Lalicon vs. National Housing Authority

An action to annul a sale of a socialized housing lot for breach of a contractual prohibition against alienation without prior written consent is an action for resolution under Article 1191 of the Civil Code, not a subsidiary action for rescission under Article 1381. Because resolution rests on a breach of a reciprocal obligation and operates as a principal action, the applicable prescriptive period is the ten‑year period for written contracts under Article 1144, not the four‑year period under Article 1389.

On November 25, 1980, the National Housing Authority (NHA) executed a Deed of Sale with Mortgage over a Quezon City lot in favor of spouses Isidro and Flaviana Alfaro. The deed contained a clause prohibiting the Alfaros from alienating the lot within five years from the date of release of the mortgage without the NHA’s prior written consent. The restriction was annotated on the transfer certificate of title issued to the Alfaros. The prohibition was designed to ensure that the government’s objective of providing cheap housing for the homeless would not be defeated by premature resale. Despite that restriction, the Alfaros sold the lot to their son Victor on November 30, 1990 — before the mortgage had been released — and Victor later transferred it to his illegitimate daughters, petitioners Vicelet and Vicelen Lalicon, and eventually to a third party, Marcela Lao Chua.

• The Original Sale and Restriction: On November 25, 1980, the NHA sold a Quezon City lot to spouses Isidro and Flaviana Alfaro under a Deed of Sale with Mortgage. Paragraph 5 of the deed provided that, except by hereditary succession, the lot could not be alienated, transferred, or encumbered within five years from the date of release of the mortgage without the NHA’s prior written consent. Transfer Certificate of Title (TCT) 277321 was issued in the Alfaros’ name, and the restriction was annotated on the title on April 14, 1981.
• The Prohibited Transfer to Victor Alfaro: On November 30, 1990, while the mortgage still subsisted, the Alfaros sold the lot to their son Victor Alfaro. Victor cohabited with Cecilia, who had two daughters with him — petitioners Vicelet and Vicelen Lalicon. Cecilia had a house built on the property and paid the amortizations. The mortgage was released by the NHA on March 21, 1991. Six days later, on March 27, 1991, Victor transferred ownership to his two illegitimate daughters.
• Registration and Subsequent Transactions: The November 30, 1990 sale was registered only on October 4, 1995, resulting in the cancellation of the Alfaros’ title and the issuance of TCT 140646 in Victor’s name. On December 14, 1995, Victor mortgaged the lot to Marcela Lao Chua and three others. On February 14, 1997, Victor sold the property to Chua, one of the mortgagees, leading to the cancellation of TCT 140646 and the issuance of TCT N‑172342 in Chua’s name.
• Discovery and Suit by NHA: The NHA learned of the forbidden sale on February 18, 1992. On April 10, 1998, it filed a complaint for annulment of the 1980 sale to the Alfaros, the 1990 sale to Victor, and all subsequent transfers, alleging violation of the five‑year restriction. The Lalicons intervened.

• Interpretation of the Restriction: Petitioners argued that the Alfaros did not violate the five‑year prohibition because the clause barred a transfer within five years from the release of the mortgage, not a transfer made before the release. Since the Alfaros sold the lot on November 30, 1990, before the mortgage was released on March 21, 1991, the sale fell outside the prohibition.
• Refusal of Consent and Substantiality of Breach: Petitioners claimed that they had written the NHA requesting consent to the resale and that the NHA unreasonably ignored those letters. They further contended that the absence of prior written consent was not such a substantial breach as to warrant rescission.
• Prescription: Invoking the trial court’s ruling, petitioners maintained that the NHA’s action was for rescission under Article 1381 of the Civil Code, which must be commenced within four years under Article 1389. Because more than four years had elapsed, the action was barred.
• Good Faith of Transferees: Petitioners asserted that they and Chua were buyers in good faith, and their rights could not be affected by a rescission.

• Nature of the Action and Prescription: The NHA contended that its action was not one for subsidiary rescission under Article 1381 but for resolution under Article 1191, because it was based on a breach of a reciprocal obligation. The applicable prescriptive period was therefore the ten‑year period for written contracts under Article 1144, and the complaint filed in 1998 was well within that period.
• Violation of the Restriction: The NHA maintained that the Alfaros’ sale to Victor was a clear contravention of the contractual prohibition, as the five‑year period merely fixed the duration of the government’s hold on the property, and any alienation without consent — whether before or after release — was forbidden.
• Constructive Notice and Lack of Good Faith: The NHA argued that the annotation of the restriction on the certificate of title constituted notice to the whole world, negating any claim of good faith by all subsequent transferees.

• Violation of Restriction: Whether the Alfaros violated the five‑year prohibition against resale without the NHA’s prior written consent.
• Prescription: Whether the NHA’s right to rescind had prescribed.
• Good Faith of Transferees: Whether the subsequent buyers acted in good faith such that their rights cannot be affected by the rescission.

