business from February 7, 1990 to May 27, 1990, with interest at the rate of
6% a month.

On June 20, 1988, petitioner mortgaged the subject real properties to the Farmers Savings
Bank and Loan Bank, Inc. (FSL Bank) to secure a loan of ₱2,000,000.00 payable in installments.
On November 15, 1990, petitioners outstanding account on the mortgage reached ₱2,278,078.13.
Petitioner then decided to sell her real properties for at least ₱6,500,000.00 so she could liquidate
her bank loan and finance her businesses. As a gesture of friendship, respondent verbally offered
to conditionally buy petitioners real properties for ₱4,200,000.00 payable on installment basis
without interest and to assume the bank loan. To induce the petitioner to accept her offer,
respondent offered the following conditions/concessions:

1. That the conditional sale will be cancelled if the plaintiff (petitioner) can
find a buyer of said properties for the amount of ₱6,500,000.00 within the next three
(3) months provided all amounts received by the plaintiff from the defendant
(respondent) including payments actually made by defendant to Farmers Savings
and Loan Bank would be refunded to the defendant with additional interest of six
(6%) monthly;

2. That the plaintiff would continue using the space occupied by her and
drugstore and cosmetics store without any rentals for the duration of the installment
payments;

3. That there will be a lease for fifteen (15) years in favor of the plaintiff over
the space for drugstore and cosmetics store at a monthly rental of only ₱8,000.00
after full payment of the stipulated installment payments are made by the defendant;

4. That the defendant will undertake the renewal and payment of the fire
insurance policies on the two (2) subject buildings following the expiration of the
then existing fire insurance policy of the plaintiff up to the time that plaintiff is fully
paid of the total purchase price of ₱4,200,000.00.[3]
 After petitioners verbal acceptance of all the conditions/concessions, both parties worked
together to obtain FSL Banks approval for respondent to assume her (petitioners) outstanding
bank account. The assumption would be part of respondents purchase price for petitioners
mortgaged real properties. FSL Bank approved their proposal on the condition that petitioner
would sign or remain as co-maker for the mortgage obligation assumed by respondent.

On November 26, 1990, the parties and FSL Bank executed the corresponding Deed of
Conditional Sale of Real Properties with Assumption of Mortgage. Due to their close personal
friendship and business relationship, both parties chose not to reduce into writing the other terms
of their agreement mentioned in paragraph 11 of the complaint. Besides, FSL Bank did not want
to incorporate in the Deed of Conditional Sale of Real Properties with Assumption of Mortgage
any other side agreement between petitioner and respondent.

Under the Deed of Conditional Sale of Real Properties with Assumption of Mortgage,
respondent was bound to pay the petitioner a lump sum of ₱1.2 million pesos without interest as
part of the purchase price in three (3) fixed installments as follows:

a) ₱200,000.00 due January 31, 1991

b) ₱200,000.00 due June 30, 1991
c) ₱800,000.00 due December 31, 1991

Respondent, however, defaulted in the payment of her obligations on their due dates.
Instead of paying the amounts due in lump sum on their respective maturity dates, respondent
paid petitioner in small amounts from time to time. To compensate for her delayed payments,
respondent agreed to pay petitioner an interest of 6% a month. As of August 31, 1992, respondent
had only paid ₱395,000.00, leaving a balance of ₱805,000.00 as principal on the unpaid
installments and ₱466,893.25 as unpaid accumulated interest.

Petitioner further averred that despite her success in finding a prospective buyer for the
subject real properties within the 3-month period agreed upon, respondent reneged on her promise
to allow the cancellation of their deed of conditional sale. Instead, respondent became interested
in owning the subject real properties and even wanted to convert the entire property into a modern
commercial complex. Nonetheless, she consented because respondent repeatedly professed
friendship and assured her that all their verbal side agreement would be honored as shown by the
fact that since December 1990, she (respondent) had not collected any rentals from the petitioner
for the space occupied by her drugstore and cosmetics store.

On March 19, 1992, the residential building was gutted by fire which caused the petitioner
to lose rental income in the amount of ₱8,000.00 a month since April 1992. Respondent neglected
to renew the fire insurance policy on the subject buildings.
 Since December 1990, respondent had taken possession of the subject real properties and
had been continuously collecting and receiving monthly rental income from the tenants of the
buildings and vendors of the sidewalk fronting the RBJ building without sharing it with petitioner.

On September 2, 1992, respondent offered the amount of ₱751,000.00 only payable

on September 7, 1992, as full payment of the purchase price of the subject real properties and
demanded the simultaneous execution of the corresponding deed of absolute sale.

Respondents Answer

Respondent countered, among others, that the tripartite agreement erroneously designated
by the petitioner as a Deed of Conditional Sale of Real Property with Assumption of Mortgage
was actually a pure and absolute contract of sale with a term period. It could not be considered a
conditional sale because the acquisition of contractual rights and the performance of the
obligation therein did not depend upon a future and uncertain event. Moreover, the capital gains
and documentary stamps and other miscellaneous expenses and real estate taxes up to 1990 were
supposed to be paid by petitioner but she failed to do so.

Respondent further averred that she successfully rescued the properties from a definite
foreclosure by paying the assumed mortgage in the amount of ₱2,278,078.13 plus interest and
other finance charges. Because of her payment, she was able to obtain a deed of cancellation of
mortgage and secure a release of mortgage on the subject real properties including petitioners
ancestral residential property in Sta. Maria, Bulacan.

Petitioners claim for the balance of the purchase price of the subject real properties was
baseless and unwarranted because the full amount of the purchase price had already been paid, as
she did pay more than ₱4,200,000.00, the agreed purchase price of the subject real properties, and
she had even introduced improvements thereon worth more than ₱4,800,000.00. As the parties
could no longer be restored to their original positions, rescission could not be resorted to.

Respondent added that as a result of their business relationship, petitioner was able to
obtain from her a loan in the amount of ₱400,000.00 with interest and took several pieces of
jewelry worth ₱120,000.00. Petitioner also failed and refused to pay the monthly rental of
₱20,000.00 since November 16, 1990 up to the present for the use and occupancy of the ground
floor of the building on the subject real property, thus, accumulating arrearages in the amount of
₱470,000.00 as of October 1992.

