In the Philippines, the sale of real property is governed primarily by the Civil Code and specialized statutes like the Maceda Law (R.A. 6552). Rescission is a remedy that seeks to unbind the parties, returning them to their original status before the contract was executed. However, the legal landscape distinguishes between a "contract of sale" and a "contract to sell," and whether the rescission is judicial or extrajudicial.
1. The Nature of Rescission
Rescission under Article 1191 of the Civil Code is a "power to rescind" implied in reciprocal obligations. It is available when one party fails to comply with what is incumbent upon them.
- Substantial Breach: Not every minor delay allows for rescission. The breach must be so substantial and fundamental as to defeat the very object of the parties in making the agreement.
- Mutual Restitution: Once a contract is rescinded, the parties must generally return what they received (the land and the money), including fruits and interest.
2. Rights of the Buyer
The buyer’s rights often depend on whether they are in default or if the seller has failed to deliver clean title or physical possession.
Under the Maceda Law (R.A. 6552)
For buyers of residential real estate on installments, the law provides significant protections against harsh forfeiture:
- Grace Period: If the buyer has paid at least two years of installments, they are entitled to a grace period of one month for every year of installments paid.
- Cash Surrender Value: If the contract is cancelled, the seller must refund the "Cash Surrender Value" (50% of total payments, plus 5% for every year after five years of installments, not exceeding 90%).
- Right to Reinstate: During the grace period, the buyer can pay the unpaid installments without interest.
Under the Civil Code
- Right to Suspend Payment: Under Article 1590, if the buyer is disturbed in their possession or has reasonable ground to fear a "vindicatory action" (a lawsuit for the land), they may suspend payment of the price until the seller has caused the disturbance to cease.
- Right to Damages: If the seller is at fault (e.g., selling the same land to another), the buyer can seek rescission plus payment for damages.
3. Rights of the Seller
The seller’s primary concern is usually the recovery of the property or the balance of the price.
The Power to Rescind
In a Contract of Sale, ownership passes to the buyer upon delivery. If the buyer fails to pay, the seller must go to court to rescind the contract unless a "pacto commissorio" (automatic rescission clause) is validly invoked.
In a Contract to Sell, the seller retains ownership until full payment. Failure to pay is not a "breach" but an event that prevents the obligation to convey title from becoming effective. Thus, the seller can simply cancel the contract following the requirements of the law.
Article 1592: The Judicial/Notarial Requirement
For the sale of immovable property, even if the contract says rescission happens automatically upon non-payment, Article 1592 dictates that the buyer may still pay as long as no judicial or notarial demand for rescission has been made. Once the seller makes a formal demand via a notary or a court filing, the court cannot grant the buyer a new term to pay.
4. Key Procedural Requirements
For a rescission to be legally binding and recognized by Philippine courts, certain steps must be followed:
| Requirement | Description |
|---|---|
| Notarial Act | Under the Maceda Law and Art. 1592, the notice of cancellation or demand for rescission must be by a notarial act. A simple letter is often insufficient. |
| 30-Day Notice | The actual cancellation of the contract takes place 30 days after the buyer receives the notice of cancellation or the demand for rescission. |
| Refund Payment | In cases covered by the Maceda Law, the cancellation is only effective once the Cash Surrender Value is paid to the buyer. |
5. Summary of Rights and Remedies
Note on Double Sales: If a seller rescinds a contract and sells the land to a second buyer, the first buyer’s rights depend on whether they acted in good faith and registered the sale or took possession first (Article 1544).
Buyer's Remedies:
- Demand specific performance (delivery of the land).
- Seek rescission with a refund of all payments plus interest.
- Claim damages if there was fraud or negligence by the seller.
Seller's Remedies:
- Extrajudicial rescission (if the contract is a "Contract to Sell").
- Judicial rescission (if the contract is a "Contract of Sale").
- Forfeiture of reasonable rent/earnest money (if stipulated and not unconscionable).