FIRST REFUSAL

Tess leased her 1,500 sq. m. lot in Antipolo City to Ruth for a period of three (3) years, from
January 2010 to February 2013. On March 19, 2011, Tess sent a letter to Ruth, part of which reads
as follows:
"I am offering you to buy the property you are presently leasing at P5,000.00 per sq. m. or for a
total of P7,500,000.00. You can pay the contract price by installment for two (2) years without
interest. I will give you a period of one (1) year from receipt of this letter to decide whether you
will buy the property."
After the expiration of the lease contract, Tess sold the property to her niece for a total
consideration of P4 million. Ruth filed a complaint for the annulment of the sale, reconveyance
and damages against Tess and her niece. Ruth alleged that the sale of the leased property
violated her right to buy under the principle of right of first refusal. Is the allegation of Ruth
tenable? (4%)

SUGGESTED ANSWER:
No, the allegation of Ruth is not tenable. The letter written by Tess did not grant a right of first
refusal to Ruth. At most, it is to be construed as an option contract whereby Ruth was given the
right to buy or not to buy the leased property. An option is itself not a purchase but it merely
secures the privilege to buy. However, the option is not valid because it was not supported by a
cause or consideration distinct from the price of the property. (Article 1479) Also, Ruth does not
appear to have exercised her option before the offer was withdrawn by the subsequent sale of
the property to the niece of Tess.

APPLICATION OF MACEDA LAW

Spouses Macario and Bonifacia Dakila entered into a contract to sell with Honorio Cruz over a
parcel of industrial land in Valenzuela, Bulacan for a price of Three Million Five Hundred Thousand
Pesos (P3,500,000.00). The spouses would give a downpayment of Five Hundred Thousand Pesos
(P500,000.00) upon the signing of the contract, while the balance would be paid for the next
three (3) consecutive months in the amount of One Million Pesos (P1,000,000.00) per month.
The spouses paid the first two (2) installments but not the last installment. After one (1) year, the
spouses offered to pay the unpaid balance which Honorio refused to accept. The spouses filed a
complaint for specific performance against Honorio invoking the application of the Maceda Law.
If you are the judge, how will you decide the case? (4%)

SUGGESTED ANSWER:
I will rule in favor of Honorio. The invocation of the Maceda Law is misplaced. The law applies
only to sale or financing of realty on installment payments including residential units or
residential condominium apartments and does not apply to sales of industrial units or industrial
lands like in the case presented. Another reason why the Maceda law will not apply is that, the
sale in the case at bar is not the sale on installment as contemplated by the law. The sale on
installment covered by the Maceda Law is one where the price is paid or amortized over a certain
period in equal installments. The sale to the Spouses Dakila is not a sale on installment but more
of a straight sale where a down payment is to be made and the balance to be paid in a relatively
short period of three months.
CONSIGNATION
Dorotea leased portions of her 2,000 sq. m. lot to Monet, Kathy, Celia, and Ruth for five (5) years.
Two (2) years before the expiration of the lease contract, Dorotea sold the property to PM Realty
and Development Corporation. The following month, Dorotea and PM Realty stopped accepting
rental payments from all the lessees because they wanted to terminate the lease contracts.
Due to the refusal of Dorotea to accept rental payments, the lessees , Ruth, et al., filed a
complaint for consignation of the rentals before the Regional Trial Court (RTC) of Manila without
notifying Dorotea. Is the consignation valid? (4%)

SUGGESTED ANSWER:
No, the consignation is not valid. For consignation of the thing or sum due to be proper, there
must be prior notice to the creditor that the debtor is going to consign the payment in court. This
notice is intended to give the creditor the opportunity to accept payment and thus avoid liability
for costs in case it is found that the act of consignation was properly made. Even on the
assumption that Dorotea was no longer the creditor as she had already sold the property to DM
Realty, the facts do not state that the realty corporation was also given notice before filing the
case for consignation.

