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VELARDE ET AL. V. COURT OF APPEALS

PETITIONERS: Spouses Mariano Z. Velarde and Avelina D. Velarde

FACTS:
• David Raymundo owns a parcel of land, with the house and other improvements thereon, located
at 1918 Kamias St., Dasmariñas Village, Makati. George Raymundo is David's father who
negotiated with the Velarde spouses for the sale of this property.
• On August 8, 1986, a Deed of Sale with Assumption of Mortgage was executed by David
Raymundo, as vendor, in favor of plaintiff Avelina Velarde, as vendee, with the following terms
and conditions (in brief and summary):
- That for P800,000.00 (as downpayment), which receipt in full is acknowledged, the vendor
sells unto the vendee the property mentioned.
- That this property was mortgaged by the vendor to the Bank of the Philippine Islands (BPI) to
secure the payment of a loan of P1,800,000.00, as evidenced by a Real Estate Mortgage
executed by the vendor in favor of BPI.
- That as part of the consideration of this sale, the vendee assumes to pay the mortgage
obligations on the property in the amount of P1,800,000.00, in favor of BPI, in the name of
the vendor, and further agrees to strictly and faithfully comply with all the terms and
conditions appearing in the Real Estate Mortgage signed and executed by the vendor in favor
of BPI, as if the same were originally signed and executed by the vendee.
- [among others]
• As part of this document, Avelina Velarde, with the consent of her husband, executed an
Undertaking attesting to these terms and the said mortgage obligations to be assumed, obligating
herself to comply with such following terms and conditions:
- 1. That until such time as my assumption of the mortgage obligations is approved by BPI, I
shall continue to pay the loan in accordance with the terms and conditions of the Deed of Real
Estate Mortgage in the name of David A. Raymundo, the original Mortgagor.
- 2. That, in the event I violate any of the terms and conditions of the said Deed of Real Estate
Mortgage, I hereby agree that my downpayment of P800,000.00, plus all payments made with
BPI on the mortgage loan, shall be forfeited in favor of Mr. David A.Raymundo, […]and Mr.
David A Raymundo shall resume complete ownership of the property sold by the Deed of Sale
with Assumption of Mortgage, and the same shall be deemed automatically cancelled in the
same manner as if the same had never been executed or entered into.
- [among others]

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 Pursuant to said agreements, the Velarde spouses paid BPI for three (3) months as follows:
September 19, 1986 at P27,225.00; October 20, 1986 at P23,000.00; and November 19, 1986 at
P23,925.00
 On December 15, 1986, the spouses were advised that the Application for Assumption of
Mortgage with BPI was not approved. Hence, they did not to make any further payment.
 Private respondents, thru counsel, wrote and informed the spouses that their non-payment to the
mortgage bank constituted non-performance of their obligation.
 In response, Velarde, thru counsel in a Letter dated January 7, 1987, relayed that she is willing to
pay the balance in cash provided that respondent (a) deliver actual possession of the property to
her for her immediate occupancy; (b) cause the release of title and mortgage from BPI, the title
free from any liens and encumbrances; and (c) execute an absolute deed of sale in her favor free
from any liens or encumbrances not later than January 21, 1987.
 The day after, private respondents sent Velarde a notarial notice of cancellation/rescission of the
intended sale allegedly due to the latter's failure to comply with the terms of the Deed of Sale
with Assumption of Mortgage and the Undertaking.
 Hence, petitioners filed a complaint against private respondents for specific performance, nullity
of cancellation, writ of possession and damages, which was dismissed by Judge Ynares-Santiago.
This judge was then promoted and hence was succeeded by Judge Abad-Santos, who granted
petitioners’ MFR and ordered the parties to proceed with the sale.
 Private respondents appealed to the CA, who set aside this order and upheld the validity of the
rescission made by private respondents. Hence, this appeal by petitioners.
ISSUES:
1. W/N the petitioners breached the contract. – YES.
2. W/N the rescission of the contract by private respondents was justified. -YES.
3. W/N petitioners' January 7, 1987 letter gave three `new conditions' constituting mere offers or an
attempt to novate. -Court finds it not necessary to discuss.

