TL;DR

This Supreme Court case clarifies that simply buying a property with annotated restrictions doesn’t automatically make you liable for the original seller’s contractual obligations. ASB Realty Corporation bought land previously sold to Amethyst Pearl Corporation, inheriting title annotations about building restrictions. When ASB didn’t meet these restrictions, Ortigas & Company, the original seller, tried to rescind the sale. The Supreme Court ruled against Ortigas, stating ASB, as a subsequent buyer, was only bound to respect the encumbrance but not to fulfill Amethyst’s original contractual duties without express assumption. This means property buyers need to be aware of title annotations, but they are not automatically responsible for prior owners’ contractual breaches unless explicitly agreed upon.

Land Covenants and Buyer’s Burden: Who Pays When Promises Aren’t Kept?

The case of ASB Realty Corporation versus Ortigas & Company Limited Partnership revolves around a fundamental question in property law: When land is sold with conditions attached, who is responsible for fulfilling those conditions when the property changes hands? Ortigas & Company, seeking to enforce building restrictions on a property they initially sold to Amethyst Pearl Corporation, sued ASB Realty, the subsequent buyer. Ortigas aimed to rescind the sale due to non-compliance with building covenants stipulated in the original Deed of Sale with Amethyst. These covenants, designed to maintain Ortigas’ controlled real estate development, were annotated on the property’s title, which ASB inherited upon purchase.

The core of the dispute lies in whether ASB Realty, by acquiring the property with these annotations, automatically assumed Amethyst’s contractual obligations to Ortigas. Ortigas argued that ASB, as Amethyst’s successor-in-interest, was bound by these covenants and their breach justified rescission. ASB countered that they were only aware of the encumbrance but had not expressly agreed to take on Amethyst’s contractual duties. The Regional Trial Court initially sided with ASB, dismissing Ortigas’ complaint based on laches and the inapplicability of restrictions to ASB. The Court of Appeals initially affirmed the RTC but later reversed its decision on reconsideration, favoring Ortigas and ordering rescission and reconveyance. This amended decision prompted ASB to elevate the case to the Supreme Court.

The Supreme Court, in its analysis, delved into the nature of property encumbrances and contractual obligations in the context of real estate transfers. The Court acknowledged that annotations on a certificate of title serve as notice to subsequent purchasers about burdens or claims on the property. Section 39 of Act No. 496, or The Land Registration Act, emphasizes that a purchaser of registered land takes the title free of all encumbrances except those noted on the certificate. These encumbrances are defined broadly as anything that impairs property use or transfer, constituting a burden on the title.

However, the crucial distinction drawn by the Supreme Court is between being aware of an encumbrance and assuming contractual obligations. While ASB, by purchasing the property with annotated covenants, was bound to respect these encumbrances, this did not automatically equate to assuming Amethyst’s contractual obligations under the original Deed of Sale. The Court emphasized that the Deed of Assignment in Liquidation between Amethyst and ASB transferred only the property itself, “free from any lien or encumbrance except those that are duly annotated on the Transfer Certificate of Title,” but not the contractual liabilities of Amethyst.

The Court further clarified that contractual obligations are generally not assignable without express agreement or legal mechanisms like novation. In this case, there was no evidence of novation – no consent from Ortigas to substitute ASB for Amethyst in the original contract, and no express assumption of obligations by ASB. Referencing the principle in Garcia v. Villar, the Court likened the situation to a mortgage, where a buyer of mortgaged property is bound to respect the mortgage but does not automatically become the debtor. The obligation to pay remains with the original debtor unless there is a clear assumption and creditor consent.

The Supreme Court underscored that rescission under Article 1191 of the Civil Code, the basis of Ortigas’ claim, is a remedy for breach of contract between parties to that contract. It requires a reciprocal obligation and a substantial breach by one party. In this case, the reciprocal obligation existed between Ortigas and Amethyst, not directly between Ortigas and ASB. ASB’s failure to comply with the building covenants, while potentially a violation of the encumbrance, was not a breach of a contract to which ASB was a party in the first place. Therefore, Ortigas lacked a cause of action against ASB for rescission of the Deed of Sale.

Ultimately, the Supreme Court reversed the Court of Appeals’ amended decision and dismissed Ortigas’ complaint. The ruling reinforces the principle that while property purchasers are bound by annotated encumbrances, they do not automatically inherit the contractual obligations of previous owners unless there is a clear legal basis for such assumption, such as novation or express agreement. This decision provides crucial clarity on the limits of liability for subsequent property owners concerning prior contractual commitments related to the land.

FAQs

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: ASB Realty Corporation v. Ortigas & Company Limited Partnership, G.R No. 202947, December 09, 2015