Ruling of the RTC

On February 22, 2006, the RTC handed down its decision finding that respondent failed to pay
in full the ₱4.2 million total purchase price of the subject real properties leaving a balance of
₱805,000.00. It stated that the checks and receipts presented by respondent refer to her payments
of the mortgage obligation with FSL Bank and not the payment of the balance of ₱1,200,000.00.
The RTC also considered the Deed of Conditional Sale of Real Property with Assumption of
Mortgage executed by and among the two parties and FSL Bank a contract to sell, and not a
contract of sale. It was of the opinion that although the petitioner was entitled to a rescission of
the contract, it could not be permitted because her non-payment in full of the purchase price may
not be considered as substantial and fundamental breach of the contract as to defeat the object of
the parties in entering into the contract.[4] The RTC believed that the respondents offer stated in
her counsels letter dated September 2, 1992 to settle what she thought was her unpaid balance of
₱751,000.00 showed her sincerity and willingness to settle her obligation. Hence, it would be
more equitable to give respondent a chance to pay the balance plus interest within a given period
of time.

Finally, the RTC stated that there was no factual or legal basis to award damages and attorneys
fees because there was no proof that either party acted fraudulently or in bad faith.

Thus, the dispositive portion of the RTC Decision reads:

WHEREFORE, judgment is hereby rendered as follows:

1. Allowing the defendant to pay the plaintiff within thirty (30) days from
the finality hereof the amount of ₱805,000.00, representing the unpaid
purchase price of the subject property, with interest thereon at 2% a month
from January 1, 1992 until fully paid. Failure of the defendant to pay said
amount within the said period shall cause the automatic rescission of the
contract (Deed of Conditional Sale of Real Property with Assumption of
Mortgage) and the plaintiff and the defendant shall be restored to their former
positions relative to the subject property with each returning to the other
whatever benefits each derived from the transaction;

2. Directing the defendant to allow the plaintiff to continue using the

space occupied by her for drugstore and cosmetic store without any rental
pending payment of the aforesaid balance of the purchase price.

3. Ordering the defendant, upon her full payment of the purchase price
together with interest, to execute a contract of lease for fifteen (15) years in favor
of the plaintiff over the space for the drugstore and cosmetic store at a fixed
monthly rental of ₱8,000.00; and
 4. Directing the plaintiff, upon full payment to her by the defendant of the
purchase price together with interest, to execute the necessary deed of sale, as
well as to pay the Capital Gains Tax, documentary stamps and other
miscellaneous expenses necessary for securing the BIR Clearance, and to pay
the real estate taxes due on the subject property up to 1990, all necessary to
transfer ownership of the subject property to the defendant.

No pronouncement as to damages, attorneys fees and costs.

SO ORDERED.[5]

Ruling of the CA

On February 13, 2009, the CA rendered its decision affirming with modification the RTC
Decision. The CA agreed with the RTC that the contract entered into by the parties is a contract
to sell but ruled that the remedy of rescission could not apply because the respondents failure to
pay the petitioner the balance of the purchase price in the total amount of ₱805,000.00 was not a
breach of contract, but merely an event that prevented the seller (petitioner) from conveying title
to the purchaser (respondent). It reasoned that out of the total purchase price of the subject
property in the amount of ₱4,200,000.00, respondents remaining unpaid balance was only
₱805,000.00. Since respondent had already paid a substantial amount of the purchase price, it
was but right and just to allow her to pay the unpaid balance of the purchase price plus interest.
Thus, the decretal portion of the CA Decision reads:

WHEREFORE, premises considered, the Decision dated 22 February

2006 and Order dated 22 December 2006 of the Regional Trial Court of
Valenzuela City, Branch 172 in Civil Case No. 3945-V-92 are AFFIRMED with
MODIFICATION in that defendant-appellant Victoria T. Tuparan is hereby
ORDERED to pay plaintiff-appellee/appellant Mila A. Reyes, within 30 days
from finality of this Decision, the amount of ₱805,000.00 representing the
unpaid balance of the purchase price of the subject property, plus interest
thereon at the rate of 6% per annum from 11 September 1992 up to finality of
this Decision and, thereafter, at the rate of 12% per annum until full payment.
The ruling of the trial court on the automatic rescission of the Deed of
Conditional Sale with Assumption of Mortgage is hereby DELETED. Subject to
the foregoing, the dispositive portion of the trial courts decision is AFFIRMED
in all other respects.

SO ORDERED.[6]
 After the denial of petitioners motion for reconsideration and respondents motion for
partial reconsideration, petitioner filed the subject petition for review praying for the reversal and
setting aside of the CA Decision anchored on the following
ASSIGNMENT OF ERRORS

A. THE COURT OF APPEALS SERIOUSLY ERRED AND ABUSED ITS

DISCRETION IN DISALLOWING THE OUTRIGHT RESCISSION OF THE SUBJECT
DEED OF CONDITIONAL SALE OF REAL PROPERTIES WITH ASSUMPTION OF
MORTGAGE ON THE GROUND THAT RESPONDENT TUPARANS FAILURE TO PAY
PETITIONER REYES THE BALANCE OF THE PURCHASE PRICE OF ₱805,000.00 IS
NOT A BREACH OF CONTRACT DESPITE ITS OWN FINDINGS THAT PETITIONER
STILL RETAINS OWNERSHIP AND TITLE OVER THE SUBJECT REAL
PROPERTIES DUE TO RESPONDENTS REFUSAL TO PAY THE BALANCE OF THE
TOTAL PURCHASE PRICE OF ₱805,000.00 WHICH IS EQUAL TO 20% OF THE
TOTAL PURCHASE PRICE OF ₱4,200,000.00 OR 66% OF THE STIPULATED LAST
INSTALLMENT OF ₱1,200,000.00 PLUS THE INTEREST THEREON. IN EFFECT, THE
COURT OF APPEALS AFFIRMED AND ADOPTED THE TRIAL COURTS
CONCLUSION THAT THE RESPONDENTS NON-PAYMENT OF THE ₱805,000.00 IS
ONLY A SLIGHT OR CASUAL BREACH OF CONTRACT.

B. THE COURT OF APPEALS SERIOUSLY ERRED AND ABUSED ITS

DISCRETION IN DISREGARDING AS GROUND FOR THE RESCISSION OF
THE SUBJECT CONTRACT THE OTHER FRAUDULENT AND MALICIOUS
ACTS COMMITTED BY THE RESPONDENT AGAINST THE PETITIONER
WHICH BY THEMSELVES SUFFICIENTLY JUSTIFY A DENIAL OF A
GRACE PERIOD OF THIRTY (30) DAYS TO THE RESPONDENT WITHIN
WHICH TO PAY TO THE PETITIONER THE ₱805,000.00 PLUS INTEREST
THEREON.

