LAW ON SALES 4

 

LAW ON SALES IV

 

Extinguishment of Sale

 

Sales are extinguished:

  1. By the same causes as all other obligations (Articles 1231 & 1600)

    1. Payment or performance of obligation
    2. Loss of the thing due
    3. Condonation or remission of debt
    4. Confusion or merger or rights
    5. Compensation
    6. Prescription
    7. Annulment
    8. Rescission
    9. Fulfillment of resolutory condition

  2. Novation

 

  1. By redemption, whether conventional or legal redemption

 

A. Conventional Redemption (Soriano, 2016) 

 

Definition: Conventional redemption occurs when the vendor reserves the right to repurchase the thing sold (Article 1600), with the obligation to return to the vendee (Article 1616):  a. price of the sale;

  1. expenses of the contract;
  2. necessary and useful expenses made on the thing sold; and  
  3. any other legitimate payments made because of the sale.  

 

This is applicable in the contract of pacto de retro sale or sale with a right to repurchase. In the sale with a right to repurchase, the vendee is subrogated to the rights and actions of the vendor (Article 1609). 

 

Reservation of right to repurchase

 

The right to redeem must be reserved by the seller through a stipulation to that effect in the contract of sale (Villarica v. Court of Appeals, G.R. No. L-19196, 1968).  

 

There cannot be conventional redemption unless it has been stipulated upon in the contract of sale.

 

Period of redemption

  1. When right of redemption has been agreed upon and no period is fixed within which the right shall be exercised, the prescriptive period shall be four (4) years from the date of the contract.

 

  1. When a period is fixed by the parties, or when the period agreed upon is indefinite, such as when the repurchase may be made “at any time”, the right of redemption must be exercised within 10 years from the date of the contract. This is the maximum prescriptive period, and any stipulation as to excess shall be null and void.
  2. In case a final judgment in a civil action has been rendered by court declaring the contract to be pacto de retro sale of immovable instead of equitable mortgage, the vendor a retro may still exercise the right within 30 days from the rendition of final judgment.

 

Persons who may avail the right to repurchase:

1. The vendor a retro or original vendor; and 2. Creditors of the vendor.

 

Persons against whom the right of repurchase may be exercised:

 

  1. The vendee a retro or original vendee;
  2. The several heirs of the vendee a retro for each heir’s share;
  3. One heir of the vendee a retro for the whole property; and
  4. Every possessor whose right is derived from the vendee a retro even if no mention is made in the second contract the right to repurchase, provided that the right has been recorded in the Registry of Property, or even of the right is not registered, but the possessor knows the existence of the right.

 

Rules in redemption in case of multi-parties:

  1. Redemption in sale of part of undivided immovable (Article 1611) 

 A co-owner of an undivided immovable which is essentially indivisible who sells his share with a right to repurchase to a third person who subsequently acquires the whole thereof may be compelled by the latter to redeem the whole property if former wishes to make use of the right of redemption.  

 

  1. Redemption in joint sale by co-owners/ co-heirs of undivided immovable  

 If several persons, jointly and in the same contract, should sell an undivided immovable with a right to repurchase, none of them may exercise this right for more than his respective share. The same rule shall apply if the person who sold an immovable alone has left several heirs, whereby each heir may redeem only the part of which he may have acquired (Article 1612).

 

 In both instances, the vendee may demand that the co-owners or co-heirs agree upon the repurchase of the whole thing, and if they fail to do so, the vendee cannot be compelled to consent to a partial redemption (Article 1613).

         

  1. Redemption in separate sales by co-owners of undivided immovable 

 Each one of the co-owners of an undivided immovable who may have sold his share separately may independently exercise the right of repurchase as regards his own share and the vendee cannot compel him to redeem the whole property (Article 1614).

 

  1. Redemption against heirs of vendee 

If the vendee should leave several heirs, the action for redemption cannot be brought against each of them except for his own share, whether the thing is undivided, or it has been partitioned among them. But if the inheritance has been divided and the thing sold has been awarded to one of the heirs, the action for redemption may be instituted against him for the whole (Article 1615).

