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EQUATORIAL REALTY DEVELOPMENT v. MAYFAIR THEATER

FACTS:

Carmelo & Bauermann, Inc. (Carmelo) owned a parcel of land with two buildings in Manila which were leased to Mayfair Theater Inc. (Mayfair) for movie theaters. Mayfair had a right of first refusal to purchase the properties. However, Carmelo sold the properties to Equatorial Realty Development, Inc. (Equatorial) without offering them to Mayfair. Mayfair filed a complaint seeking to annul the sale and requested specific performance and damages. The trial court initially ruled in favor of Carmelo and Equatorial, but on appeal, the Court of Appeals reversed the decision and ordered Carmelo to return the properties to Equatorial and allowed Mayfair to buy the properties for the original sale price. Mayfair executed the judgment and deposited the purchase price, minus withholding tax, with the court. However, the Court of Appeals, upon Equatorial's petition, ruled that Mayfair had no right to deduct the withholding tax and ordered Mayfair to deposit the full purchase price with the court. Equatorial questioned this ruling before the Supreme Court.

Equatorial Realty Development, Inc. also filed an action for the collection of a sum of money against Mayfair Theater, Inc. claiming payment of rentals or reasonable compensation for Mayfair's use of the subject premises after the lease contracts had expired. The trial court dismissed the complaint, but Equatorial appealed to the Supreme Court, arguing that it was entitled to the back rentals from Mayfair. The Supreme Court held that no right of ownership was transferred from Carmelo to Equatorial due to a failure to deliver the property to the buyer. Rent is considered a civil fruit of ownership and belongs to the owner of the property. Therefore, the rentals that accrued from the time of the sale to Carmelo should belong to Carmelo as the owner of the property during that period.

ISSUES:

  1. Substantive issue: Is Equatorial entitled to back rentals?

  2. Procedural issue: Was the dismissal of Civil Case No. 97-85141 based on the grounds raised by respondent in its Motion to Dismiss and covered by Rule 16 of the Rules of Court?

  3. Does Equatorial, as the buyer, have the right to the fruits of the property sold even after the sale has been rescinded?

  4. Do the rental payments made by Mayfair to Equatorial during the litigation constitute actual delivery or recognition of Equatorial's title?

  5. Whether petitioner is entitled to reasonable compensation for respondent's use and occupation of the subject property from the time the lease expired.

  6. Whether the trial court deviated from the accepted and usual course of judicial proceedings by dismissing the case on a ground not raised in respondent's Motion to Dismiss.

RULING:

  1. The Petition is not meritorious.

  2. No. Rescission creates the obligation to return the things which were the object of the contract, together with their fruits. Equatorial is obligated to return not only the land and building sold but also the rental payments received.

  3. No. The rental payments made by Mayfair to Equatorial should not be interpreted as actual delivery or recognition of Equatorial's title. Mayfair paid the rentals to avoid imminent eviction while awaiting the outcome of the case.

  4. Petitioner is not entitled to reasonable compensation for respondent's use and occupation of the subject property from the time the lease expired. If petitioner suffered any loss, it must bear it in silence due to its own bad faith.

  5. The trial court did not deviate from the accepted and usual course of judicial proceedings by dismissing the case on a ground not raised in respondent's Motion to Dismiss. The cause of action of petitioner was barred by a prior judgment of the court.

PRINCIPLES:

  • Rent is a civil fruit that belongs to the owner of the property producing it by right of accession.

  • Ownership of the thing sold is transferred by tradition or delivery, and not by contract alone.

  • Delivery may be either actual or constructive, but both forms of delivery contemplate the absolute giving up of control and custody of the property by the vendor, and the assumption of the same by the vendee.

  • The execution of a public instrument of sale is equivalent to delivery of the thing sold, but this presumption of delivery can be negated if there is an impediment preventing the passing of the property into the hands of the vendee.

  • Ownership is acquired, not by mere agreement, but by tradition or delivery.

  • A rescissionable contract is valid until rescinded.

  • Rental payments made during litigation do not constitute actual delivery or recognition of ownership rights.

  • Neither party is entitled to any consideration of equity if both parties took unconscientious advantage (equity). Rentals cannot be granted without mocking the en banc Decision of the court.

  • A final judgment on the merits rendered by a court of competent jurisdiction is conclusive as to the rights of the parties and their privies and constitutes an absolute bar to subsequent actions involving the same claim, demand, or cause of action (res judicata). It frees the parties from undergoing unnecessary suits and repetitive trials, prevents the clogging of court dockets, and stabilizes rights and promotes the rule of law.