AUSL PRE-BAR

REVIEW
CIVIL LAW: SPECIAL CONTRACTS
Atty. Nico B. Valderrama, CPA, MPM, LLM

SPECIAL CONTRACTS
SALES
TRUSTS
AGENCY
COMPROMISE
LOAN
DEPOSIT
LEASE

1
SALES

SALES
1. General provisions
2. Parties
3. Obligations of the vendor
4. Obligations of the vendee
5. Transfer of ownership
6. Risk of loss
7. Documents of title
8. Warranties
9. Breach of contract
10. Performance of contract
11. Extinguishment

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General provisions; Definition
• Sales: a contract where one party (seller or vendor) obligates
himself to transfer the ownership of and to deliver a determinate
thing, while the other party (buyer or vendee) obligates himself
to pay for said thing a price certain in money or its equivalent

Note: Sale by itself is not a mode of acquiring ownership. It

merely causes certain obligations to arise. Delivery is the
operative mode that transfers ownership.

General provisions; Nature

• Consensual contract which means that the sale is perfected by mere
consent or is perfected at the moment there is a meeting of minds
(consent) upon the thing which is the object of the contract and upon
the price
• Bilateral contract which creates reciprocal obligations
• Not a mode of acquisition or transmission of ownership but merely a
title (contract of sale)
• Nominate and principal contract
• Generally, commutative and onerous
• Aleatory – sale of hope where there is no sense of equivalence in the value of
prestation

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General provisions; Distinctions
Attributes Contract of Sale Contract to Sell
Payment in full of the price is
Non-payment of the price is a
Payment of the Price a positive suspensive
resolutory condition
condition
Ownership is retained by the
Title over the property passes seller, regardless of delivery
Transfer of Title
to the buyer upon delivery and is not to pass until full
payment of the price
Since the seller retains
After delivery has been
ownership, despite delivery,
made, the seller has lost
Effect of Delivery to Seller’s he is enforcing and not
ownership and cannot
Remedy rescinding the contract if he
recover it unless the contract
seeks to oust the buyer for
is resolved or rescinded
failure to pay

General provisions; Essential

requisites
1) Consent or meeting of minds
2) Determinate subject matter
3) Price certain in money or its equivalent

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General provisions; Distinctions
Attributes Sale Donation
Nature as to Prestation Onerous Gratuitous or onerous
Nature as to Perfection Consensual contract Formal contract
Governed by law on
Governing Law Governed by law on sales
donations

General provisions; Distinctions

Attributes Sale Barter
Consideration Giving of money as payment giving of a thing
Governing Law Governed by law on sales
If consideration consists
partly in money and partly Look at manifest intention
by thing
value of thing is equal or less If intention is not clear: value
If intention is not clear than amount of the money: of thing is more than amount
sale of money: barter

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General provisions; Distinctions
Attributes Sale Contract for Piece of Work
It would have existed and would
Existence of It is not in existence and would
have been the subject of sale to
Thing never have existed but for the order
some other person, even if the
Transferred of the party desiring to acquire it
order had not been given
The primary objective of the
contract is a sale of the
manufactured item; it is a sale of The services dominate the contract
Object of the
goods even though the item is even though there is a sale of
Contract
manufactured by labor furnished by goods involved
the seller and upon previous order
of the customer
Applicability of
Applicable Not within the Statute of Frauds
Statute of Frauds

General provisions; Distinctions

Attributes Sale Dation in Payment
As to Credit No pre-existing credit Pre-existing credit
As to Obligation Obligations are created Obligations are extinguished
Debtor: extinguishment of the debt
As to Seller: price
Creditor: acquisition of the object
Consideration Buyer: acquisition of the object
offered in lieu of the original credit
As to
Greater freedom in determining Less freedom in determining the
Determination of
the price price
Price
The payment is received by the
As to Payment of
Buyer still has to pay the price debtor before the contract is
Price
perfected

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General provisions; Subject matter
• Requisites of a valid subject matter:
• Licit
• Existence
• Determinate or at least Determinable
• Right of vendor to transfer ownership
• Rights: must be transmissible

General provisions; Stages

1) Generation or negotiation
2) Perfection: meeting of the minds
3) Consummation: when the object is delivered and the price is paid

Policitacion: an unaccepted unilateral promise to buy or sell; this produces

no juridical effect and creates no legal bond

Option Contract: a contract granting privilege in one person for which he

has paid a consideration giving him only the right to buy certain
merchandise at anytime within the agreed period at a fixed price

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General provisions; Price
sum stipulated as equivalent of the thing sold and also every
incident taken into consideration for the fixing of the price, put to
the debit of the vendee and agreed to by him

Requisites for validity:

1) Real
2) In money or its equivalent
3) Certain or ascertainable
4) In some cases, must not be grossly inferior to the value of the
thing sold

General provisions; Price

How price is determined:
1) Fixed and agreed upon by the parties
2) With reference to another thing certain
3) Left to the judgment of a specified person or persons even before
such determination
4) In cases provided in Article 1472: The price of securities, grain,
liquids, and other things shall also be considered certain, when the
price fixed is that which the thing sold would have on a definite
day, or in a particular exchange or market, or when an amount is
fixed above or below the price on such day, or in such exchange or
market, provided said amount be certain.

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General provisions; Price
• Rule on inadequacy of price: Mere inadequacy of price
does not affect the validity of the sale.
• Exceptions:
1) When there is fraud, mistake or undue influence
indicative of a defect in consent is present
2) When it shows that the parties really intended a
donation or some other act or contract
3) Judicial sale, where the inadequacy is shocking to
the conscience of man and there is showing that in
event of resale, a better price can be obtained

General provisions; Price

Effect of failure to determine the price:
• Where contract is executory: The contract is inefficacious.
• Where the thing has been delivered to and appropriated
by the buyer: The buyer must pay a reasonable price
therefor.

Manner of payment: Manner of payment must be agreed

upon. (Marnelego vs. Banco Filipino)

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Parties; Capacity
• General Rule: All persons who are authorized to obligate themselves may enter into a contract of sale.
• Exceptions:
• Absolute incapacity (minors, demented persons, imbeciles, deaf and dumb, prodigals, civil interdictees)
• Relative incapacity
• Husband and wife: Generally, a sale by one spouse to another is void.
• Exceptions:
• Regime of separation of property governs them.
• A judicial separation of property has been decreed.
• Incapacity by reason of relation to property: The following cannot acquire property by purchase, even
at a public auction, either in person or through the mediation of another:
• Guardian, with respect to the property of his or her ward
• Agents, with respect to the property whose administration or sale may have been entrusted to
them, unless the consent of the principal has been given
• Executor or administrator, with respect to the property of the estate under administration
• Public officers and employees, with respect to the properties of the government, its political
subdivisions or GOCCs, that are entrusted to them
• Judges, justices, prosecuting attorneys, clerks of courts etc., with respect to the property in
custodia legis
• Any other person specially disqualified by law

Parties; Minor or incapacitated

Article 1489: Where necessaries are those sold and
delivered to a minor or other person without capacity to act,
he must pay a reasonable price therefor.

Necessaries: everything that is indispensable for

sustenance, dwelling, clothing and medical attendance,
according to the social position of the family.

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Parties; Non-owner
• General Rule on sale by non-owner: Buyer acquires no title even if in
good faith and for value under the maxim nemo dat quad non habet
(nobody can dispose of that which does not belong to him).
• Exceptions:
• Owner is estopped or precluded by his conduct.
• Sale made by the registered or apparent owner in accordance with registration laws.
• Sales sanctioned by judicial or statutory authority.
• Purchases in a merchant’s store, fairs or markets; the thing must be on display to
make it part of the goods for sale to bar recovery by the true owner.
• When a person who is not the owner sells and delivers a thing and subsequently
acquires title thereto.
• When the seller has a voidable title which has not been avoided at the time of the
sale.
• Sale by co-owner of whole property or a definite portion thereof.
• Special rights of unpaid seller.

Sale by an Owner versus Non-

Owner/Without Authority to Sell

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Perfection
stage where the validity of the contract of sale is determined the moment when the parties come to agree on the
terms of the contract

• General Rule: It is perfected at the moment there is a meeting of minds upon a determinate thing and a certain
price.
• Exception: when the sale is subject to a suspensive condition by virtue of law or stipulation

• Requirements:
• For a certain offer to be valid, it must be certain, definite and intentional.
• When parties are face to face: when an offer is accepted without conditions or qualifications; a conditional
acceptance is a counter-offer, hence, acceptance must be certain, absolute and complete.
• If negotiated through phone: as if it is negotiated face to face.
• When contract is through correspondence or telegram: when the offeror receives or has knowledge of
the acceptance by the offeree, hence, if buyer accepted but seller had no knowledge of it yet, the seller
may still withdraw.
• When a sale is subject to a suspensive condition: from the moment the condition is fulfilled.

Formalities
• General Rule on formalities: Sale is a consensual contract. No
form is required for its validity. It can be in writing, by word of
mouth, partly in writing and partly by word of mouth, or it can be
inferred from the conduct of the parties.
• Exceptions: The following must be in writing to be enforceable:
• Sale of personal property at a price not less than P500.00
• Sale of real property or an interest therein
• Sale of property not to be performed within a year from the date thereof
• When an applicable statute requires that the contract of sale be in a
certain form

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Obligations of the vendor
1) To preserve the subject matter from the time of perfection up to the time
of delivery
2) To transfer the ownership of the thing sold
3) To deliver to the buyer the thing sold
4) To warrant the following:
• that he or she has a right to sell the thing at the time when the
ownership is to pass, and that the buyer shall from that time have and
enjoy the legal and peaceful possession of the thing, and
• that the thing shall be free from any hidden faults or defects, or any
charge or encumbrance not declared or known to the buyer

Rules on sale of part (undivided share)

of specific mass of fungible goods:

1. If the quantity, number, weight or measure, of the mass is more than

the quantity sold, the parties shall become co-owners of the mass.
2. If the quantity of the mass is less than the quantity sold, the buyer
becomes the owner of the whole mass, with the seller being bound
to make good the deficiency from goods of the same kind and quality,
unless a contrary intent appears.

