Buyers of personal property are further protected by the Recto Law.

Initially known as the Installment

Sales Law, it is now included under a set of provisions under the Civil Code of the Philippines.

Consumer rights are protected under Philippine laws, and real estate is no different. A property purchase
involves a lot of money, so a buyer needs to know the laws that protect them. If you are purchasing your
first home, you will need to familiarize yourself with the Recto Law, its purpose, and the sanctions given
to people who violate it.

Q: What is the Recto Law?

A: People who purchase personal property, as opposed to real property, on installment are protected by
the Recto Law. Authored in 1933 by the “Great Academician,” Senator Claro M. Recto, the statute was
called Act No. 4122, otherwise known as the Installment Sales Law. Its main purpose is to prevent
potential abuses by the seller in the event that the buyer is unable to make further installments for a
property.

It was passed by the Philippine Legislature on December 9, 1933. The law amended a certain portion of
the Civil Code of 1889 (Código Civil) through the insertion of Section 1454-A.

The Civil Code of 1889 itself was repealed by Republic Act No. 386 which took effect in 1950. It became
known as the Civil Code of the Philippines. This expanded Section 1454-A into what are now Articles 1484
to 1486 of the Civil Code. These are the provisions that currently contain the precepts of the Recto Law.

Although primarily for buyers of personal property in installments, it was used in a particular case
involving a contract of lease even without a clear option to buy. The agreement was not actually to lease
the personal property but to acquire it upon the fulfillment of the purported contract.

How is it different from the Maceda Law?

The main contrast between the two statutes lies in its application. Articles 1484 to 1486 of the Civil Code
govern sales on installment of personal property. On the other hand, the Maceda Law or Republic Act No.
6552 applies to purchasers of real property on an installment basis. The latter is also known as the Realty
Installment Buyer Act and contemplates residential properties in particular.

The Maceda Law requires certain requisites before a purchaser of real property can benefit from its
provisions. Those who have paid less than two years’ worth of installments only have a sixty-day grace
period to satisfy an installment that has become due. Failure to pay allows the seller to send the buyer a
notice to rescind the contract, which may be cancelled after thirty days from its receipt. A buyer who has
paid more than two years’ worth of installments can have a grace period of one month for every year
paid, provided that this is exercised only once every five years. If cancelled, the purchaser may recover
50% of the payments made with an additional 5% for every year after five years.
The Recto Law, on the other hand, gives the latter three alternatives instead of cumulative choices to
terminate a contract:

1. Demand payment
2. Cancel the sale
3. Foreclose the mortgage

Note that the buyer must be in default by two or more installments before any of the remedies may be
exercised.

To whom does the Recto Law apply?

It applies to both the buyer and the seller. In some cases, the parties can also be regarded as the lessor
and lessee. It can also govern certain transactions entered into by a mortgagor and mortgagee of personal
properties.

The buyer (or lessee or mortgagor) can select from the three alternatives as well, insofar as they are
applicable. This law will also govern leases with an option to purchase, such as in the aforementioned
case. However, the Recto Law does not cover straight sales wherein a down payment is given and the
remaining balance is agreed to be fulfilled through a single payment.

Even if the Recto Law was authored to prevent abuses by mortgagees (lenders), it is quite possible that a
mortgagor in default may increase his liability. This happens when the mortgagor fails to pay two or more
installments and refuses to return the personal property upon the seller’s demand. Should there be an
action for replevin to recover such property and the court rules in favor of the seller, the buyer might have
to pay costs and attorney’s fees as well.

The seller could likely be penalized in similar fashion should the Recto Law be violated. One remedy would
prevent the seller from exercising the others. For instance, if the buyer has already returned the personal
property to the seller, the seller can no longer try to collect the remaining installments. This would be
viewed as an unnecessary legal proceeding should the seller pursue more than one remedy in court. It
would cause the buyer to make additional needless expenses which will likely be paid for by an erring
seller.

