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Contract Rescission in Property Sale

Arra Realty Corporation sold Engineer Erlinda Penaloza half of the second floor of a building for $3,105,838. Penaloza paid $1,175,124.59 and took possession. However, unknown to Penaloza, Arra Realty had previously mortgaged the entire property to China Banking Corporation. When Arra Realty failed to pay its loan, the property was foreclosed and sold to China Banking Corporation. The court ruled that as Arra Realty had mortgaged the property before Penaloza took possession, the contract of sale was not rescinded and ownership had transferred to Penaloza despite her failure to pay the full price. As such, China

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Juvial Guevarra Boston
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185 views1 page

Contract Rescission in Property Sale

Arra Realty Corporation sold Engineer Erlinda Penaloza half of the second floor of a building for $3,105,838. Penaloza paid $1,175,124.59 and took possession. However, unknown to Penaloza, Arra Realty had previously mortgaged the entire property to China Banking Corporation. When Arra Realty failed to pay its loan, the property was foreclosed and sold to China Banking Corporation. The court ruled that as Arra Realty had mortgaged the property before Penaloza took possession, the contract of sale was not rescinded and ownership had transferred to Penaloza despite her failure to pay the full price. As such, China

Uploaded by

Juvial Guevarra Boston
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Arra Realty Corporation vs.

Spouse Arguelles
GR 142310, 20 September 2004
Doctrine: In a contract of sale, until and unless the contract is resolved or rescinded in
accordance with law, the vendor cannot recover the thing sold even if the vendee failed
to pay in full the initial payment for the property. The failure of the buyer to pay the
purchase price within the stipulated period does not by itself bar the transfer of ownership
or possession of the property sold, nor ipso facto rescind the contract. Such failure will
merely give the vendor the option to rescind the contract of sale judicially or by notarial
demand.
FACTS:
• Arra Realty Corporation was the owner of a parcel of land, located in Alvarado St.,
Legazpi Village, Makati City. Through the president, Architect Carlos D. Arguelles,
the ARC decided to construct a five-story building on its property and engaged the
services of Engineer Erlinda Penaloza as project and structural engineer.
• Penaloza and the ARC, agreed that Penaloza would share the purchase price of
one floor of the building for the price of P3,105,838. Sometime Iin May 1983,
Penaloza took possession of the one-half portion of the second floor where she
put up her office and a school. Unknown to her, ARC had executed a real estate
mortgage over the lot and the entire building in favor of the China Banking
Corporation.
• Penaloza was able to pay P1,175,124.59 for the portion of the second floor of the
building she had purchased from the ARC. Then she learned that the property had
been mortgaged to the China Banking Corp. sometime. When the ARC failed to
pay its loan to China Banking Corp., the subject property was foreclosed
extrajudicially, and thereafter, sold at public auction to China Banking Corp.
• Penaloza filed a complaint for “specific performance or damages” with a prayer for
a writ of preliminary injunction against the petitioners.
ISSUE:
Whether or not Guarantee Development Corporation is not an innocent purchaser for
value and that automatic rescission is present. - YES

In a contract of sale, until and unless the contract is resolved or rescinded in accordance
with law, the vendor cannot recover the thing sold even if the vendee failed to pay in full
the initial payment for the property. The failure of the buyer to pay the purchase price
within the stipulated period does not by itself bar the transfer of ownership or possession
of the property sold, nor ipso facto rescind the contract. Such failure will merely give the
vendor the option to rescind the contract of sale judicially or by notarial demand as
provided for by Article 1592 of the New Civil Code.
The respondent cannot be blamed for suspending further remittances of payment to the
petitioner ARC because when she pushed for the issuance of her title to the property
after taking possession thereof, the ARC failed to comply. She was aghast when she
discovered that in July 1984, even before she took possession of the property, the
petitioner ARC had already mortgaged the lot and the building to the China Banking
Corporation; when she offered to pay the balance of the purchase price of the property
to enable her to secure her title thereon, the petitioner ARC ignored her offer. Under
Article 1590 of the New Civil Code, a vendee may suspend the payment of the price of
the property sold.

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