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Sample Problem

S sold and delivered a mass of black pepper (100

sacks) in his specific warehouse to B at a lump sum
price P100,000 per sack.

If the content of the mass is only 80 sacks, S is still

required to deliver additional 20 sacks to B, unless there
is stipulation to the contrary.

Sample Problem

S sells to B at P50 per liter the 300 liters of gasoline

stored in his truck, which is unknown to the them
contains 500 liters. What is the status of the contract
of sale between S and B?

The sale is valid up to 300 liters of gasoline. B becomes

the owner of the 3/5 while S becomes the owner of 2/5
thereof.

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Sale of real estate with a statement of its
area at the rate of a certain price per unit
of measure or number
Remedies of the buyer if the seller delivers:
• Excess area
• Accept the whole area and pay for the contract rate; or
• Accept the agreed area and reject the excess
• Lacking area
• Lacking Less than 10% of Actual Area
• Demand delivery of the deficiency, if possible
• Action quanti minoris or proportionate reduction of price; or
• Action for cancellation but only if the lacking area of less than 10% of Actual Area is very important
• Lacking 10% or more of Actual Area
• Demand delivery of the deficiency, if possible
• Action quanti minoris or proportionate reduction of price; or
• Action for cancellation whether or not the lacking area of 10% or more of Actual Area is very
important

NOTE: Prescriptive period of the action: within 6 months from the date of delivery

Sale of real estate with a statement of its

area at the rate of a certain price per unit
of measure or number
Remedies of the buyer if the seller delivers:
• Poor Quality of 10% or less of Actual Area
• Demand delivery in contracted quality, if possible
• Action quanti minoris or proportionate reduction of price; or
• Action for cancellation but only if the poor quality of not more than 10% of Actual Area is very important
• Poor Quality of more than 10% of Actual Area
• Demand delivery in contracted quality, if possible
• Action quanti minoris or proportionate reduction of price; or
• Action for cancellation whether or not the poor quality of more than 10% of Actual Area is very important

NOTE: Prescriptive period of the action: within 6 months from the date of delivery

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Sale of immovables for a lump sum
• Where both the area and the boundaries of the immovable are declared,
the area covered within the boundaries of the immovables prevails over
the stated area. In case of conflict, it is the boundaries which should
prevail.

• The definition of a piece/tract of land/ground is not the area, calculated

with more or less certainty, mentioned in the description, but the
boundaries therein laid down, as enclosing the land and indicating its
limits (metes and bounds)

Obligations of the vendee

1) To accept delivery
2) To pay the purchase price at the time and place stipulated
3) In some cases, to pay interest

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Acceptance of goods
1. Express: Buyer intimates to the seller that he or she has
accepted them;
2. Implied: Buyer does any act in relation to the goods
which is inconsistent with the ownership of the seller when
the goods have been delivered to him or her; or
3. Constructive: After lapse of reasonable time, buyer retain
the goods without intimating to the seller that he or she
has rejected them.

Obligation to pay the price

1. As to time and place of payment
• As stipulated
• Otherwise, must be made at the time and place of delivery of the thing
sold.
• If time and place of delivery is not stated, domicile of the seller.
2. Payment shall be made to the person to whose favor the obligation has
been constituted or his successors in interest or any person authorized
to receive.
3. Right of buyer to suspend payment in case of disturbance in the
possession or ownership, or fear thereof

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Payment of interest

Buyer shall owe interest for the period between delivery

of thing and payment of price when:
1. Stipulated;
2. The thing sold and delivered produce fruits or income;
3. The buyer is in default, from the time of judicial or
extrajudicial demand for payment of price.

Transfer of ownership
Pactum reservati dominii: an agreement that dominion reserved in favor of the seller until the full payment of purchase
price

Kinds of delivery:
1) Actual or real: placing the thing under the control and possession of the buyer
2) Legal or constructive: delivery is represented by other signs or acts indicative thereof:
• Delivery by execution of public instrument
• Traditio symbolica: parties use a token or symbol to represent the thing delivered
• Traditio longa manu: seller points out to buyer the things (must be in sight) which are transferred
• Traditio brevi manu: when the buyer who already holds possession of a thing in another’s name agrees with that he or she shall
possess it in his or her own name
• Traditio constitutum possessorium: seller continues in possession but under a different title other than ownership
3) Quasi-tradition: delivery of rights, credits or incorporeal property, made by:
• Placing titles of ownership in the hands of the buyer
• Allowing buyer to make use of rights
4) Tradition by operation of law

―On sale or return‖: ownership passes upon delivery

―On approval‖, ―on trial‖ or ―on satisfaction‖: ownership passes when buyer signifies his approval

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Risk of loss and deterioration; Rules
• Before perfection: Seller bears the risk.
• At the time of perfection:
• Thing entirely lost: Contract is void and inexistent.
• Thing only partially lost: Vendee may elect between withdrawing from the contract or
demanding the remaining part, paying its proportionate price.
• After perfection:
• Governed by the stipulations of the parties
• In the absence of any stipulation, buyer bears the risk as an exception to the res perit
domino rule.
• Exceptions:
• When the object sold consists of fungible goods for a price fixed according to
weight, number and measure. If no delivery yet, the seller bears the risk, unless
the buyer is in mora accipiendi.
• Seller is guilty of fraud, negligence, default or violation of contractual terms.
• Object sold is generic.
• After delivery: Buyer bears the risk.

Why does the buyer suffer the risk of loss

after perfection and before delivery?
As explained by Hector de Leon in his book on Law on Sales, Article 1480 states the correct rule considering the following:

1) Article 1504 refers to "goods", while Article 1480 refers to "things". "Goods" only refers to those defined in Article 1636,
while "things" which cannot be called "goods" include real estate. Hence, Article 1480 is the general rule, while Article
1504 is the exception, in order to harmonize the two conflicting provisions.
2) Article 1189 is in consonance with Article 1480. Under Article 1189, if the thing is improved or deteriorates without the
fault of the debtor (seller), the improvement or deterioration shall inure or be borne by the creditor (buyer).
3) Under Article 1537, the fruits shall pertain to the buyer from the perfection of the contract.
4) Under Article 1165(3), if the obligor (seller) delays, or has promised to deliver the same thing to 2 or more persons
who do not have the same interest, he shall be responsible for any fortuitous event until he has effected delivery. By
implication, if the seller is not in delay, or has not promised to deliver the same thing to 2 or more persons, it is the
buyer who will be responsible for any fortuitous event before the thing is delivered to the buyer.
5) Under Articles 1262(1) and Article 1269, when the obligation to deliver a determinate thing is lost or destroyed without
the fault of the debtor (seller), the obligation to deliver is extinguished and the creditor (buyer) shall have the right of
action the seller may have against third persons by reason of the loss. Hence, the buyer only gets to sue the
responsible third persons because the buyer suffered a loss which he has paid or which the law requires him to pay.

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Double sale; Requisites
1) The two (or more) sales transactions in issue must pertain
to exactly the same subject matter, and must be valid
sales transactions.
2) The two (or more) buyers at odds over the rightful
ownership of the subject matter must each represent
conflicting interests; and
3) The two (or more) buyers at odds over the rightful
ownership of the subject matter must each have bought
from the very same seller.

Double sale; Rules of preference

• Personal property: possessor in good faith
• Real property:
1) Registrant in good faith
2) Possessor in good faith
3) Person with oldest title in good faith

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Sample Problem

S sold his watch to B. However, B informed S that he

would obtain actual delivery of the watch after 3 days.
The day after the sale to B, S sold the same watch to X
who immediately took possession of the watch. X was
not aware of the sale to B. Who has a better right over
the watch?

X, because he first took possession of the watch in good

faith.

Sample Problem
On May 1, S sold his registered lot to X. The deed of
sale was in a private instrument. On May 3, S sold the
same lot to Y in a public instrument. On May 5, S sold
again the said lot to Z in a public instrument. Z
immediately registered the sale with Register of
Deeds on May 5. X took actual possession of the lot
on May 6. X, Y and Z were not aware of the sale made
to others. Who among the buyers has the better
right?

Z because he is the first registrant in good faith.

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Sample Problem
Liam sold Gab a parcel of registered land for
P300,000. The sale is evidenced by a deed of sale
(DOS). One month later, Liam sold the same to Apple
for P400,000 evidenced by another DOS. With
knowledge of the sale to Gab, Apple immediately
took possession of the land and registered the DOS
with the RD. The ownership over the land will be
transferred to?

Gab, because he can present the oldest title.

Sample Problem

Marlon verbally appointed Sarah as his agent to sell

Marlon’s land. On Jan 3, Sarah sold the land to Gigi who
took possession thereof. However, on Jan 2, Marlon,
without informing Sarah, had also sold the same land to
Mia. The deeds of sale were not registered. Who has a
better right?

Mia, because the sale to Gigi by Sarah was void. No double

sale happened.

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Right of first refusal
• right of first priority, all things and conditions being equal;
identity of terms and conditions offered to the optionee and all
other prospective buyers, with optionee to enjoy the right of first
priority

• A right of first refusal means identity of terms and conditions to

be offered to the lessee and all other prospective buyers and a
contract of sale entered into in violation of a right of first refusal
of another person, while valid, is rescissible. (Tanay Recreation
v. Fausto, GR 140182, April 12, 2005)

Documents of title
includes any bill of lading, dock warrant, quedan or warehouse receipt or order for the delivery of
goods, or any other document used in the ordinary course of business in the sale or transfer of goods,
as proof of the possession or control of the goods, or authorizing or purporting to authorize the
possessor of the document to transfer or receive, either by indorsement or by delivery, goods
represented by such document

Purposes of documents of title:

1) Contract
2) Evidence of receipt of goods
3) Represents the goods and therefore operates as transferable document that carries with it
control over the goods

• Negotiable document of title: a document of title on which it is stated that the goods referred to
therein will be delivered to the bearer, or to the order of any person named in such document

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Documents of title; Rule on
levy/garnishment
• Non-negotiable:
• Notification is operative act to transfer title/possession of
goods in favor of assignee.
• Before notification: can still be garnished.
• Negotiable: cannot be levied or garnished when documents are
already with purchaser in good faith unless:
• Document is first surrendered.
• Document is impounded by court.
• Negotiation is enjoined.