C. EVEN ASSUMING ARGUENDO THAT PETITIONER IS NOT

ENTITLED TO THE RESCISSION OF THE SUBJECT CONTRACT, THE
COURT OF APPEALS STILL SERIOUSLY ERRED AND ABUSED ITS
DISCRETION IN REDUCING THE INTEREST ON THE ₱805,000.00 TO
ONLY 6% PER ANNUM STARTING FROM THE DATE OF FILING OF THE
COMPLAINT ON SEPTEMBER 11, 1992 DESPITE THE PERSONAL
COMMITMENT OF THE RESPONDENT AND AGREEMENT BETWEEN
THE PARTIES THAT RESPONDENT WILL PAY INTEREST ON THE
₱805,000.00 AT THE RATE OF 6% MONTHLY STARTING THE DATE OF
DELINQUENCY ON DECEMBER 31, 1991.

D. THE COURT OF APPEALS SERIOUSLY ERRED AND ABUSED ITS

DISCRETION IN THE APPRECIATION AND/OR MISAPPRECIATION OF
FACTS RESULTING INTO THE DENIAL OF THE CLAIM OF PETITIONER
REYES FOR ACTUAL DAMAGES WHICH CORRESPOND TO THE
MILLIONS OF PESOS OF RENTALS/FRUITS OF THE SUBJECT REAL
PROPERTIES WHICH RESPONDENT TUPARAN COLLECTED
CONTINUOUSLY SINCE DECEMBER 1990, EVEN WITH THE UNPAID
BALANCE OF ₱805,000.00 AND DESPITE THE FACT THAT RESPONDENT
DID NOT CONTROVERT SUCH CLAIM OF THE PETITIONER AS
CONTAINED IN HER AMENDED COMPLAINT DATED APRIL 22, 2006.

E. THE COURT OF APPEALS SERIOUSLY ERRED AND ABUSED ITS

DISCRETION IN THE APPRECIATION OF FACTS RESULTING INTO THE
DENIAL OF THE CLAIM OF PETITIONER REYES FOR THE ₱29,609.00
BACK RENTALS THAT WERE COLLECTED BY RESPONDENT TUPARAN
FROM THE OLD TENANTS OF THE PETITIONER.

F. THE COURT OF APPEALS SERIOUSLY ERRED AND ABUSED ITS

DISCRETION IN DENYING THE PETITIONERS EARLIER URGENT
MOTION FOR ISSUANCE OF A PRELIMINARY MANDATORY AND
PROHIBITORY INJUNCTION DATED JULY 7, 2008 AND THE
SUPPLEMENT THERETO DATED AUGUST 4, 2008 THEREBY
CONDONING THE UNJUSTIFIABLE FAILURE/REFUSAL OF JUDGE
FLORO ALEJO TO RESOLVE WITHIN ELEVEN (11) YEARS THE
PETITIONERS THREE (3) SEPARATE MOTIONS FOR PRELIMINARY
INJUNCTION/ TEMPORARY RESTRAINING ORDER, ACCOUNTING AND
DEPOSIT OF RENTAL INCOME DATED MARCH 17, 1995, AUGUST 19, 1996
AND JANUARY 7, 2006 THEREBY PERMITTING THE RESPONDENT TO
UNJUSTLY ENRICH HERSELF BY CONTINUOUSLY COLLECTING ALL
THE RENTALS/FRUITS OF THE SUBJECT REAL PROPERTIES WITHOUT
ANY ACCOUNTING AND COURT DEPOSIT OF THE COLLECTED
RENTALS/FRUITS AND THE PETITIONERS URGENT MOTION TO
DIRECT DEFENDANT VICTORIA TUPARAN TO PAY THE
ACCUMULATED UNPAID REAL ESTATE TAXES AND SEF TAXES ON THE
SUBJECT REAL PROPERTIES DATED JANUARY 13, 2007 THEREBY
EXPOSING THE SUBJECT REAL PROPERTIES TO IMMINENT
AUCTION SALE BY THE CITY TREASURER OF VALENZUELA CITY.

G. THE COURT OF APPEALS SERIOUSLY ERRED AND ABUSED ITS

DISCRETION IN DENYING THE PETITIONERS CLAIM FOR MORAL AND
EXEMPLARY DAMAGES AND ATTORNEYS FEES AGAINST THE
RESPONDENT.
 In sum, the crucial issue that needs to be resolved is whether or not the CA was correct in
ruling that there was no legal basis for the rescission of the Deed of Conditional Sale with
Assumption of Mortgage.

Position of the Petitioner

The petitioner basically argues that the CA should have granted the rescission of the subject Deed
of Conditional Sale of Real Properties with Assumption of Mortgage for the following reasons:

1. The subject deed of conditional sale is a reciprocal obligation whose

outstanding characteristic is reciprocity arising from identity of cause by virtue of
which one obligation is correlative of the other.

2. The petitioner was rescinding not enforcing the subject Deed of Conditional
Sale pursuant to Article 1191 of the Civil Code because of the respondents
failure/refusal to pay the ₱805,000.00 balance of the total purchase price of the
petitioners properties within the stipulated period ending December 31, 1991.

3. There was no slight or casual breach on the part of the respondent because
she (respondent) deliberately failed to comply with her contractual obligations with
the petitioner by violating the terms or manner of payment of the ₱1,200,000.00
balance and unjustly enriched herself at the expense of the petitioner by collecting
all rental payments for her personal benefit and enjoyment.

Furthermore, the petitioner claims that the respondent is liable to pay interest at the rate of
6% per month on her unpaid installment of ₱805,000.00 from the date of the
delinquency, December 31, 1991, because she obligated herself to do so.
Finally, the petitioner asserts that her claim for damages or lost income as well as for the
back rentals in the amount of ₱29,609.00 has been fully substantiated and, therefore, should have
been granted by the CA. Her claim for moral and exemplary damages and attorneys fees has been
likewise substantiated.

Position of the Respondent

The respondent counters that the subject Deed of Conditional Sale with Assumption of Mortgage
entered into between the parties is a contract to sell and not a contract of sale because the title of
the subject properties still remains with the petitioner as she failed to pay the installment payments
in accordance with their agreement.

Respondent echoes the RTC position that her inability to pay the full balance on the purchase
price may not be considered as a substantial and fundamental breach of the subject contract and
it would be more equitable if she would be allowed to pay the balance including interest within a
certain period of time. She claims that as early as 1992, she has shown her sincerity by offering
to pay a certain amount which was, however, rejected by the petitioner.

