Republic of the Philippines vs. David

Under a Deed of Conditional Sale, the stipulation that the vendee “shall actually occupy and be in possession of the PROPERTY at all times” imposes two concurring conditions joined by the conjunctive “and”: actual occupancy (which cannot be constructive) and possession. Actual occupancy is distinct from possession under Article 531; possession may be constructive, but occupancy must be actual and real. A vendee’s failure to actually occupy the unit — allowing a third party to live there even as a caretaker — violates the condition of actual occupancy and supports rescission of the contract.

Pursuant to its Employees’ Housing Loan Program, the Social Security System awarded a house and lot in North Fairview, Quezon City, to Jerry V. David, an SSS employee, under a Deed of Conditional Sale. The contract contained restrictive covenants designed to ensure that low-cost housing units would be used exclusively by SSS employees and their immediate families. Among these was the requirement that the vendee and his heirs “shall actually occupy and be in possession of the PROPERTY at all times.” After an internal audit revealed widespread violations, the SSS investigated and found that David neither resided in nor occupied the unit but had allowed a certain Buenaventura Penus to live there. The SSS then sought judicial rescission of the contract and repossession of the property.

• Nature of the Transaction: Respondent Jerry V. David, an SSS employee, was awarded a house and lot at Block 18, Lot 8, SSS Housing, North Fairview, Quezon City under the SSS Employees’ Housing Loan Program. The parties executed a Deed of Conditional Sale. The purchase price of P172,978.85 was fully paid by respondent in December 1992, two months after the unit was delivered on October 23, 1992.

• Contractual Restrictions: The Deed of Conditional Sale contained restrictive covenants. Paragraph 10(a) required the vendee to make the purchase for his own exclusive use and benefit, not for another undisclosed party. Paragraph 10(b) prohibited sale, assignment, encumbrance, mortgage, lease, sublease, or any disposition within the first five years, except to the SSS or an eligible employee with the SSS’s right of first refusal. Paragraph 10(c) provided: “The VENDEE, and his heirs and/or successors, shall actually occupy and be in possession of the PROPERTY at all times.” Violation of any condition constituted a breach and subjected the vendee to contract annulment, repossession, and forfeiture of installment payments (subject to Republic Act No. 6552).

• Investigation and Alleged Violations: The SSS Internal Audit Service conducted an investigation into reports of widespread violations of housing award conditions. The audit revealed that respondent neither resided in nor occupied the housing unit and had allowed a certain Buenaventura Penus to possess and occupy the property. By letter, the SSS formally revoked, terminated, and/or rescinded the Deed of Conditional Sale. Respondent refused to vacate and surrender possession.

• Respondent’s Defense: Respondent denied the violations. He claimed that the house was uninhabitable when delivered, being near a creek and requiring renovations. He engaged his cousin, Buenaventura Penus, as a caretaker during the construction period. Later, Oden Domingo took over as caretaker in 1996. Respondent maintained that his use of caretakers satisfied the contractual requirement of possession and occupancy, and he had not sold or leased the property.

• Trial and Appellate Findings: The RTC dismissed the amended complaint, holding that SSS failed to prove that respondent purchased the property for another’s benefit or that he disposed of his rights. It credited respondent’s testimony that the unit was not habitable and found that the caretaker arrangement amounted to “possession” sufficient to satisfy the deed’s condition. The Court of Appeals affirmed, ruling that no evidence showed the caretakers possessed on their own behalf rather than on respondent’s behalf; via the caretakers, respondent was deemed to have occupied and possessed the property. The CA invoked Article 531 of the Civil Code and concluded that the property was subject to respondent’s will, which is equivalent to possession.

• Distinction Between “Actual Occupancy” and “Possession”: Petitioner maintained that the Deed required “actual physical possession at all times” — distinct from the simple possession defined in Article 531 — and that respondent’s failure to personally reside in the unit violated paragraph 10(c). The material occupation by third parties contravened the objective of restricting use and enjoyment of the units to SSS employees and their immediate families.

• Uninhabitability Defense Lacked Basis: Petitioner argued that respondent’s claim that the house was uninhabitable was contradicted by his acceptance of the unit without protest, his full payment of the purchase price in December 1992, and the fact that the alleged caretakers had lived there continuously from 1992 to 1996. Petitioner contended that respondent should have used available funds to improve the unit instead of prepaying its price, and that low-cost core units are intended to be occupied while improvements are made.

• Sufficiency of Possession Through a Caretaker: Respondent countered that his caretakers were in material occupation on his behalf, thereby satisfying the condition of possession under Article 531. No evidence showed that Penus or Domingo occupied the property on their own behalf or that respondent had sold, leased, or otherwise disposed of his rights.

