EQUATORIAL REALTY DEVELOPMENT, INC. vs. MAYFAIR THEATER, INC. (G.R.

No. 133879, November 21, 2001)

FACTS:

Mother Case:

Carmelo entered into a Contract of Lease with Mayfair Theater Inc. apportion of its building for
a period of 20 years. Two years later, Mayfair entered into a second Contract of Lease with
Carmelo for the lease of another portion of the latter's property, the period was likewise for 20
years. Both leases contained a provision granting Mayfair a right of first refusal to purchase the
subject properties.

However, within the 20-year-lease term, the subject properties were sold by Carmelo to
Equatorial Realty Development, Inc. for the total sum of P11,300,000 without their first being
offered to Mayfair. As a result of the sale to Equatorial, Mayfair filed a Complaint before RTC
for (a) the annulment of the Deed of Absolute Sale between Carmelo and Equatorial, (b) specific
performance, and (c) damages.

The lower court rendered a Decision in favor of Carmelo and Equatorial. On appeal, CA
completely reversed and set aside the judgment of the lower court. The controversy then reached
the SC, which affirmed the CA ruling and ordered that (1) the Deed of Absolute Sale between
Equatorial and Carmelo is deemed rescinded; (2) Carmelo is ordered to return to Equatorial the
purchase price; (3) Equatorial is directed to execute the deeds and documents necessary to return
ownership to Carmelo; and (4) Carmelo is ordered to allow Mayfair to buy the aforesaid lots for
P11,300,000.00. This decision became final and executory.

Mayfair filed a Motion for Execution, which the trial court granted.

Present case at bar:

Five months after Mayfair submitted its Motion for Execution, Equatorial filed with the RTC an
action for the collection of a sum of money against Mayfair, representing itself as the owner of
the subject premises by reason of the Contract of Sale and claiming payment of rentals or
reasonable compensation for the defendant's use of the subject premises after its lease contracts
had expired.

RTC dismissed the Complaint holding that the rescission of the Deed of Absolute Sale in the
mother case did not confer on Equatorial any vested or residual proprietary rights. It declared the
rescinded Deed of Absolute Sale as void at its inception as though it did not happen. Hence, the
present petition before the SC.

ISSUE: Whether or not Equatorial is entitled to back rentals

RULING:
No. No right of ownership was transferred from Carmelo to Equatorial in view of a patent failure
to deliver the property to the buyer.

The rentals that fell due from the time of the perfection of the sale to petitioner until its rescission
by final judgment should belong to the owner of the property during that period. Ownership of
the thing sold is a real right, which the buyer acquires only upon delivery of the thing to him.
And there is said to be delivery if and when the thing sold “is placed in the control and
possession of the vendee.” Thus, it has been held that while the execution of a public instrument
of sale is recognized by law as equivalent to the delivery of the thing sold, such constructive or
symbolic delivery, being merely presumptive, is deemed negated by the failure of the vendee to
take actual possession of the land sold.

In this case, it is clear that petitioner never took actual control and possession of the property
sold because of the respondent's timely objection to the sale and its continued actual possession
of the property. The objection took the form of a court action impugning the sale which, as we
know, was rescinded by a judgment rendered by this Court in the mother case. It has been held
that the execution of a contract of sale as a form of constructive delivery is a legal fiction. It
holds true only when there is no impediment that may prevent the passing of the property from
the hands of the vendor into those of the vendee. When there is such impediment, "fiction yields
to reality — the delivery has not been effected."

Hence, respondent's opposition to the transfer of the property by way of sale to Equatorial was a
legally sufficient impediment that effectively prevented the passing of the property into the
latter's hands.

However, the point may be raised that under Article 1164 of the Civil Code, Equatorial as buyer
acquired a right to the fruits of the thing sold from the time the obligation to deliver the property
to petitioner arose. That time arose upon the perfection of the Contract of Sale, from which
moment the laws provide that the parties to a sale may reciprocally demand performance. Does
this mean that despite the judgment rescinding the sale, the right to the fruits belonged to and
remained enforceable by Equatorial?

Article 1385 of the Civil Code answers this question in the negative, because rescission creates
the obligation to return the things which were the object of the contract, together with their fruits,
and the price with its interest; Not only the land and building sold, but also the rental payments
paid, if any, had to be returned by the buyer.

The Decision in the mother case stated that "Equatorial has received rents" from Mayfair "during
all the years that this controversy has been litigated." Does this concede actual delivery?

No. The fact that Mayfair paid rentals to Equatorial during the litigation should not be interpreted
to mean either actual delivery or ipso facto recognition of Equatorial's title. It had no choice but
to pay the rentals so that it can maintain physical possession of the premises while awaiting the
outcome of the mother case. The rental payments made by Mayfair should not be construed as a
recognition of Equatorial as the new owner. They were made merely to avoid imminent eviction.
At bottom, it may be conceded that, theoretically, a rescissible contract is valid until rescinded.
However, this general principle is not decisive to the issue of whether Equatorial ever acquired
the right to collect rentals. What is decisive is the civil law rule that ownership is acquired, not
by mere agreement, but by tradition or delivery. Under the factual environment of this
controversy as found by this Court in the mother case, Equatorial was never put in actual and
effective control or possession of the property because of Mayfair's timely objection.