Finally, respondent states that the subject deed of conditional sale explicitly provides that the
installment payments shall not bear any interest. Moreover, petitioner failed to prove that she was
entitled to back rentals.
The Courts Ruling

The petition lacks merit.

The Court agrees with the ruling of the courts below that the subject Deed of Conditional
Sale with Assumption of Mortgage entered into by and among the two parties and FSL Bank
on November 26, 1990 is a contract to sell and not a contract of sale. The subject contract was
correctly classified as a contract to sell based on the following pertinent stipulations:

8. That the title and ownership of the subject real properties shall remain
with the First Party until the full payment of the Second Party of the balance of
the purchase price and liquidation of the mortgage obligation
of ₱2,000,000.00. Pending payment of the balance of the purchase price and
liquidation of the mortgage obligation that was assumed by the Second Party,
the Second Party shall not sell, transfer and convey and otherwise encumber the
subject real properties without the written consent of the First and Third Party.

9. That upon full payment by the Second Party of the full balance of the
purchase price and the assumed mortgage obligation herein mentioned the
Third Party shall issue the corresponding Deed of Cancellation of Mortgage and
the First Party shall execute the corresponding Deed of Absolute Sale in favor
of the Second Party.[7]

Based on the above provisions, the title and ownership of the subject properties remains
with the petitioner until the respondent fully pays the balance of the purchase price and the
assumed mortgage obligation. Thereafter, FSL Bank shall then issue the corresponding deed of
cancellation of mortgage and the petitioner shall execute the corresponding deed of absolute sale
in favor of the respondent.

Accordingly, the petitioners obligation to sell the subject properties becomes demandable
only upon the happening of the positive suspensive condition, which is the respondents full
payment of the purchase price. Without respondents full payment, there can be no breach of
contract to speak of because petitioner has no obligation yet to turn over the title. Respondents
failure to pay in full the purchase price is not the breach of contract contemplated under Article
1191 of the New Civil Code but rather just an event that prevents the petitioner from being bound
to convey title to the respondent. The 2009 case of Nabus v. Joaquin & Julia Pacson[8] is
enlightening:

The Court holds that the contract entered into by the Spouses Nabus and
respondents was a contract to sell, not a contract of sale.

A contract of sale is defined in Article 1458 of the Civil Code, thus:

Art. 1458. By the contract of sale, one of the contracting parties obligates
himself to transfer the ownership of and to deliver a determinate thing, and the
other to pay therefor a price certain in money or its equivalent.

xxx

Sale, by its very nature, is a consensual contract because it is perfected by

mere consent. The essential elements of a contract of sale are the following:

a) Consent or meeting of the minds, that is, consent to transfer

ownership in exchange for the price;
b) Determinate subject matter; and
c) Price certain in money or its equivalent.

Under this definition, a Contract to Sell may not be considered as a

Contract of Sale because the first essential element is lacking. In a contract to
sell, the prospective seller explicitly reserves the transfer of title to the
prospective buyer, meaning, the prospective seller does not as yet agree or
consent to transfer ownership of the property subject of the contract to sell until
the happening of an event, which for present purposes we shall take as the full
payment of the purchase price. What the seller agrees or obliges himself to do
is to fulfill his promise to sell the subject property when the entire amount of
the purchase price is delivered to him. In other words, the full payment of the
purchase price partakes of a suspensive condition, the non-fulfillment of which
prevents the obligation to sell from arising and, thus, ownership is retained by
the prospective seller without further remedies by the prospective buyer.

xxx xxx xxx

Stated positively, upon the fulfillment of the suspensive condition which
is the full payment of the purchase price, the prospective sellers obligation to
sell the subject property by entering into a contract of sale with the prospective
buyer becomes demandable as provided in Article 1479 of the Civil Code which
states:

Art. 1479. A promise to buy and sell a determinate thing for a price certain
is reciprocally demandable.
 An accepted unilateral promise to buy or to sell a determinate thing for a
price certain is binding upon the promissor if the promise is supported by a
consideration distinct from the price.

A contract to sell may thus be defined as a bilateral contract whereby the

prospective seller, while expressly reserving the ownership of the subject
property despite delivery thereof to the prospective buyer, binds himself to sell
the said property exclusively to the prospective buyer upon fulfillment of the
condition agreed upon, that is, full payment of the purchase price.

A contract to sell as defined hereinabove, may not even be considered as

a conditional contract of sale where the seller may likewise reserve title to the
property subject of the sale until the fulfillment of a suspensive condition,
because in a conditional contract of sale, the first element of consent is present,
although it is conditioned upon the happening of a contingent event which may
or may not occur. If the suspensive condition is not fulfilled, the perfection of
the contract of sale is completely abated. However, if the suspensive condition
is fulfilled, the contract of sale is thereby perfected, such that if there had
already been previous delivery of the property subject of the sale to the buyer,
ownership thereto automatically transfers to the buyer by operation of law
without any further act having to be performed by the seller.

In a contract to sell, upon the fulfillment of the suspensive condition

which is the full payment of the purchase price, ownership will not
automatically transfer to the buyer although the property may have been
previously delivered to him. The prospective seller still has to convey title to the
prospective buyer by entering into a contract of absolute sale.

Further, Chua v. Court of Appeals, cited this distinction between a

contract of sale and a contract to sell:

In a contract of sale, the title to the property passes to the vendee upon the
delivery of the thing sold; in a contract to sell, ownership is, by agreement, reserved
in the vendor and is not to pass to the vendee until full payment of the purchase
price. Otherwise stated, in a contract of sale, the vendor loses ownership over the
property and cannot recover it until and unless the contract is resolved or
rescinded; whereas, in a contract to sell, title is retained by the vendor until full
payment of the price. In the latter contract, payment of the price is a positive
suspensive condition, failure of which is not a breach but an event that prevents
the obligation of the vendor to convey title from becoming effective.

