In a contract to sell, the seller retains ownership of the property until the buyer completes full payment. This landmark Supreme Court decision clarifies that if a buyer takes actions that undermine the seller’s ownership before full payment—such as secretly transferring the property title—it constitutes a significant breach. As a result, the seller has the right to rescind the contract and reclaim ownership. This ruling protects sellers from buyers who attempt to seize control of property prematurely, ensuring the integrity of real estate transactions and upholding contractual agreements.

Premature Title Transfer: When a Buyer’s Actions Undermine a Seller’s Contract

Spouses Delfin and Aurora Tumibay owned a piece of land in Bukidnon. Aurora’s sister, Reynalda Visitacion, was granted a Special Power of Attorney (SPA) to offer the land for sale, subject to the Tumibays’ approval of the selling price. Rowena Gay T. Visitacion Lopez, Reynalda’s daughter, agreed with the Tumibays to purchase the land for P800,000, payable in monthly installments over ten years. Rowena began making payments, but before completing the full amount, she had her mother, Reynalda, transfer the land title to her name using the SPA, without the Tumibays’ explicit consent. The Tumibays filed a complaint to nullify the sale, arguing that Reynalda exceeded her authority and that the transfer was fraudulent. The core legal question was whether Rowena’s actions constituted a breach of contract, entitling the Tumibays to rescind the agreement and recover their property.

The Regional Trial Court (RTC) initially sided with the Tumibays, declaring the sale void and ordering the land to be reconveyed to them. The RTC found that Reynalda had indeed violated the terms of the SPA by selling the land without the Tumibays’ approval of the selling price. The trial court also noted the sale contravened Article 1491 of the Civil Code, which prohibits an agent from acquiring property subject to the agency without the principal’s consent. However, the Court of Appeals (CA) reversed this decision, stating that the SPA sufficiently authorized Reynalda to sell the land and that the Tumibays’ acceptance of payments from Rowena implied ratification of the sale. The CA directed Rowena to pay the remaining balance of the agreed price.

Dissatisfied, the Tumibays elevated the case to the Supreme Court. The Supreme Court undertook a meticulous review of the facts. The Court had to resolve conflicting findings between the trial court and appellate court. The key issue was whether the actions of Rowena, particularly the premature transfer of title, constituted a breach of the contract to sell, and if so, what remedies were available to the Tumibays. The Supreme Court emphasized that, as a general rule, it does not disturb the factual findings of the appellate court, but it made an exception in this case because of conflicting findings.

The Supreme Court identified several key pieces of evidence supporting the existence of a contract to sell between the Tumibays and Rowena. The first was the established record of monthly installment payments made by Rowena to Aurora Tumibay. The payments were documented through money orders and checks spanning nearly three years. Second, the Court noted Aurora’s admission of receiving an initial cash payment of $1,000. While Aurora claimed it was a mere deposit, she failed to adequately explain why she continued to accept subsequent monthly installments without finalizing the purchase price agreement. Finally, the Court found it implausible that Rowena would consistently make substantial payments over an extended period without a clear agreement on the purchase price.

Based on this evidence, the Supreme Court concluded that the parties had indeed entered into an oral contract to sell for P800,000. The Court defined a contract to sell as a bilateral agreement where the seller retains ownership until the buyer fully pays the purchase price. In this type of contract, ownership is not transferred until full payment is made, protecting the seller against a buyer who intends to pay in installments. The Court found that while no written agreement existed, the actions of the parties indicated their intention to enter into a contract to sell, which was partially executed through Rowena’s installment payments.

However, the Supreme Court found that Rowena breached the contract to sell. The Court focused on the fact that Rowena had the land title transferred to her name before fully paying the agreed price. By examining the prevailing exchange rates published by the Bangko Sentral ng Pilipinas, the Court calculated that Rowena had only paid approximately 32.58% of the P800,000 purchase price at the time of the title transfer. Rowena admitted that the full price had not been paid when her mother finalized the deed of sale, attempting to justify the transfer as a security measure. The Supreme Court rejected this justification, emphasizing that the premature transfer was done without the Tumibays’ knowledge or consent.

According to the Supreme Court, Rowena’s reliance on the SPA was misplaced. The SPA only authorized Reynalda to sell the land at a price approved by the Tumibays. It did not empower her to amend the contract to sell or transfer the title prematurely. Therefore, Rowena acted unilaterally, breaching the fundamental terms of the agreement. As a result, the Supreme Court ruled that the contract to sell was rescissible under Article 1191 of the Civil Code, which grants the power to rescind obligations in reciprocal contracts when one party fails to comply with their obligations.

The Court emphasized that rescission is typically reserved for breaches that are substantial and fundamental, defeating the core purpose of the agreement. The Supreme Court found that Rowena’s act of transferring the title to her name without the Tumibays’ knowledge or consent and before full payment constituted such a breach. The Court stated that the main purpose of a contract to sell is to protect the seller by withholding ownership until full payment is made. The Court further highlighted that the injured party may choose between fulfillment and the rescission of the obligation, with the payment of damages in either case.

The Supreme Court held that the remedies available to the Tumibays included moral damages and attorney’s fees. The Court found Rowena guilty of fraud (dolo) in the performance of her obligations. This was because she knowingly transferred the title to her name despite not having fully paid, and she orchestrated the transfer without the Tumibays’ consent. Such actions were deemed incompatible with good faith. Given the established fraud and bad faith, the Court deemed the award of moral damages appropriate. The Court also found Rowena liable for attorney’s fees, as her actions compelled the Tumibays to litigate to protect their interests.

Balancing the equities, the Supreme Court addressed the monthly installments paid by Rowena. The Court ordered the reimbursement of these payments with legal interest. While acknowledging Rowena’s unjustified actions, the Court deplored the Tumibays’ lack of candor in their initial complaint, where they failed to disclose the contract to sell and the installment payments. As a result, the sums paid by Rowena as monthly installments were to be returned with legal interest, computed from the filing of the Answer to the Complaint until the finality of the judgment, and thereafter at a higher rate until fully paid.

The Supreme Court concluded by declaring the deed of sale dated July 23, 1997, as void. The Court found that Reynalda, as the attorney-in-fact, had acted beyond the scope of her authority under the SPA. She executed the deed without the Tumibays’ knowledge and at a price not approved by them. Because Rowena was aware of the limitations of Reynalda’s authority under the SPA, and because the Tumibays did not ratify Reynalda’s actions, the sale was deemed void under Article 1898 of the Civil Code. The Supreme Court emphasized that continued acceptance of payments did not imply ratification, especially since the Tumibays were unaware of the title transfer.

FAQs

This case underscores the critical importance of adhering to the terms of a contract to sell, especially regarding property ownership and payment schedules. It serves as a warning to buyers against taking premature actions that undermine the seller’s rights. It also reinforces the principle that contracts must be executed in good faith, with transparency and mutual consent. The Supreme Court’s decision offers clarity on the remedies available to sellers when buyers breach these fundamental obligations, ensuring fairness and stability in real estate transactions.

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: Spouses Delfin O. Tumibay and Aurora T. Tumibay, G.R. No. 171692, June 03, 2013