• Uninhabitability Justifying Non-Occupancy: Respondent argued that the unit was not in a habitable condition when delivered, necessitating renovations and the engagement of a caretaker. He asserted that his full payment of the purchase price demonstrated good faith and that he was ready to occupy the house once renovations were completed.

• Interpretation of the Contract: Whether the phrase “actually occupy and be in possession of the PROPERTY at all times” imposes two distinct and concurring conditions — actual occupancy and possession — or is satisfied by constructive possession through a caretaker.

• Breach and Rescission: Whether respondent’s failure to personally occupy the housing unit, instead allowing third persons to live there as caretakers, breached the Deed of Conditional Sale and justified rescission.

• Interpretation of the Contract: The conjunctive “and” in paragraph 10(c) meant that the vendee was required to meet two separate, concurring conditions: actual occupancy and possession at all times. Actual occupancy is not the same as actual possession. Under Article 531, possession may be acquired by material occupation, the exercise of a right, subjection to one’s will, or legal formalities; thus, possession can be either actual or constructive. Actual occupancy, however, connotes “something real, or actually existing, as opposed to something merely possible, or to something which is presumptive or constructive”; unlike possession, occupancy can only be real or actual, not constructive. The primary intention of the parties, read from the entirety of the restrictive covenants, was to limit the use and benefit of the housing units to SSS employees and their immediate families, in line with the social justice policy of the SSS Law and the low-cost housing program. Construed in context, “actual occupancy” required respondent or his immediate family to personally live in the unit; possession through a caretaker satisfied the possession condition but failed to fulfill the distinct condition of actual occupancy.

• Breach and Rescission: Respondent’s failure to actually occupy the property, coupled with his allowing Penus and later Domingo to live there, constituted a breach of subparagraphs (a) and (c) of paragraph 10 of the Deed. His defense of uninhabitability was not supported by substantial evidence. Respondent accepted the unit without protest, paid the full price, and remained silent for years while the caretakers resided there. The evidence for the SSS — the Internal Audit Service report, which showed that 509 of 728 awardees had occupied their units, and the Interview Slip documenting third-party occupancy — contradicted respondent’s claim. Moreover, low-cost houses of this nature are core or shell units designed for immediate occupancy while improvements are undertaken. The contract, though a contract of adhesion, is valid, and respondent’s adherence signified consent; contractual obligations have the force of law and must be performed in good faith. Because the Deed of Conditional Sale was a reciprocal contract — respondent’s obligation to faithfully comply with the conditions being correlative to the SSS’s obligation to convey title upon full payment and compliance — respondent’s breach entitled the SSS to rescission under Article 1191. The Deed itself contained an express resolutory clause in paragraph 11. However, forfeiture of installment payments under paragraph 12 was inapplicable because respondent paid the purchase price in full, not in installments, placing the payment beyond the ambit of Republic Act No. 6552 (the Maceda Law). Rescission entails mutual restitution under Article 1385: respondent must return the property with any rental fruits, and petitioner must refund the full price of P172,978.85 with legal interest and the value of any substantial improvements introduced by respondent, as appraised by the vendor in accordance with the Deed.

• Distinction Between Actual Occupancy and Possession — “Actual occupancy” is different from “possession” as defined in Article 531 of the Civil Code. Possession can be actual (material occupation) or constructive (subjection to one’s will through another who recognizes the owner’s rights). Actual occupancy, however, connotes something real or actually existing as opposed to something merely possible, presumptive, or constructive; it can only be actual, not constructive. Where a contract requires a vendee to “actually occupy and be in possession,” both conditions must be satisfied independently; occupancy through a caretaker meets the possession requirement but fails to satisfy the distinct requirement of actual occupancy. (Applied to hold that respondent’s caretaker arrangement complied with possession but not with actual occupancy, breaching the deed.)

• Interpretation of the Conjunctive “And” in Contracts — The word “and” is not surplusage and must be given its ordinary meaning as connoting a conjunction, joinder, or union. It binds together and relates to one another the terms it connects, making the conditions cumulative. In construing a contract, the intention of the parties is ascertained from all the words used in context; stipulations are to be interpreted together, attributing to doubtful ones the sense that results from all taken jointly. (Applied to construe paragraph 10(c) as imposing two separate obligations — actual occupancy and possession — both of which had to be fulfilled.)