Although a great deal of effort and research was put into the creation of this article, Lamudi Philippines
always advises home buyers and future property owners to consult with professionals, such as licensed
real estate brokers and attorneys, to ensure their real estate transactions are properly and promptly
processed.
What is the coverage of the Recto Law?

It covers:

1. Contracts of Sale of personal property by installments.

2. Contracts purporting to be leases of personal property with option to buy, when the lessor has deprived
the lessee of the possession or enjoyment of the thing (PCI Leasing and Finance Inc. v. Giraffe-X Creative
Imaging, Inc., G.R. No. 142618, July 12, 2007).

What are the remedies for the seller under this law?

As provided, the seller shall do:

1. Exact fulfillment of the obligation, should the vendee fail to pay.

The seller shall file specific performance in court to exact payment from the vendee. As a general rule,
the seller cannot avail other remedy if he opted this. However, if after choosing, it has become impossible
for the vendee to pay the seller, the latter may file for the rescission of the contract.

2. Cancel the sale, should the vendee’s failure to pay cover two or more installments.

This is rescission of the contract that can be exercised by the seller. But the vendee must have failed to
pay 2 or more installments as a condition thereto.

The requirements for rescission are:

a. A notarized notice of rescission must have been sent to the buyer.

b. The seller takes possession of the property subject to the sale.

c. The seller files action for rescission.

3. Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee’s
failure to pay cover two or more installments. In this case, he shall have no further action against the
purchaser to recover the unpaid balance of the price.

Dear PAO,

I am inclined to invest my money by buying a condominium unit on installment basis. I heard rumors,
however, that buying condominium units is not advisable for investment purposes. My sales agent advised
me that whenever I want to cancel the sale, I can still refund 50 percent of actual payments I have made.
In this connection, can you enlighten me about the differences between the Maceda Law and the Recto
Law. Or are these two laws the same?

Thank you,
Dear Ron,

The Maceda Law and the Recto Law are not the same. Both laws, however, govern the sale of property
on installment basis. The Recto Law, which forms part of the Civil Code, specifically Article 1484 to Article
1486, covers sales of personal property on installment basis. The Maceda Law is a special law, particularly
Republic Act (RA) 6552 or the Realty Installment Buyer Act, that governs installment sales of real property.

The Supreme Court cited in the case of Bachrach Motor vs. Millan (G.R. No. L-42256, April 25, 1935),
penned by former Associate Justice Leonard Goddard, that the principal object of Recto Law is to prevent
abuses in foreclosure of chattel mortgages, especially when the mortgagee-creditors foreclosed the
mortgaged properties and bought them at a much lower price, then continues collecting for deficiencies
against the mortgagor-debtor.

It provides for remedies in case the buyer fails to pay.

“Article 1484. In a contract of sale of personal property the price of which is payable in installments, the
vendor may exercise any of the following remedies:

Exact fulfillment of the obligation, should the vendee fail to pay;

Cancel the sale, should the vendee’s failure to pay cover two or more installments;

Foreclose the chattel mortgage on the thing sold, if one has been constituted, should the vendee’s failure
to pay cover two or more installments. In this case, he shall have no further action against the purchaser
to recover any unpaid balance of the price. Any agreement to the contrary shall be void (1454-A-a)” (Civil
Code of the Philippines).

On the other hand, RA 6552 or the Realty Installment Buyer Act, also known as the Maceda Law, is the
real estate equivalent of the Recto Law. Under Section 3, it only applies to residential real estate, as it
excludes other real estates, such as, industrial lots, commercial buildings [and/or commercial lots by
implication] and sale to tenants under agrarian laws. Moreover, Section 2 of this law provides that it was
enacted to protect buyers of real estate on installment payments against onerous and oppressive
conditions.

“Section 2. It is hereby declared a public policy to protect buyers of real estate on installment payments
against onerous and oppressive conditions.

