An annotation made pursuant to Section 4, Rule 74 of the Rules of Court (Rules) on a certificate of title covering real property is an encumbrance on the property and may be a ground for the buyer to suspend payment.
This was the Supreme Court’s ruling in Tan v. Benolirao.
Spouses Benolirao and the Spouses Taningco were the co-owners of a parcel of land in Tagaytay City. In October 1992, they executed a Deed of Conditional Sale, which was in fact a mere Contract to Sell, over the property in favor of Delfin Tan. The deed stated:
a) An initial down-payment of TWO HUNDRED (P200,000.00) THOUSAND PESOS, Philippine Currency, upon signing of this contract; then the remaining balance of ONE MILLION ONE HUNDRED SEVENTY EIGHT THOUSAND (P1,178,000.00) PESOS, shall be payable within a period of one hundred fifty (150) days from date hereof without interest;
b) That for any reason, BUYER fails to pay the remaining balance within above mentioned period, the BUYER shall have a grace period of sixty (60) days within which to make the payment, provided that there shall be an interest of 15% per annum on the balance amount due from the SELLERS;
c) That should in case (sic) the BUYER fails to comply with the terms and conditions within the above stated grace period, then the SELLERS shall have the right to forfeit the down payment, and to rescind this conditional sale without need of judicial action;
d) That in case, BUYER have complied with the terms and conditions of this contract, then the SELLERS shall execute and deliver to the BUYER the appropriate Deed of Absolute Sale;
Tan then issued a check for P200,000.00 as down payment for the property.
In November 1992, however, one of the Benolirao’s died intestate. His widow and children executed an extrajudicial settlement of his estate in January 1993. On the basis of the extrajudicial settlement, a new certificate of title over the property, was issued in March 1993 in the names of the Spouses Taningco and Erlinda Benolirao and her children. Pursuant to Section 4, Rule 74 of the Rules, the following annotation was also made on:
x x x any liability to credirots (sic), excluded heirs and other persons having right to the property, for a period of two (2) years, with respect only to the share of Erlinda, Andrew, Romano and Dion, all surnamed Benolirao
As stated in the Deed, Tan had until March 1993 to pay the balance of the purchase price. By agreement of the parties, this period was extended by two months, so Tan had until May 1993 to pay the balance. Tan failed to pay and asked for another extension, which the vendors again granted. Notwithstanding this second extension, Tan still failed to pay the remaining balance. The vendors thus wrote him a letter demanding payment of the balance of the purchase price within five days from notice; otherwise, they would declare the rescission of the “conditional sale” and the forfeiture of his down payment based on the terms of the contract.
Tan refused to comply with the vendors’ demand and instead wrote them a letter, claiming that the annotation on the title, made pursuant to Section 4, Rule 74 of the Rules, constituted an encumbrance on the property that would prevent the vendors from delivering a clean title to him. Thus, he alleged that he could no longer be required to pay the balance of the purchase price and demanded the return of his down payment.
Because the vendors refused to refund the down payment, Tan eventually filed a complaint with the court for specific performance against the vendors, alleging that there was a novation of the Deed of Conditional Sale done without his consent since the annotation on the title created an encumbrance over the property. Tan prayed for the refund of the down payment and the rescission of the contract.
Tan lost the case, but he appealed all the way to the Supreme Court, which ruled in his favor.
The Supreme Court declared that a Section 4, Rule 74 annotation is indeed an encumbrance on the property. And because of the encumbrance the vendors could no longer compel Tan to pay the balance of the purchase since considering they themselves could not fulfill their obligation to transfer a clean title over the property to Tan.
So what then happens to their contract?
The Supreme Could held that the contract to sell was terminated when the vendors could no longer legally compel Tan to pay the balance of the purchase price as a result of the legal encumbrance which attached to the title of the property.
Since Tan’s refusal to pay was due to the supervening event of a legal encumbrance on the property and not through his own fault or negligence, it found that the forfeiture of Tan’s down payment was clearly unwarranted.