One who buys property with full knowledge of the flaws and defects in the title of the vendor is enough proof of his bad faith and estopped from claiming that he acquired the property in good faith against the owners.
G.R. Nos. 179518, 179835, and 179954, 19 November 2014
The case discusses the principles of buyers in good faith and buyers in bad faith in relation to sale of realty.
The Sanchezes were not negligent. At the outset, their negligence was never raised at the pre-trial stage. Hence, it cannot be raised on appeal. Notwithstanding, they still cannot be considered negligent, nor in bad faith, if such was passed upon. “Negligence is the omission of that diligence required by the nature of the obligation and corresponds to the circumstances of the persons, of the time and of the place. The Sanchezes could not be found negligent as they relied upon the assurances of Garcia after their oral agreement to sell was negotiated. The Sanchezes trusted Garcia and entrusted to him—per their oral agreement—the owner’s original duplicate of TCT 156254 in order to facilitate the documentation required under the terms of agreement for the sale of the subject lot. It must be pointed out that the parties in this case were not dealing on equal terms. The Sanchezes had insufficient knowledge in the legalities of transacting with real estate. This is evidenced by the fact that they already considered an oral agreement for the sale of real property as sufficient. Had they been knowledgeable in such matters, they would have known that such oral agreement is unenforceable and instead sought the production of a written agreement. Moreover, the facts show that the Sanchezes did not simply surrender possession of the property to TSEI and Garcia, but that such possession was taken from them without their consent.”
Regarding bad faith, paragraph 2 of Article 453 of the Civil Code specifically provides: “It is understood that there is bad faith on the part of the landowner whenever the act was done with his knowledge and without opposition on his part.” This provision does not state what form such opposition should take. “The fact of the matter is that the Sanchezes did take action to oppose the construction on their property by writing the HLURB and the City Building Official of Quezon City. As a result, the HLURB issued two (2) Cease and Desist Orders and several directives against Garcia/TSEI which, however, were left unheeded.”
Further, “the Sanchezes could not be faulted for not having been able to enjoin the sale of the townhouses by Garcia and TSEI to the intervenors Sps. Caminas, Maniwang, Tulagan, and Marquez who bought their townhouse units during the same period that the Sanchezes were demanding the full payment of the subject lot and were exercising their right of extrajudicial rescission of the Agreement. As the intervenors asserted having bought the townhouse units in early 1989, it can be seen that the pre-selling was done almost immediately after the Sanchezes and Garcia/TSEI agreed on the terms of the sale of the subject lot, or shortly after Garcia and TSEI had taken over the property and demolished the old house built thereon. In either case, the pre-selling already commenced and was continuing when the two postdated checks amounting to the remaining balance of 800,000 bounced. And when the Sanchezes informed Garcia and TSEI that they were rescinding the Agreement in early 1989, the intervenors apparently were already in the process of closing their deals with TSEI for the purchase of townhouse units.”
As for Garcia and/or TSEI, they were builders in bad faith. “They knew for a fact that the property still belonged to the Sanchezes and yet proceeded to build the townhouses not just without the authority of the landowners, but also against their will.”
With respect to the intervenors, they are buyers in bad faith. These are the established rules in jurisprudence regarding buyers of realty:
“1. Well settled is the rule that all persons dealing with property covered by a torrens certificate of title are not required to go beyond what appears on the face of the title. When there is nothing on the certificate of title to indicate any cloud or vice in the ownership of the property, or any encumbrance thereon, the purchaser is not required to explore further than what the torrens title upon its face indicates in quest for any hidden defect or inchoate right that may subsequently defeat his right thereto.
“2. This rule, however, admits of an exception as where the purchaser or mortgagee has knowledge of a defect or lack of title in the vendor, or that he was aware of sufficient facts to induce a reasonably prudent man to inquire into the status of the property in litigation.
“3. Likewise, one who buys property with full knowledge of the flaws and defects in the title of the vendor is enough proof of his bad faith and estopped from claiming that he acquired the property in good faith against the owners.
