IX. CONTRACT OF SALE Flashcards

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1
Q

IX. CONTRACT OF SALE
A. Nature and Form (Civil Code, arts. 1458-1488)
1. Contract of Sale (reciprocal demandable obligations) vs. Contract to Sell (reciprocal suspensive conditional obligation)

Transfr of O
Risk of L
Remedies

In a contract to sell, ownership is transferred only after certain conditions are met.

In a contract of sale, ownership is usually transferred immediately or at a specified time.

A

Differences:

  1. **Transfer of Ownership: TITLE
    • In a contract of sale, Title of the property PASSES from the seller to the buyer is IMMEDIATE upon the perfection of the contract, even if the price may not have been paid or delivered.
    • In a contract to sell, ownership is retained by the seller until the full payment of the purchase price.
  2. Risk of Loss:
    • In a contract of sale, once the ownership is transferred to the buyer, the risk of loss or deterioration of the property also transfers to the buyer, even if the property is still in the possession of the seller.
    • In a contract to sell, the risk of loss or deterioration of the property typically remains with the seller until ownership is transferred to the buyer upon fulfilment of the conditions.
  3. Remedies in Case of Breach:
    • In a contract of sale, if either party fails to perform their obligations, the other party may either sue for SP specific performance to compel the completion of the sale or sue for Damages for the breach of contract.
    • In a contract to sell, if the buyer fails to pay the price, the seller may choose to either sue for SP Specific performance and demand payment of the price or RESCIND the contract and recover the property, with damages if applicable.
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2
Q

IX. CONTRACT OF SALE

A. Nature and Form (Civil Code, arts. 1458-1488)

  1. Option Contract

Umilateral C granting Opt 2B/S

A

A unilateral contract wherein one party, known as the optionor, grants the other party, known as the optionee,
the exclusive right to buy or sell a property within a specified period and at a predetermined price.
However, the optionee is not obligated to exercise this right.

Here’s an example of an option contract involving fictional characters:

Fictional Characters:
- Alice: Alice is the owner of a piece of land located in a prime location in the city.
- Bob: Bob is interested in purchasing Alice’s land but is unsure whether he wants to proceed with the purchase immediately.

Scenario:
Alice and Bob enter into an option contract regarding the sale of Alice’s land. They agree that Alice will grant Bob the exclusive right to purchase the land within the next six months for a price of $100,000. In exchange for this exclusive right, Bob pays Alice a non-refundable option fee of $5,000.

During the six-month period, Bob conducts further research and due diligence on the property to determine if it aligns with his investment goals. He assesses market conditions, evaluates financing options, and explores potential development plans for the land.

At the end of the six-month period, Bob decides to exercise his option and purchase the land from Alice for $100,000. Since Bob has already paid the option fee, Alice cannot sell the land to any other party during the option period. However, if Bob chooses not to exercise his option within the specified timeframe, Alice is free to sell the land to another interested buyer.

In this example, the option contract provides Bob with the flexibility to assess the property and make an informed decision without the risk of losing the opportunity to purchase the land. It also gives Alice assurance that Bob is serious about potentially buying the property, as evidenced by the payment of the option fee.

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3
Q

IX. CONTRACT OF SALE

A. Nature and Form (Civil Code, arts. 1458-1488)

  1. Right of First Refusal

Grants O toB b4

A contractual grant that gives a party (the optionee) the first priority to purchase a property if the owner decides to sell it, rather than being a sale of the property itself.

A

The right of first refusal, as defined under the Philippines Civil Code (RA 386), particularly within Articles 1458-1488, grants a party the opportunity to purchase a property before it is offered to others, provided they match the terms of a bona fide offer made by a third party. Essentially, the holder of the right of first refusal has the option to buy the property on the same terms and conditions as those offered to a third party, but they are not obligated to do so.

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4
Q

IX. CONTRACT OF SALE

A. Nature and Form (Civil Code, arts. 1458-1488)

  1. Earnest Money in Contract of Sale and Contract to Sell

-Sd pd by buyer
Earnest money, also known as a GOOD FAITH DEPOSIT or a security deposit, is a sum of money paid by a buyer to a seller as a sign of the buyer’s serious intention to purchase a property or enter into a contract.

It is typically a portion of the total purchase price or contract amount.

The purpose of earnest money is to demonstrate the buyer’s commitment to the transaction and to provide some assurance to the seller that the buyer will follow through with the purchase.

