The Importance of Due Diligence: Adverse Claims and Good Faith in Real Estate

Filinvest Development Corporation vs. Golden Haven Memorial Park, Inc., G.R. No. 187824 & 188265, November 17, 2010

Imagine investing your life savings in a piece of land, only to discover later that someone else has a valid claim to it. This nightmare scenario underscores the critical importance of due diligence when buying property. A recent Supreme Court case, Filinvest Development Corporation vs. Golden Haven Memorial Park, Inc., highlights this very issue, emphasizing the responsibilities of buyers to investigate potential adverse claims before finalizing a purchase.

In this case, two real estate developers, Filinvest and Golden Haven, both sought to purchase the same parcels of land. The central question revolved around who acted in good faith and, consequently, who held the superior title. This decision serves as a crucial reminder that ‘buyer beware’ is not just a saying, but a fundamental principle in Philippine real estate law.

Legal Principles: Good Faith, Notice, and Due Diligence

Philippine property law places a significant emphasis on good faith in transactions. Good faith, in this context, means an honest intention to abstain from taking any unconscientious advantage of another. In real estate, a buyer acting in good faith is generally protected, especially when relying on a clean title. However, this protection diminishes when the buyer has notice of an adverse claim.

Notice, whether actual or constructive, plays a pivotal role. Constructive notice exists when a claim is registered or annotated on the property’s title, such as through an adverse claim. The annotation of an adverse claim serves as a warning to the world that someone else asserts a right or interest in the property. This principle stems from the Torrens system, which aims to create indefeasible titles, but also protects legitimate claims.

Due diligence requires a buyer to go beyond simply examining the title. They must also investigate the seller’s right and capacity to transfer ownership. Failure to conduct thorough inquiries can result in being deemed a buyer in bad faith, losing rights to the property.

According to Article 1544 of the Civil Code of the Philippines, regarding double sales, states:

“If the same thing should have been sold to different vendees, the ownership shall be transferred to the person who may have first taken possession thereof in good faith, if it should be movable property. Should it be immovable property, the ownership shall belong to the person acquiring it who first duly recorded it in the Registry of Property in good faith.

Should there be no inscription, the ownership shall pertain to the person who in good faith was first in the possession; and, in the absence thereof, to the person who presents the oldest title, provided there is good faith.”

Example: Imagine a buyer who sees a notice of lis pendens (a pending lawsuit) on a property title. Even if the title appears clean otherwise, the buyer has a duty to investigate the lawsuit to understand its potential impact on the property. Failing to do so could mean they are not considered a buyer in good faith.

Case Narrative: Filinvest vs. Golden Haven

The dispute arose from a parcel of land inherited by several heirs. These heirs then entered into agreements to sell portions of the land to both Golden Haven Memorial Park, Inc. (GHM) and Filinvest Development Corporation (Filinvest). The timeline of events is crucial:

• March-July 1989: Some heirs executed agreements to sell their shares to GHM, receiving initial payments.
• August 4, 1989: GHM annotated a Notice of Adverse Claim on the mother title covering one of the lots.
• September-December 1989: Despite the existing adverse claim, other heirs sold the same lots to Filinvest.
• January 14, 1991: GHM filed a complaint to annul the sales to Filinvest.

The Regional Trial Court (RTC) initially ruled in favor of GHM, declaring the contracts to sell valid and Filinvest’s sales void. However, the Court of Appeals (CA) partially reversed this, favoring Filinvest regarding some of the lots. Ultimately, the case reached the Supreme Court.

The Supreme Court focused on whether Filinvest acted in good faith when purchasing the lots despite the prior adverse claim of GHM. The Court highlighted that Filinvest was aware of the adverse claim before completing its purchases. Moreover, Filinvest knew that GHM, a competitor, had possession of the co-owner’s duplicate title.

“Here, Filinvest was on notice that GHM had caused to be annotated on TCT 67462 RT-1, the mother title, as early as August 4, 1989 a notice of adverse claim covering Lot 6. This notwithstanding, Filinvest still proceeded to buy Lots 1, 2, 6, and 12 on September 10, November 18, and December 29, 1989.”

“Filinvest’s knowledge that GHM, a competitor, had bought Lot 6 in which Filinvest was interested, that GHM had annotated an adverse claim to that Lot 6, and that GHM had physical possession of the title, should have put Filinvest on its toes regarding the prospects it faced if it bought the other lots covered by the title in question.”

The Supreme Court ultimately ruled that Filinvest was not a buyer in good faith due to its awareness of the adverse claim and its failure to conduct sufficient inquiries. As a result, the Court upheld the validity of GHM’s contracts and invalidated the sales to Filinvest, reversing the Court of Appeals’ decision.

Practical Implications: Lessons for Real Estate Buyers

This case provides crucial lessons for anyone involved in real estate transactions in the Philippines. The ruling emphasizes the importance of conducting thorough due diligence, especially when there are indications of potential adverse claims. Ignoring such red flags can have severe consequences, including losing rights to the property.

The case reinforces the principle that a buyer cannot claim good faith if they had knowledge of facts that should have prompted further investigation. This includes not only examining the title but also inquiring about any potential claims or disputes related to the property.

Key Lessons:

• Always conduct a thorough title search: Verify the authenticity and status of the title at the Register of Deeds.
• Investigate any adverse claims: If a notice of adverse claim exists, understand the nature and extent of the claim.
• Inquire about possession: Determine who is in possession of the property and under what right.
• Consult with a legal professional: A lawyer can help you assess the risks and conduct necessary due diligence.
• Beware of red flags: Any unusual circumstances or conflicting information should be thoroughly investigated.

Example: Suppose you’re buying a condo unit. Before finalizing the purchase, check not only the unit’s title but also the master title of the entire condominium project. Investigate any pending lawsuits or disputes involving the condominium corporation that could affect your investment.

Frequently Asked Questions

Q: What is an adverse claim?

A: An adverse claim is a notice registered on a property’s title to warn third parties that someone else claims an interest in the property that is adverse to the registered owner.

Q: How can I find out if a property has an adverse claim?

A: You can conduct a title search at the Register of Deeds where the property is located. The title search will reveal any registered liens, encumbrances, or adverse claims affecting the property.

Q: What happens if I buy a property without knowing about an adverse claim?

A: Your rights as a buyer depend on whether you acted in good faith. If you had no knowledge of the adverse claim and conducted reasonable due diligence, you may be protected. However, if the adverse claim was registered, you are presumed to have constructive notice and may not be considered a buyer in good faith.

Q: What steps should I take before buying a property?

A: Before buying a property, you should conduct a thorough title search, investigate any adverse claims, inquire about possession, and consult with a legal professional to assess the risks.

Q: Is it always necessary to hire a lawyer when buying property?

A: While not legally required, hiring a lawyer is highly recommended. A lawyer can provide valuable legal advice, conduct thorough due diligence, and protect your interests throughout the transaction.

Q: What is the role of good faith in property transactions?

A: Good faith is a fundamental principle in property transactions. A buyer acting in good faith is generally protected, especially when relying on a clean title. However, this protection diminishes when the buyer has notice of an adverse claim or other red flags.

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