“4. To prove good faith, the following conditions must be present: (a) the seller is the registered owner of the land; (b) the owner is in possession thereof; and (3) at the time of the sale, the buyer was not aware of any claim or interest of some other person in the property, or of any defect or restriction in the title of the seller or in his capacity to convey title to the property. All these conditions must be present, otherwise, the buyer is under obligation to exercise extraordinary diligence by scrutinizing the certificates of title and examining all factual circumstances to enable him to ascertain the seller’s title and capacity to transfer any interest in the property.”
In the case at bar, the intervenors are buyers in bad faith for the following reasons:
“Firstly, they admitted that they executed either contracts of sale or contracts to sell indicating that the lot is covered by TCT No. 156254 registered under the name of the respondent Sanchezes. While the established rule is that persons dealing with property covered by a Torrens certificate of title are not required to go beyond what appears on the face of the title, intervenors cannot seek haven from such doctrine as the title of the lot does not pertain to the vendor (Garcia or TSEI) they dealt with. The fact that the lot being sold to them belonged to persons other than TSEI or Garcia should have driven the intervenors, as prudence would dictate, to investigate the true status of the property. They should have gone to the Register of Deeds of Quezon City (RD) to verify if in fact TCT No. 156254 had already been cancelled and a new title has been issued to TSEI or Garcia. They should have asked for the deed of absolute sale filed and registered with the RD to find out if the Sanchezes indeed sold the lot in question to TSEI. They could have verified from the primary entry book of said office if the deed of absolute sale from the Sanchezes in favor of TSEI was registered in said book, which, under the Property Registration Decree (PD No. 1529), is considered as an effective and legal notice to third persons and the whole world of such transfer. Evidently, the intervenors failed to do so.
“Secondly, the intervenors know, based on the contract of sale or contract to sell, that the property is registered under TCT No. 156254 in the name of the Sanchezes. As such, they should have insisted that they talk to the Sanchezes before executing said conveyances. Had they done so, they would have known that the Sanchezes have not executed a written deed of absolute sale in favor of TSEI for the latter’s failure to pay the consideration in full. Having failed to ferret out the truth from the Sanchezes, intervenors cannot be considered innocent purchasers for failure to exercise utmost caution and extra diligence in determining the true owner of the property.
“Thirdly, the intervenors should have been suspicious of the explanation of Garcia that TCT No. 383697, reflecting TSEI as the owner of the property, has been burned and that he is in the process of reconstituting the title. Before signing the contract of sale or contract to sell, they should have asked Garcia where the reconstitution case has been filed or is pending and proceeded to verify with the said court the status of the reconstitution. Had they done so, they would have known that neither Garcia nor TSEI had a deed of absolute sale executed in their favor over the lot in question. The truth of the matter is that it is the duplicate certificate of title of TCT No. 156254 that has been lost or misplaced, and is being sought to be reconstituted, not TCT No. 383697. Had intervenors been prudent enough to verify with the court the status of the alleged TCT No. 383697, they would have known that Garcia planned to deceive them in the sale of the subject property.
“Fourthly, the intervenors knew that they were buying a townhouse over a subdivision lot from TSEI and Garcia. Such being the case, they should have verified with the HLURB whether said project is registered with said housing agency and if a license to sell has been issued to TSEI or Garcia. Had they made such an inquiry, they would have known that instead of a permit for the project and a license to sell the property, a cease and desist order was issued by the HLURB precisely to enjoin TSEI and Garcia from selling said property to the public. Similarly, they could have inquired from the City Building Official of Quezon City if a building permit was issued to TSEI and Garcia for the construction of the townhouses, which would have yielded the same negative result.”