PLEDGE
Donna pledged a set of diamond ring and earrings to Jane for P200,000.00 She was made to sign
an agreement that if she cannot pay her debt within six months, Jane could immediately
appropriate the jewelry for herself. After six months, Donna failed to pay. Jane then displayed
the earrings and ring set in her jewelry shop located in a mall. A buyer, Juana, bought the jewelry
set for P300,000.00.

a) Was the agreement which Donna signed with Jane valid? Explain with legal basis. (2%)
b) Can Donna redeem the jewelry set from Juana by paying the amount she owed Jane to Juana?
c) Give an example of a pledge created by operation of law. (2%)

SUGGESTED ANSWER:
a) appropriate the jewelry upon default of Donna is considered pactum commissorium and
it is considered void by law. ( Article 2088)

b) No, Donna cannot redeem it from Juana because the pledge contract is between her and
Jane. Juana is not a party to the pledge contract. (Article 1311, Civil Code)

c) One example of a pledge created by operation of law is the right of the depositary to
retain the thing deposited until the depositor shall have paid him whatever may be due
to the depositary by reason of the deposit. (1994) Another is the right of the agent to
retain the thing which is the object of the agency until the principal reimburses him the
expenses incurred in the execution of the agency. (Article 1914, Civil Code)

GUARANTY
A. Mr. and Mrs. Roman and Mr. and Mrs. Cruz filed an application for registration of a parcel of
land which after due proceedings was granted by the RTC acting registration as land court.
However, before the decree of registration could be issued, the spouses Roman and the spouses
Cruz sold the lot to Juan. In the notarized deed of sale, the sellers expressly undertook to submit
the deed of sale to the land registration court so that the title to the property would be directly
issued in Juan's name. Is such a stipulation valid? (2%)

SUGGESTED ANSWER
a) Yes, because when one who is not the owner of the property sells or alienates it and later
the seller or grantor acquires title, such title passes by operation of law to the buyer or
grantee. (Article 1434, Civil Code)

MORTGAGE
Ellen entrusted her title over the lot where she is residing to Patrick, her nephew, for safekeeping
because of her poor eyesight. Patrick, a gambler, prepared a Special Power of Attorney
empowering him to mortgage the lot. Ellen's signature was forged. With the help of Julia who
represented herself as Ellen, Mega Bank granted a loan to Patrick secured by a mortgage on
Ellen's lot. Due to non-payment, Mega Bank foreclosed the mortgage and was declared the
highest bidder. Title was later registered in the name of the bank. When Ellen was notified that
she should vacate the premises, she filed a complaint to nullify the loan with mortgage, the
auction sale and the title of Mega Bank on the ground that the bank is not a mortgagee in good
faith. Decide the case with reasons. (5%)

SUGGESTED ANSWER
I will decide in favor of Ellen. Banks, their business being impressed with public interest,
are expected to exercise more care and prudence than private individuals in their dealings, even
those involving registered lands. The highest degree of diligence is expected, and high standards
of integrity and performance are even required of it.

A mortgagee — usually, can rely on what appears on the certificate of title presented by the
mortgagor and an innocent mortgagee is not expected to conduct an exhaustive investigation on
the history of the mortgagor's title. This rule is, however, strictly applied against banking
institutions. Mega Bank cannot be considered a mortgagee in good faith as it failed to inspect the
disputed property when offered to it as security for the loan, which could have led it to discover
the forged Special Power of Attorney.