Section 3. In all transactions or contracts involving the sale or financing of real estate on installment
payments, including residential condominium apartments but excluding industrial lots, commercial
buildings and sales to tenants under Republic Act Numbered Thirty-eight hundred forty-four, as amended
by Republic Act Numbered Sixty-three hundred eighty-nine, where the buyer has paid at least two years
of installments, the buyer is entitled to the following rights in case he defaults in the payment of
succeeding installments: xxx”
With respect to your concern on the fifty percent (50 percent) refund in case you cancelled the
transaction, pertinent is Section 3 of RA 6552, which states that where the buyer has paid at least two
years of installment, he shall have the rights in case of default in payment of succeeding installments to:
(i) pay without interest the balance within the grace period of one month for every year of installment
payment (The grace period, however, shall be exercised once every five years); or (ii) in case the contract
is cancelled, the buyer shall be entitled to 50 percent of what he has paid plus another five percent for
every year but not exceeding 90 percent of payments made.

“Section 3. In all transactions or contracts involving the sale or financing of real estate on installment
payments, including residential condominium apartments but excluding industrial lots, commercial
buildings and sales to tenants under Republic Act Numbered Thirty-eight hundred forty-four, as amended
by Republic Act Numbered Sixty-three hundred eighty-nine, where the buyer has paid at least two years
of installments, the buyer is entitled to the following rights in case he defaults in the payment of
succeeding installments:

(a) To pay, without additional interest, the unpaid installments due within the total grace period earned
by him which is hereby fixed at the rate of one month grace period for every one year of installment
payments made: Provided, That this right shall be exercised by the buyer only once in every five years of
the life of the contract and its extensions, if any.

(b) If the contract is canceled, the seller shall refund to the buyer the cash surrender value of the payments
on the property equivalent to fifty per cent of the total payments made, and, after five years of
installments, an additional five per cent every year but not to exceed ninety per cent of the total payments
made: Provided, That the actual cancellation of the contract shall take place after 30 days from receipt by
the buyer of the notice of cancellation or the demand for rescission of the contract by a notarial act and
upon full payment of the cash surrender value to the buyer.

Down payments, deposits or options on the contract, shall be included in the computation of the total
number of installment payments made.”

We find it necessary to mention that this opinion is solely based on the facts you have narrated and our
appreciation of the same. The opinion may vary when the facts are changed or elaborated. We hope that
we were able to enlighten you on the matter.
 EN BANC

[G.R. No. L-25951. June 30, 1969.]

FILIPINAS INVESTMENT & FINANCE CORPORATION, Plaintiff-Appellant, v. JULIAN R.

VITUG, JR. and SUPREME SALES & DEVELOPMENT CORPORATION, Defendants-Appellees.

Wilhelmina V. Joven, for Plaintiff-Appellant.

Antonio V. Borromeo for Defendants-Appellees.

SYLLABUS

1. CIVIL LAW; SALE OF CHATTEL BY INSTALLMENTS; RULE THAT VENDOR AFTER RECOVERY OF
PROPERTY CANNOT RECOVER UNPAID BALANCE OF PRICE, NOT APPLICABLE TO ASSIGNEE IN INSTANT
CASE. — Where in the assignment made by the vendor to the assignee of the promissory note and
chattel mortgage of the vendee involving property bought by installments, there was definite and clear
agreement between the vendor and assignee that should the assignee fail to secure recovery from the
vendee, the right was reserved to the assignee to seek recourse for the deficiency against the vendor,
the assignee can recover from the vendor the deficiency that resulted after the assignee had foreclosed
the chattel mortgage on and sold at public auction the chattel involved. The Recto Law providing for
non-recovery of the unpaid balance of the price after the property sold had been foreclosed is not
violated.

2. ID.; ID.; ID.; ID.; PURPOSE. — Congress seeks to protect under the Recto Law (Article 1484 of the
Civil Code) are only the buyers on installment who more often than not have been victimized by sellers
who, before the enactment of this law, succeeded in unjustly enriching themselves at the expense of
the buyers because aside from recovering the goods sold, upon default of the buyer in the payment of
two installments, still retained for themselves all amounts already paid, in addition, furthermore, to
other damages, such as attorney’s fees and costs.