It serves as a form of security or guarantee for both parties involved in the transaction.

A

Earnest money is something of value given by the buyer to the
seller to show that the buyer is really in earnest, and to bind the
bargain. It is actually a partial payment of the purchase price and is
considered as proof of the perfection of contract

Contract of Sale:

  1. Transfer of Ownership: In a contract of sale, earnest money is given as a sign of the BUYER’S COMMITMENT to purchase the property, and it signifies the beginning of the transfer of ownership. Once earnest money is given, the buyer gains equitable ownership rights over the property.
  2. Binding Agreement: The receipt of earnest money in a contract of sale signifies the formation of a binding contract between the buyer and the seller. Both parties are obligated to fulfill their respective obligations under the contract, and the earnest money serves as PART OF THE PURCHASE PRICE.
  3. Risk of Loss: In a contract of sale, the risk of loss or damage to the property generally transfers to the buyer upon the receipt of earnest money. The buyer bears the risk associated with the property from the moment earnest money is given, even if full payment and transfer of title have not yet occurred.

Contract to Sell:

  1. Security Deposit: In a contract to sell, earnest money is often referred to as a SECURITY DEPOSIT. It serves as a guarantee of the buyer’s intention to complete the purchase at a later date. Unlike in a contract of sale, earnest money in a contract to sell does not signify the transfer of ownership rights.
  2. Conditional Ownership: Unlike in a contract of sale where the buyer gains equitable ownership upon the receipt of earnest money, in a contract to sell, the seller retains full ownership of the property until the fulfilment of all conditions, including full payment of the purchase price.
  3. Return of Earnest Money: If the buyer fails to fulfill the conditions stipulated in the contract to sell, such as making full payment within the agreed-upon period, the earnest money is typically forfeited in favor of the seller. However, if the seller fails to fulfill their obligations, the earnest money must be returned to the buyer.

In summary, while earnest money in both the contract of sale and the contract to sell serves as a form of security or commitment, the key differences lie in the timing of ownership transfer, the binding nature of the agreement, and the consequences of non-fulfilment of obligations.

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5
Q

IX. CONTRACT OF SALE

B. Capacity to Buy or Sell (Civil Code, arts. 1489-1492)

Ability 2 Acqre Paymmt / v. Transfer Clean T

A
  1. Capacity to Buy:
    a. Refers to the legal ability of a person or entity to enter into a contract of sale as a buyer.
    b. Involves the Capability to ACQUIRE property or goods from another party in exchange for consideration, typically money.
    c. Determines whether the buyer has the legal authority and competence to enter into a binding agreement to purchase property or goods.
  2. Capacity to Sell:
    a. Refers to the legal ability of a person or entity to enter into a contract of sale as a seller.
    b. Involves the capability to TRANSFER ownership of property or goods to another party in exchange for consideration, typically money.
    c. Determines whether the seller has the legal authority and competence to enter into a binding agreement to Transfer Ownership of property or goods.
  3. Key Differences:
    a. Direction of Rights: The capacity to buy focuses on the rights and abilities of the purchaser, while the capacity to sell focuses on the rights and abilities of the seller.
    b. Legal Implications: The capacity to buy determines whether the buyer has the legal standing to enforce the terms of the PURCHASE Agreement, while the capacity to sell determines whether the seller has the legal standing to TRANSFER OWNERSHIP of the property or goods.
    c. Contractual Obligations: While both capacities involve entering into a contract of sale, they represent different roles and responsibilities within the transaction. The capacity to buy involves obligations related to PAYMENT and Acceptance of the property or goods, while the capacity to sell involves Obligations related to DELIVERING the property or goods and ensuring CLEAR title.

In summary, the capacity to buy and the capacity to sell are essential components of a contract of sale, representing the respective rights and abilities of the buyer and seller. Understanding these distinctions is crucial for ensuring the validity and enforceability of sales transactions under Philippine law.