Warranties
statements or representations made by the seller contemporaneously and as a part of the
contract of sale, having reference to the character, quality or title of the goods and by which
he or she promises or undertakes to insure that certain facts are or shall be as he or she
then represents

Kinds:
• Express: any affirmation of fact or promise by the seller relating to the thing, inducing the
buyer to purchase the same and if the buyer purchases the thing relying thereon
• Implied: that which the law derives from the nature of the transaction or the relative
situation or circumstances of the parties, irrespective of any inspection of the seller to
create it
• Warranty against eviction
• Warranty against hidden defects
• Warranty as to fitness and merchantability

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Warranties; Effects of waiver
• Waiver in warranty against eviction: Parties may increase or diminish implied warranty against
eviction; but effect depends on good faith or bad faith on the part of the seller.
• Seller in bad faith and there is waiver: null and void
• Buyer without knowledge of a particular risk, made general renunciation of warranty: not waiver
but limits liability of seller in case of eviction
• Buyer with knowledge of risk of eviction assumed its consequences and made a waiver: seller
not liable
• Waiver to a specific case of eviction: wipes out warranty as to that specific risk but not as to
eviction caused by other reasons
• Waiver against hidden defects: If there has been a stipulation exempting seller from hidden
defects
• If seller is not aware of hidden defects: loss of the thing due to such defect will not make seller
liable
• If seller is aware: seller is in bad faith, thus seller is liable

Sale of immovable property

(encumbered with non-apparent
burden or servitude)
If the encumbrance is not mentioned in the agreement and of
such nature that the buyer would not have acquired it had he
been aware (within 1 year from execution of deed of sale):
• Rescission of the contract; or
• Demand payment of appropriate indemnity (action for
damages).

After 1 year, the buyer may only sue for damages.

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Breach of contract; Buyer’s remedies
1) Action for specific performance in case of non-delivery
2) In case of breach of warranty:
• Accept or keep the goods and set up against the seller, the breach of
warranty by way of recoupment in diminution or extinction of the price;
• Accept or keep the goods and maintain an action against the
seller for damages for the breach of warranty;
• Refuse to accept the goods, and maintain an action against the
seller for damages for the breach of warranty;
• Rescind the contract of sale and refuse to receive the goods or
if the goods have already been received, return them or offer to
return them to the seller and recover the price or any part
thereof which has been paid.

Rules in case of sale of animals

When void:
1. When animals are suffering from contagious disease;
2. If the use or service to which the animals are acquired has
been stated in the contract and they are later found unfit

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Redhibitory defect
a defect in an animal and it is of such nature that expert
knowledge, even after a professional inspection has been
made, is not sufficient to discover it

Redhibitory defect; Remedies

1. Withdraw from the contract (accion redhibitoria) and the
animal shall be returned in the condition it was sold and
delivered; OR
2. Demanding proportionate reduction of the price (accion
quanti minoris)

27
Rules on the sale of 2 or more
animals, whether for lump sum or for
separate price
1. Sold not as a pair: The redhibitory defect of one shall
only give rise to its redhibition and not of the others
(accion redhibitoria or accion quanti minoris, over the
defective animal).
2. Sold as a pair: If buyer would not have purchased the
sound animals without the defective one, the entire
contract may be rescinded (accion redhibitoria).

Breach of contract; Seller’s remedies;

Ordinary
1) Action for payment of price
2) Action for damages in case of non-acceptance of goods
3) Action for rescission of contract

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Breach of contract; Seller’s remedies;
Ordinary
In all cases of rescission, there must be substantial breach as to defeat the very
object of the parties and not merely a slight or casual breach.
• In case of immovables: automatic rescission upon judicial or notarial demand for
rescission and not for the payment of the price
• In case of movables: automatic rescission in the interest of the seller if the buyer upon the
expiration of the period for delivery of thing:
• Should not have appeared to receive it, or
• Having appeared should not have tendered the price of the thing
• Technical rescission: requisites:
• Goods have not net been delivered
• Buyer has repudiated the sale or manifested his inability to perform his obligations, or committed a
breach thereof, and
• Notice to rescind given to the buyer
• When the seller has reasonable grounds to fear the loss of an immovable and its price.
However, should such ground not exist, Article 1191 shall apply.

Breach of contract; Seller’s remedies;

Special
Special Remedies of ―Unpaid Seller‖
1) Possessory Lien or Right of Retention: right to retain the
thing in possession or right to withhold delivery
2) Stoppage in Transitu: right to resume possession
3) Right of Resale of Goods
4) Special Right to Rescind

29
Breach of contract; Recto Law
Requisites for applicability of Recto Law (Article 1484):
1) Contract of sale
2) Personal property
3) Payable in installments

Applicable also to leases of personal property with option to

buy, when the lessor has deprived the lessee of the
possession or enjoyment of the thing

Breach of contract; Recto Law

Alternative and exclusive remedies under Recto Law:
1) Specific performance upon buyer’s failure to pay
2) Rescission of the sale if buyer shall have failed to pay 2 or
more installments
3) Foreclosure of the chattel mortgage on the thing sold if
buyer shall have failed to pay 2 or more installments. In
this case, there shall be no deficiency judgment.

30
Sample Problem
James sold a car to Jan where Jan paid an initial payment and issued a promissory
note for the balance payable after six months with stipulated interest. Jan secured
said obligation by mortgaging the same car. Unfortunately, Jan defaulted to pay the
note upon maturity. James foreclosed the mortgage constituted on the car and sold
the same at public auction, which resulted into deficiency judgment. An action for
collection was instituted but Jan sought the application of the Recto Law which bars
collection of deficiency.

• The provision of Recto Law cannot apply in a sale where the price is payable partly in
cash and partly in one term because the same is not a sale on installment but actually
―straight sale‖.
• James may recover the unpaid balance of the purchase price against Jan even when the
latter shall have lost by foreclosure the subject matter of the sale.

Sample Problem
Adrian and Ariel entered into a contract of lease with
option to buy the car of the former for a term of two
years. For three months, Ariel failed to pay the
rentals and by reason thereof, Adrian repossessed
the car.

When Adrian deprived Ariel the possession of the leased

car, he has no further action against the latter for any
unpaid rentals.

31
Breach of contract; Maceda Law
RA 6552 (Maceda Law): governs the sale or financing of real
estate on installment payment

When not applicable:

• Sale of industrial or commercial lands
• Sale of urban land covered by Urban Land Reform Law and
agricultural land under the Agrarian Reform Law
• Sale of lands payable in straight terms

Breach of contract; Maceda Law

Requisites:
1) Transactions or contracts involving the sale or financing of
real estate on installment payments, including residential
condominium apartments
2) Buyer defaults in payment of succeeding installments

32
Breach of contract; Maceda Law;
Rights granted to buyers
• Buyer paid at least 2 years installment:
• Pay without interest the balance within grace period of one month for every year of
installment payment
• Grace period to be exercised once every 5 years
• When no payment: cancelled; buyer entitled to 50% of what he has paid + if after 5
years of installments, 5% for every year but not to exceed 90% of total payments
made (CASH SURRENDER VALUE)
• Cancellation is effected 30 days from notice and upon payment of cash surrender
value
• Right to sell his rights or assign the same to another person or to reinstate the
contract by updating the account during the grace period and before actual
cancellation of the contract
• Right to pay in advance any installment or the full unpaid balance of the purchase
price anytime without interest and to have such full payment of the purchase price
annotated in the certificate of title covering the property

Breach of contract; Maceda Law;

Rights granted to buyers
• Buyer paid less than 2 years installment:
• 1st grace period is 60 days from date installment became due
• 2nd grace period of 30 days from notice of cancellation/demand for
rescission
• Buyer can still pay within the 30-day period
• With interest
• No payment after 30 days: cancellation
• Right to pay in advance any installment or the full unpaid balance of
the purchase price anytime without interest and to have such full
payment of the purchase price annotated in the certificate of title
covering the property

33
Breach of contract; Maceda Law
Remedies of the buyer:
1) Action for specific performance
2) Enforcement of remedies by buyer for seller’s breach of
warranty
3) Rescission
4) Suspension of payment of the price

Effect of failure to pay within period

stipulated; Article 1592 of NCC
In the sale of immovable property, even though it may have been
stipulated that upon failure to pay the price at the time agreed upon
the rescission of the contract shall of right take place, the vendee may
pay, even after the expiration of the period, as long as no demand
for rescission of the contract has been made upon him either
judicially or by a notarial act.

After the demand, the court may not grant him a new term.

34
Sample Problem

On January 1, 2020, S sold and delivered a specific house and lot to

B with a stipulation that the price of P1,500,000 will be paid on July
1, 2020. The contract provides that in case of non-compliance by B
on the payment of the price, the contract of sale of house and lot
will be automatically cancelled on the date of default. On July 1,
2020, B defaulted in the payment of the price.

B may still pay the price of P1,500,000 after his default on July 1,2020
provided notarial or judicial demand for rescission has not yet been made
by the seller to him.

Performance of contract
stage where both seller and buyer comply with their
respective obligations, generally speaking, the delivery of the
thing sold and the payment of the purchase price

35
Extinguishment; Causes
1) Same causes as in all other obligations
2) Conventional redemption
3) Legal redemption

Extinguishment; Conventional
Redemption
the right which the seller reserves to himself or herself, to
reacquire the property sold provided he or she returns to the
buyer:
1) Price of the sale
2) Expenses of the contract
3) Any other legitimate payments made therefor, and
4) The necessary and useful expenses made on the thing
sold,
and fulfills other stipulations which may have been agreed upon

36
Extinguishment; Equitable mortgage
one which lacks the proper formalities, form of words, or other requisites prescribed by law
for a mortgage, but shows the intention of the parties to make the property, subject of the
contract, as a security for a debt and contains nothing impossible or contrary to law

When presumed:
1) When the price of a sale with right to repurchase is unusually inadequate;
2) When the vendor remains in possession as lessee or otherwise;
3) When upon or after the expiration of the right to repurchase another instrument
extending the period of redemption or granting a new period is executed;
4) When the purchaser retains for himself a part of the purchase price;
5) When the vendor binds himself to pay the taxes on the thing sold;
6) In any other case where it may be fairly inferred that the real intention of the parties
is that the transaction shall secure the payment of a debt or the performance of any
other obligation.

