VILLARICA vs. CA G.R. No.

L-19196 November 29, 1968

FACTS:

Villarica executed a deed of absolute sale over a lot on May 19, 1951 amounting to
P35,000.00 in favour of Consuji. It was registered on May 25, 1951. On that same day,
May 25, 1951, Consuji executed another public instrument where he granted Consuji an
option to buy the same property within a period of one year for the price of
P37,750.00. (Note, subsequent lang yung pag-grant ng option to buy.)

In 1953, Villarica brought an action in the CFI against Consunji for the reformation of the
instrument of absolute sale into an equitable mortgage as such was the real intention
of the parties. He argues that under Article 1604 in relation to Articles 1602 and 1603 of
the Civil Code, the instrument of absolute sale, should be presumed as an equitable
mortgage on the grounds that (1) the price of P35,000 was unusually inadequate; (2)
the vendors remained in possession of the property sold; (3) the period of one year for
repurchase granted was extended for one month; and (4) he pays the taxes on the
land sold. (Read Art. 1602 para mas maintindihan, kahit provision lang)

ISSUE:

Whether the executed absolute sale is in truth an equitable mortgage

HELD:

No. The price of P35,000 was not inadequate. The price of P35,000 was the market
price of the lot in 1951.
The vendors did not remain in possession of the land sold as lessees or otherwise. On
their request in order to help them in the expenses of their children in Manila, the
vendors were merely allowed by the vendees to collect the monthly rents of P300 for
five months up to October, 1951, on the understanding that the amounts so collected
would be charged against them.

Under 1601, option to buy is different and distinct from the right of repurchase which
must be reserved by the vendor, by stipulation to that effect, in the contract of sale.
(Under 1602, a contract of sale with right to repurchase is presumed to equitable
mortgage. Here, what was granted is option to buy, not right to repurchase.)

The right of repurchase is not a right granted the vendor by the vendee in a subsequent
instrument, but is a right reserved by the vendor in the same instrument of sale as one
of the stipulations of the contract. Once the instrument of absolute sale is executed, the
vendor can no longer reserve the right to repurchase, and any right thereafter granted
the vendor by the vendee in a separate instrument cannot be a right of repurchase but
some other right like the option to buy in the instant case. It cannot be considered as
evidencing a contract of sale with pacto de retro. Since there was no right to repurchase
but an option to buy, the extension of the period of one year for the exercise of the
option by one month does not fall under No. 3, of Article 1602 of the Civil Code

As to the payment of taxes: the taxes paid by the vendors were back taxes up to the
time of the sale on May 19, 1951. The vendors had the obligation to pay the back taxes
because they sold the land free of all liens and encumbrances. The taxes due after the
sale were paid by the vendees.

Denied
SECTION 1. - Conventional Redemption

Art. 1601. Conventional redemption shall take place when the vendor reserves the right to
repurchase the thing sold, with the obligation to comply with the provisions of Article 1616 and
other stipulations which may have been agreed upon. (1507)

Art. 1602. The contract shall be presumed to be an equitable mortgage, in any of the following
cases:

(1) When the price of a sale with right to repurchase is unusually inadequate;

(2) When the vendor remains in possession as lessee or otherwise;

(3) When upon or after the expiration of the right to repurchase another instrument extending
the period of redemption or granting a new period is executed;

(4) When the purchaser retains for himself a part of the purchase price;

(5) When the vendor binds himself to pay the taxes on the thing sold;

(6) In any other case where it may be fairly inferred that the real intention of the parties is that
the transaction shall secure the payment of a debt or the performance of any other obligation.

In any of the foregoing cases, any money, fruits, or other benefit to be received by the vendee
as rent or otherwise shall be considered as interest which shall be subject to the usury laws. (n)

Art. 1603. In case of doubt, a contract purporting to be a sale with right to repurchase shall be
construed as an equitable mortgage. (n)