It is not the title of the contract, but its express terms or stipulations that
determine the kind of contract entered into by the parties. In this case, the
contract entitled Deed of Conditional Sale is actually a contract to sell. The
contract stipulated that as soon as the full consideration of the sale has been
paid by the vendee, the corresponding transfer documents shall be executed by
the vendor to the vendee for the portion sold. Where the vendor promises to
execute a deed of absolute sale upon the completion by the vendee of the
 payment of the price, the contract is only a contract to sell. The aforecited
stipulation shows that the vendors reserved title to the subject property until
full payment of the purchase price.

xxx

Unfortunately for the Spouses Pacson, since the Deed of Conditional Sale
executed in their favor was merely a contract to sell, the obligation of the seller
to sell becomes demandable only upon the happening of the suspensive
condition. The full payment of the purchase price is the positive suspensive
condition, the failure of which is not a breach of contract, but simply an event
that prevented the obligation of the vendor to convey title from acquiring binding
force. Thus, for its non-fulfilment, there is no contract to speak of, the obligor
having failed to perform the suspensive condition which enforces a juridical
relation. With this circumstance, there can be no rescission or fulfillment of an
obligation that is still non-existent, the suspensive condition not having
occurred as yet. Emphasis should be made that the breach contemplated in
Article 1191 of the New Civil Code is the obligors failure to comply with an
obligation already extant, not a failure of a condition to render binding that
obligation.[Emphases and underscoring supplied]

Consistently, the Court handed down a similar ruling in the 2010 case of Heirs of Atienza
v. Espidol, [9] where it was written:

Regarding the right to cancel the contract for non-payment of an

installment, there is need to initially determine if what the parties had was a
contract of sale or a contract to sell. In a contract of sale, the title to the property
passes to the buyer upon the delivery of the thing sold. In a contract to sell, on
the other hand, the ownership is, by agreement, retained by the seller and is not
to pass to the vendee until full payment of the purchase price. In the contract of
sale, the buyers non-payment of the price is a negative resolutory condition; in
the contract to sell, the buyers full payment of the price is a positive suspensive
condition to the coming into effect of the agreement. In the first case, the seller
has lost and cannot recover the ownership of the property unless he takes action
to set aside the contract of sale. In the second case, the title simply remains in
the seller if the buyer does not comply with the condition precedent of making
payment at the time specified in the contract. Here, it is quite evident that the
contract involved was one of a contract to sell since the Atienzas, as sellers, were
to retain title of ownership to the land until respondent Espidol, the buyer, has
paid the agreed price. Indeed, there seems no question that the parties
understood this to be the case.

Admittedly, Espidol was unable to pay the second installment

of P1,750,000.00 that fell due in December 2002. That payment, said both the
RTC and the CA, was a positive suspensive condition failure of which
 was not regarded a breach in the sense that there can be no rescission of an
obligation (to turn over title) that did not yet exist since the suspensive condition
had not taken place. x x x. [Emphases and underscoring supplied]

Thus, the Court fully agrees with the CA when it resolved: Considering, however, that the
Deed of Conditional Sale was not cancelled by Vendor Reyes (petitioner) and that out of the total
purchase price of the subject property in the amount of ₱4,200,000.00, the remaining unpaid
balance of Tuparan (respondent) is only ₱805,000.00, a substantial amount of the purchase price
has already been paid. It is only right and just to allow Tuparan to pay the said unpaid balance of
the purchase price to Reyes.[10]

Granting that a rescission can be permitted under Article 1191, the Court still cannot allow
it for the reason that, considering the circumstances, there was only a slight or casual breach in
the fulfillment of the obligation.

Unless the parties stipulated it, rescission is allowed only when the breach of the contract
is substantial and fundamental to the fulfillment of the obligation. Whether the breach is slight or
substantial is largely determined by the attendant circumstances. [11] In the case at bench, the
subject contract stipulated the following important provisions:

2. That the purchase price of ₱4,200,000.00 shall be paid as follows:

a) ₱278,078.13 received in cash by the First Party but directly paid to the Third
Party as partial payment of the mortgage obligation of the First Party in order to
reduce the amount to ₱2,000,000.00 only as of November 15, 1990;

b) ₱721,921.87 received in cash by the First Party as additional payment of

the Second Party;

c) ₱1,200,000.00 to be paid in installments as follows:

1. ₱200,000.00 payable on or before January 31, 1991;

2. ₱200,000.00 payable on or before June 30, 1991;
3. ₱800,000.00 payable on or before December 31, 1991;

Note: All the installments shall not bear any interest.

d) ₱2,000,000.00 outstanding balance of the mortgage obligation as

of November 15, 1990 which is hereby assumed by the Second Party.

xxx
 3. That the Third Party hereby acknowledges receipts from the Second
Party P278,078.13 as partial payment of the loan obligation of First Party in order to
reduce the account to only ₱2,000,000.00 as of November 15, 1990 to be assumed
by the Second Party effective November 15, 1990.[12]

From the records, it cannot be denied that respondent paid to FSL Bank petitioners
mortgage obligation in the amount of ₱2,278,078.13, which formed part of the purchase price of
the subject property. Likewise, it is not disputed that respondent paid directly to petitioner the
amount of ₱721,921.87 representing the additional payment for the purchase of the subject
property. Clearly, out of the total price of ₱4,200,000.00, respondent was able to pay the total
amount of ₱3,000,000.00, leaving a balance of ₱1,200,000.00 payable in three (3) installments.

Out of the ₱1,200,000.00 remaining balance, respondent paid on several dates the first and
second installments of ₱200,000.00 each. She, however, failed to pay the third and last installment
of ₱800,000.00 due on December 31, 1991. Nevertheless, on August 31, 1992, respondent,
through counsel, offered to pay the amount of ₱751,000.00, which was rejected by petitioner for
the reason that the actual balance was ₱805,000.00 excluding the interest charges.

Considering that out of the total purchase price of ₱4,200,000.00, respondent has already
paid the substantial amount of ₱3,400,000.00, more or less, leaving an unpaid balance of only
₱805,000.00, it is right and just to allow her to settle, within a reasonable period of time, the
balance of the unpaid purchase price. The Court agrees with the courts below that the respondent
showed her sincerity and willingness to comply with her obligation when she offered to pay the
petitioner the amount of ₱751,000.00.

On the issue of interest, petitioner failed to substantiate her claim that respondent made a
personal commitment to pay a 6% monthly interest on the ₱805,000.00 from the date of
delinquency, December 31, 1991. As can be gleaned from the contract, there was a stipulation
stating that: All the installments shall not bear interest. The CA was, however, correct in imposing
interest at the rate of 6% per annum starting from the filing of the complaint on September 11,
1992.