 

 

Judicial order for recording of consolidation of ownership

 

In case of real property, the consolidation of ownership in the vendee by virtue of the failure of the vendor to comply with the provisions of article 1616 shall not be recorded in the Registry of Property without a judicial order, after the vendor has been duly heard (Article 1607).

 

Rights of parties as to fruits of land (Article 1617)

 

If at the time of the execution of sale there should be visible or growing fruits on the land, there will be no reimbursement for or pro-rating of the fruits existing at the time of redemption, if the purchaser paid no indemnity at the time the sale was executed.

 

If there were no fruits at the time of sale and some exist at the time of redemption, they shall be prorated between the redemptioner and the vendee, giving the vendee the part corresponding to the time he possessed the land in the last year, counted from the anniversary of the date of sale.

 

Right of vendor a retro to recover thing sold free from charges (Article 1618)

 

The vendor shall receive the property sold free from all charges or mortgages constituted by the vendee, but he shall respect the leases which the vendee may have executed on good faith, and in accordance with the custom of the place where the land is situated.

 

Equitable Mortgage

 

Equitable mortgage is one which, although lacking in some formality, or form or words, or other requisites demanded by statute, nevertheless reveals the intention of the parties to charge real property as security for a debt and contains nothing impossible or contrary to the law (Soriano, 2016). 

 

Requisites for presumption of equitable mortgage 

1. The parties enter into a contract denominated as sale; and 2. They intend to secure an existing debt by way of mortgage.

 

The contract shall be presumed to be an equitable mortgage, in any of the following cases (Article 1602): 

  1. When the price of a sale with right to repurchase is unusually inadequate;
  2. When the vendor remains in possession as lessee or otherwise;
  3. When upon or after the expiration of the right to repurchase, another instrument extending the period of redemption or granting a new period is executed;
  4. When the purchaser retains for himself a part of the purchase price;
  5. When the vendor binds himself to pay the taxes on the thing sold;  
  6. In any other case where it may be fairly inferred that the real intention of the parties is that the transaction shall secure the payment of a debt or the performance of any other obligation; and
  7. When there is doubt as to whether the contract is a contract of sale with right to repurchase or an equitable mortgage (Article 1603).

 

In any of the preceding cases, any money, fruits, or other benefits to be received by the vendee as rent or otherwise shall be considered as interest, which shall be subject to the usury laws.

          

Remedy of reformation 

 

The apparent vendor may ask for the annulment in the contracts presumed to be equitable mortgage (Article 1605).

 

B. Legal Redemption

 

Legal redemption is the right to be subrogated, upon the same terms and conditions stipulated in the contract, in the place of one who acquires a thing by purchase or dation in payment, or by any other transaction whereby ownership is transmitted by onerous title (Article 1619). 

 

Exercise of right of pre-emption or redemption 

The right of pre-emption or redemption shall be exercised within 30 days from the written notice by the prospective vendor, or by the vendor, as the case may be.

 

The deed of sale shall not be recorded in the Registry of Property unless accompanied by an affidavit of the vendor that he has given written notice thereof to all possible redemptioners (Article 1623).

 

Purpose of legal redemption 

1. to enable the debtor to pay less than the value of the credit; 2. to prevent speculation on the part of the assignee; and

3. to put an end to the litigation.

 

Instances when legal redemption is denied (Article 1536)

 

The debtor’s right of legal redemption is denied when the assignment of the right in litigation is made:

  1. to a co-heir or co-owner of the right assigned;  
  2. to a creditor in payment of his credit; or
  3. to the possessor of a tenement or piece of land which is subject to the right in litigation assigned.  

 

Instances of Legal Redemption

  1. Sale of a co-owner of his share to a third person (Article 1620) 

A co-owner of a thing may exercise the right of redemption in case the shares of all the other coowners or any of them, are sold to a third person.

 

If two (2) or more co-owners desire to exercise the right of redemption, they may only do so in proportion to the share they may respectively have in the thing owned in common.

 

The right of co-owners excludes that of adjoining owners (Article 1623).