Extinguishment; Period of redemption

• No period agreed upon: 4 years from date of contract
• Period agreed upon: should not exceed 10 years
• if it exceeded: valid only for the first 10 years
• “not within X years from date of contract”: valid for (10 – X) years
after expiration of X years
• “within X years from expiration of Y years from date of contract”:
valid for (10 – Y or X, whichever is shorter) years after expiration of Y
years
• “within X years after 10 years from date of contract”: void; as if no
period agreed upon
• When a civil action was filed on the basis that the contract was a true
sale with right to repurchase: seller has 30 days from final judgment

37
Extinguishment
Exercise of right to redeem: Seller a retro must first pay the
following:
1) The price of thing sold
2) Expenses of the contract
3) Other legitimate payments made by reason of the sale
4) Necessary and useful expenses made on the thing sold

Extinguishment; Legal redemption

the right to be subrogated, upon the same terms and
conditions stipulated in the contract, in the place of one who
acquires a thing by purchase or dation in payment or by any
other transaction whereby ownership is transferred by
onerous title

Redemption: sale has already been made

Pre-emption: sale is yet to be made

38
Extinguishment; Legal redemption;
Rules
1) By a co-owner for any or all shares of other co-owners sold to
a third person
• If price is grossly excessive, pay only the reasonably price.
2) By an owner of adjoining land for a rural land not exceeding
one hectare is sold to a grantee who already owns a rural
land
• If there are 2 or more interested adjoining owners, the owner of the
smaller land shall be preferred; if both have the same area, the first one
who requested shall be preferred.
3) By an owner of adjoining land for an urban land that is so
small and cannot be used for any practical purpose
• If there are 2 or more interested adjoining owners, the one whose
intended use appears best justified shall be preferred.

Extinguishment; Legal redemption;

How exercised
• The seller must give written notice to the co-owner or adjoining landowner.
• Said co-owner or adjoining landowner must exercise his or her right within
30 days from notice.
• A deed of sale shall not be recorded in the Registry of Deeds absent an
affidavit from the vendor stating that he has given written notice to all
possible redemptioners.

NOTE: The right of redemption of co-owners excludes that of adjoining

owners. If those interested to redeem are co-owners and adjoining owners,
co-owners shall be preferred.

39
TRUSTS

Trust; Definition
• A trust is the legal relationship between one person having
an equitable ownership of property and another person
owning the legal title to such property, the equitable
ownership of the former entitling him to the performance of
certain duties and the exercise of certain powers by the
latter.
• What distinguishes a trust from other relations is the
separation of the legal title and equitable ownership of the
property. In a trust relation, legal title is vested in the
fiduciary while equitable ownership is vested in a
beneficiary (or cestui que trust).

40
Trust; Characteristics
1) It is a relationship;
2) It is a relationship of fiduciary character;
3) It is a relationship with respect to property, not one
involving merely personal duties;
4) It involves the existence of equitable duties imposed
upon the holder of the title to the property to deal with
it for the benefit of another; and
5) It arises as a result of a manifestation of intention to
create the relationship.

Trust; Kinds
• Express trust: created by intention of the trustor or of the parties
• Stated otherwise, express trusts are those which are created by the
direct and positive acts of the parties, by some writing or deed, or will,
or by words either expressly or impliedly evincing an intention to create
a trust.
• Implied trust (or ―trust by operation of law,‖ ―indirect trust‖ and ―involuntary
trust‖): arises by legal implication based on the presumed intention of the
parties or on equitable principles independent of the particular intention of
the parties.
• They are those which, without being expressed, are deducible from the
nature of the transaction as matters of intent or, independently of the
particular intention of the parties, as being inferred from the transaction
by operation of law basically by reason of equity.

41
Trust; Express trust; Elements
• As a rule, the burden of proving the existence of a trust is on the party
asserting its existence, and such proof must be clear and satisfactorily
show the existence of the trust and its elements.
• The presence of the following elements must be proved:
1) A trustor or settlor who executes the instrument creating the trust;
2) A trustee, who is the person expressly designated to carry out the
trust;
3) The trust res, consisting of duly identified and definite real properties;
and
4) The cestui que trust, or beneficiaries whose identity must be clear.

Trust; Express trust; Acceptance

• Acceptance by the beneficiary is necessary.
• Nevertheless, if the trust imposes no onerous condition
upon the beneficiary, his acceptance shall be presumed, if
there is no proof to the contrary.

42
Trust; Express trust
• No trust shall fail because the trustee appointed declines
the designation, unless the contrary should appear in the
instrument constituting the trust.
• Effect of non-acceptance:
• General rule: Trust will continue to exist.
• Exception: The instrument provide for the termination of the trust
in the event of trustee’s non-acceptance.

Trust; Express trust; Immovable

property
• The existence of express trusts concerning real property may not be established by parol
evidence. It must be proven by some writing or deed.
• But in Ringor v. Ringor, the Court allowed oral testimony to prove the existence of a trust,
which had been partially performed. It was stressed therein that what is important is that
there should be an intention to create a trust.
• Under the doctrine of partial performance recognized in this jurisdiction, the objection to
the oral character of a trust may be overcome or removed where there has been partial
performance of the terms of the trust as to raise an equity in the promisee.
• A trustee may perform the provisions of the trust, and if he does, the beneficiary is
protected in benefits that he has received from such performance. Thus, when a verbal
contract has been completed, executed or partially consummated, its enforceability will
not be barred by the Statute of Frauds, which applies only to an executory agreement.

43
Trust; Express trust; Prescription
• Rules applicable to express trusts:
• A trustee cannot acquire by prescription the ownership of property
entrusted to him.
• An action to compel a trustee to convey property registered in his
name in trust for the benefit of the beneficiary does not prescribe.
• The defense of prescription cannot be set up in an action to recover
property held by a person in trust for the benefit of another.
• The property held in trust can be recovered by the beneficiary
regardless of the lapse of time.
• The basis of the rule is that the possession of a trustee is not adverse. Not
being adverse, he does not acquire by prescription the property held in
trust.

Trust; Express trust; Prescription

• However, acquisitive prescription may bar the action of the beneficiary
against the trustee in an express trust for the recovery of the property held
in trust where:
1) The trustee has performed unequivocal acts of repudiation amounting
to an ouster of the beneficiary;
2) Such positive acts of repudiation have been made known to the
beneficiary; and
3) The evidence thereon is clear and conclusive.

44
Trust; Implied trust; Kinds
• Constructive trust (also trusts ex maleficio, trusts ex delicto and trusts de son tort): one which
arises in order to satisfy the demands of justice. They are construed against one who by actual or
constructive fraud, duress, abuse of confidence, commission of a wrong or any form of
unconscionable conduct, artifice, concealment of questionable means, or who in any way against
equity and good conscience has obtained or holds the legal right to property which he ought not, in
equity and good conscience, hold and enjoy. They are aptly characterized as ―fraud-rectifying
trust,‖ imposed by equity to satisfy the demands of justice and to defeat or prevent the wrongful act
of one of the parties.
• Resulting trust: arises from the nature or circumstances of the consideration involved in a
transaction whereby one person becomes invested with legal title but is obligated in equity to hold
his title for the benefit of another. This is based on the equitable doctrine that valuable consideration
and not legal title is determinative of equitable title or interest and is always presumed to have been
contemplated by the parties. Such intent is presumed as it is not expressed in the instrument or
deed of conveyance and is to be found in the nature of their transaction. Implied trusts of this nature
are hence describable as ―intention-enforcing trusts.‖

Trust; Implied trust; Kinds;

Distinctions
Attributes Constructive Trusts Resulting Trusts
Trustee may acquire the entrusted Trustee cannot acquire the entrusted
Acquisition by
property by prescription even if he does property by prescription UNLESS he
prescription
not repudiate the trust. repudiates the trust.
Imprescriptible, UNTIL the trustee
repudiates the trust
Period of 10 years from date of issuance of the
NOTE: Once the resulting trust is
prescription transfer certificate of title
repudiated, it is converted into a
constructive trust which is subject to
prescription.
Effect of laches Enforcement may be barred by laches. Enforcement may be barred by laches.

45
Trust; Implied trust; Constructive trust
Article 1450. If the price of a sale of property is loaned or paid by one person for the benefit of
another and the conveyance is made to the lender or payor to secure the payment of the debt, a trust
arises by operation of law in favor of the person to whom the money is loaned or for whom it is paid.
The latter may redeem the property and compel a conveyance thereof to him.

• Requisites:
1) A property was purchased by one in behalf of another;
2) The purchaser used his own funds because the other person does not have sufficient funds to
purchase the same; and
3) The property is then transferred in the name of the lender or payer to secure the payment of
the debt.
• Effects:
• A constructive trust results in favor of the person to whom the money is loaned or for whom it is
paid (as beneficiary); while the person who paid for the property is deemed the trustee.
• The beneficiary may redeem the property and compel a conveyance thereof to him, but only
after he reimburses the trustee of the purchase price.

Trust; Implied trust; Constructive trust

Article 1454. If an absolute conveyance of property is made in order to secure the
performance of an obligation of the grantor toward the grantee, a trust by virtue of law is
established. If the fulfillment of the obligation is offered by the grantor when it becomes due,
he may demand the reconveyance of the property to him.

• Requisites:
1) An absolute conveyance of property is made by the grantor in favor of the grantee;
and
2) The conveyance is made to secure the performance of an obligation of the grantor to
the grantee.
• Effects:
• A constructive trust is established.
• If the fulfillment of the obligation is offered by the grantor when it becomes due, he
may demand the reconveyance of the property to him.

