TL;DR

This Supreme Court case clarifies that in contracts to sell commercial or industrial land in the Philippines, sellers can cancel the contract if buyers default on payments, even without needing to refund prior payments. However, this cancellation must be properly communicated to the buyer. The Court ruled that while the seller in this case had the right to cancel due to non-payment, the cancellation was invalid because no proper demand for payment or notice of cancellation was given to the buyer, emphasizing the importance of due process even in commercial real estate transactions.

When Default Doesn’t Mean Defeat: Upholding Notice in Commercial Land Deals

This case revolves around a dispute arising from a Deed of Conditional Sale between Royal Plains View, Inc. (buyer) and Nestor Mejia (seller) for a commercial land parcel. The core legal question is whether Nestor Mejia validly rescinded or cancelled the contract due to Royal Plains View’s payment default. The petitioners, Royal Plains View, Inc., argued against the rescission, seeking to enforce the contract or, alternatively, recover payments already made. The respondent, Nestor Mejia, claimed valid rescission due to non-payment. The Regional Trial Court (RTC) initially sided with the seller, finding fraud in the transaction, but the Court of Appeals (CA) reversed this, applying the Maceda Law (R.A. No. 6552). Ultimately, the Supreme Court stepped in to refine the application of contract law and buyer protection in commercial real estate deals.

The Supreme Court first addressed a procedural issue: whether Nestor Mejia, who was declared in default at the RTC level, could still file an appellee’s brief in the CA. The Court affirmed the CA’s decision to allow the brief, clarifying that while a defaulted party loses the right to present evidence in the trial court, they retain the right to appeal and be notified of subsequent proceedings. This ensures due process even for parties in default, allowing them to challenge legal errors in higher courts. The Court emphasized that default serves to expedite proceedings, not to strip a party of all post-judgment rights.

Moving to the substantive issue, the Court classified the Deed of Conditional Sale as a contract to sell, not a contract of sale. This distinction is crucial in Philippine law. In a contract of sale, ownership transfers upon delivery, and non-payment is a resolutory condition. Conversely, in a contract to sell, ownership remains with the seller until full payment, which is a suspensive condition. Failure to pay in a contract to sell prevents the obligation to convey title from arising. The Deed’s clause stating that the seller would execute a Deed of Absolute Sale upon full payment clearly indicated a contract to sell.

The CA erroneously applied the Maceda Law, which provides protections to installment buyers of residential real estate. The Supreme Court clarified that the Maceda Law explicitly excludes industrial lots and commercial buildings. The subject property, a six-hectare lot purchased by a real estate company, falls outside the Maceda Law’s scope. However, this doesn’t mean commercial buyers are without any protection. The Court referenced the Luzon Brokerage case, affirming that while the Maceda Law doesn’t apply, the seller in commercial contracts to sell still has the right to cancel upon default, but this right is not absolute and must be exercised properly.

The Court then examined Nestor Mejia’s “Rescission of Deed of Conditional Sale.” It noted that “rescission” is technically inaccurate for contracts to sell. Failure to pay is not a breach but a non-fulfillment of a suspensive condition. However, the Court interpreted Nestor’s action as a cancellation, which is the appropriate remedy for sellers in contracts to sell upon buyer default. Despite the right to cancel, the Supreme Court stressed that this cancellation must be communicated to the buyer. Drawing from University of the Philippines v. De Los Angeles, the Court highlighted that unilateral cancellation is provisional and subject to judicial review. Notice to the defaulting party is essential to allow them to contest the cancellation.

In this case, Nestor Mejia’s cancellation was deemed invalid because he failed to make a formal demand for payment or provide proper notice of cancellation to Royal Plains View, Inc. Demand is generally required under Article 1169 of the Civil Code to establish default unless waived, which was not the case here. Without proper demand and notice, the cancellation was premature and ineffective. Therefore, the Deed of Conditional Sale remained valid and subsisting.

Considering the substantial payments already made by Royal Plains View, Inc., the Supreme Court, invoking equity, granted them a 60-day grace period to pay the remaining balance. While denying petitioners’ claims for damages and specific performance in the strict sense, the Court aimed for a just resolution. The Court ordered that upon full payment within 60 days, Nestor Mejia must execute a Deed of Absolute Sale. Failure to pay would result in the contract’s cancellation, and past payments would be considered rentals. This ruling balances the seller’s right to cancel with the buyer’s right to due process and equitable consideration, even in commercial real estate transactions.

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: Royal Plains View, Inc. v. Mejia, G.R. No. 230832, November 12, 2018