 

  1. Sale of adjacent rural lands not exceeding one (1) hectare (Article 1621) 

The owners of adjoining lands shall also have the right of redemption when a piece of rural land, the area of which does not exceed one hectare, is alienated, unless the grantee does not own any rural land.

 

If two (2) or more adjoining owners desire to exercise the right of redemption at the same time:

  1. the owner of the adjoining land of smaller area shall be preferred; and  

  2. if both lands have the same area, the one who first requested the redemption.

  3. Sale of adjacent rural-urban land (Article 1622)

If a piece of urban land, which is so small and so situated that a major portion thereof cannot be used for any practical purpose within a reasonable time, having been bought merely for speculation, is about to be re-sold, the owner of any adjoining land has a right of pre-emption at a reasonable price, i.e., the adjoining owner shall be given the right to buy the property before it is offered to others.

 

If two (2) or more adjoining owners desire to exercise the right of redemption or pre-emption at the same time, preference shall be given to the owner whose intended use of the land in question appears to be best justified.

 

Right of pre-emption is the right of adjoining urban landowner to be given the first opportunity to purchase a piece of urban land about to be resold which is so small and so situated that a major portion thereof cannot be used for any practical purpose within a reasonable time, having been bought merely for speculation.

 

  1. Legal redemption in sale of credit or other incorporeal rights in litigation a. Requisites

  2. There must be a sale or assignment of a credit. The concept of sale must be understood in its restricted sense. The right cannot be exercised if the transaction is exchange or donation.

 

  1. There must be a pending litigation at the time of the assignment. The complaint by the assignor must have been filed and answered by the creditor before the sale of the credit.

 

  1. The debtor must pay the assignee:

  2. the price paid by him;  

  3. the judicial costs incurred by him; and

  4. the interest on the price from the date of payment.

 

iv. The right must be exercised by the debtor within thirty (30) days from the date the assignee demands (judicially or extra-judicially) payment from him.

 

Assignment of Credits and Other Incorporeal Rights

 

Assignment of credit is a contract by which the owner (assignor/creditor) of a credit and other incorporeal rights transfers, either onerously or gratuitously, to another (assignee) his rights and actions against a third person (debtor) (Soriano, 2016).

 

An assignment of credit not only entitles the assignee to the credit itself but also gives him the power to enforce it as against the debtor of the assignor.

 

Nature and form of assignment of credits

The contract is perfected from the moment the parties agree upon the credit or right assigned and upon the price even if, neither has been delivered (Article 1475).  

 

It partakes the nature of a contract of sale; hence, it is perfected by mere consent being a consensual contract.

Contracts are obligatory in whatever form they may have been entered, provided all the essential elements for their validity are present. It may be written, oral or partly oral and partly written.

 

To bind third persons:

  1. If personal property – It must be in a public instrument.
  2. If real property – It must be in a public instrument recorded in the Registry of Property.

 

Extent of assignment of credit

The assignment of credit includes not only the credit itself but also all rights accessory thereto (Article 1537). However, the parties may stipulate not to include the accessory rights. The accessory rights included in the assignment are:

  1. Guaranty
  2. Mortgage
  3. Pledge
  4. Preference

 

Effect of payment by debtor to the creditor after the assignment of credit (De Leon, 2016)

  1. Before knowledge of the assignment

If made before knowing the assignment, the debtor is released from his obligation. This is true even if the assignment is duly registered (Article 1626).

 

  1. After knowledge of the assignment

The debtor is not released from his obligation to the assignee even if not notified.

 

Note: An assignment does not require the consent of the debtor. However, actual notice must be given to him of the assignment so that he could make his payment to the assignee. This notice is a form of protection in favor of the assignee.

 

Warranties of the Assignor: The assignor warrants that:

  1. the credit exists; and
  2. it is legal unless sold as doubtful.

 

As a rule, the assignor does not warrant the solvency of the debtor, except:

  1. when there is a stipulation; and
  2. when the insolvency already existed before the sale and of public knowledge.

