This Supreme Court case clarifies that an annotation on a property title under Section 4, Rule 74 of the Rules of Court constitutes a legal encumbrance. This means potential buyers must be aware of possible claims from excluded heirs or unpaid creditors. In contracts to sell, this encumbrance allows buyers to suspend payments if the seller cannot provide a ‘clean’ title, protecting the buyer’s investment and preventing forfeiture of down payments when unforeseen title issues arise.

The Conditional Sale, the Inheritance, and the Unexpected Title Trouble

This case, Delfin Tan v. Erlinda C. Benolirao, revolves around a conditional sale of land between Delfin Tan (buyer) and several co-owners, the Benoliraos and Taningcos (sellers). Tan made a down payment, but before he could pay the remaining balance, one of the co-owners died. An extrajudicial settlement followed, leading to a new title with an annotation under Section 4, Rule 74, meant to protect potential claims against the estate. Tan viewed this annotation as an encumbrance preventing the sellers from delivering a clear title and refused to pay the remaining balance, demanding his down payment back. The sellers refused, leading to a legal battle.

The heart of the matter rests on the nature of the annotation placed on the Transfer Certificate of Title (TCT) No. 27335. This annotation stemmed from the extrajudicial settlement of the estate of Lamberto Benolirao, and it essentially served as a warning to third parties about potential claims against the property for a period of two years. The Supreme Court had to determine if such an annotation qualifies as an encumbrance.

The Supreme Court emphasized that the annotation placed on the title pursuant to Section 4, Rule 74, creates a legal encumbrance. This encumbrance warns potential buyers of possible claims from excluded heirs or unpaid creditors, impacting the property’s marketability and posing a risk to the buyer’s investment. The annotation serves as a lien in favor of excluded heirs or creditors, and buyers who proceed despite the annotation must acknowledge the potential for the title to be subject to those rights.

“x x x any liability to credirots (sic), excluded heirs and other persons having right to the property, for a period of two (2) years, with respect only to the share of Erlinda, Andrew, Romano and Dion, all surnamed Benolirao“

The Court distinguished between a contract of sale and a contract to sell. A contract of sale involves the transfer of ownership in exchange for a price. In contrast, a contract to sell reserves ownership with the seller until full payment, with the promise to transfer ownership upon the fulfillment of this condition. Here, the contract was deemed a ‘contract to sell’ because the sellers were obligated to execute a deed of absolute sale only upon Tan’s full payment.

Building on this principle, the court explained the repercussions of the encumbrance in the context of a contract to sell. The appearance of the encumbrance prevented the sellers from fulfilling their promise of delivering a clear title upon full payment. The Court stated, “By the time Tan’s obligation to pay the balance of the purchase price arose on May 21, 1993… a new certificate of title covering the property had already been issued on March 26, 1993, which contained the encumbrance on the property… Clearly, at this time, the vendors could no longer compel Tan to pay the balance of the purchase since considering they themselves could not fulfill their obligation to transfer a clean title over the property to Tan.”

Because of the supervening event of the encumbrance, the contract to sell was terminated, not rescinded. In contracts to sell, the failure of the buyer to pay is not a breach but prevents the seller’s obligation to transfer title from arising. Thus, the forfeiture of Tan’s down payment was deemed unwarranted because the encumbrance made it impossible for the sellers to provide a clear title. Furthermore, the court underscored that the usual remedy of rescission under Article 1191 of the Civil Code, which applies to contracts of sale, does not extend to contracts to sell.

In light of these findings, the Supreme Court reversed the lower courts’ decisions. It ordered the return of Tan’s down payment with legal interest from the date of his demand. Additionally, Tan was awarded attorney’s fees as he was compelled to litigate due to the sellers’ failure to return the down payment despite their inability to provide a clean title. The Court ruled that a legal interest of 6% per annum should be computed from May 28, 1993 (the date of the first demand letter), until the judgment becomes final and executory. After the judgment becomes final, the interest rate increases to 12% per annum until full satisfaction.

FAQs

What was the key issue in this case?	The primary issue was whether an annotation on a property title under Section 4, Rule 74 of the Rules of Court constitutes a legal encumbrance, and what impact it had on the obligations of parties in a contract to sell.
What is a contract to sell?	A contract to sell is an agreement where the seller retains ownership of the property until the buyer fully pays the purchase price, at which point the seller is obligated to transfer the title to the buyer.
What is a legal encumbrance?	A legal encumbrance is any right or claim on a property that may diminish its value or restrict its use, such as a lien, mortgage, or, as in this case, an annotation related to potential claims against an estate.
What is the effect of a Section 4, Rule 74 annotation?	It serves as a warning to third parties about potential claims against the property stemming from excluded heirs or unpaid debts of the deceased, essentially creating a legal encumbrance on the title.
Can a buyer refuse to pay the remaining balance if there’s an encumbrance?	In a contract to sell, yes. If the seller cannot provide a clear title due to an encumbrance, the buyer is justified in refusing to pay the remaining balance, as the seller cannot fulfill their end of the agreement.
What happens to the down payment if the sale doesn’t proceed due to the encumbrance?	The Supreme Court ruled that the forfeiture of the down payment was unwarranted and the seller should return it with legal interest to the buyer, since the buyer’s refusal to pay was due to a valid reason: the encumbrance.
What interest rates apply to the monetary award in this case?	The down payment should earn 6% interest per annum from the date of the demand letter (May 28, 1993) until the judgment becomes final and executory. Once final, the interest rate increases to 12% per annum until full satisfaction.
Why was the remedy of rescission not applicable?	Rescission under Article 1191 of the Civil Code applies to contracts of sale where ownership has already transferred. This case involved a contract to sell, where ownership remained with the seller until full payment; therefore, the applicable principle was termination, not rescission.

This case serves as a crucial reminder to exercise caution when purchasing real property and the necessity of a thorough title search to identify potential encumbrances. The ruling underscores that a Section 4, Rule 74 annotation has real consequences that both sellers and buyers must acknowledge.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.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: Delfin Tan v. Erlinda C. Benolirao, G.R. No. 153820, October 16, 2009