46
Trust; Implied trust; Constructive trust
Article 1455. When any trustee, guardian or other person holding a fiduciary relationship
uses trust funds for the purchase of property and causes the conveyance to be made to him
or to a third person, a trust is established by operation of law in favor of the person to whom
the funds belong.

• Requisites:
1) A property is purchased by a trustee, guardian or other person holding a fiduciary
relationship;
2) In said transaction, he or she uses trust funds; and
3) He or she causes the conveyance to be made to him or her or to a third person.
• Effects:
• A constructive trust is established by operation of law.
• The beneficiary of the trust is the person to whom the funds belong.

Trust; Implied trust; Constructive trust

Article 1456. If property is acquired through mistake or fraud, the person
obtaining it is, by force of law, considered a trustee of an implied trust for the
benefit of the person from whom the property comes.

• Requisites:
1) A property is acquired; and
2) The acquisition is either through mistake or fraud.
• Effects:
• A constructive trust is established by force of law.
• The person obtaining the property is considered a trustee for the
benefit of the person from whom the property comes.

47
Trust; Additional principles
• The enumeration of implied trusts is not exclusive.

• A trust terminates upon the death of the trustee, particularly

where the trust is personal to him or her in the sense that
the trustor intended no other person to administer it.

• Trustee obtaining title cannot repudiate by relying on

registration.

Trust; Trust pursuit rule

• There is a fundamental principle in agency that where certain property entrusted to an agent and
impressed by law with a trust in favor of the principal is wrongfully diverted, such trust follows the
property in the hands of a third person and the principal is ordinarily entitled to pursue and recover it
so long as the property can be traced and identified, and no superior equities have intervened.
• This principle is actually one of trusts, since the wrongful conversion gives rise to a constructive
trust which pursues the property, its product or proceeds, and permits the beneficiary to recover the
property or obtain damages for the wrongful conversion of the property.
• It applies when a constructive or resulting trust has once affixed itself to property in a certain state
or form. Hence, a trust will follow the property –– through all changes in its state and form as long
as such property, its products or its proceeds, are capable of identification, even into the hands of a
transferee other than a bona fide purchaser for value, or restitution will be enforced at the election
of the beneficiary through recourse against the trustee or the transferee personally.
• This is grounded on the principle in property law that ownership continues and can be asserted by
the true owner against any withholding

48
Trust; Trust pursuit rule
• This is grounded on the principle in property law that ownership continues and
can be asserted by the true owner against any withholding of the object to which
the ownership pertains, whether such object of the ownership is found in the
hands of an original owner or a transferee, or in a different form, as long as it can
be identified.
• Accordingly, the person to whom is made a transfer of trust property constituting
a wrongful conversion of the trust property and a breach of the trust, when not
protected as a bona fide purchaser for value, is himself liable and accountable as
a constructive trustee.
• The liability attaches at the moment of the transfer of trust property and continues
until there is full restoration to the beneficiary.
• Thus, the transferee is charged with, and can be held to the performance of the
trust, equally with the original trustee, and he can be compelled to execute a
reconveyance.

AGENCY

49
Agency; Definition
a contract in which a person binds himself to render some
service or to do something in representation or on behalf of
another, with the consent or authority of the latter

It enables a person to increase the range of his or her individual

and corporate activity by enabling him or her to be constructively
present in many places and to carry on diverse activities at the
same time.

Agency; Characteristics
• Principal
• Nominate
• Bilateral
• Preparatory
• Commutative
• Generally onerous
• A representative relation; not a status; not inherent or
permanent
• A fiduciary relation; based on trust and confidence

50
Agency; Parties
• Principal: whom the agent represents and from whom he or
she derives authority
• Agent: who acts or stands for another
• Sub-agent: who acts or stands for the agent

Agency; Parties; Capacity

• Principal may either be natural or juridical person.
• In general, if one is capacitated to act for himself or herself, he
or she can act through an agent.
• Insofar as third persons are concerned, it is enough that the
principal is the one capacitated, for generally an agent assumes
no personal liability.

51
Sample problem
P appoints A, a minor, as his agent to sell certain goods. A
sells the goods to a buyer B. P afterwards seeks to disaffirm
the sale, and brings an action to recover the goods on the
ground that A’s act was void, as a minor cannot be an agent.

A is deemed to be an extension of the personality of P, who

himself is of legal age.

When principal is bound by act of

agent
• Agent must act within the scope of his authority.
• Agent must act in behalf of the principal.

Exceptions:
• Latter acts without or beyond the scope of his authority in the
former’s name.
• Latter acts within the scope of his authority but in his own name,
except when the transaction involves a thing belonging to the
principal.

52
Sample problem
A son was allowed by his father to use the latter’s land and
to make improvements on it. The son was also authorized to
get profits as a result of whatever improvements may be
introduced. One day, the son purchased certain materials
which he needed for the improvements. Is the father liable?

No, since he did not constitute his son as his agent. The
relationship between them insofar as the land is concerned is
similar to that of lessor and lessee, not that of principal and
agent.

Express vs. implied agency

• It is express when it is expressly constituted.
• It is implied:
• From the acts of the principal
• From principal’s silence or inaction
• From principal’s failure to repudiate the agency, knowing
that another is acting on his or her behalf without
authority

NOTE: Acceptance by agent may be made in the same

manner.

53
Sample problem
A hotel and X entered into a contract which allowed the latter to
keep the hotel for 7 years. X was to reside in the hotel with his
family, but would be allowed free rent and board. X’s duty was to
run the hotel with books of account subject to inspection by the
board of directors of the hotel. X was also authorized to hire a
bookkeeper, who however could be discharged by him, at the
instance of the board of directors. X was forbidden to contract
debts in behalf of the hotel without prior permission from the
hotel board. Is X a lessee or an agent?

X is an agent, subject to the control of the board of directors of the

hotel.

Informing other people of the

existence of the agency
Article 1873. If a person specially informs another or states by
public advertisement that he has given a power of attorney to a
third person, the latter thereby becomes a duly authorized agent,
in the former case with respect to the person who received the
special information, and in the latter case with regard to any
person.

The power shall continue to be in full force until the notice is

rescinded in the same manner in which it was given.

54
Sample problem
A company wrote a circular letter to its customers
introducing a certain X as its duly authorized agent. One
customer then dealt with the company thru X. One day, X’s
authority was revoked, but the customer continued to deal
thru X since it never was informed by circular or otherwise
of the revocation. Is the company still liable for X’s acts even
after the revocation of the agency?

Yes, for the customer was in good faith, not having been
informed by circular or otherwise, of the revocation.

Agency by estoppel
One who clothes another with apparent authority as his or her
agent, and holds him or her out to the public as such, cannot be
permitted to deny the authority of such person to act as his or her
agent, to the prejudice of innocent third parties dealing with such
person in good faith, and in the honest belief that he or she is
what he or she appears to be.

If A leads B to believe that C is his (A’s) agent, when as a matter

of fact such is not true, and B acts on such misrepresentation, A
cannot disclaim liability, for he has created an agency by
estoppel.

55
Agency by estoppel vs. implied
agency
Attributes Agency by Estoppel Implied Agency
The agent is a true agent
As between the principal
The agent is not a true agent. with rights and duties of an
and agent
agent.
If estoppel is caused by the
principal, he or she is liable,
but only if the third person The principal is always liable.
acted on the
As to third persons misrepresentation.
If estoppel is caused by the
agent, it is only the agent The agent is never
who is liable; never the personally liable.
alleged principal.

General vs. special agency

• General: when it comprises all of the businesses of the principal.
• Special: when it comprises one or more specific transactions.

• The distinction depends on the extent of the business covered.

• The more special the power is, the more specific it is.
• Either a general or special agency may be couched in general and specific
terms.
• An agency couched in general terms comprises ONLY ACTS OF
ADMINISTRATION.
• To do ACTS OF STRICT DOMINION, special powers of attorney are
needed.

56
Sample problem
Eudora made Nana her agent in this manner:

―I make you my agent for all my properties. I withhold no power from you. You
may execute such acts as you may consider appropriate. You are hereby given
general and unlimited management.‖

• May Nana compromise in behalf of Eudora? NO.

• May Nana accept or repudiate an inheritance for Eudora? NO.
• May Nana sell or mortgage Eudora’s lands? NO.

THESE ARE ACTS OF STRICT DOMINION. The agency between Eudora and
Nana is couched in general terms.

Examples of acts of mere

administration
1) To sue for the collection of debts
2) To employ workers or servants and employees needed for the conduct of
business
3) To engage counsel to preserve the ownership and possession of the
principal’s property
4) To lease real property to another person for one year or less, provided the
lease is not registered
5) To make customary gifts for charity or to employees in the business
managed by the agent
6) To borrow money if it be urgent and indispensable for the preservation of
the things under administration

57
Agency requiring special power of
attorney; When needed
1) Acts of strict dominion or ownership
2) Gratuitous contracts
3) Contracts where personal trust or confidence is of the
essence of the agreement

―Special Powers of Attorney‖: clear mandate (express or implied)

specifically authorizing the performance of an act

Agency requiring special power of

attorney
1) To make such payments as are not usually considered as acts of
administration;
2) To effect novations which put an end to obligations already in existence
at the time the agency was constituted;
3) To compromise, to submit questions to arbitration, to renounce the right
to appeal from a judgment, to waive objections to the venue of an action
or to abandon a prescription already acquired;
4) To waive any obligation gratuitously;
5) To enter into any contract by which the ownership of an immovable is
transmitted or acquired either gratuitously or for a valuable
consideration;

58
Agency requiring special power of
attorney
6) To make gifts, except customary ones for charity or those made
to employees in the business managed by the agent;
7) To loan or borrow money, unless borrowing be urgent and
indispensable for the preservation of the things which are under
administration;
8) To lease any real property to another person for more than one
year;
9) To bind the principal to render some service without
compensation;
10) To bind the principal in a contract of partnership;

Agency requiring special power of

attorney
11)To obligate the principal as a guarantor or surety;
12)To create or convey real rights over immovable property;
13)To accept or repudiate an inheritance;
14)To ratify or recognize obligations contracted before the
agency;
15)Any other act of strict dominion

59
Special rules
• A special power to sell excludes the power to mortgage;
and a special power to mortgage does not include the
power to sell.