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6
Q

IX. CONTRACT OF SALE

C. Obligations of the Vendor (Civil Code, arts. 1459-1505)

Trans O
Del Thing

A

The Philippine Civil Code outlines several obligations of the vendor (seller) in a contract of sale. Key points with explanations and examples:

  1. To Transfer Ownership and Deliver the Thing Sold (Article 1495):
    Explanation: The vendor is legally bound to transfer ownership of the sold item to the buyer and deliver it to their possession.
    Example: If you buy a car from a dealership, the vendor (dealership) must transfer the ownership title to your name and physically hand over the car keys.
  2. Deliver the Thing in the AGREED MANNER (Articles 1497-1501):
    Explanation: Delivery can occur in various ways depending on the agreement and type of property. It can involve physical handover, symbolic delivery (like keys), agreement without transfer (if buyer already has possession), or specific methods for intangible property (like stocks).
    Example 1: For a book purchase online, delivery might involve the vendor sending the book through a courier service.
    Example 2: If you buy furniture and agree to pick it up yourself, the vendor would allow you to take possession at their store, fulfilling their delivery obligation.
  3. WARRANT the Thing Sold (Article 1495):
    Explanation: This entails the vendor guaranteeing specific aspects of the sold item, such as its Quality, absence of defects, and legal ownership rights. Warranties can be Express (stated in the contract) or Implied by law.
    Example: A car dealership might offer a warranty on the engine and transmission for a specific period, ensuring their functionality during that time.
  4. Additional Obligations:
    Expense of Execution and Registration (Article 1487): Unless agreed otherwise, the vendor generally bears the costs associated with finalizing the sale and registering the ownership transfer (e.g., car registration fees).
    Compliance with Capacity to Sell (Article 1489 & 1490): The vendor must be legally authorized to sell the item. Restrictions apply to specific individuals like guardians and government officials to prevent misuse of their positions.
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7
Q

IX. CONTRACT OF SALE

D. Double Sale (Civil Code, art. 1544)

EFFECT OF DOUBLESALE
1. Movable– Owner who is first to possess in good faith shall be
preferred

  1. Immovable
    a. First to register in good faith
    b. No registration– first to possess in good faith
    c. No registration & no possession in good faith
    person who presents oldest title in good faith
A

Summary of Article 1544: Resolving Double Sales in the Philippines
Article 1544 of the Philippine Civil Code deals with the situation of double sales, where the same property is sold to two different buyers. It establishes the following rules for determining who becomes the rightful owner:

For Movable Property:
Good Faith Possession Takes Priority: The buyer who first takes possession of the property in good faith becomes the owner. This means they must have honestly believed they were buying a legitimate good from someone with the right to sell it.
Example: If John sells his bike to both Alice and Bob, and Alice takes possession of the bike first, believing she is the rightful owner, she becomes the owner even if Bob has a prior contract.

For Immovable Property:
Registration Takes Priority: The buyer who first registers their ownership claim in the Registry of Property becomes the owner. This establishes public record of ownership and prioritizes transparency.
Possession Only in Absence of Registration: If no registration is done, the buyer who first takes possession in good faith becomes the owner.
Oldest Title with Good Faith as Last Resort: If there is neither registration nor possession, the buyer with the oldest title and good faith becomes the owner.

Key Points:
Good faith plays a crucial role in determining ownership in both scenarios.
Registration is paramount for immovable property, taking precedence over possession.

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8
Q

IX. CONTRACT OF SALE

E. Effects of Loss of Thing Sold (Civil Code, arts. 1493-1494)

KEY POINTS ON RES PERIT DOMINO

  1. Definition:
    • Res Perit Domino translates to “the thing perishes with the owner,” indicating that the owner bears the loss of property under certain conditions.
  2. Loss Before Perfection of Sale:
    • If the loss occurs before the perfection of the sale, the owner (seller) bears the loss. This means that if the sale has not been finalized, the risk remains with the owner.
  3. Loss After Perfection but Before Delivery:
    • If the loss occurs after the sale has been perfected (i.e., the contract is valid) but before delivery, the seller bears the risk of loss. This is because ownership has not yet transferred to the buyer.
  4. Loss After Delivery:
    • If the loss occurs after delivery of the property, the buyer bears the risk of loss. Once the property is delivered, the buyer assumes responsibility for any loss or damage.
  5. Exceptions:
    • The general rules can be modified by contractual stipulations. Parties may agree otherwise regarding the risk of loss in their sales contract.

This summary captures the essential elements of the Res Perit Domino principle, outlining the responsibilities of the seller and buyer regarding property loss at different stages of a sale.