Finally, the Court upholds the ruling of the courts below regarding the non-imposition of
damages and attorneys fees. Aside from petitioners self-serving statements, there is not enough
evidence on record to prove that respondent acted fraudulently and maliciously against the
petitioner. In the case of Heirs of Atienza v. Espidol,[13] it was stated:
 Respondents are not entitled to moral damages because contracts are not
referred to in Article 2219 of the Civil Code, which enumerates the cases when
moral damages may be recovered. Article 2220 of the Civil Code allows the
recovery of moral damages in breaches of contract where the defendant acted
fraudulently or in bad faith. However, this case involves a contract to sell,
wherein full payment of the purchase price is a positive suspensive condition,
the non-fulfillment of which is not a breach of contract, but merely an event that
prevents the seller from conveying title to the purchaser. Since there is no
breach of contract in this case, respondents are not entitled to moral damages.

In the absence of moral, temperate, liquidated or compensatory damages,

exemplary damages cannot be granted for they are allowed only in addition to
any of the four kinds of damages mentioned.

WHEREFORE, the petition is DENIED.

SO ORDERED.
 THIRD DIVISION

SPOUSES JOSE T. VALENZUELA G.R. No. 163244

and GLORIA VALENZUELA, Present:
Petitioners, YNARES-SANTIAGO, J.,
Chairperson,
CHICO-NAZARIO,
VELASCO, JR.,
- versus - NACHURA, and
PERALTA, JJ.
Promulgated:

June 22, 2009

KALAYAAN DEVELOPMENT &
INDUSTRIAL CORPORATION,
Respondent.
x - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

PERALTA, J.:

This is a petition for review on certiorari assailing the Decision[1] dated January 23,
2004 of the Court of Appeals in CA-G.R. CV No. 69814, and its Resolution[2] dated April 20,
2004, denying petitioners motion for reconsideration.

The factual and procedural antecedents are as follows:

Kalayaan Development and Industrial Corporation (Kalayaan) is the owner of a parcel of

land covered by Transfer Certificate of Title (TCT) No. T-133026[3] issued by the Register of
Deeds of Metro Manila, District III. Later, petitioners, Spouses Jose T. Valenzuela and Gloria
Valenzuela (Gloria), occupied the said property and introduced several improvements thereon.

When Kalayaan discovered that the lot was being illegally occupied by the petitioners, it
demanded that they immediately vacate the premises and surrender possession
thereof. Petitioners then negotiated with Kalayaan to purchase the portion of the lot they were
occupying. On August 5, 1994, the parties executed a Contract to Sell[4] wherein they stipulated
that petitioners would purchase 236 square meters of the subject property
for P1,416,000.00. Petitioners initially gave P500,000.00 upon signing the contract and agreed to
pay the balance of P916,000.00 in twelve (12) equal monthly installments, or P76,333.75 a month
until fully paid.[5] The parties also agreed that, in case petitioners failed to pay any of the
installments, they would be liable for liquidated penalty at the rate of 3% a month compounded
monthly until fully paid. It was also stipulated that Kalayaan shall execute the corresponding deed
of absolute sale over the subject property only upon full payment of the total purchase price.[6]

Thereafter, petitioners made the following payments: P70,000.00 on October 20,

1994; P70,000.00 on November 23, 1994; and P68,000.00 on December 20, 1994, or a total
of P208,000.00. After these payments, petitioners failed to pay the agreed monthly installments.

In a letter[7] dated September 6, 1995, petitioners requested Kalayaan that they be issued a
deed of sale for the 118 sq. m. portion of the lot where their house was standing, considering that
they no longer had the resources to pay the remaining balance. They reasoned that, since they had
already paid one-half of the purchase price, or a total of P708,000.00 representing 118 sq. m. of
the subject property, they should be issued a deed of sale for the said portion of the property.

In a letter[8] dated December 15, 1995, Kalayaan reminded petitioners of their unpaid
balance and asked that they settle it within the next few days. In a demand letter[9] dated January
30, 1996, Kalayaan, through counsel, demanded that petitioners pay their outstanding obligation,
including the agreed penalties, within ten (10) days from receipt of the letter, or they would be
constrained to file the necessary actions against them. Again, in a letter[10] dated March 30, 1996,
Kalayaan gave petitioners another opportunity to settle their obligation within a period of ten (10)
days from receipt thereof.

On June 13, 1996, petitioners wrote Atty. Atilano Huaben Lim, then counsel of Kalayaan,
and requested him to intercede on their behalf and to propose to Kalayaan that Glorias sister,
Juliet Flores Giron (Juliet), was willing to assume payment of the remaining balance for the 118
sq. m. portion of the subject property at P10,000.00 a month.[11] Petitioners stated that they had
already separated the said 118 sq. m. portion and had the property surveyed by a licensed geodetic
engineer to determine the unpaid portion of the property that needed to be separated from their
lot.

On January 20, 1997, March 20, 1997, April 20, 1997, June 20, 1997, July 20, 1997,
September 20, 1997, October 20, 1997, and December 20, 1997, Juliet made payments
of P10,000.00 per month to Kalayaan, which the latter accepted for and in behalf of her sister
Gloria.[12]

Thereafter, Kalayaans in-house counsel, Atty. Reynaldo Romero, demanded that

petitioners pay their outstanding obligation. However, his demands remained unheeded. Thus,
on June 19, 1998, Kalayaan filed a Complaint for Rescission of Contract and Damages [13] against
petitioners before the Regional Trial Court (RTC) of Caloocan City, Branch 126, which was later
docketed as Civil Case No. C-18378.

On September 3, 1998, petitioners filed their Answer with Counterclaim[14] praying,

among other things, that the RTC dismiss the complaint and for Kalayaan to deliver the
corresponding TCT to the subject property, so that the same may be cancelled and a new one
issued in the name of the petitioners. Petitioners also prayed for the award of exemplary damages,
moral damages, attorneys fees, and cost of suit.[15]

After filing their respective pleadings, trial on the merits ensued. On August 2, 2000, the
RTC rendered a Decision[16] in favor of Kalayaan, rescinding the contract between the parties;
ordering the petitioners to vacate the premises; and to pay the amount of P100,000.00 as attorneys
fees.The decretal portion of the Decision reads:

IN VIEW OF ALL THE FOREGOING, judgment is hereby rendered rescinding the contract
between the plaintiff and the defendants and ordering the defendants and all persons claiming
rights under them to vacate the premises and to surrender possession thereof to the
plaintiff. Moreover, defendants shall pay the amount of P100,000.00 as attorneys fees.

The counterclaim of the defendants is hereby ordered DISMISSED for lack of merit.