RATIO:
1. Yes. Petitioners did not merely stop paying the mortgage obligations; they also failed to pay the
balance of the purchase price. As admitted by both parties, their agreement mandated that
petitioners should pay the purchase price balance of P1.8 million to private respondents in case
the request to assume the mortgage would be disapproved. Thus, on December 15, 1986, when
petitioners received notice of the bank's disapproval, they should have paid the balance of the
P1.8 million loan. Instead of doing so, petitioners sent a letter to private respondents offering to
make such payment only upon the fulfillment of certain conditions not originally agreed upon in
the contract of sale.

In a contract of sale, the seller obligates itself to transfer the ownership of and deliver a
determinate thing, and the buyer to pay therefor a price certain in money or its equivalent. Private
respondents had already performed their obligation through the execution of the Deed of Sale,
which effectively transferred ownership of the property to petitioner through constructive
delivery. Petitioners, on the other hand, did not perform their correlative obligation of paying the
contract price in the manner agreed upon.

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2. Yes. The breach committed by petitioners was not so much their nonpayment of the mortgage
obligations, as their nonperformance of their reciprocal obligation to pay the purchase price under
the contract of sale. Private respondents' right to rescind the contract finds basis in Article 1191 of
the Civil Code.1 The right of rescission of a party to an obligation under Article 1191 of the Civil
Code is predicated on a breach of faith by the other party who violates the reciprocity between
them. In the present case, private respondents validly exercised their right to rescind the contract,
because of the failure of petitioners to comply with their obligation to pay the balance of the
purchase price.

True, petitioners expressed their willingness to pay the balance of the purchase price one month
after it became due; however, this was not equivalent to actual payment. Moreover, the offer to
pay was conditioned on the performance by private respondents of additional burdens that had
not been agreed upon in the original contract. Thus, it cannot be said that the breach committed
by petitioners was merely slight or casual as would preclude the exercise of the right to rescind.

Mutual Restitution
Required in Rescission
Since the breach committed was the nonperformance of a reciprocal obligation, not a violation of the
terms and conditions of the mortgage contract, the automatic rescission and forfeiture of payment clauses
stipulated in the contract do not apply. Instead, Civil Code provisions govern, and considering such,
mutual restitution is required to bring back the parties to their original situation prior to the inception of
the contract. Accordingly, the initial payment totaling P874,150.00 advanced by petitioners should be
returned by private respondents, lest the latter unjustly enrich themselves at the expense of the former.
Rescission creates the obligation to return the object of the contract. It can be carried out only when the
one who demands rescission can return whatever he may be obliged to restore. To rescind is to declare a
contract void at its inception and to put an end to it as though it never was. It is not merely to terminate it
and release the parties from further obligations to each other, but to abrogate it from the beginning and
restore the parties to their relative positions as if no contract has been made.

3. The Court finds it no longer necessary to discuss the third issue, for the three conditions
appearing on the January 7,1987 letter of petitioners were not part of the original contract. They
had no right to demand preconditions to the fulfillment of their obligation, which had become
due.

RULING:
WHEREFORE, the assailed Decision is hereby AFFIRMED with the MODIFICATION that private
respondents are ordered to return to petitioners the amount of P874,150, which the latter paid as a
consequence of the rescinded contract, with legal interest thereon from January 8,1987, the date of
rescission. No pronouncement as to costs.

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Art. 1191. -- The power to rescind obligations is implied in reciprocal ones, in caseone of the obligors should not comply with
what is incumbent upon him. The injured party may choose between fulfillment and the rescission of theobligation, with the
payment of damages in either case. He may also seek rescissioneven after he has chosen fulfillment, if the latter should become
impossible

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