A

When the Thing Sold is Lost in the Philippines: Understanding the Buyer’s Options
Articles 1493 and 1494 of the Philippine Civil Code address situations where the thing sold (item) is lost before the sale is completed. Here’s a breakdown of the buyer’s options in such scenarios:

  1. If the entire thing is lost:
    The contract becomes void: If, at the time of the sale agreement, the entire item is already lost (unknown to both parties), the sale is considered invalid from the start.
    No obligation to pay: The buyer has no obligation to pay the seller any money since there’s nothing to receive.
    Example: You agree to buy a specific antique vase from a seller. However, it turns out the vase was accidentally broken and discarded before your purchase. In this case, the sale is void, and you don’t have to pay for the non-existent vase.
  2. If only part of the thing is lost:
    Buyer has two options: If only a portion of the item is lost without the seller’s knowledge, the buyer has two choices:
    A. Withdraw from the contract: The buyer can choose to cancel the entire sale and not proceed with the purchase.
    B. Demand the remaining part: The buyer can choose to accept the remaining portion of the item and pay a reduced price based on the lost portion’s value. The new price is calculated proportionally to the original agreed price.
    Example: You agree to buy a set of 10 vintage books from a seller. Upon delivery, you discover that one book is missing. Here, you can either:
    * Cancel the entire purchase and get a full refund.
    * Accept the remaining 9 books and pay a proportionally reduced price for the incomplete set.

Key Points:
These articles protect the buyer from unknowingly purchasing lost items.
The buyer has the right to choose the most suitable option based on the specific situation.

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9
Q

IX. CONTRACT OF SALE

F. Recto Law (Civil Code, art. 1484)

A

The Recto Law: Seller’s Options in Installment Sales (Article 1484)
Article 1484, also known as the Recto Law, outlines the remedies available to a seller (vendor) when dealing with a buyer (vendee) who fails to pay installments for personal property. It empowers the seller with three options:

  1. Exact fulfillment of the obligation: This is the preferred option. The seller can demand the buyer fully pay the remaining installments as per the original agreement.
  2. Cancel the sale: If the buyer misses two or more installments, the seller has the right to cancel the sale contract. This means the seller can take back the item and the sale is considered nullified.
  3. Foreclose the chattel mortgage: If a chattel mortgage (a lien on the sold property created to secure payment) was established during the sale, the seller can foreclose on it after two or more missed installments. However, in this case, the seller cannot pursue the buyer for any remaining unpaid balance. Any agreement attempting to do so is deemed void.

Example: You buy a phone on a 12-month installment plan. After paying for 6 months, you miss the next 3 payments. The seller, under the Recto Law, has three options:
a) Demand you pay the remaining 6 installments (fulfillment of obligation).
b) Cancel the sale and take back the phone (cancellation after two missed payments).
c) Foreclose on the chattel mortgage, if established, but cannot ask you for the remaining balance (foreclosure with no further action).

Key Points:

The Recto Law protects sellers in installment sales by offering them various options to recover their property or receive payment.
The seller cannot choose all options simultaneously. They must pick one and adhere to its consequences.

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10
Q

IX. CONTRACT OF SALE

G. Maceda Law (R.A. No. 6552)

A

Key Points of the Realty Installment Buyer Act (RA 6552)

This law, also known as the Maceda Law, aims to protect Filipinos buying real estate through installment payments. Here’s a breakdown of its key points:

1) Protects Buyers:** The law protects buyers from unfair terms in installment contracts, ensuring fair treatment in case of payment difficulties.

2) Grace Period:**
* Buyers who paid at least 2 years of installments get a grace period to catch up on missed payments. This grace period is 1 month for every year of installments paid (e.g., 2 years paid = 2 months grace period). This right can only be used once every 5 years.
* Buyers who paid less than 2 years get a minimum 60-day grace period after missing a payment.

3) Cancellation and Refunds:**
* If the contract is cancelled after 2 years of payments, the seller must refund a portion of the buyer’s payments:
* 50% refund initially.
* An additional 5% every year after 5 years, up to a maximum of 90% refund.
* The seller must wait 30 days after notifying the buyer of cancellation before repossessing the property, and only after paying the full refund.

4) Buyer’s Rights:**
* Buyers can sell their rights in the contract to another person through a notarized deed of sale.
* Buyers can “reinstate” the contract by catching up on payments during the grace period, before cancellation.
* Buyers can pay off the entire remaining balance at any time without additional interest.