• Rescission Under Article 1191 in a Conditional Sale — In a contract of conditional sale (contract to sell), full payment of the purchase price and faithful compliance with all stipulated conditions are reciprocal obligations. A breach of any such condition gives the vendor the right to seek rescission (resolution) under Article 1191 of the Civil Code. The remedy is resolution based on breach of a reciprocal obligation, not rescission under Article 1381. The parties may also stipulate an express resolutory clause allowing annulment and repossession upon breach. (Applied to cancel the Deed of Conditional Sale upon respondent’s failure to actually occupy the unit.)

• Mutual Restitution Upon Rescission — Article 1385 of the Civil Code mandates that rescission creates the obligation to return the things that were the object of the contract, together with their fruits, and the price with its interest. Rescission aims to restore the parties to their relative positions as if no contract had been made. (Applied to order respondent to vacate and return the property and petitioner to refund the full purchase price with legal interest and the value of improvements.)

• Enforceability of Contracts of Adhesion — A contract of adhesion — where one party imposes a ready-made form on the other — is not invalid per se. The adhering party is free to reject the contract entirely; acceptance signifies consent. Once entered into, the terms have the force of law between the parties and must be complied with in good faith. (Applied to reject respondent’s attack on the validity of the Deed as a one-sided agreement.)

• “Plainly, the primary intention behind the above-quoted stipulations is to restrict the sale, the use and the benefit of the housing units to SSS employees and their immediate families only. This objective is in line with that of the SSS housing loan program — to aid its employees in acquiring their own dwelling units at a low cost.” — Encapsulates the purpose of the restrictive covenants and the social justice policy informing the contract.

• “The use of the conjunctive and in subparagraph (c) is not by any chance a surplusage. Neither is it meant to be without any legal signification. Its use is confirmatory of the restrictive intent that the houses provided by petitioner should be for the exclusive use and benefit of the SSS employee-beneficiary.” — Articulates the rule that “and” connotes cumulative conditions and must be given effect.

• “Actual occupancy connotes ‘something real, or actually existing, as opposed to something merely possible, or to something which is presumptive or constructive.’ Unlike possession, it can only be actual or real, not constructive.” — The core definition that separates “actual occupancy” from the broader concept of possession under Article 531.

• “To rescind is to declare a contract void at its inception and to put an end to it as though it never was.” — States the effect of resolution under Article 1191, reinforcing the requirement of mutual restitution.

• Republic of the Philippines v. CA , 390 Phil. 1041 (2000) — Cited for the definition of actual possession as the manifestation of acts of dominion over property; used to distinguish possession from actual occupancy.

• Manacop v. CA , 342 Phil. 735 (1997) — Relied upon for the definition of “actual occupancy” as something real or actually existing, as opposed to constructive or presumptive.

• Kintanar v. Bell Telecommunication Philippines, Inc. , 271 SCRA 790 (1997) — Cited for the rule that “and” connotes a binding together and relating to one another; supports the interpretation of the conjunctive “and” as imposing multiple conditions.

• Ong v. CA , 369 Phil. 243 (1999) — Referred to for the doctrine that rescission under Article 1191 is a principal action for resolution based on breach of a reciprocal obligation.

• Velarde v. CA , 413 Phil. 360 (2001) — Cited for the principle that rescission creates the obligation of mutual restitution, restoring the parties to their original positions as though no contract existed.

• Article 531, Civil Code — Defines how possession is acquired (material occupation, exercise of a right, subjection to one’s will, or legal formalities). The Court explained that under this provision possession may be actual or constructive, whereas “actual occupancy” is limited to real, physical occupation.

• Article 1306, Civil Code — Allows contracting parties to establish stipulations, clauses, terms and conditions not contrary to law, morals, good customs, public order, or public policy. The restrictive covenants in the Deed were held valid under this article.

• Article 1374, Civil Code — Mandates that the various stipulations of a contract shall be interpreted together, attributing to doubtful ones the sense that results from all taken jointly. Applied in construing subparagraph (c) in harmony with subparagraphs (a) and (b).

• Article 1191, Civil Code — Provides for the power to rescind reciprocal obligations in case of non-compliance by one obligor. Applied as the legal basis for the SSS’s action for resolution.

• Article 1385, Civil Code — Prescribes mutual restitution upon rescission: the return of the objects of the contract with their fruits, and the price with its interest. Governed the terms of restitution ordered.

• Republic Act No. 6552 (Maceda Law) — Mentioned in the contract’s forfeiture clause but held inapplicable because respondent paid the purchase price in full, not in installments.

Corona and Carpio-Morales, JJ., concurred. Sandoval-Gutierrez, J., was on leave.