• Violation of Restriction: The Alfaros clearly violated the contractual prohibition. The restriction clause was a condition of the sale, not merely of the mortgage. The five‑year period, counted from the release of the mortgage, measured the length of time the government deemed necessary to ensure that its socialized housing objective would not be undermined by early resale. The argument that a sale before release was not covered was an overly clever reading that would defeat the purpose of the condition. The NHA had no obligation to grant an exemption, and resale without its consent constituted a substantial breach. The essence of the government’s socialized housing program is to preserve the beneficiary’s ownership for a reasonable period, in this case at least five years from the time the property is acquired free from encumbrance.
• Prescription: The action was for resolution under Article 1191, not for rescission under Article 1381. Resolution under Article 1191 applies to reciprocal obligations, where a breach by one party constitutes an implied resolutory condition entitling the other to seek rescission or specific performance with damages. It is a principal action. Rescission under Article 1381, on the other hand, is a subsidiary action not based on a party’s breach but on other specified defects. The four‑year prescriptive period in Article 1389 governs only rescission under Article 1381. The NHA’s action, grounded on breach, was subject to the ten‑year prescriptive period for written contracts under Article 1144. The right of action accrued on February 18, 1992, when the NHA learned of the forbidden sale. The complaint filed on April 10, 1998 was well within the ten‑year period.
• Good Faith of Transferees: The Lalicons and Chua were not buyers in good faith. The five‑year prohibition without the NHA’s prior written consent was annotated on the certificate of title, giving constructive notice to the whole world. The Lalicons knew, or were charged with knowledge, that the Alfaros’ sale to Victor before the release of the mortgage violated that restriction. Chua, having taken a mortgage from Victor in 1995 — still within the prohibited period — was likewise charged with notice that Victor had no right to encumber the property, since his acquisition from the Alfaros was defective. Her subsequent purchase of the property after the five‑year period expired did not cure the notice of the illegality of Victor’s title. Mutual restitution being required in resolution under Article 1191, the NHA was ordered to return the amortizations and the value of improvements, with interest at six percent per annum from finality of judgment. The question of who between the Lalicons and Chua had the better right to receive the reimbursement was not reached, as it had not been raised as an issue and the CA’s order of restitution in favor of the Lalicons had become final.

• Resolution under Article 1191 vs. Rescission under Article 1381 — Resolution under Article 1191 is a principal action grounded on a breach of a reciprocal obligation, where the breach operates as an implied resolutory condition giving the injured party the option to demand either rescission (resolution) or specific performance, with damages in either case. Rescission under Article 1381 is a subsidiary action available for contracts afflicted with lesion, fraud, or other specified defects, and is not based on a party’s non‑performance. The four‑year prescriptive period in Article 1389 applies only to rescission under Article 1381; an action for resolution under Article 1191 is governed by the general ten‑year prescriptive period for written contracts under Article 1144. (Applied to classify the NHA’s action as one for resolution, thereby saving it from prescription.)
• Mutual Restitution in Resolution — When a contract is resolved under Article 1191, the parties must restore to each other what they have received. (Applied to require the NHA to return amortizations and the value of improvements to the party who paid them.)
• Constructive Notice from Annotations on Title — Purchasers of registered land are charged with notice of all annotations on the certificate of title. An annotation of a restriction against alienation without consent defeats a claim of good faith by subsequent transferees. (Applied to hold that the Lalicons and Chua could not be considered buyers in good faith.)

• “But an action for rescission can proceed from either Article 1191 or Article 1381. It has been held that Article 1191 speaks of rescission in reciprocal obligations within the context of Article 1124 of the Old Civil Code which uses the term ‘resolution.’ Resolution applies only to reciprocal obligations such that a breach on the part of one party constitutes an implied resolutory condition which entitles the other party to rescission. Resolution grants the injured party the option to pursue, as principal actions, either a rescission or specific performance of the obligation, with payment of damages in either case. Rescission under Article 1381, on the other hand, was taken from Article 1291 of the Old Civil Code, which is a subsidiary action, not based on a party’s breach of obligation. The four‑year prescriptive period provided in Article 1389 applies to rescissions under Article 1381.” — This passage articulates the doctrinal distinction between resolution and rescission and determines the applicable prescriptive period.

• Congregation of the Religious of the Virgin Mary v. Orola, G.R. No. 169790, April 30, 2008, 553 SCRA 578, 585 — Relied upon for the distinction between resolution under Article 1191 and rescission under Article 1381, and for the rule that the four‑year prescriptive period under Article 1389 applies only to the latter.
• Laperal v. Solid Homes, Inc., 499 Phil. 367, 378 (2005) — Cited for the requirement of mutual restitution in cases of resolution under Article 1191.

• Article 1191, New Civil Code — The provision on resolution in reciprocal obligations. Applied as the basis of the NHA’s action for breach of the five‑year restriction, giving the NHA the option to seek annulment of the subsequent sales.
• Articles 1381 and 1389, New Civil Code — Articles governing subsidiary rescission and its four‑year prescriptive period. Distinguished and held inapplicable because the action was for resolution, not subsidiary rescission.
• Article 1144, New Civil Code — The ten‑year prescriptive period for actions upon a written contract. Applied to hold that the NHA’s action was timely filed.
• Paragraph 5 of the Deed of Sale with Mortgage — The contractual stipulation prohibiting alienation within five years from release of the mortgage without NHA’s prior written consent. Construed as a condition of the sale whose breach gave rise to the right of resolution.

Associate Justices Antonio T. Carpio, Presbitero J. Velasco, Jr., Jose Catral Mendoza, and Maria Lourdes P. A. Sereno concurred.