 

Liability of the assignor when warranties are violated (De Leon, 2016)

  1. For violation of the above warranties, the liability of the vendor (assignor) in good faith is limited only to the price received and to the expenses of the contract, and any other legitimate payments because of the assignment (Article 1628).
  2. The assignor in bad faith is liable not only for the payment of the price and all expenses but also for damages (Article 1628).

 

Duration of assignor’s liability where debtor’s solvency guaranteed (De Leon, 2016) This provision does not apply if the assignor acted in bad faith.  

 

In case the assignor has expressly warranted the solvency of the debtor, the duration of the assignor’s liability shall be as follows:  

1. If there is a stipulation, then for the term or period fixed by the parties; and 2. If there is no stipulation:  

  1. for one (1) year from the assignment of the credit when the period for payment of the credit has expired; or  
  2. for one (1) year after its maturity, when such period for payment has not yet expired.

 

Sale of hereditary rights 

One who sells an inheritance without enumerating the things of which it is composed shall only be answerable for his character as an heir (Article 1630).

 

The seller of an inheritance warrants only the fact of his heirship, but he does not warrant the objects which make up his inheritance. The sale is, therefore, a sort of an aleatory contract because the assignee bears the risk that the estate may not be sufficient to pay the obligations of the deceased.

 

Sale of whole of certain rights, rents, or products (Article 1631)

The vendor warrants only the legitimacy of the whole and not the various parts of which it may be composed.

The vendor is not liable for eviction of each of the various parts, except when:

  1. the vendee is evicted from the whole; or          
  2. the vendee is evicted from the part of greater value and not just from the greater part of the rights, rents, or products.

 

Liability of vendor of inheritance for fruits received (Article 1632) 

Unless otherwise stipulated, the fruits of inheritance are included in the sale thereof. If the vendor merely received the fruits, he must deliver them to the vendee; if they have been consumed, he must reimburse the vendee; if they have been sold, he must deliver the price of the sale.

 

Liability of vendee for debts of and charges on estate (Article 1633) 

Since under Article 1632, the vendor is obliged to pay the vendee the fruits or anything received from the inheritance, it is also just that the vendee be required to reimburse the vendor for whatever the latter has paid for the debts of and charges on the estate.  

 

The liability of the vendee for the fruits received and debts and charges are subject to any contrary agreement.

 

Rules on Installment Sales

 

Sale of Personal Property in Installments (Recto Law)

 

Purpose: To remedy the abuses committed in connection with the foreclosure of chattel mortgages; to prevent mortgagees from seizing the mortgaged property, buying it at foreclosure sale for a low price and then bringing suit against the mortgagor for a deficiency judgment (Universal Motors Corp. v Dy Hian Tat, G.R. No. L23788,1969). 

 

Remedies of the vendor (De Leon, 2016)

  1. Exact fulfillment of the obligation (specific performance) should the vendee fail to pay, regardless of the number of installments defaulted.

 

  1. Cancel the sale, should the vendee’s failure to pay cover two (2) or more installments. The vendor shall return to the vendee the sums received minus reasonable rent. However, the parties may stipulate that the installments or rents paid shall not be returned provided that the stipulation is not unconscionable.  

 

  1. Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee’s failure to pay cover two (2) or more installments. In this case, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary is void.

 

When deficiency may be recovered:

  1. In the case of sale on straight-term;
  2. If security foreclosed is other than the chattel mortgage constituted on the thing sold; or
  3. In the case of sale on execution of judgment in favor of the seller.

 

Note: The above remedies are alternative, not cumulative, in that the exercise of one would bar the exercise of the others.

 

Sale of Real Property in Installments (Maceda Law)

This is also known as the “Realty Installment Buyer Act.” This aims to protect buyers of real estate on installment payments against onerous and oppressive conditions (Soriano, 2016).