3. ID,; ID.; ID.; CASE OF CRUZ V. FILIPINAS INVESTMENT AND FINANCE CORPORATION, ET AL
DISTINGUISHED FROM CASE AT BAR. — The case of Cruz v. Filipinas Investment and Finance Corp., et
al was entirely different from the one at bar. In that case, herein appellant Filipinas Investment and
Finance Corporation was trying to recover from the guarantor of the buyer, whereas in the present case,
it is precisely stipulated in effect, that the Filipinas Investment and Finance Corp. had right of recourse
against the seller should the buyer fail to pay the assigned credit in full.

DECISION

BARREDO, J.:

Appeal from an order of dismissal by the Court of First Instance of Manila, in its Civil Case No. 60915,
entitled Filipinas Investment & Finance Corporation v. Julian R. Vitug, Jr. and Supreme Sales &
Development Corporation, of the amended complaint of July 16, 1965 of plaintiff-appellant Filipinas
Investment & Finance Corporation whereby it sought to recover from defendant-appellee Supreme Sales
& Development Corporation the deficiency that resulted after it had foreclosed the chattel mortgage on
and sold at public auction, the car of the other defendant, Julian Vitug, Jr. who had failed to pay to
appellee installments due on the promissory note representing the purchase price of said car which he
had bought from the same, appellant being the assignee of appellee of its rights in the said promissory
note.

The material allegations in appellant’s amended complaint are: cha nrob 1es virtual 1aw lib rary
The defendant, Julian R. Vitug Jr., executed and delivered to appellee a promissory note in the amount
of P14,605.00 payable in monthly installments according to a schedule of payments; the payment of
the aforesaid amount which was the purchase price of a motor vehicle, a 4-door Consul sedan, bought
by said defendant from appellee, was secured by a chattel mortgage over such automobile; on the same
day, appellee negotiated the above-mentioned promissory note in favor of appellant Filipinas Investment
& Finance Corporation, assigning thereto all its rights, title and interests to the same, the assignment
including the right of recourse against appellee; defendant Vitug defaulted in the payment of part of the
installment which fell due on January 6, 1965, as well as the subsequent three consecutive monthly
installments which he was supposed to have paid on February 6, March 6 and April 6, 1965; there being
a provision in the aforesaid promissory note and chattel mortgage that failure to pay the installments
due would result in the entire obligation becoming due and demandable, appellant demanded from
appellee the payment of such outstanding balance; in turn, appellee "authorized (appellant) to take
such action as may be necessary to enable (it) to take possession of the . . . motor vehicle." Pursuant
to such authority, appellant secured possession of the mortgaged vehicle by means of the writ of replevin
duly obtained from the court, preparatory to the foreclosure of the mortgage, but said writ became
unnecessary because upon learning of the same, defendant Vitug voluntarily surrendered the car to
appellant; thereafter, the said car was sold at public auction, but the proceeds still left a deficiency of
P8,349.35, plus interest of 12% per annum from April 21, 1965; and appellant, the above foreclosure
and sale notwithstanding, would hold appellee liable for the payment of such outstanding balance, plus
attorney’s fees and costs.

On August 4, 1965, appellee filed an urgent motion to dismiss on the ground, inter alia that under Article
1484 of the Civil Code of the Philippines, which particular provision is otherwise known as the Recto
Law, appellant has no cause of action against appellee. Said provision is as follows: jgc:chanroble s.com. ph

"ART. 1484. In a contract of sale of personal property the price of which is payable in installments, the
vendor may exercise any of the following remedies: (1) Exact fulfillment of the obligation, should the
vendee fail to pay; (2) Cancel the sale, should the vendee’s failure to pay cover two or more
installments; (3) Foreclose the chattel mortgage on the thing sold, if one has been constituted, should
the vendee’s failure to pay cover two or more installments. In this case, he shall have no further action
against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary shall
be void."cralaw virtua 1aw libra ry

In its order of August 30, 1965, subject of this appeal, the lower court found the aforesaid ground to be
meritorious and, as already stated, the amended complaint was dismissed as to appellee Supreme Sales
& Development Corporation. According to the order of dismissal: jgc:chan roble s.com.p h