• A special power to compromise does not authorize

submission to arbitration.

Agency by operation of law

when it is demanded by virtue of the existence of an emergency;
it terminates when the agency has passed
• Doctrine of Agency by Necessity: conditions:
1) The real existence of an emergency
2) Inability of the agent to communicate with the principal
3) The exercise of the additional authority for the principal’s own
protection
4) The adoption of fairly reasonable means, premises duly considered
5) The ceasing of the authority the moment the emergency no longer
demands the same

60
Obligations of agent to principal
1) Loyalty to the principal.
2) Obedience to principal’s instruction.
3) Exercise of reasonable care.
4) To carry out the agency which he or she has accepted.
5) To answer for damages which through his or her acts, his or
her principal may suffer.

Obligations of agent to principal

6) To finish the business already begun on the death of the principal should
delay entail any danger.
7) To observe the diligence of a good father of a family in the custody and
preservation of the goods forwarded to him or her by the owner in case
he or she declines an agency, until an agent is appointed.
8) To advance the necessary funds should there be a stipulation to do so.
9) To act in accordance with the instructions of the principal, and in default
thereof, to do all that a good father of a family, would do.
10) Not to carry out the agency if its execution would manifestly result in loss
or damage to the principal.

61
Obligations of agent to principal
11) To answer for damages if there being a conflict between his or her interests
and those of the principal, he or she should prefer his or her own.
12) Not to loan to himself or herself if he or she has been authorized to lend money
at interest.
13) To render an account of his or her transactions and to deliver to the principal
whatever he or she may have received by virtue of the agency.
14) To distinguish goods by countermarks and designate the merchandise
respectively belonging to each principal, in the case of a commission agent
who handles goods of the same kind and mark, which belong to different
owners.
15) To be responsible in certain cases for the acts of the substitute appointed by
him or her.

Obligations of agent to principal

16) To pay interest on funds he or she has applied to his or her own
use.
17) To inform the principal where an authorized sale of credit has been
made, of such sale.
18) To bear the risk of collection, should he or she receive also on a
sale, a guarantee commission.
19) To indemnify the principal for damages for his or her failure to
collect the credits of his or her principal at the time that they
become due.
20) To be responsible for fraud or negligence.

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Consequences of agent’s acts to third
persons
• Agent is not personally liable unless he or she expressly binds himself or herself
or exceeds the limits of his or her authority without giving sufficient notice.
• A contract entered into in excess of the scope of the agent’s authority with the
other contracting party’s knowledge of such limits and not ratified by the principal
is void.
• So far as third persons are concerned, an act is deemed to have been performed
within the scope of the agent's authority, if such act is within the terms of the
power of attorney, as written, even if the agent has in fact exceeded the limits of
his or her authority according to an understanding between the principal and the
agent.
• A third person cannot set up the fact that the agent has exceeded his or her
powers, if the principal has ratified, or has signified his or her willingness to ratify
the agent's acts.

Obligations of principal to agent

• In addition to his or her contractual duties, the principal is under
obligation to deal fairly and in good faith with his or her agent.
• In the absence of express agreement:
• To comply with all the obligations which the agent may have contracted within
the scope of his or her authority and in the name of the principal.
• To advance to the agent, should the latter so request, the sums necessary for
the execution of the agency.
• To reimburse the agent for all advances made by him or her, provided the
agent is free from fault.
• To indemnify the agent for all the damages which the execution of the agency
may have caused the latter without fault or negligence on his or her part.
• To pay the agent the compensation agreed upon, or if no compensation was
specified, the reasonable value of the agent’s services.

63
When an agency cannot be revoked at
the principal’s will
• When it is coupled with an interest (interest possessed by the agent not in
the proceeds arising from the exercise of the power, but interest in the
subject matter of the power)
• If a bilateral contract depends upon the agency.
• If the agency is the means of fulfilling an obligation already contracted.
• In case of a partner appointed as manager in the contract of partnership
and his or her removal from the management is unjustifiable.
• When there has been a waiver by the principal.
• When the principal is obliged not to revoke; If he or she does so, he or she
will be liable for damages.
• When revocation is done in bad faith.

Withdrawal by agent
• Must give notice to the principal.
• Must indemnify should the principal suffer damages by reason
of the withdrawal from the impossibility of continuing the
performance of the agency without grave detriment to himself or
herself.

NOTE: The agent, even if he or she should withdraw from the

agency for a valid reason, must continue to act until principal has
had reasonable opportunity to take the necessary steps to meet
the situation.

64
Instances when death of the principal
does not terminate agency
• If the agency has been constituted in the common interest of
the principal and the agent.
• Sheila borrows from Jericho, and as security entrusts to Steph a ring,
which Jericho can sell in case Sheila fails to pay the debt at the time of
maturity. Even if Sheila dies, the agency of Jericho would still remain.
• If it has been constituted in the interest of a third person who
has accepted the stipulation in his or her favor.
• Daryl sells his land to Apa and appoints Apa as his agent in paying with
the purchase price what Daryl owes Wolo, a third person. Here, even
when Daryl dies, the agency of Apa continues to exist.

Modes of extinguishment
• By its revocation;
• By the withdrawal of the agent;
• By the death, civil interdiction, insanity or insolvency of the
principal or of the agent;
• By the dissolution of the firm or corporation which entrusted or
accepted the agency;
• By the accomplishment of the object or purpose of the agency;
and
• By the expiration of the period for which the agency was
constituted.

65
Death of the principal
Agent’s acts are valid with respect to third persons who have
contracted with the agent in good faith (not knowing that the
principal has died).

Death of the agent

His or her heirs must notify the principal thereof, and in the
meantime adopt such measures as the circumstances may
demand in the interest of the latter.

66
COMPROMISE

Compromise; Definition
Article 2028. A compromise is a contract whereby the
parties, by making reciprocal concessions, avoid a litigation
or put an end to one already commenced.

67
Compromise; Where not allowed
Article 2035. No compromise upon the following questions shall
be valid:
1) The civil status of persons;
2) The validity of a marriage or a legal separation;
3) Any ground for legal separation;
4) Future support;
5) The jurisdiction of courts;
6) Future legitime.

Compromise; Where not allowed

Article 2037. A compromise has upon the parties the effect and
authority of res judicata; but there shall be no execution except in
compliance with a judicial compromise.

Effect of compromise: res judicata only if there has been no

vitiated consent

68
Compromise; Where not allowed
Article 2041. If one of the parties fails or refuses to abide by the
compromise, the other party may either enforce the compromise
or regard it as rescinded and insist upon his original demand.

Effect if compromise agreement is not fulfilled:

• Enforce the compromise; OR
• Rescind it and insist on his or her original demand
• No necessity for judicial declaration of rescission
• No rescission after a party has enjoyed its benefits

LOAN

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LOAN
1. Loan
2. Commodatum
3. Simple loan
4. Interests on loan
a. Conventional interest
b. Interest on interest
c. Compensatory, penalty, or indemnity interest
d. Finance charges
e. Usury

Loan
a contract wherein one of the parties delivers to another, either
something not consumable so that the latter may use the same
for a certain time and return it or money or other consumable
thing, upon the condition that the same amount of the same kind
and quality shall be paid
• Kinds:
• Simple loan (mutuum)
• Commodatum

70
Simple loan (or mutuum)
a contract for the loan of goods which will be used or consumed
by the borrower, to be repaid with goods of an equivalent quantity
and quality

Commodatum
a real, principal, essentially gratuitous, and personal contract
where one of the parties (called the bailor or lender) delivers to
another (called the bailee or borrower) a consumable object so
that the latter may USE the same for a certain period and later
RETURN it

71
Mutuum vs. Commodatum
Attributes Simple Loan (Mutuum) Commodatum
What to be Equivalent amount to be returned Same thing to be returned (subject
returned (subject matter is fungible) matter is non-fungible)
May be gratuitous or onerous (with
Consideration Essentially gratuitous
interest)
Ownership Ownership goes to borrower or bailee Ownership retained by lender or bailor
Property
Refers to personal property only May involve real and personal property
involved
Referred to as loan for use or temporary
Purpose Referred to as loan for consumption
possession
Borrower, because of his ownership, Lender, because of his ownership, bears
Risk of loss
bears risk of loss risk of loss
While generally obliged to return object
Obligation to Can be generally obliged to pay only at at the end of period, still in some cases
pay or return end of period the return can be demanded even before
the end of the period
Nature Not personal in character Personal in character

Obligations of bailor
• To respect the duration of the loan because the bailor is bound
by the terms of the contract of commodatum which is for a
certain time.
• Refund to the bailee extraordinary expenses incurred for the
preservation of the thing, provided the bailee brings the same
to the knowledge of the bailor before incurring them, except
when the reply to the notification cannot be awaited without
danger.
• To be liable to the bailee for damages for known hidden flaws.

72
Obligations of bailee
• Take care of the thing with diligence of a good father of a family.
• Return the identical thing loaned upon the expiration of term or upon accomplishment of
purpose.
• Pay for the ordinary expenses for the use and preservation of the thing.
• Liable for loss due to fortuitous events when:
• He or she keeps it longer than the period stipulated or after the accomplishment of its
use.
• He or she lends or leases it to third persons who are not a member of his or her
household.
• The thing loaned has been delivered with appraisal of its value unless there is a
stipulation exempting the bailee from responsibility in case of fortuitous event.
• Being able to save either of the thing borrowed or his or her own things, he or she
chose to save the latter.
• The bailee devoted the thing for a different use from that agreed upon.