  • Examples:
  • Example 1 (More than 2 years of payments): Mark has been paying installments on a condo for 3 years. He misses a few payments due to financial difficulties. Under the Maceda Law, he has 3 months (1 month/year x 3 years) to catch up on missed payments without penalty.
  • Example 2 (Less than 2 years of payments): Sarah has been paying for a house lot for 1 year but struggles to keep up. She misses a payment. The seller must give her at least 60 days to settle the missed payment before cancelling the contract.
  • Example 3 (Cancellation and Refund): After 5 years of condo payments, Leah defaults and the contract is cancelled. She is entitled to a 50% refund of her total payments immediately. Additionally, she gets an extra 5% every year after the 5th year, up to a maximum of 90% refund.
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11
Q

IX. CONTRACT OF SALE

H. Rights of Unpaid Seller (Civil Code, arts. 1525-1535)

A

Unpaid Seller’s Rights

Article 1525: Unpaid Seller
* Defines an unpaid seller as someone who hasn’t received full payment or received payment through a dishonored instrument.
* Example: John sells a car to Mary but only receives a partial payment. John is an unpaid seller.

Article 1526: Unpaid Seller’s Remedies
* Outlines four primary rights of an unpaid seller:
* Lien: Right to hold goods until payment.
* Stoppage in transit: Reclaim goods while in transit if buyer is insolvent.
* Resale: Sell goods under specific circumstances.
* Rescission: Cancel the sale under specific conditions.
* Example: If Mary doesn’t pay for the car, John can keep the car until payment (lien). If Mary becomes bankrupt while the car is being shipped, John can stop the delivery (stoppage in transit).

Article 1527: Seller’s Lien
* Specifies when a seller can exercise the right to retain goods (lien).
* No credit term.
* Credit term expired.
* Buyer is insolvent.
* Example: John can keep a car until payment if it was a cash sale or the agreed credit period has passed.

Article 1528: Partial Delivery and Lien
* If part of the goods are delivered, the seller can still exercise lien on the remaining goods unless there’s a clear intention to waive the lien.
* Example: If John delivers part of a furniture set but not the whole, he can still hold the remaining furniture until full payment.

Article 1529: Loss of Lien
* Describes situations where the seller loses the right to retain goods (lien).
* Goods delivered to a carrier.
* Buyer or buyer’s agent obtains possession.
* Seller waives the right.
* Example: If John hands over the car to a shipping company for delivery to Mary, he loses the lien.

Article 1530: Stoppage in Transitu
* Defines the right of an unpaid seller to stop goods in transit if the buyer is insolvent.
* Example: If Mary goes bankrupt while the car is being shipped, John can stop the delivery and take back the car.

Article 1531: Goods in Transit
* Clarifies when goods are considered “in transit” for stoppage.
* Example: Goods are in transit from the time they’re given to a carrier until the buyer receives them.

Article 1532: Exercising Stoppage in Transitu
* Outlines how to exercise the right to stop goods in transit.
* Example: John can stop the car by informing the shipping company of his claim and arranging for its return.

Article 1533: Resale by Unpaid Seller
* Conditions under which an unpaid seller can resell the goods.
* Example: If the car is perishable (e.g., a food item) or the buyer defaults on payment for an unreasonable time, John can resell the car.

Article 1534: Rescission by Unpaid Seller
* Conditions under which an unpaid seller can cancel the sale and reclaim ownership.
* Example: If the buyer defaults on payment for an unreasonable time and the contract allows rescission, John can take back the car.

Article 1535: Effect of Buyer’s Actions
* The seller’s rights are generally unaffected by the buyer’s actions unless the seller agrees or a negotiable document of title is involved.
* Example: If Mary sells the car to someone else before John stops the delivery, the new buyer might have valid ownership if they acted in good faith and without knowledge of John’s rights.

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12
Q

IX. CONTRACT OF SALE

I. Conventional Redemption (Civil Code, arts. 1601 and 1606-1618); Legal Redemption (Civil Code, arts. 1619-1623)

A

Key Points on Conventional Redemption

  1. Definition:
    • Conventional redemption occurs when the vendor (seller) reserves the right to repurchase the property sold, as outlined in Article 1601 of the Civil Code.
  2. Requisites for Redemption:
    • To exercise the right of repurchase, the vendor must return to the vendee (buyer):
      1. The price of the sale.
      2. Any expenses of the contract and legitimate payments made due to the sale.
      3. Necessary and useful expenses incurred on the property sold (as per Article 1616).
  3. Period of Redemption:
    • If a period is agreed upon, it cannot exceed 10 years.
    • If no period is specified, the redemption period is 4 years.
    • If the period to redeem has expired and there is a lawsuit regarding the nature of the contract, the vendor has 30 days from final judgment to redeem.