"It is undisputed in the instant case that the amount of P14,605.00 mentioned as consideration in both
the promissory note and the chattel mortgage in the instant case represents the selling price of one(1)
automobile New Ford Consul 315 4-door Sedan, payable in the installments mentioned in said
documents. Under pars. 5 and 9 of the amended complaint, the writ of replevin was obtained in the
instant case for purposes of foreclosure of mortgage. In applying for a writ of replevin, the plaintiff
thereby made his choice, namely, to foreclose the mortgage covering said automobile; and having
accepted said automobile from defendant Julian R. Vitug, Jr., what remains is for the plaintiff to sell said
automobile through either a judicial or an extrajudicial foreclosure of said mortgage, without benefit of
a deficiency judgment or deficiency collection . . . should the proceeds of the foreclosure sale be less
than the balance of the installment sale price of said automobile due and collectible." cralaw vi rtua1aw lib ra ry

On September 23, 1965, appellant filed a motion for reconsideration but this was denied on October 26,
1965, hence, this appeal.

The principal error assigned by appellant has reference to the applicability of Art. 1484 of the Civil Code,
as amended, to the facts of this case. Appellant maintains that: chanrob 1es vi rtua l 1aw lib ra ry

"II

THE TRIAL COURT ERRED IN HOLDING THAT ARTICLE 1484 OF THE CIVIL CODE OF THE PHILIPPINES
IS APPLICABLE TO THE TRANSACTION BETWEEN PLAINTIFF-APPELLANT AND DEFENDANT-APPELLEE."
virtua 1aw
cra l a w

libra ry

Under the facts alleged in the amended complaint which are deemed admitted by the motion to dismiss,
1 this assignment of error must be sustained.

The specific allegations in the amended complaint which have material bearing to the issue herein are: jgc:cha nrob les.com .ph

"4. On November 4, 1964, defendant Supreme Sales & Development Corporation, with notice to
defendant Julian R. Vitug, Jr. negotiated in favor of (endorsed and delivered to) plaintiff the above-
mentioned promissory note, Annex "A", on a with-recourse basis whereby in case of the failure and/or
refusal of the maker thereof, defendant Julian R. Vitug, Jr. to pay the obligation under the said
promissory note, plaintiff shall have the right of recourse against the said defendant corporation.

"On the same date, the said defendant corporation, with notice to defendant Julian R. Vitug, Jr., assigned
to plaintiff its rights, title, and interests to the aforesaid promissory note and chattel mortgage, Annexes
"A" and "B" hereof, as shown by the Deed of Assignment executed by defendant Supreme Sales &
Development Corporation in favor of plaintiffs, a copy of which is hereto attached as Annex "C" and
made an integral part hereof, which assignment is also subject to the right of recourse above-mentioned.

"13. The defendant corporation is liable to plaintiff for the entire balance of the obligation covered by
the promissory note, Annex "A", and secured by the chattel mortgage, Annex "B" as a general endorser
of the promissory note, Annex "A", and assignor of the chattel mortgage on a with-recourse basis. But
should plaintiff be able to sell the above-described motor vehicle, then the said defendant corporation
is liable to the plaintiff for the payment of the balance of the obligation after applying thereto the
proceeds of the sale of the said vehicle." (Record on Appeal, pp. 12 and 15.)

Thus it can be seen that the assignment made by appellee to appellant of the promissory note and
mortgage of defendant Vitug was on a with-recourse basis. In other words, there was a definite and
clear agreement between appellant and appellee that should appellant fail to secure full recovery from
defendant Vitug, the right was reserved to appellant to seek recourse for the deficiency against appellee.
Accordingly, the question for resolution by the Court now is whether or not this provision regarding
recourse contained in the agreement between appellant and appellee violates the Recto Law which
declares null and void any agreement in contravention thereof. We do not believe that it does.