Obligations of bailee
• Liable for deterioration if:
• Expressly stipulated.
• Guilty of fault or negligence.
• He or she devotes the thing to any purpose different from that for which it has
been loaned.
• Pay extraordinary expenses arising from the actual use of the thing,
which shall be borne by both the bailor and the bailee, even though
the bailee acted without fault, unless there is a stipulation to the
contrary.
• Pay for the expenses other than those under Articles 1941 and 1949
(ordinary expenses for preservation and expenses for ostentation).

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Interests on loan; Conventional
interest
the rate of interest agreed upon by the parties in the contract

Article 1956. No interest shall be due unless it has been

expressly stipulated in writing.

Interests on loan; Interest on interest

compound interest; interest on accrued interest

When accrued interest earns interest:

1) If there is agreement to this effect, or
2) If there is judicial demand

74
Interests on loan; Compensatory,
penalty, or indemnity interest
awarded in the form of damages in accordance with Articles 2209-2213 of the Civil
Code

• If the obligation consists in the payment of a sum of money, and the debtor incurs
in delay, the indemnity for damages, there being no stipulation to the contrary,
shall be the payment of the interest agreed upon, and in the absence of
stipulation, the legal interest, which is six per cent per annum.
• Interest may, in the discretion of the court, be allowed upon damages awarded for
breach of contract.
• In crimes and quasi-delicts, interest as a part of the damages may, in a proper
case, be adjudicated in the discretion of the court.
• Interest due shall earn legal interest from the time it is judicially demanded,
although the obligation may be silent upon this point.

Interests on loan; Finance charges

a fee charge for the use of credit or the extension of existing
credit

Under Section 3(3) of the Truth in Lending Act, a finance charge

includes interest, and in accordance to Section 4, such
information must be furnished to each person to whom credit is
extended, prior to the consummation of the transaction.

In case of violation: The penalty may be recovered in an action

filed within one year from date of occurrence.

75
Guidelines for the application of
proper interest rate
• No interest shall be due unless it has been expressly stipulated
in writing.
• If a particular rate of interest has been expressly stipulated by
the parties, that interest, not the legal rate of interest, shall be
applied.
• If the exact rate of interest is not mentioned, the legal rate of 6%
shall be payable and computed from date of default.
• When an obligation, regardless of source, is breached the
contravenor can be held liable for damages.

Guidelines for the application of

proper interest rate
• With regard to an award of interest in the concept of damages, the
rate of interest, as well as the accrual thereof is imposed as follows:
• When the obligation breached consists of payment of a sum of
money, in the absence of an agreement, the rate shall be the legal
rate (6%) computed from delay.
• In other cases, the rate of interest shall be 6% per annum.
• When the judgment of the court awarding a sum of money
becomes final and executory, the rate of legal interest, shall be 6%
per annum from finality until its satisfaction, this interim period
being deemed to be by then an equivalent to a forbearance of
credit.

76
Usury; Definition and elements
the act of lending money at an interest rate that is higher than the
rate permitted by law

1) A loan, express or implied

2) Understanding between the parties that the money lent shall
or may be returned
3) For such loan, a greater rate of interest than is allowed by law
shall be paid or agreed to be paid
4) Corrupt intent to take more than the legal rate for the use of
money

Usury
• The SC said that nothing in the circular suspending the Usury Law
grants lenders authority to raise interest rates to levels which will
either enslave their borrowers or lead to a hemorrhaging of their
assets. (Almeda vs. CA, 04/17/1996)
• While stipulated interest of 5.5% per month on a loan is not usurious
pursuant to CB Circular No. 905, the same must be equitably
reduced for being iniquitous, unconscionable and exorbitant. It is
contrary to morals. It was reduced to 12% per annum in consonant
with justice and fair play. (Medel vs. CA, 11/27/1998)
• When the agreed rate is iniquitous and unconscionable, the courts
may reduce the same as reason and equity demand. (Imperial vs.
Jaucian, 04/14/2004)

77
DEPOSIT

Deposit; Definition
constituted from the moment a person receives a thing
belonging to another, with the obligation of safely keeping it
and of returning the same

Kinds:
• Judicial
• Extrajudicial
• Voluntary
• Necessary

78
Deposit; Characteristics
• It is a real contract.
• Principal purpose: safekeeping of the thing delivered
• The depositary cannot use the thing deposited except:
• With the express permission of the depositor; or
• When the preservation of the thing deposited requires its use.
• Only movable things can be the object of a deposit.
• It is a gratuitous contract, except when there is an agreement to the
contrary or unless the depositary is engaged in the business of
storing goods.
• It is either unilateral or bilateral (with or without compensation).

Judicial deposit; Definition

when an attachment or seizure of property in litigation is
ordered

79
Voluntary deposit; Definition
made by the will of the depositor

Necessary deposit; Definition

• Made in compliance with a legal obligation
• On the occasion of a calamity
• Made by travelers in hotels or inns
• Made by travelers in common carriers

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Judicial vs. extrajudicial deposits
Attributes Judicial Deposit Extrajudicial Deposit
Origin Will of the court Will of the parties
Status No contract There is a contract
To guarantee the right of Custody and safekeeping
Purpose the plaintiff in case of of the thing for the benefit
favorable judgment of the depositor
Cause Onerous Generally gratuitous
Either movable or
Subject matter Always movable property
immovable property
In whose behalf it In behalf of the prevailing
In behalf of the depositor
is held party

LEASE

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Lease; Definition
• a consensual, bilateral, onerous, and commutative contract
• one person binds himself to grant temporarily the use of a
things or the rendering of some service to another who
undertakes to pay some rent, compensation, or price

• Kinds:
• Lease of things
• Lease of service
• Lease of work

Lease of things
where one person binds himself to grant temporarily the use of a
thing to another who undertakes to pay some rent,
compensation, or price certain therefor

• to last for a period which is either definite or indefinite, but in no

case should exceed 99 years
• consensual, principal, onerous, and nominate

82
Lease of things; Essential elements
• Consent
• Object or subject matter: real or personal property
• Consumable goods may only be a subject matter when:
• They are merely to be exhibited; or
• They are accessory to an industrial establishment
• Rent

NOTE: Lessor need not be an owner since lease does not

involve transfer of ownership.

Lease of things; Formalities

• No required form for validity
• Governed by Statute of Frauds
• No registration required, unless needed to make it effective
regarding third persons
• SPA is required if lease is to be recorded or lease exceeds one
year; otherwise, the lease is void.

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Lease of things; Term
• No perpetual lease allowed.
• Foreign lessees:
• Investor: 50 years max, renewable once for not exceeding 25 years
• Non-investor: 25 years max, renewable for another 25 years
• No period has been fixed
• Rural lands: necessary for the gathering of the fruits
• Urban lands: generally depending on the rental agreed upon
• Lease during the lifetime of one of the parties: A lease of things
during the lifetime of one of the parties is valid, which is considered
one for life, ending upon the death of the party who could have
terminated the contract.

Lease of things; Term

• Rent paid monthly: A lease agreement though not having a fixed period, but rentals are
paid monthly, is deemed to be from month to month, thereby considered to be for a
definite period, nonetheless.
• Period subject to resolutory condition: When the lease contract provides that it “shall
continue for an indefinite period provided the lessee is up-to-date in the payment of his
monthly rentals,” it is one with a period subject to a resolutory condition. The condition
imposed in order that the contract shall remain effective is that the lessee is up-to-date
in his or her monthly payments.
• Court’s power to fix longer term: The power of the courts to ―fix a longer term for lease‖
is potestative or discretionary — ―may‖ is the word — to be exercised or not in
accordance with the particular circumstances of the case; a longer term to be granted
where equities come into play demanding extension, to be denied where none appear,
always with due reference to the parties’ freedom to contract.

84
Lease of things vs. sale
Lease Sale
Only use or enjoyment is transferred Ownership is transferred
Transfer is temporary Transfer is permanent
Seller must be the owner at the time
Lessor need not be the owner the property is supposed to be
delivered
The price of the object, distinguished Usually, the selling price is
from rent, is usually not mentioned mentioned

Lease of things vs. simple loan

Lease Simple Loan
Lessor does not lose ownership Lender loses ownership
Relationship is one of lessor and Relationship is one of creditor and
lessee debtor
Not governed by the Usury Law Governed by the Usury Law
If what is leased is real property for
Not governed by the Statute of
more than one year, the statute of
Frauds
frauds must be complied with
Refers to real and personal property Refers only to personal property

85
Lease of things vs. commodatum
Lease Commodatum
Onerous contract Essentially gratuitous contract
Not essentially personal in character Personal in character
Consensual contract Real contract

Lease of work or services

one of the parties binds himself or herself to execute a piece of
work or to render to the other some service for a price certain,
but the relation of principal and agent does not exist between
them

86
Lease of rural and urban lands
• Rural lands: regardless of site, if the principal purpose is to
obtain products from the soil
• Urban lands: principally for purposes of residence
NOTE: Lease may be made orally, but if the lease of real
property is for more than one year, it must be in writing.

If someone rents as a summer resort a small house in a

farm, is it a rural or urban lease? It is an urban lease even
if the house is situated on a farm.

Lease of rural and urban lands;

Qualified persons
• Filipinos: may lease lands of public domain with an area of
500 hectares and may acquire not more than 12 hectares
• Corporations: at least 60% Filipino-owned, may lease
lands of public domain for a period of 25 years,
renewable for not more than 25 years, the area not to
exceed more than 1,000 hectares

87
Lease of rural and urban lands;
Qualified persons
• Aliens:
• 99-year limit applies as long as it is a lease of personal property
• Aliens cannot lease public lands and cannot acquire private lands
except through succession
• If lease of real property (private lands), maximum of 25 years
renewable for another 25 years
• Under the Investor’s Lease Act of 1995, the 25-year period was
extended to 50 years renewable for another 25 years provided:
• Lessee must make investments.
• Lease is approved by DTI.
• NOTE: If the terms are violated, DTI can terminate it.

