Peter and Paul entered into a Contract to Sell whereby Peter, the lot owner, agreed to sell to Paul his lot on November 6, 2016 for the price of Pl ,000,000.00 to be paid at the residence of Peter in Makati City at 1 :00 p.m. If the full price is paid in cash at the specified time and place, then Peter will execute a Deed of Absolute Sale and deliver the title to Paul.
On November 6, 2016, Paul did not show up and was not heard of from that date on. In view of the nonperformance by Paul of his obligation, Peter sent a letter to Paul that he is expressly and extra-judicially declaring the Contract to Sell rescinded and of no legal and binding effect. Peter further stated that failure on the part of Paul to contest the rescission within thirty (30) days from receipt of said letter shall mean that the latter agreed to the rescission.
Paul did not reply to this letter for five (5) years. Thus, Peter decided to sell his lot to Henry in 2021. After hearing that Henry bought the lot, Paul now questions the sale of the lot to Henry and files a complaint for nullification of the sale.
[a] Is the exercise by Peter of his power to rescind extra-judicially the Contract to Sell the proper and legal way of rescinding said contract? Explain. (2.5%)
[b] In case Paul made a downpayment pursuant to a stipulation in the Contract to Sell, what is the legal remedy of Peter? (2.5%)
Suggested answer only. Not an official answer and not legal advice.
(a) Yes, Peter's extrajudicial cancellation of the Contract to Sell is legal, and (b) if a downpayment was made, Peter's remedy is to cancel the contract and refund the downpayment. In a contract to sell,
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Quick check
In a contract to sell real property, what is the legal effect of the buyer's failure to pay the purchase price on the agreed date?
Failure to pay the price in a contract to sell prevents the seller's obligation to convey title from taking effect.
Under the doctrine in UP v. De Los Angeles, how may a seller cancel a contract to sell upon the buyer's default?
A seller may extrajudicially cancel a contract to sell for non-performance by serving formal notice.
What is the general rule regarding downpayments received by a seller upon extrajudicial cancellation of a contract to sell?
Absent an express forfeiture clause, the seller must return any downpayment received upon cancellation.
Why was Peter's sale of the lot to Henry in 2021 valid despite Paul's prior contract to sell?
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Which Civil Code principle prohibits a seller from retaining a buyer's downpayment after extrajudicially cancelling a contract to sell without a forfeiture clause?
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Learn more about these topics
1. Contract to Sell
In a contract to sell, ownership is reserved by the vendor and is not to pass until full payment of the purchase price. The payment of the price is a positive suspensive condition, the failure of which is not a breach of contract but an event that prevents the obligation of the vendor to convey title from becoming effective. Non-payment does not create a right to rescind under Article 1191 of the Civil Code, but rather renders the contract to sell ineffective and gives the vendor the right to cancel the agreement.
2. Extrajudicial Contract Cancellation
Under settled Philippine civil law and the doctrine established in UP v. De Los Angeles, a party may extrajudicially cancel or rescind a contract for non-performance without prior judicial intervention. When a contract to sell explicitly allows or when the buyer fails to fulfill the positive suspensive condition of full payment, the seller may extrajudicially declare the contract cancelled. While the buyer may question the cancellation in court, the extrajudicial declaration produces legal effect unless overturned by final judicial decree.
3. Downpayment Refund Remedy
Upon the valid extrajudicial cancellation of a contract to sell real property, the seller is obligated to return to the buyer any downpayment or installments received, unless there is a valid stipulation for forfeiture. In the absence of an express forfeiture clause, retaining the downpayment constitutes unjust enrichment under Article 22 of the Civil Code. Therefore, the seller's proper remedy is to extrajudicially cancel the contract and return the downpayment to the defaulting buyer.