TL;DR

The Supreme Court ruled that a buyer who has made substantial payments on a property under a contract to sell cannot have the contract rescinded for failing to pay the remaining balance, especially if the seller has not yet transferred the title. In this case, the buyer had paid a significant portion of the agreed price, and the court found that the failure to pay the small remaining balance did not constitute a fundamental breach of contract that would justify rescission. This decision highlights the importance of substantial performance in contract law and protects buyers who have invested significantly in a property from losing their investment over minor defaults. Instead, the buyer was given the opportunity to pay the balance due with interest.

Conditional No More? How Substantial Payment Shifts the Balance in Property Sales

This case explores the nuances of real estate contracts, specifically the difference between a contract of sale and a contract to sell. At the heart of the dispute is whether a seller can rescind a contract when the buyer has paid a significant portion of the purchase price but still owes a remaining balance. The Supreme Court grapples with the question of whether such a partial breach justifies the extreme remedy of rescission, especially when the seller retains ownership of the property until full payment.

The case revolves around Mila A. Reyes (petitioner) and Victoria T. Tuparan (respondent) who entered into a Deed of Conditional Sale of Real Properties with Assumption of Mortgage. The agreement stipulated that Tuparan would purchase Reyes’s property for P4,200,000.00, paying a portion in cash and assuming Reyes’s existing mortgage with Farmers Savings Bank and Loan Bank, Inc. A key provision stated that title to the property would remain with Reyes until Tuparan fully paid the purchase price and the mortgage obligation. Tuparan made substantial payments, covering most of the purchase price and the mortgage. However, she defaulted on the final installment of P800,000.00, leaving a balance of P805,000.00. Reyes sought to rescind the contract, arguing that Tuparan’s failure to pay the full amount constituted a breach.

The Regional Trial Court (RTC) and the Court of Appeals (CA) both agreed that the contract was a contract to sell, not a contract of sale. The CA, however, ruled that rescission was not warranted because Tuparan had already paid a substantial amount. It held that Tuparan’s failure to pay the balance was not a fundamental breach. The Supreme Court affirmed the CA’s decision, emphasizing that Reyes retained ownership of the property until full payment. It cited the distinction between contracts of sale and contracts to sell, elaborating that in a contract to sell, full payment is a positive suspensive condition. Here’s what the court had to say:

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.

Building on this principle, the Court underscored that the breach contemplated in Article 1191 of the New Civil Code refers to the failure to comply with an existing obligation, not the non-fulfillment of a condition that prevents the obligation from arising. Furthermore, even if rescission were permissible, the Court found that Tuparan’s partial breach was not substantial enough to justify it. The Court considered that Tuparan had already paid a significant portion of the purchase price, demonstrating her intent to fulfill her obligations. The remedy of rescission is not absolute and is generally not granted for slight or casual breaches of contract.

The Court also addressed the issue of interest. The contract stipulated that the installments would not bear any interest. Therefore, the Court upheld the CA’s imposition of interest at 6% per annum from the date of filing the complaint, not from the date of delinquency as Reyes had argued. The Court also denied Reyes’s claim for damages and attorney’s fees, finding insufficient evidence of fraud or bad faith on Tuparan’s part. The decision in Heirs of Atienza v. Espidol was cited to support the denial of moral damages in the absence of a breach of contract.

FAQs

This case illustrates the Court’s inclination to protect parties who have substantially performed their obligations under a contract. It emphasizes that rescission is an extreme remedy that should be reserved for cases of fundamental breach, especially when significant payments have already been made. The decision serves as a reminder that courts will consider the specific facts and circumstances of each case to determine whether rescission is equitable and just.

For inquiries regarding the application of this ruling to specific circumstances, please contact Atty. Gabriel Ablola through gaboogle.com or via email at connect@gaboogle.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Mila A. Reyes v. Victoria T. Tuparan, G.R. No. 188064, June 01, 2011