This summary encapsulates the essential elements of conventional redemption, including its definition, requirements for the vendor, and the applicable periods for redemption.

Here’s a concise summary of the key points regarding legal redemption based on the provided information:

Key Points on Legal Redemption

  1. Definition:
    • Legal redemption is the right to be subrogated in place of a purchaser or acquirer of a property, under the same terms and conditions stipulated in the contract.
  2. Instances of Legal Redemption:
    • Sale of a Co-owner’s Share: When a co-owner sells their share to a stranger (NCC, Art. 1620).
    • Sale of Incorporeal Rights: When a credit or other incorporeal right in litigation is sold (NCC, Art. 1634).
    • Sale of Heir’s Rights: When an heir sells their hereditary rights to a stranger (NCC, Art. 1088).
    • Sale of Adjacent Rural Lands: Sale of adjacent rural lands not exceeding 1 hectare (NCC, Art. 1621).
    • Sale of Adjacent Small Urban Lands: Sale of adjacent small urban lands bought merely for speculation.

This summary captures the essential elements of legal redemption, including its definition and specific instances where it applies as outlined in the relevant articles of the Civil Code.

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13
Q

IX. CONTRACT OF SALE

J. Equitable Mortgage (Civil Code, arts. 1602-1605)

A

An equitable mortgage is a type of security interest in real property where the property owner conveys an interest in the property to a lender to secure a debt or obligation, without transferring full ownership.

It allows the borrower to retain possession and use of the property while providing the lender with security in case of default on the loan.

Unlike a traditional mortgage, which involves a Formal Transfer of legal title, an equitable mortgage is BASED ON EQUITABLE principles of fairness and justice, typically documented through a written agreement or other evidence of intent.

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14
Q

IX. CONTRACT OF SALE

Equitable Mortgage - Art 1602

When is there a presumption of equitable mortgage?

NOTE:
An equitable mortgage, according to Article 1602 of the Philippine Civil Code, is a situation where a contract appears to be a regular sale with the right to repurchase (pacto de retro), but it actually functions as a loan with the property acting as security.

Here’s the key point: The intention is to secure a debt, not truly sell the property.

Example:
Imagine Leo needs a loan but struggles to get one from a bank. He approaches his friend Sarah and offers to “sell” his house to her for a very low price (much lower than its actual value) with a clause stating he can buy it back within a year (right of repurchase).

In reality, Leo doesn’t intend to permanently sell the house. He just wants to use it as security for the loan he’s receiving from Sarah (the low price is essentially the loan amount). If Leo repays Sarah within the year, he can “buy back” his house (redeem it).

This situation, despite being disguised as a sale, would likely be considered an equitable mortgage under Article 1602 because:

The sale price is unusually low.
Leo retains the right to repurchase the house.
This protects Leo’s ownership of the house as long as he repays the loan (debt) to Sarah within the agreed timeframe.

A

Article 1602 of the Philippines Civil Code outlines the circumstances where a contract may be presumed to be an equitable mortgage rather than a sale.

Here are the key points:

  1. Presumption of Equitable Mortgage: The contract is presumed to be an equitable mortgage, not a sale, in specific situations outlined in the article.
  2. Cases of Presumption: There are six cases listed where this presumption arises:
    a. Unusually Inadequate Price
    b. Vendor Remains in Possession
    c. Execution of Another Instrument Extending Redemption Period
    d. Purchaser Retains Part of Purchase Price
    e. Vendor Agrees to Pay Taxes on the Property
    f. Any Other Case Inferring the Real Intention of Securing Debt or Obligation
  3. Interest Subject to Usury Laws: In cases where the contract is presumed to be an equitable mortgage, any benefit received by the purchaser, such as rent, shall be considered as interest. This interest is subject to the usury laws.

In essence, Article 1602 provides criteria for determining when a transaction, ostensibly a sale, is actually intended to secure the payment of a debt or the performance of an obligation, leading to the classification of the contract as an equitable mortgage.

Article 1603. In case of doubt, a contract purporting to be a sale with right to repurchase shall be construed as an equitable mortgage.

Article 1604. The provisions of article 1602 shall also apply to a contract purporting to be an absolute sale. (n)

Article 1605. In the cases referred to in articles 1602 and 1604, the apparent vendor may ask for the reformation of the instrument.