 

  1. Rights of the buyer

  2. The following are the rights given to the buyer who has paid at least two (2) years of installments if he defaults in the payment of succeeding payments:

  3. To pay without additional interest, the unpaid installments due within the total grace period earned by him fixed at the rate of one-month grace period for every year of installment payments made. This right, however, shall be exercised by him only once in every five (5) years of the life of the contract and its extension, if any;  

 

  1. Actual cancellation can only take place after 30 days from receipt by the buyer of the notice of cancellation or demand for rescission by a notarial act and upon full payment of cash surrender value to the buyer;

 

  1. If the contract is canceled, the seller shall refund to the buyer the cash surrender value of the payments on the property equivalent to 50% of the total payments made and, after five (5) years of installments, an additional 5% every year but not to exceed 90% of the total payments made;

 

  1. The buyer has the right to sell his right or assign the same before actual cancellation of the contract and to pay in advance any unpaid installment anytime without interest and to have such full payment of the purchase price annotated in the certificate of title covering the property; and

 

  1. The buyer shall have the right to pay in advance any installment or the full unpaid balance of the purchase price any time without interest and to have such payment annotated in the certificate of title covering the property.

 

 

 

  1. In case the defaulting buyer has paid less than two (2) years of installments:

  2. The seller shall give him a grace period of not less than 60 days from the date the installment became due. If he fails to pay the installments due at the expiration of the grace period, the seller may cancel the contract after 30 days from receipt by the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act;

 

  1. The buyer shall have the right to sell his rights or assign the same to another person or to reinstate the contract by updating the account during the grace period and before the actual cancellation of the contract; and

 

  1. The buyer shall have the right to pay in advance any installment or the full unpaid balance of the purchase price any time without interest and to have such payment annotated in the certificate of title covering the property.

 

  1. Conditions for cancellation of sale by seller

The actual cancellation shall take place after 30 days from receipt by the buyer of the notice of cancellation or the demand for rescission by a notarial act and upon full payment of the cash surrender value to the buyer. Down payments, deposits or options on the contract shall be included in the computation of the total number of installment payments made.

 

  1. Installment sales not covered

The act excludes from its operation sales on installments of industrial lots, commercial buildings, and sales to tenants under the Code of Agrarian Reforms. In other words, in the case of such kind of property, the act recognizes the vendor’s right unqualifiedly to cancel the sale upon the buyer’s default.

 

Installment sale of subdivision lots and condominiums (Presidential Decree 957) (Soriano, 2016) 

  1. Transactions covered

  2. Every disposition or attempt to dispose, for a valuable consideration, of a subdivision lot, including the building and other improvements thereon, if any, in a subdivision project or a condominium unit in a condominium project; and

  3. Contract to sell, contract of purchase and sale, exchange, attempt to sell, option of sale or purchase, a solicitation of a sale, or an offer to sell, directly or indirectly by agent, or by circular, letter, advertisement or otherwise.

 

  1. Subdivision lot shall mean any of the lots, whether residential, commercial, industrial, or recreational, in a subdivision project.

 

Condominium unit shall mean a part of the condominium project intended for any type of independent use or ownership, including one (1) or more rooms or spaces located in one (1) or more floors in a building or buildings and such accessories as may be appended thereto.

 

  1. Rights of the buyer in case of default

The rights of the buyer in the event of this failure to pay the installments due for reasons other than the failure of the owner or developer to develop the project shall be governed by Republic Act No. 6552 or the Maceda Law.

                   

No installment payment made by a buyer in a subdivision or condominium project for the lot or unit he contracted to buy shall be forfeited in favor of the owner or developer when the buyer, after due notice to the owner or developer, desists from further payment due to the failure of the owner or developer to develop the subdivision or condominium project according to the approved plans and within the time limit for complying with the same. Such buyer may, at his option, be reimbursed the total amount paid including amortization interests but excluding delinquency interests, with interest thereon at the legal rate.

 

References

De Leon, H. S. (2016). The law on sales, agency and credit transactions. Manila: Rex Book Store.

Philippines. (1949). Republic Act No. 386: An Act to Ordain and Institute the Civil Code of the Philippines. Retrieved on December 5, 2018 from https://www.officialgazette.gov.ph/1949/06/18/republic-actno-386

Soriano, F. R. (2016). Notes in business law. Manila: GIC Enterprises & Co., Inc.