In short, the sale to Equatorial may have been valid from inception, but it was judicially
rescinded before it could be consummated. Petitioner never acquired ownership, not because the
sale was void but because the sale was not consummated by a legally effective delivery of the
property sold.

SC upheld the trial court's decision for (a) the patent failure to deliver the property and (b)
petitioner's bad faith. Petition is denied.
Spouses MARIANO Z. VELARDE and AVELINA D. VELARDE vs. CA, DAVID
RAYMUNDO and GEORGE RAYMUNDO (G.R. No. 108346, July 11, 2001)

FACTS:

Private respondent David Raymundo is the absolute and registered owner of a parcel of land,
together with the house and other improvements located Dasmariñas Village, Makati. David's
father, George Raymundo, negotiated with petitioners Avelina and Mariano Velarde the sale of
said property which was under.

A Deed of Sale with Assumption of Mortgage was executed by David Raymundo, as vendor, in
favor of plaintiff Avelina Velarde, as vendee, stating that David sells, cedes, transfers conveys
and delivers the property to Avelina for P800,000 and that Avelina assumes to pay the mortgage
obligations on the property in the amount of P1,800,000 in favor of BPI.

On the same date, and as part of the above-document, Avelina executed an Undertaking stating:
(1) that Avelina paid David P800,000 and assumes the mortgage obligations on the property with
BPI in the amount of P1.8M; (2) that while Avelina’s application for the assumption of the
mortgage obligations on the property is not yet approved by BPI, she agrees to pay the mortgage
obligations on the property, including interest and charges for late payment; and (3) that Avelina
binds and obligates herself to strictly and faithfully comply with the following terms and
conditions: (a) until such time that assumption of mortgage obligations on the property is
approved by BPI, she shall continue to pay said loan in accordance with its terms and conditions;
(b) in the event Avelina violates any of the terms and conditions, her downpayment plus all
payments made with BPI on the mortgage loan shall be forfeited in favor of David, and that
David shall resume total and complete possession and ownership of the property, and the Deed
of Sale with Assumption of Mortgage shall be deemed automatically cancelled.

Pursuant to said agreements, Velarde paid BPI the monthly interest on the loan secured by the
mortgage for three (3) months. However, when they were advised that the Application for
Assumption of Mortgage with BPI was not approved, the Velardes prompted not to make any
further payment. 

Raymundo, thru his counsel, wrote Velarde informing the latter that their non-payment to the
mortgage bank constituted non-performance of their obligation.

Velarde, thru counsel, responded that they are willing to pay the balance in cash, provided: (a)
that he deliver actual possession of the property; (b) that he cause the re-lease of title and
mortgage from BPI and make the title available and free from any liens and encumbrances; and
(c) execute an absolute deed of sale in her favor.

Raymundo sent plaintiffs a notarial notice of cancellation/rescission of the intended sale of the
subject property allegedly due to the latter's failure to comply with the terms and conditions of
the Deed of Sale with Assumption of Mortgage and the Undertaking. Consequently, Velarde
filed a Complaint against private respondents for specific performance, nullity of cancellation,
writ of possession and damages before the RTC.
RTC initially dismissed the Complaint but granted petitioner's Motion for Reconsideration and
directed the parties to proceed with the sale. The court instructed petitioners to pay the balance of
P1.8M to private respondents who, in turn, were ordered to execute a deed of absolute sale and to
surrender possession of the disputed property to petitioners. However, CA reinstated dismissal of
petitioners' Complaint and upheld the validity of the rescission made by Raymundo. Hence this
appeal.

ISSUE: Whether or not the rescission made by Raymundo was valid

RULING:

Yes. The breach committed by petitioners was not their nonpayment of the mortgage obligation
but their nonperformance of their reciprocal obligation to pay the purchase price under the
contract of sale. Private respondents' right to rescind the contract finds basis in Article 1191 of
the Civil Code, which explicitly provides as follows:

"Art. 1191. The power to rescind obligations is implied in reciprocal ones, in case one of
the obligors should not comply with what is incumbent upon him. 

The injured party may choose between fulfillment and the rescission of the obligation,
with the payment of damages in either case. He may also seek rescission even after he
has chosen fulfillment, if the latter should become impossible." 

The right of rescission of a party to an obligation under Article 1191 of the Civil Code is
predicated on a breach of faith by the other party who violates the reciprocity between them. The
breach contemplated in the said provision is the obligor's failure to comply with an existing
obligation. When the obligor cannot comply with what is incumbent upon it, the obligee may
seek rescission and, in the absence of any just cause for the court to determine the period of
compliance, the court shall decree the rescission.

In the present case, private respondents validly exercised their right to rescind the contract,
because of the failure of petitioners to comply with their obligation to pay the balance of the
purchase price. Petitioners not only failed to pay the P1.8 million balance, but they also imposed
upon private respondents’ new obligations as preconditions to the performance of their own
obligation. In effect, the qualified offer to pay was a repudiation of an existing obligation, which
was legally due and demandable under the contract of sale. Hence, private respondents were left
with the legal option of seeking rescission to protect their own interest. 

Considering that the rescission of the contract is based on Article 1191 of the Civil Code, mutual
restitution is required to bring back the parties to their original situation prior to the inception of
the contract. Accordingly, the payments totaling P874,150.00 advanced by petitioners should be
returned by private respondents.

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

CA decision is affirmed with modification that private respondents return to petitioners the
amount which the latter paid as a consequence of the rescinded contract.