Lease of rural and urban lands;

Disqualified persons
• General Rule: All persons who are authorized to obligate themselves may enter into a contract of lease.
• Exceptions:
• Absolute incapacity (minors, demented persons, imbeciles, deaf and dumb, prodigals, civil interdictees)
• Relative incapacity
• Husband and wife: Generally, a lease by one spouse to another is void.
• Exceptions:
• Regime of separation of property governs them.
• A judicial separation of property has been decreed.
• Incapacity by reason of relation to property: The following cannot lease a property, either in person or
through the mediation of another:
• Guardian, with respect to the property of his or her ward
• Agents, with respect to the property whose administration or sale may have been entrusted to
them, unless the consent of the principal has been given
• Executor or administrator, with respect to the property of the estate under administration
• Public officers and employees, with respect to the properties of the government, its political
subdivisions or GOCCs, that are entrusted to them
• Judges, justices, prosecuting attorneys, clerks of courts etc., with respect to the property in
custodia legis
• Any other person specially disqualified by law

88
Lease of rural and urban lands;
Registration
• A lease does not have to be recorded in the Registry of Property to be
binding between the parties.
• If a lease is to be recorded, the following persons must have proper
authority:
• Husband (paraphernal real estate of the wife)
• Father or guardian (property of the minor or ward)
• Manager or administrator (property under administration)
• To be binding upon third persons, every lease of real estate must be
recorded in the Registry of Property.
• To be binding upon third persons, every lease of personal property must
be in a public instrument.
• When a third person already knows of the existence and duration of the
lease, he or she is bound by such lease even if has not been recorded.

Lease of rural and urban lands;

Effects of non-registration
• The lease is not binding on innocent third persons
such as a purchaser.
• Such an innocent third person is allowed to
terminate the lease in case he or she buys the
property from the owner-lessor.
• If the stranger knows of the existence of the lease, but
has been led to believe that the lease would expire
very soon, or before the new lease in favor of him or
her begins (when in fact this was not true), the
stranger can still be considered innocent.

89
Rights of the lessor
• To receive rent
• To be notified about usurpation or untoward acts
• To be notified about need of repairs
• To receive the property upon termination of the lease
• To continue engaging in the same business or industry to
which the lessee devotes the thing leased, unless there is a
stipulation to the contrary

Obligations of the lessor

• Delivery of the object (cannot be waived)
• Making of necessary repairs
• Maintenance in peaceful and adequate possession
• Cannot alter the form of the thing leased

90
Rights of the lessee
• To be respected in his or her possession
• To be restored to said possession by the means established
by law or by the ROC, should he or she be disturbed
therein

Obligations of the lessee

• To pay rent
• To use the thing leased as a diligent father of a family, devoting
it to the use stipulated; or in the absence thereof, to that inferred
from the nature of the thing leased according to the custom of
the place
• To make urgent repairs even if annoying to him or her, unless
the place becomes uninhabitable
• To pay expenses for the deed of lease

91
Obligations of the lessee
• To notify the lessor of usurpation or untoward acts
• To notify the lessor of need for repairs
• To return the property leased upon termination of the lease in
the same condition as he or she received it save what has been
lost or impaired by:
• Lapse of time
• Ordinary wear and tear
• Inevitable cause or fortuitous event

Responsibility for deterioration or loss

of thing leased
• General Rule: The presumption is that the lessee is
responsible for the deterioration or loss of the thing leased.
• Exception: when the destruction is due to earthquake, flood,
storm or other natural calamity; fire is not a natural calamity;
however, if the lessee can prove that he or she had no fault
respecting the fire and that it was impossible for him or her to
stop its spread, he or she will not be liable.
• Effect of destruction of thing leased by fortuitous event:
• If totally destroyed, the lease is extinguished;
• If destruction is partial only, the lessee may choose between a
proportional reduction of the rent and a rescission of the lease.

92
Rights of the lessor in case of breach
of contract
• In case of breach of the contract, or when the lessee does not comply with
his or her obligations under Article 1657 of the Civil Code, the lessor may
ask for:
• the rescission of the contract and indemnification for damages, or
• only indemnification for damages, allowing the contract to remain in
force.
• Rescission of lease contracts under Article 1659 of the Civil Code is not
one that requires an independent action, unlike resolution of reciprocal
obligations under Article 1191 of said Code.
• It is not necessary, in such situation, that an independent action for the
rescission of the lease should first be instituted in court, for the purpose of
putting an end to the right of the tenant to remain in possession under the
lease.

Rights of the lessee in case of breach

of contract
• The lessee may ask for:
• the rescission of the contract and indemnification for damages, or
• only indemnification for damages, allowing the contract to remain in force.
• Alternatively, the lessee may suspend the payment of the rent in case the lessor fails to
make the necessary repairs or to maintain the lessee in peaceful and adequate
enjoyment of the property leased.

NOTE: If the leased property is a dwelling place or any other building intended for human
habitation and the same is in such a condition that its use brings imminent and serious
danger to life or health, the lessee may terminate the lease at once by notifying the
lessor, even if at the time the contract was perfected the former knew of the dangerous
condition or waived the right to rescind the lease on account of this condition.

93
Subleasing and assignment
• The lessee may sublet the thing leased, in whole or in part, unless expressly prohibited
in the contract of lease.
• The lessee remains liable to the lessor for the performance of the contract.
• The sub-lessee is subsidiarily liable to the lessor for any rent due from the lessee, but
he or she shall not be liable beyond the amount of rent due from him or her, in
accordance with the terms of the sublease, at the time of the extrajudicial demand by
the lessor.
• The sub-lessee is also bound to the lessor for all acts which refer to the use and
preservation of the thing leased in the manner stipulated between the lessor and the
lessee.
• The sub-lessee cannot sue the lessor directly; the suing of the lessor must be done
by the lessee.

Subleasing and assignment

• The lessee cannot assign the lease contract without the consent of the lessor, unless
there is a stipulation to the contrary.
• The assignment of a lease by the lessee involves a transfer of rights and obligations
pertaining to the contract; hence, the consent of the lessor is necessary.
• There is a novation by the substitution of the person of one of the parties –– the
lessee. The personality of the lessee, who dissociates from the lease, disappears.
• A new juridical relation arises between the two persons who remain –– the lessor and
the assignee who is converted into the new lessee.

NOTE: The reason why assignment is generally prohibited while subleasing is generally
allowed is because the assignment of the lease contract is a novation where the personality
of the lessee disappears. Hence, the consent of the lessor is necessary. In sub-lease, on
the other hand, the lessee remains a party to the lease contract and, as such, he or she
remains liable to the lessor.

94
Termination of lease
Grounds:
1) By the expiration of the period;
2) By the total loss of the thing;
3) By resolution of the right of the lessor;
4) By will of the purchaser or transferee of the thing; and
5) By rescission due to non-performance of the obligation of
one of the parties.

Expiration of the period

• If the lease was made for a determinate time, it ceases upon the day fixed,
without the need of a demand.
• An implied new lease (tacita reconduccion) is created pursuant to Article
1670 of the New Civil Code when it is shown that:
• the term of the original contract of lease has expired;
• the lessor has not given the lessee a notice to vacate; and
• the lessee continued enjoying the thing leased for 15 days with the
acquiescence of the lessor.

95
Expiration of the period; Implied new
lease
• Tacita reconduccion refers to the right of the lessee to continue enjoying the material or
de facto possession of the thing leased within a period of time fixed by law. During its
existence, the lessee can prevent the lessor from evicting him or her from the disputed
premises.
• Since tacita reconduccion is determinative of who between the parties is entitled to de
facto possession, the MeTC has jurisdiction to resolve and pass upon the issue
of implied new lease in unlawful detainer case.
• Indeed, the MeTC is clothed with exclusive original jurisdiction over an unlawful
detainer case even if the same would entail compelling the plaintiff therein to
recognize an implied lease agreement.

Expiration of the period; Implied new

lease
• The implied new lease is not for the period of the original contract, but for the time
established in Articles 1682 and 1687 of the Civil Code.
• In case of lease of rural lands: When its duration is not fixed, it is understood to
have been made for all the time necessary for the gathering of the fruits which the
whole estate leased may yield in one year, or which it may yield once, although two or
more years may have to elapse for the purpose.
• In case of lease of urban lands: When its period has not been fixed, it is understood
to be from year to year, if the rent agreed upon is annual; from month to month, if it
is monthly; from week to week, if the rent is weekly; and from day to day, if the rent is
to be paid daily.

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Expiration of the period; Implied new
lease
• In case of an implied new lease, the other terms of the original contract, aside from the
period, shall be revived. ―The other terms of the original contract‖ mentioned in Article
1670, are only those terms which are germane to the lessee’s right of continued
enjoyment of the property leased, such as the amount of the rental, the date when it must
be paid, the care of the property, the responsibility of repairs, etc.
• Thus, the grant of the preferential right to buy the leased property granted in the
original contract will not be revived automatically for the purpose of the implied new
lease. In case of an implied new lease, the obligation contracted by a third person for
the security of the principal contract shall cease with respect to the new lease.
• If the lessee continues enjoying the thing after the expiration of the contract when there is
no implied new lease because the lessor objected to the continued enjoyment by the
lessee, the latter shall be subject to the responsibilities of a possessor in bad faith.

Grounds for ejectment

The lessor may judicially eject the lessee for any of the following
grounds:
• When the period agreed upon, or that which is fixed for the
duration of leases under Articles 1682 and 1687 has expired;
• Lack of payment of the price stipulated;
• Violation of any of the conditions agreed upon in the
contract; and
• When the lessee devotes the thing to any use or service not
stipulated, which causes the deterioration thereof; or if he or
she does not observe the requirement of due diligence of a
good father of the family in the use of the thing leased.

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Improvements introduced by the
lessee
• General Rule: Lessee is not entitled to reimbursement.
• A lessee is neither a builder in good faith nor in bad faith.
• Useful improvements:
• Lessor has the option to pay 50% of the value of the improvements made in
good faith.
• Otherwise, the lessee has the right to remove the improvements even
though the principal thing suffers damage but without causing any more
impairment on the property leased than is necessary.
• Ornamental improvements: Lessee is not entitled to
reimbursement but he or she may remove them provided no
damage is caused to the principal thing, and the lessor does not
choose them to retain them by paying their value.

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