Cheng vs. Genato

Second buyer (P) vs. Seller (D) and first buyers (D)
GR 129760	[T]

Summary: While there was an ongoing contract to sell between a seller of a property and the first buyers, a second buyer made an offer for the property on the condition that the existing contract to sell be rescinded. The seller accepted payment, but later relented and continued with the first transaction. The second buyer is suing for specific performance.

Rule of Law: The breach contemplated in Article 1191 of the New Civil Code for there to be a valid rescission is the obligor's failure to comply with an obligation already extant, not a failure of a condition to render that obligation binding.

Facts: Seller Ramon Genato (D) owns two parcels of land which he agreed to sell to spouses Ernesto and Socorro Da Jose (D)—the first buyers. Spouses Da Jose (D) paid P50,000 to Genato (D) as agreed upon in a contract to sell. Before the balance became due, spouses Da Jose (D) asked for and was granted a 30-day extension to finish verifying the titles to the properties.

Pending the effectivity of the extension period, and without due notice to the spouses Da Jose (D), Genato (D) executed an Affidavit to Annul the Contract to Sell. However, no annotation of the said affidavit at the back of his titles was made right away.

Meanwhile, Ricardo Cheng (P) went to Genato's (D) residence and expressed interest on the properties. Genato (D) then showed Cheng (P) the titles to his properties and the Contract to Sell to spouses Da Jose (D). Genato (D) also showed Cheng (P) the Affidavit to Annul the Contract to Sell.

In spite of these, Cheng (P) went ahead and issued a check for P50,000.00 upon the assurance by Genato (D) that the previous contract with spouses Da Jose (D) will be annulled. Genato (D) issued a handwritten receipt for the money he received.

Later, Genato (D) registered the Affidavit to Annul the Contract to Sell in the Registry of Deeds and met by coincidence the spouses Da Jose (D) who were also at the Office of the Registry of Deeds. The spouses Da Jose (D) were shocked to discover about the affidavit and protested against the rescission of their contract. They reminded Genato (D) that the 30-day extension was still in effect, and that they were willing and able to pay the balance of the agreed down payment. Genato (D) decided to continue with their contract and formalized the agreement in a conforme letter.

Thereafter, Genato (D) informed Cheng (P) of his decision and returned Cheng's (P) down payment. Consequently, Cheng (P) sent Genato (D) a demand for compliance with their agreement stating that the contract to sell between him and Genato (D) was already perfected and threatened legal action.

Meanwhile, spouses Da Jose (D) and Genato (D) proceeded with the transaction. However, Cheng (P) had an affidavit of adverse claim annotated on the title of the properties of Genato (D) and filed a case for specific performance against Genato (D) alleging that they have a perfected contract of sale.

Genato (D) countered that the agreement was only a simple receipt of an option-bid deposit and it was not earnest money. In addition, the agreement was subject to the condition that the prior contract with spouses Da Jose (D) must first be canceled.

Spouses Da Jose (D) asserted that they have a superior right to the property as first buyers and alleged that the unilateral cancellation of the Contract to Sell was without effect and void. They also cited Cheng's (P) bad faith as a buyer after being informed by Genato (D) of the existing Contract to Sell.

The lower court ruled in favor of Cheng (P) and recognized that the receipt covered a sale and not simply an option to buy. It further ruled that there was a valid rescission of the Contract to Sell. And finally, upon consideration of the substance of the agreement between Genato (D) and spouses Da Jose (D), it concluded that Cheng (P) was the preferred buyer.

On appeal, the lower court decision was reversed with a ruling that the previous Contract to Sell was not validly rescinded.

Issues: (1) Was the Contract to Sell between Genato (D) and spouses Da Jose (D) validly rescinded? (2) Was Cheng's (P) receipt a conditional contract of sale?

Ruling: No. The following jurisprudence cannot be applied because no default can be ascribed to spouses Da Jose (D) since the 30-day extension period has not yet expired.

In a contract to sell, the payment of the purchase price is a positive suspensive condition, the failure of which is not a breach, casual or serious, but a situation that prevents the obligation of the vendor to convey title from acquiring an obligatory force.
   —Odyssey Park vs. Court of Appeals, 280 SCRA 253

It is one where the happening of the event gives rise to an obligation. Thus, for its non-fulfillment there will be no contract to speak of, the obligor having failed to perform the suspensive condition which enforces a juridical relation. In fact with this circumstance, there can be no rescission of an obligation that is still non-existent, the suspensive condition not having occurred as yet.
   —Rillo vs. Court of Appeals, 274 SCRA 461

Emphasis should be made that the breach contemplated in Article 1191 of the New Civil Code is the obligor's failure to comply with an obligation already extant, not a failure of a condition to render binding that obligation.
   —Odyssey Park vs. Court of Appeals, supra

Even assuming in gratia argumenti that the spouses Da Jose (D) defaulted, as claimed by Genato (D), in their Contract to Sell, the affidavit to annul the contract is not called for. With or without the affidavit, the non-payment of the full down payment of the purchase price ipso facto avoids their contract to sell, it being subjected to a suspensive condition.

When a contract is subject to a suspensive condition, its effectivity can take place only if and when the event covered by the condition happens or is fulfilled.
   —Javier vs. Court of Appeals, 183 SCRA 171 citing Article 1181 of the Civil Code and Araneta vs. Rural Progress Administration, 92 Phil. 98.

If the suspensive condition does not take place, the parties would stand as if the conditional obligation had never existed.
   —Javier vs. Court of Appeals, supra also citing Gaite vs. Fonacier, 2 SCRA 830.

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* Keywords: suspensive condition