SO ORDERED.[17]
 Aggrieved, petitioners sought recourse before the Court of Appeals (CA) in their appeal
docketed as CA-G.R. CV No. 163244. Petitioners argued that the RTC erred when:

IT RULED THAT THE PLAINTIFF-APPELLEE MADE A VALID FORMAL DEMAND

UPON THE DEFENDANTS-APPELANTS TO PAY THE LATTERS DUE AND
OUTSTANDING OBLIGATION;

IT RULED THAT THE PRINCIPLE OF NOVATION OF AN EXISTING OBLIGATION IS

NOT APPLICABLE IN THE INSTANT CASE;

IT RULED THAT THE PRINCIPLE OF RESCISSION IS APPLICABLE IN THE CASE AND

THAT THE PLAINTIFF-APPELLEE IS ENTITLED THERETO VIS--VIS THE
DEFENDANTS-APPELLANTS;

IT FAILED TO RULE THAT THE PLAINTIFF-APPELLEE IS BARRED BY ESTOPPEL

FROM ASKING FOR THE RESCISSION OF THE CONTRACT TO SELL.

IT RULED THAT THE DEFENDANTS-APPELLANTS DID NOT HAVE THE FINANCIAL

CAPACITY TO PAY THE REMAINING BALANCE OF THE OBLIGATION AND THAT,
CONSEQUENTLY, COMPLIANCE WITH THE TERMS OF THE SAID OBLIGATION HAS
BECOME IMPOSSIBLE.

IT RULED THAT THE PLAINTIFF-APPELLEE IS ENTITLED TO ITS CLAIM FOR

ATTORNEYS FEES AND THE COST OF SUIT.[18]

On January 23, 2004, the CA rendered a Decision affirming the Decision of the RTC, the
dispositive portion of which reads:

WHEREFORE, premises considered, the assailed decision dated August 2, 2000 is hereby
AFFIRMED, and the present appeal is hereby DISMISSED for lack of merit.

SO ORDERED. (Emphasis supplied.)[19]

Petitioners filed a Motion for Reconsideration,[20] but it was denied for lack of merit in a
Resolution[21] dated April 20, 2004.

Hence, the present petition assigning the following errors:

I. THE HONORABLE COURT OF APPEALS ERRED IN FAILING TO APPLY THE

PROVISIONS OF THE NEW CIVIL CODE REGARDING SUBSTANTIAL
PERFORMANCE IN THE JUST RESOLUTION OF THE PETITIONERS APPEAL.

II. THE HONORABLE COURT OF APPEALS SHOULD HAVE APPLIED THE

APPLICABLE PROVISIONS OF THE LAW VIS--VIS THE RESCISSION OF
 CONTRACTS TO SELL REAL PROPERTY, SPECIFICALLY THE REQUIREMENT OF
A PRIOR AND VALIDLY NOTARIZED LETTER OF DEMAND.

III. THE HONORABLE COURT OF APPEALS FAILED TO APPLY TO THE INSTANT

CASE THE PERTINENT PROVISIONS OF THE NEW CIVIL CODE REGARDING THE
PRINCIPLE OF NOVATION AS A MODE OF EXTINGUISHING AN OBLIGATION.

IV. THE AWARD, BY THE COURT OF APPEALS, OF ATTORNEYS FEES, WAS NOT IN
ACCORD WITH THE FACTS AND THE LAW.

Petitioners maintain that they should have been entitled to get at least one-half of the
subject property, because payment equivalent to its value has been made to, and received by
Kalayaan. Petitioners posit that the RTC should have applied Article 1234[22] of the Civil Code
to the present case, considering that it has been factually established that they were able to pay at
least one-half of the total obligation in good faith.

Petitioners contend that Kalayaan allowed Juliet to continue with the payment of the other
half of the property in installments of P10,000.00 a month. They also insist that they or Juliet was
not given proper demand. They maintain that the demand letters that were previously sent to them
were for their previous obligation with Kalayaan and not for the new agreement between Juliet
and Kalayaan to assume payment of the unpaid portion of the subject property. Petitioners aver
that, for a demand of rescission to be valid, it is an absolute requirement that should be made by
way of a duly notarized written notice.

Petitioners likewise claim that there was a valid novation in the present case. They aver
that the CA failed to see that the original contract between the petitioners and Kalayaan was
altered, changed, modified and restructured, as a consequence of the change in the person of the
principal debtor and the monthly amortization to be paid for the subject property. When they
agreed to a monthly amortization of P10,000.00 per month, the original contract was changed;
and Kalayaan recognized Juliets capacity to pay, as well as her designation as the new debtor. The
original contract was novated and the principal obligation to pay for the remaining half of the
subject property was transferred from petitioners to Juliet. When Kalayaan accepted the payments
made by the new debtor, Juliet, it waived its right to rescind the previous contract. Thus, the
action for rescission filed by Kalayaan against them, was unfounded, since the contract sought to
be rescinded was no longer in existence.
 Finally, petitioners question the RTCs award of attorneys fees. They maintain that there
was no basis for the RTC to have awarded the same.They claim that Kalayaan was not forced, by
their acts, to litigate, because Juliet was offering to pay the installments, but the offer was denied
by Kalayaan. Moreover, since there were no awards for moral and exemplary damages, the award
of attorneys fees would have no basis and should be deleted.

The petition is devoid of merit.

In the present case, the nature and characteristics of a contract to sell is determinative of
the propriety of the remedy of rescission and the award of attorneys fees.

Under a contract to sell, the seller retains title to the thing to be sold until the purchaser
fully pays the agreed purchase price. The full payment is a positive suspensive condition, the non-
fulfillment of which is not a breach of contract, but merely an event that prevents the seller from
conveying title to the purchaser. The non-payment of the purchase price renders the contract to
sell ineffective and without force and effect.[23] Unlike a contract of sale, where the title to the
property passes to the vendee upon the delivery of the thing sold, in a contract to sell, ownership
is, by agreement, reserved to the vendor and is not to pass to the vendee until full payment of the
purchase price. Otherwise stated, in a contract of sale, the vendor loses ownership over the
property and cannot recover it until and unless the contract is resolved or rescinded; whereas, in
a contract to sell, title is retained by the vendor until full payment of the purchase price. In the
latter contract, payment of the price is a positive suspensive condition, failure ofwhich is not a
breach but an event that prevents the obligation of the vendor to convey title from becoming
effective.[24]

Since the obligation of respondent did not arise because of the failure of petitioners to fully
pay the purchase price, Article 1191[25] of the Civil Code would have no application.