As for VTCI, it was also a purchaser in bad faith for the following reasons:
“Firstly, respondent VTCI has not shown that it verified with the RD if the alleged TCT 383697 of respondent TSEI is valid and genuine. It did not present any certified true copy of said TCT 383697 to demonstrate that based on the RD’s records, said title exists and that it is genuine and valid. It should be remembered that the duplicate certificate of TCT 156254 was lost and subject of reconstitution. Yet respondents Garcia and TSEI were not able to show that it was already reconstituted. In addition, there was no deed of absolute sale executed by the Sanchezes in favor of TSEI as the latter failed to pay the last two (2) installments and subsequently, the agreement to sell was rescinded by the Sanchezes for non-payment. There being no deed of absolute sale, there is, consequently, no ground for the RD to cancel TCT No. 156254 and subsequently issue TCT 383697 in the name of TSEI. This goes to show that TCT 383697 of TSEI appears to be spurious and a fake title. This is buttressed by the fact that the date of the issuance of TCT 383697 is June 9, l988, pre-dating the execution of the Agreement between the Sanchezes and TSEI on December 8, l988. With the failure of VTCI to exert earnest efforts to verify the authenticity of TCT 383697, then it is not a purchaser in good faith.
“Secondly, Garcia and TSEI stopped the construction of the townhouses on March 30, l989 pursuant to the CDO of the HLURB. Thus, the townhouses were not fully finished and completed. Yet on December 27, l989 (date of notarization), VTCI entered into three (3) Deeds of Absolute sale over three (3) townhouses on three (3) lots covered by TCT 383697 and despite the non-completion of the townhouses, it still fully paid the uniform price of 700,000 for the townhouse on each of the 3 lots – 1st lot with an area of 52.5 square meters; 2nd lot with an area of 72.5 square meters; and 3rd lot with an area of 42.5 square meters. The price of 700,000 was even applied to all lots even if ordinarily a bigger lot will commend a higher price. These are doubtful transactions since a man of average intellect will not fully pay the price of a townhouse which has not yet been completed. The alleged purchases are not in accord with the normal business practice and common behavior of an ordinary human being. These circumstances sway the Court to believe that said alleged conveyances are not genuine and that VTCI is not a purchaser in good faith.
“Thirdly, with the CDO and the warnings to the public and prospective buyers published in the Philippine Daily Inquirer on April 16, 1989 and in the Manila Bulletin on April 19, 2014, VTCI should have been aware of the irregularities in the proposed sale of townhouses by Garcia and TSEI. The failure of VTCI to heed the warnings and prohibition to buy said townhouses tends to show that said respondent is not a purchaser in good faith.
“Fourthly, with the issuance of the CDO by the HLURB and the notices in the major dailies, VTCI should have inquired with the said HLURB if Garcia and TSEI have a permit to sell the townhouses. Had it done so, it would have discovered that the project, as it lacks the necessary permits, is unauthorized and that the title over the townhouses is questionable.
“Fifthly, a buyer of a townhouse will ordinarily visit the project site and look at and investigate the lot, the title and the townhouses being sold. If it inspected the site of the construction project, it would have known from the other purchasers that the project has no permit from the HLURB and that construction has been stopped because of the CDO. Had VTCI done the inspection and investigation, then it would not have entered into the deeds of absolute sale with Garcia and TSEI. Thus, respondent VTCI cannot be considered as a purchaser in good faith.”
As for BPI, it cannot be considered as a mortgagee in good faith considering the “glaring anomalies in the loan transaction between TSEI and FEBTC” as shown in the following:
“Firstly, when Garcia gave TCT 156254 to FEBTC for the processing of a loan secured by a mortgage, it indubitably showed that Garcia/TSEI did not yet own the subject property as said title was in the name of the Sanchezes. But FEBTC did not require Garcia/TSEI to submit a Special Power of Attorney (SPA) in their favor authorizing them to mortgage the subject property covered by TCT 156254.
“Secondly, considering that Garcia/TSEI were already selling the townhouse units to the public as early as January 1989, FEBTC was also remiss in not requiring Garcia/TSEI to submit a written approval from the HLURB for the mortgage of the subject property where the townhouse units were being constructed as required under Sec. 18 of Presidential Decree No. (PD) 957.
“Thirdly, considering further that Garcia presented the Agreement between the Sanchezes and Garcia/TSEI as basis for ownership of the subject property covered by TCT 156254, FEBTC was remiss in neither ascertaining whether the full payment of the 1.8 million covered by six (6) checks in view of the proviso number 6 of the Agreement nor requiring the presentment of the EXTRA-JUDICIAL SETTLEMENT OF ESTATE WITH SALE from the Sanchezes in favor of Garcia/TSEI.