As pointed out in appellant’s brief, the transaction between appellant and appellee was purely an
ordinary discounting transaction whereby the promissory note executed by defendant Vitug was
negotiated by appellee in favor of appellant for a valuable consideration at a certain discount,
accompanied by an assignment also of the chattel mortgage executed by said defendant to secure the
payment of his promissory note and with the express stipulation that should there be any deficiency,
recourse could be had against appellee. Stated otherwise, the remedy presently being sought is not
against the buyer of the car or the defendant Vitug but against the seller, independent of whether or
not such seller may have a right of recovery against the buyer, which, in this case, he does not have
under the Recto Law. It is clear to Us, on the other hand, that under said law, what Congress seeks to
protect are only the buyers on installment who more often than not have been victimized by sellers
who, before the enactment of this law, succeeded in unjustly enriching themselves at the expense of
the buyers because aside from recovering the goods sold, upon default of the buyer in the payment of
two installments, still retained for themselves all amount already paid, in addition, furthermore, to other
damages, such as attorney’s fees, and costs. Surely, Congress could not have intended to impair and
much less do away with the right of the seller to make commercial use of his credit against the buyer,
provided said buyer is not burdened beyond what this law allows.

We are not unmindful that in the case of Cruz, Et. Al. v. the same Filipinas Investment & Finance
Corporation, L-24772, May 27, 1968, 23 SCRA 791, this Court broadened the scope of the Recto Law
beyond its letter and held that within its spirit, a seller of goods on installment does not have any right
of action against a third party who, in addition to the buyer’s mortgage of the goods sold, furnishes
additional security for the payment of said installments or the purchase price of said goods. In that case,
it was held: jgc:chanrob les.co m.ph

"It is here agreed that plaintiff Cruz failed to pay several installments as provided in the contract; that
there was extrajudicial foreclosure of the chattel mortgage on the said motor vehicle; and that
defendant-appellant itself bought it at the public auction duly held thereafter, for a sum less than the
purchaser’s outstanding obligation. Defendant-appellant, however, sought to collect the supposed
deficiency by going against the real estate mortgage which was admittedly constituted on the land of
plaintiff Reyes as additional security to guarantee the performance of Cruz’ obligation, claiming that
what is being withheld from the vendor, by the proviso of Article 1484 of the Civil Code, is only the right
to recover "against the purchaser," and not a recourse to the additional security put up, not by the
purchaser himself, but by a third person.

"There is no merit in this contention. To sustain appellant’s argument is to overlook the fact that if the
guarantor should be compelled to pay the balance of the purchase price, the guarantor will in turn be
entitled to recover what she has paid from the debtor vendee (Art. 2066, Civil Code); so that ultimately,
it will be the vendee who will be made to bear the payment of the balance of the price, despite the
earlier foreclosure of the chattel mortgage given by him. Thus, the protection given by Article 1484
would be indirectly subverted, and public policy overturned." c ralaw virt ua1aw library

As can be seen, that case of Cruz was entirely different from this one at bar. In that case, herein
appellant Filipinas Investment & Finance Corporation was trying to recover from the guarantor of the
buyer, whereas in the present case, it is precisely stipulated in effect, that the Filipinas Investment &
Finance Corporation had a right of recourse against the seller should the buyer fail to pay the assigned
credit in full.

It is the contention of appellee that since what were assigned to appellant were only whatever rights it
had against the buyer, it should follow that inasmuch as appellee has no right to recover from the
defendant beyond the proceeds of the foreclosure sale, the appellant, as assignee, should also have no
right to recover any deficiency. We do not view the matter that way. The very fact that the assignee
was given the stipulated right of recourse against the assignor negates the idea that the parties
contemplated to limit the recovery of the assignee to only the proceeds of the mortgage sale.

ACCORDINGLY, the order of dismissal of the lower court is reversed and this case is ordered remanded
to the lower court for further proceedings, with costs against appellee Supreme Sales & Development
Corporation.

Concepcion, C.J., Reyes, J.B.L., Makalintal, Zaldivar, Sanchez, Castro, Capistrano and Teehankee, JJ.,
concur.

Dizon and Fernando, JJ., did not take part.