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15
Q

Challenging Multiple Choice Questions on the Realty Installment Buyer Act (RA 6552)

1. Maria bought a condominium unit on installment and has been paying for 3 years. She accidentally missed two installments. Under the act, what is the minimum number of days Maria has to settle the missed payments before the seller can cancel the contract?

a) 30 days
b) 60 days
c) One month for every year of installments paid (3 months)
d) No grace period; the seller can cancel immediately

A

Answer: (b) 60 days

Reasoning: Section 3 applies to Maria’s situation because she has paid at least two years of installments. However, Section 4 outlines situations where less than two years are paid. Since Maria falls under the latter case, she gets a minimum grace period of 60 days, not the one-month-per-year grace period offered in section 3.

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16
Q

2. John has been paying for a commercial building on installment for a year. He defaults on his payments. How much cash surrender value is John entitled to if the contract is cancelled?

a) 0% - The act doesn’t apply to commercial buildings.
b) 50% of the total payments made
c) Proportionate amount based on number of payments made
d) Seller can keep all payments

A

Answer: (a) 0% - The act doesn’t apply to commercial buildings.

Reasoning: Section 3 explicitly excludes “industrial lots, commercial buildings” from protection under the act. John is not entitled to any cash surrender value because the act doesn’t cover his situation.

17
Q

3. Sarah has been paying for a condo unit for 4 years and defaults on her payments. She wants to reinstate the contract but can’t afford to pay everything at once. Under the act, what is one option available to Sarah?

a) Negotiate a new payment plan with the seller.
b) Sell her rights in the contract to someone else.
c) Both (a) and (b)
d) Neither (a) nor (b) - She must pay everything at once.

A

Answer: (b) Sell her rights in the contract to someone else.

Reasoning: Section 5 grants the buyer the right to assign their rights to another person. This allows Sarah to potentially recoup some of her investment even if she can’t continue with the purchase herself. The act doesn’t require negotiating a new payment plan directly with the seller.

18
Q

4. Mark wants to pay off the remaining balance on his house he’s been buying on installment. The contract includes a penalty for early payment. Can Mark ignore the penalty clause under the act?

a) Yes, Section 6 allows early payment without interest or penalty.
b) No, the act doesn’t address pre-existing penalty clauses.
c) It depends on the specific wording of the penalty clause.
d) Mark can negotiate a lower penalty with the seller.

A

Answer: (b) No, the act doesn’t address pre-existing penalty clauses.

Reasoning: Section 6 grants the right to pay the remaining balance without additional interest, but it doesn’t explicitly address pre-existing penalty clauses. The act only nullifies clauses that contradict sections 3, 4, 5, and 6. Mark may need to negotiate with the seller or potentially challenge the clause in court depending on its specific wording.

19
Q

Challenging MCQs on Unpaid Seller’s Rights

MCQ 1
Maria buys a refrigerator on installment from an appliance store. After making three payments, she defaults on the remaining installments. The appliance store repossesses the refrigerator. Which of the following is correct?

(A) The appliance store can only repossess the refrigerator if there was a stipulation in the contract allowing repossession.
(B) The appliance store can repossess the refrigerator as Maria is in default of payment.
(C) The appliance store can only repossess the refrigerator if Maria consents.
(D) The appliance store cannot repossess the refrigerator as ownership has already passed to Maria.

A

Answer: (B) The appliance store can repossess the refrigerator as Maria is in default of payment.

Legal Basis: This question tests the understanding of the unpaid seller’s right of lien and the concept of conditional sale. Since Maria has not fully paid for the refrigerator, the appliance store retains a lien on the goods. When Maria defaults on payment, the store can exercise its right to repossess.

20
Q

MCQ 2
John sells a car to Maria on credit. Before Maria takes possession, she declares bankruptcy. John learns of this after the car has been shipped to Maria’s address. Which of the following remedies is available to John?

(A) John can only sue Maria for the unpaid balance.
(B) John can demand payment from the shipping company.
(C) John can stop the delivery of the car.
(D) John has no recourse as ownership of the car has already passed to Maria.

A

Answer: (C) John can stop the delivery of the car.

Legal Basis: This question tests the understanding of the unpaid seller’s right of stoppage in transit. Since Maria is insolvent and the car is still in transit, John can exercise his right to stop the delivery to protect his interest in the unpaid purchase price.