Rayos v. Court of Appeals[26] elucidates:

Construing the contracts together, it is evident that the parties executed a contract to sell
and not a contract of sale. The petitioners retained ownership without further remedies by the
respondents until the payment of the purchase price of the property in full. Such payment is a
 positive suspensive condition, failure of which is not really a breach, serious or otherwise,
but an event that prevents the obligation of the petitioners to convey title from arising, in
accordance with Article 1184 of the Civil Code. x x x

xxxx

The non-fulfillment by the respondent of his obligation to pay, which is a suspensive

condition to the obligation of the petitioners to sell and deliver the title to the property,
rendered the contract to sell ineffective and without force and effect. The parties stand as if
the conditional obligation had never existed. Article 1191 of the New Civil Code will not apply
because it presupposes an obligation already extant. There can be no rescission of an
obligation that is still non-existing, the suspensive condition not having happened.

The parties contract to sell explicitly provides that Kalayaan shall execute and deliver the
corresponding deed of absolute sale over the subject property to the petitioners upon full payment
of the total purchase price. Since petitioners failed to fully pay the purchase price for the entire
property, Kalayaans obligation to convey title to the property did not arise. Thus, Kalayaan may
validly cancel the contract to sell its land to petitioner, not because it had the power to rescind the
contract, but because their obligation thereunder did not arise.

Petitioners failed to pay the balance of the purchase price. Such payment is a positive
suspensive condition, failure of which is not a breach, serious or otherwise, but an event that
prevents the obligation of the seller to convey title from arising. [27] The non-fulfillment by
petitioners of their obligation to pay, which is a suspensive condition for the obligation of
Kalayaan to sell and deliver the title to the property, rendered the Contract to Sell ineffective and
without force and effect. The parties stand as if the conditional obligation had never
existed.[28] Inasmuch as the suspensive condition did not take place, Kalayaan cannot be
compelled to transfer ownership of the property to petitioners.

As regards petitioners claim of novation, we do not give credence to petitioners assertion

that the contract to sell was novated when Juliet was allegedly designated as the new debtor and
substituted the petitioners in paying the balance of the purchase price.

Novation is the extinguishment of an obligation by the substitution or change of the

obligation by a subsequent one which extinguishes or modifies the first, either by changing the
object or principal conditions, or by substituting another in place of the debtor, or by subrogating
a third person in the rights of the creditor.[29]
 Article 1292 of the Civil Code provides that [i]n order that an obligation may be
extinguished by another which substitutes the same, it is imperative that it be so declared in
unequivocal terms, or that the old and the new obligations be on every point incompatible with
each other.Novation is never presumed. Parties to a contract must expressly agree that they are
abrogating their old contract in favor of a new one. In the absence of an express agreement,
novation takes place only when the old and the new obligations are incompatible on every
point.[30] The test of incompatibility is whether or not the two obligations can stand together, each
one having its independent existence. If they cannot, they are incompatible and the latter
obligation novates the first.[31]

Thus, in order that a novation can take place, the concurrence of the following requisites
are indispensable:

1) There must be a previous valid obligation;

2) There must be an agreement of the parties concerned to a new contract;
3) There must be the extinguishment of the old contract; and
4) There must be the validity of the new contract.

In the instant case, none of the requisites are present. There is only one existing and binding
contract between the parties, because Kalayaan never agreed to the creation of a new contract
between them or Juliet. True, petitioners may have offered that they be substituted by Juliet as
the new debtor to pay for the remaining obligation. Nonetheless, Kalayaan did not acquiesce to
the proposal.

Its acceptance of several payments after it demanded that petitioners pay their outstanding
obligation did not modify their original contract.Petitioners, admittedly, have been in default; and
Kalayaans acceptance of the late payments is, at best, an act of tolerance on the part of Kalayaan
that could not have modified the contract.
As to the partial payments made by petitioners from September 16, 1994 to December 20,
1997, amounting to P788,000.00, this Court resolves that the said amount be returned to the
petitioners, there being no provision regarding forfeiture of payments made in the Contract to
Sell. To rule otherwise will be unjust enrichment on the part of Kalayaan at the expense of the
petitioners.
 Also, the three percent (3%) penalty interest appearing in the contract is patently iniquitous
and unconscionable as to warrant the exercise by this Court of its judicial discretion. Article 2227
of the Civil Code provides that [l]iquidated damages, whether intended as an indemnity or a
penalty, shall be equitably reduced if they are iniquitous or unconscionable. A perusal of the
Contract to Sell reveals that the three percent (3%) penalty interest on unpaid monthly
installments (per condition No. 3) would translate to a yearly penalty interest of thirty-six percent
(36%).

Although this Court on various occasions has eliminated altogether the three percent (3%)
penalty interest for being unconscionable,[32] We are not inclined to do the same in the present
case. A reduction is more consistent with fairness and equity. We should not lose sight of the fact
that Kalayaan remains an unpaid seller and that it has suffered, one way or another, from
petitioners non-performance of its contractual obligations. In view of such glaring reality, We
invoke the authority granted to us by Article 1229[33] of the Civil Code, and as equity dictates, the
penalty interest is accordingly reimposed at a reduced rate of one percent (1%) interest per month,
or twelve percent (12%) per annum,[34] to be deducted from the partial payments made by the
petitioners.

As to the award of attorneys fees, the undeniable source of the present controversy is the
failure of petitioners to pay the balance of the purchase price. It is elementary that when attorneys
fees is awarded, they are so adjudicated, because it is in the nature of actual damages suffered by
the party to whom it is awarded, as he was constrained to engage the services of a counsel to
represent him for the protection of his interest.[35] Thus, although the award of attorneys fees to
Kalayaan was warranted by the circumstances obtained in this case, we find it equitable to reduce
the award from P100,000.00 to P50,000.00.

WHEREFORE, premises considered, the Decision of the Regional Trial Court in Civil
Case No. C-18378, dated August 2, 2000, is hereby MODIFIED to the extent that the contract
between the parties is cancelled and the attorneys fees is reduced to P50,000.00. Respondent is
further ordered to refund the amount paid by the petitioners after deducting the penalty interest
due. In all other aspects, the Decision stands.
 Subject to the above disquisitions, the Decision dated January 23, 2004 and the Resolution
dated April 20, 2004, of the Court of Appeals in CA-G.R. CV No. 69814, are AFFIRMED.

SO ORDERED.