Lalicon v. National Housing Authority

G.R. No. 185440 (July 13, 2011)

NHA annulled sales by housing beneficiaries; buyers acted in bad faith knowing title restrictions.

Facts:

On November 25, 1980, the National Housing Authority (NHA) executed a Deed of Sale with Mortgage for a parcel of land in Quezon City in favor of spouses Isidro and Flaviana Alfaro (the Alfaros). The deed included a provision that prohibited the Alfaros from selling the property within five years from the date of its release from mortgage without prior written consent from the NHA. This restriction was duly annotated on the Alfaros' title.

On November 30, 1990, while the mortgage was still in effect, the Alfaros sold the property to their son, Victor Alfaro. The mortgage was released on March 21, 1991, and shortly thereafter, on March 27, 1991, Victor transferred ownership of the land to his daughters, Vicelet and Vicelen Lalicon (the Lalicons). The registration of this transfer occurred on October 4, 1995, resulting in the issuance of a new title in Victor's name. Subsequently, Victor mortgaged the property and later sold it to one of the mortgagees, Marcela Lao Chua, on February 14, 1997.

On April 10, 1998, the NHA filed a case in the Quezon City Regional Trial Court (RTC) seeking annulment of the original sale to the Alfaros, the sale to Victor, and the subsequent sale to Chua, arguing that these transactions violated the NHA's rules and regulations regarding the prohibition on resale within the specified period.

The RTC ruled that while the Alfaros had violated the five-year prohibition, the NHA's right to rescind had already prescribed under Article 1389 of the Civil Code. Both the NHA and the Lalicons appealed to the Court of Appeals (CA).

On August 1, 2008, the CA reversed the RTC's decision, ruling that the NHA was entitled to rescission and declaring all subsequent titles and deeds of sale null and void. The CA ordered Chua to reconvey the land to the NHA, with the stipulation that the NHA must compensate the Lalicons for their amortizations and improvements made on the property.

Legal Issues:

  1. Did the CA err in holding that the Alfaros violated their contract with the NHA?
  2. Has the NHA's right to rescind prescribed?
  3. Were the subsequent buyers of the land acting in good faith, and can their rights be affected by the rescission?

Arguments:

  • NHA's Position: The NHA argued that the Alfaros clearly violated the five-year prohibition against resale, which entitled the NHA to rescind the contract. The NHA contended that the Lalicons' claim of good faith was unfounded since the restriction was annotated on the title, making them aware of the prohibition.

  • Lalicons' Position: The Lalicons contended that the Alfaros did not violate the prohibition since the sale to Victor occurred before the mortgage was released. They also argued that the NHA's failure to respond to their requests for consent to the resale did not constitute a substantial breach warranting rescission. Furthermore, they invoked Article 1389, claiming that the NHA's right to rescind had already prescribed.

Court's Decision and Legal Reasoning:

The Supreme Court affirmed the CA's decision, ruling as follows:

  1. Violation of Contract: The Court held that the Alfaros violated the five-year restriction by selling the property to Victor before the mortgage was released. The prohibition against resale was a condition of the sale, and the NHA was entitled to rescind the contract due to this violation.

  2. Prescription of Right to Rescind: The Court clarified that rescission could be sought under either Article 1191 or Article 1381 of the Civil Code. The NHA's action for annulment was based on a breach of a reciprocal obligation, thus falling under Article 1191, which has a ten-year prescriptive period. The NHA's right of action accrued when it learned of the Alfaros' sale to Victor, and since the NHA filed its action within this period, it was not barred by prescription.

  3. Good Faith of Subsequent Buyers: The Court found that both the Lalicons and Chua were not buyers in good faith. The restriction was annotated on the title, making it clear that the Alfaros could not sell the property without NHA's consent. Chua, having acquired the property during the prohibited period, could not claim ignorance of the illegality of the transaction.

The Court also noted that mutual restitution was required in cases of rescission under Article 1191, mandating that the NHA return the full amount of amortizations received, along with the value of improvements made on the property.

Significant Legal Principles Established:

  • The distinction between rescission under Article 1191 (reciprocal obligations) and Article 1381 (subsidiary action) of the Civil Code, particularly regarding the applicable prescriptive periods.
  • The importance of annotated restrictions on property titles in determining the good faith of subsequent buyers.
  • The requirement for mutual restitution in rescission cases under Article 1191.