REAL ESTATE MORTGAGE

On March 13, 2008, Ariel entered into a Deed of Absolute Sale (DAS) with Noel where the former
sold his titled lot in Quezon City with an area of three hundred (300) square meters to the latter
for the price of P300, 000.00. The prevailing market value of the lot was P3, 000.00 per square
meter. On March 20, 2008, they executed another "Agreement to Buy Back/Redeem Property"
where Ariel was given an option to repurchase the property on or before March 20, 2010 for the
same price. Ariel, however, remained in actual possession of the lot. Since Noel did not pay the
taxes, Ariel paid the real property taxes to avoid a delinquency sale. On March 21, 2010, Ariel
sent a letter to Noel, attaching thereto a manager's check for P300, 000.00 manifesting that he
is redeeming the property. Noel rejected the redemption claiming that the DAS was a true and
valid sale representing the true intent of the parties. Ariel filed a suit for the nullification of the
DAS or the reformation of said agreement to that of a Loan with Real Estate Mortgage. He claims
the DAS and the redemption agreement constitute an equitable mortgage. Noel however claims
it is a valid sale with pacto de retro and Ariel clearly failed to redeem the property.
As the RTC judge, decide the case with reasons. (5%)

SUGGESTED ANSWER:
I will decide in favor of Ariel and allow the reformation of the agreement. The DAS and the
redemption agreement constitute an equitable mortgage and Ariel may ask for the reformation
of the agreement to that of a Loan with Real Estate Mortgage as allowed by Article 1605 of the
Civil Code. The circumstances clearly show that that the agreement is an equitable mortgage,
such as the: a). price of the lot was inadequate since it was only sold at P300, 000 when the
prevailing market value of such was P900, 000; b). the vendor, Ariel, remained in actual
possession of the property after the purported sale; and c). Ariel was the one who paid the real
property taxes. Under the circumstances, a presumption arises under Article 1602 C.C. that what
was really executed was an equitable mortgage. Moreover, Article 1603 C.C. provides that in case
of doubt, a contract purporting to be a sale with right to repurchase shall be construed as an
equitable mortgage.

ANTICHRESIS
Distinguish antichresis from usufruct. (3%) SUGGESTED ANSWER:
They are distinguished as follows:
(1) Antichresis is always a contract while usufruct need not arise from a contract because it
may also be constituted by law or by other acts inter vivos, such as donation, or in a last
will and testament, or by prescription.
(2) The subject matter of antichresis is always a real property while the subject matter of
usufruct may either be real property or personal property.
(3) Antichresis is an accessory contract or contract of security while usufruct is a real right.
(4) While in both, the fruits do not pertain to the owner, the usufructuary is entitled to enjoy
the fruits while the antichretic creditor has the obligation to apply the fruits to the
payment of the interest, if owing, and therefatre to the principal of the credit.

CONTINUING GUARANTY
Kevin signed a loan agreement with ABC Bank. To secure payment, Kevin requested his girlfriend
Rosella to execute a document entitled “Continuing Guaranty Agreement” whereby she expressly
agreed to be solidarily liable for the obligation of Kevin.
Can ABC Bank proceed directly against Rosella upon Kevin’s default even without proceeding
against Kevin first? Explain your answer. (3%)

SUGGESTED ANSWER:
Yes, ABC Bank may proceed directly against Rosella upon Kevin’s default even without
proceeding against Kevin first because Rosella is a surety after she bound herself solidarily with
the principal debtor.

Notwithstanding the use of the word “guaranty” circumstances may be shown which convert the
contract into one of suretyship. Under the Civil Code, when the guarantor binds himself solidarily
with the principal debtor, the contract becomes one of suretyship and not of guaranty proper. In
a contract of suretyship, the liability of the surety is direct, primary and absolute. He is directly
and equally bound with the principal debtor. Such being the case, a creditor can go directly
against the surety although the principal debtor is solvent and is able to pay or no prior demand
is made on the principal debtor. [Basis: Article 2047, Civil Code; Ong v. PCIB, 448 SCRA 705;
discussed in pp. 810-812, Vol. 2, Rabuya’s Civil Law Reviewer]

In this case, since Rosella is a surety, ABC Bank can go directly against her even without
proceeding against the principal debtor because the surety insures the debt, regardless of
whether or not the principal debtor is financially capable to fulfil his obligation.