“Fourthly, FEBTC was again negligent in not scrutinizing the TCT 383697 considering that the title has the purported issuance date of June 9, 1988 way before the December Agreement was executed and when the loan was negotiated. More, the purported issuance of TCT 383697 was made more than six (6) months before Garcia/TSEI approached the bank for the loan. Thus, FEBTC should have been placed on guard as to why Garcia/TSEI initially gave it TCT 156254 in the name of the Sanchezes when TCTC 383697 was purportedly already issued and in Garcia’s possession way before the bank loan was negotiated. Again, FEBTC did not exercise the due diligence required of banks.
“Fifthly, the Court notes that FEBTC released portions of the loan proceeds in April even before it approved the loan secured by a real estate mortgage on May 22, 1989. And more anomalous is the fact that FEBTC had TCT 383697 verified for its veracity and genuineness way after it approved the loan to Garcia/TSEI. The Certification from the Register of Deeds was issued only on June 13, 1989 upon the request of Garcia.
“Verily, given the foregoing anomalies, the general rule that a mortgagee need not look beyond the title does not apply to banks and other financial institutions as greater care and due diligence are required of them, and FEBTC should have exercised the appropriate due diligence review and made the requisite inquiries about the subject property which was offered to secure the loan applied for by Garcia /TSEI under a real estate mortgage. FEBTC (now BPI) was negligent and cannot be considered as a mortgagee in good faith.”
What are the effects of attributing bad faith to intervenors, BPI, TSEI, and Garcia? Paragraph 1 of Article 1191 of the Civil Code states “that rescission is available to a party in a reciprocal obligation where one party fails to comply therewith.” Further, “Article 1385 of the Civil Code does provide that rescission shall not take place if the subject matter of the prior agreement is already in the hands of a third party who did not act in bad faith…”
Here, “the failure of TSEI to pay the consideration for the sale of the subject property entitled the Sanchezes to rescind the Agreement. And in view of the finding that the intervenors acted in bad faith in purchasing the property, the subsequent transfer in their favor did not and cannot bar rescission.”
Further, “bad faith on the part of TSEI, Garcia and the intervenors leads to the application of Articles 449-450 of the New Civil Code…” As a result, “the Sanchezes have the following options: (1) acquire the property with the townhouses and other buildings and improvements that may be thereon without indemnifying TSEI or the intervenors; (2) demand from TSEI or the intervenors to demolish what has been built on the property at the expense of TSEI or the intervenors; or (3) ask the intervenors to pay the price of the land. As such, the Sanchezes must choose from among these options within thirty (30) days from finality of this Decision. Should the Sanchezes opt to ask from the intervenors the value of the land, the case shall be remanded to the RTC for the sole purpose of determining the fair market value of the lot at the time the same were taken from the Sanchezes in 1988.”
However, if the Sanchezes decide to appropriate the townhouses, other structures and improvements as their own pursuant to Article 449 of the Civil Code, “then the intervenors-purchasers Caminas, Maniwang, Tulagan, Marquez and VCTI shall be ordered to vacate said premises within a reasonable time from notice of the finality of the decision by the Sanchezes. They have a right to recover their investment in the townhouses from Garcia and TSEI. If the Sanchezes do not want to make use of the townhouses and improvements on the subject lot, then the purchasers can be ordered to demolish said townhouses or if they don’t demolish the same within a reasonable time, then it can be demolished at their expense. On the 3rd option, if the Sanchezes do not want to appropriate the townhouses or have the same demolished, then they can ask that the townhouse purchasers pay to them the fair market value of the respective areas allotted to their respective townhouses subject of their deeds of sale.”
Lastly, the complaint was not a collateral attack on TSEI’s title. While the case was originally an action for rescission, “it became a direct attack on TCT 383697. To be sure, there is no indication that when the Sanchezes filed their complaint with the RTC they already knew of the existence of TCT 383697. However, when they were confronted with the title through the filing of the various Answers of the intervenors, the Sanchezes directly stated that the title was a fake.”