Equatorial Realty Development, Inc. v. Mayfair Theater, Inc.
REITERATIONFacts
1. The Antecedents: Carmelo & Bauermann, Inc. (Carmelo) owned a parcel of land with buildings. On June 1, 1967, Carmelo leased a portion to Mayfair Theater, Inc. (Mayfair) for 20 years, granting Mayfair a right of first refusal to purchase. On March 31, 1969, Carmelo leased another portion to Mayfair for 20 years, also with a right of first refusal. On July 30, 1978, Carmelo sold the properties to Equatorial Realty Development, Inc. (Equatorial) for P11,300,000 without offering them to Mayfair first. Mayfair sued Carmelo and Equatorial for annulment of the sale, specific performance, and damages. 2. Procedural History: The Regional Trial Court (RTC) initially ruled in favor of Carmelo and Equatorial. However, the Court of Appeals reversed this decision. This Court, in a prior en banc decision (GR No. 106063), denied the petition for review, deemed the Deed of Absolute Sale between Equatorial and Carmelo rescinded, ordered Carmelo to return the purchase price to Equatorial, and directed Equatorial to execute documents to return ownership to Carmelo, who was then ordered to allow Mayfair to purchase the lots for P11,300,000. This decision became final on March 17, 1997. Subsequently, Mayfair deposited the purchase price, and new titles were issued in its name. Equatorial filed a Petition for Certiorari and Prohibition, which was resolved by the Court of Appeals, leading to further litigation. In a subsequent decision (May 12, 2000), this Court directed the trial court to strictly follow the original en banc decision. Meanwhile, Equatorial filed the present action with the RTC for collection of rentals from Mayfair for the period after the lease contracts expired, claiming ownership based on the July 30, 1978 sale. The RTC dismissed Equatorial's complaint, finding the sale void at its inception and Equatorial not the owner. This dismissal is now before this Court. 3. The Petition: This is a Petition for Review under Rule 45 of the Rules of Court, challenging the RTC's dismissal of Equatorial's complaint for back rentals. Equatorial argues that the RTC erred in holding the Deed of Absolute Sale void at its inception and in ruling that Equatorial is not the owner and has no right to demand back rentals. Equatorial contends that the RTC disregarded basic legal principles and the dispositive portion of the Supreme Court's prior decision. The core issues are whether Equatorial is entitled to back rentals and whether the RTC's dismissal was procedurally sound. Equatorial asserts that the rescinded Deed of Absolute Sale was valid until rescinded and that it acquired ownership and the right to fruits (rentals) during the period the sale was considered valid, even if later rescinded. The petition also raises procedural arguments regarding the grounds for dismissal.
Issue(s)
Whether Equatorial acquired ownership of the subject properties and is entitled to collect rentals from Mayfair. Whether the rescission of the sale and Equatorial's bad faith affect its entitlement to rentals. Whether the RTC erred in dismissing the complaint, and whether the dismissal was justified under the principle of res judicata.
Ruling
The Petition is denied. The Court upholds the trial court's disposition, not for the reason it gave (void at inception), but for the patent failure to deliver the property and petitioner's bad faith. The Court also finds that the cause of action is barred by prior judgment (res judicata).
Ratio Decidendi
On the issue of ownership and entitlement to rentals: The Court reiterates that ownership is acquired not by mere agreement but by tradition or delivery. In this case, Equatorial never took actual control and possession of the property because of Mayfair's timely objection and the subsequent rescission of the sale by this Court in the mother case. The execution of a public instrument is merely a presumptive delivery, which is negated by the failure to take actual possession. The rescission of the sale under Article 1385 of the Civil Code creates the obligation to return the things object of the contract, together with their fruits and the price with its interest. Therefore, Equatorial, not having acquired ownership due to lack of legally effective delivery, is not entitled to the civil fruits of ownership, such as rentals. On the effect of rescission and bad faith: While a rescissible contract is valid until rescinded, the rescission under Article 1385 requires the return of fruits. Furthermore, the Court found Equatorial to be a buyer in bad faith, having knowingly entered into the sale in violation of Mayfair's right of first refusal. This bad faith bars Equatorial from claiming benefits like rentals, as it would reward bad faith instead of punishing it. The sale was judicially rescinded before it could be consummated by legally effective delivery. On the procedural issue of the motion to dismiss: The Court finds that the RTC correctly granted the motion to dismiss on the ground of bar by prior judgment (res judicata). Although the RTC erred in interpreting the rescinded Deed of Absolute Sale as 'void at its inception,' its conclusion that the prior judgment in G.R. No. 106063 barred Equatorial's claim for back rentals was correct. The mother case had already resolved that Equatorial was not entitled to back rentals due to lack of ownership and bad faith, thus settling the issue between the parties.
Main Doctrine
Ownership is acquired not by mere agreement but by tradition or delivery. A contract of sale, even if validly perfected, is not consummated by mere execution of a public instrument if there is an impediment to the transfer of possession. Bad faith on the part of the buyer bars the grant of benefits such as rentals.