GUZMAN, BOCALING & CO., PETITIONER, VS. RAOUL S. V. BONNEVIE, RESPONDENT.

The subject of the controversy is a parcel of land measuring six hundred
(600) square meters, more or less, with two buildings constructed thereon,
belonging to the Intestate Estate of Jose L. Reynoso.

This property was leased to Raoul S. Bonnevie and Christopher
Bonnevie by the administratrix, Africa Valdez de Reynoso, for a period of one
year beginning August 8, 1976, at a monthly rental of P4,000.00.

The Contract of Lease contained the following stipulation:

20. – In case the LESSOR
desires or decides to sell the leased property, the LESSEES shall be given a
first priority to purchase the same,
all things and considerations being equal.

On November 3, 1976, according to Reynoso, she notified the
private respondents by registered mail that she was selling the leased premises
for P600,000.00 less a mortgage
loan of P100,000.00, and was giving them 30 days from receipt of the letter
within which to exercise their right of first priority to purchase the subject
property. She said that in the event
that they did not exercise the said right, she would expect them to vacate the
property not later than March, 1977.

On January 20, 1977, Reynoso sent another letter to private
respondents advising them that in view of their failure to exercise their right
of first priority, she had already sold the property.

Upon receipt of this letter, the private respondents wrote Reynoso informing her that
neither of them had received her letter dated November 3, 1976; that they had
advised her agent to inform them officially should she decide to sell the property so negotiations could be initiated;
and that they were “constrained to refuse (her) request for the
termination of the lease.”

On March 7, 1977, the leased premises were formally sold to
petitioner Guzman, Bocaling & Co. The Contract of Sale provided for immediate payment of P137,500.00 on
the purchase price, the balance of P262,500.00 to be paid only when the
premises were vacated.

On April 12, 1977, Reynoso wrote a letter to the private
respondents demanding that they vacate the premises within 15 days for their failure to pay the rentals for four
months. When they refused, Reynoso
filed a complaint for ejectment against them which was docketed as Civil Case
No. 043851-CV in the then City Court of Manila.

On September 25, 1979, the parties submitted a Compromise Agreement, which provided
inter alia that “the
defendant Raoul S.V. Bonnevie shall vacate the premises subject of the Lease
Contract, voluntarily and peacefully not later than October 31, 1979.”

This agreement was approved by the City Court and became the
basis of its decision. However, as the private respondents failed to
comply with the above-quoted stipulation, Reynoso filed a motion for execution
of the judgment by compromise, which was granted on November 8, 1979.

On November 12, 1979, private respondent Raoul S. Bonnevie filed a motion to set aside the decision of
the City Court as well as the
Compromise Agreement on the sole ground that Reynoso had not delivered to him
the “records of payments and receipts of all rentals by or for the account
of defendants xxx.” The motion was denied and the case was elevated to the
then Court of First Instance. That
Court remanded the case to the City Court of Manila for trial on the merits
after both parties had agreed to set aside the Compromise Agreement.

On April 29, 1980,
while the ejectment case was pending in the City Court, the private respondents
filed an action for annulment of the sale between Reynoso and herein petitioner
Guzman, Bocaling & Co. and cancellation of the transfer certificate of
title in the name of the latter. They also asked that Reynoso be required to sell
the property to them under the same terms and conditions agreed upon in the
Contract of Sale in favor of the petitioner. This complaint was docketed as Civil Case No. 131461 in the then Court
of First Instance of Manila.

On May 5, 1980, the City Court decided the ejectment case,
disposing as follows:

WHEREFORE, judgment is hereby rendered ordering defendants and all
persons holding under them to vacate the premises at No. 658 Gen. Malvar
Street, Malate, Manila, subject of this action, and deliver possession thereof
to the plaintiff, and to pay to the latter: (1) The sum of P4,000.00 a month from April 1, 1977 to August 8, 1977;
(2) The sum of P7,000.00 a month, as reasonable compensation for the continued
unlawful use and occupation of said premises, from August 9, 1977 and every
month thereafter until defendants actually vacate and deliver possession
thereof to the plaintiff; (3) The sum of P1,000.00 as and for attorney’s fees;
and (4) The costs of suit.

The decision was appealed to the then Court of First Instance of
Manila, docketed as Civil Case No. 132634 and consolidated with Civil Case No.
131461. In due time, Judge Tomas P.
Maddela, Jr. decided the two cases as follows:

WHEREFORE, premises considered, this Court in Civil Case No. 132634
hereby modifies the decision of the lower court as follows:

1.      Ordering defendants Raoul S.V. Bonnevie
and Christopher Bonnevie and all persons holding under them to vacate the
premises at No. 658 Gen. Malvar St., Malate, Manila, subject of this action and
deliver possessions thereof to the plaintiff; and

2.      To pay the latter the sum of P4,000.00 a
month from April 1, 1977 up to September 21, 1980 (when possession of the
premises was turned over to the Sheriff) after deducting whatever payments were
made and accepted by Mrs. Africa Valdez Vda. de Reynoso during said period,
without pronouncement as to costs.

As to Civil Case No. 131461, the Court hereby renders judgment in
favor of the plaintiff Raoul Bonnevie as against the defendants Africa Valdez
Vda. de Reynoso and Guzman and Bocaling & Co., declaring the deed of sale
with mortgage executed by defendant Africa Valdez Vda. de Reynoso in favor of
defendant Guzman and Bocaling null and void; cancelling the Certificate of
Title No. 125914 issued by the Register of Deeds of Manila in the name of
Guzman and Bocaling & Co.,; ordering the defendant Africa Valdez Vda. de
Reynoso to execute in favor of the plaintiff Raoul Bonnevie a deed of sale with
mortgage over the property leased by him in the amount of P400,000.00 under the
same terms and conditions should there be any other occupants or tenants in the
premises; ordering the defendants jointly and severally to pay the plaintiff
Raoul Bonnevie the amount of P50,000.00 as temperate damages; to pay the
plaintiff jointly and severally the amount of P2,000.00 per month from the time
the property was sold to defendant Guzman and Bocaling by defendant Africa
Valdez Vda. de Reynoso on March 7, 1977, up to the execution of a deed of sale
of the property by defendant Africa Valdez Vda. de Reynoso in favor of
plaintiff Bonnevie; to pay jointly and severally the plaintiff Bonnevie the
amount of P20,000.00 as exemplary damages, for attorney’s fees in the amount of
P10,000.00, and to pay the costs of suit.

Both Reynoso and the petitioner company filed with the Court of
Appeals a petition for review of this decision. The appeal was eventually resolved against them in a decision
promulgated on March 16, 1988, where the respondent court substantially
affirmed the conclusions of the lower court but reduced the award of damages.^[1]

Its motion for reconsideration having been denied on December 14,
1988, the petitioner has come to this Court, asserting inter alia that the respondent court erred in ruling that the grant of first priority to purchase the
subject properties by the judicial administratrix needed no authority from the probate court; holding that
the Contract of Sale was not voidable but rescissible; considering the
petitioner as a buyer in bad faith; ordering Reynoso to execute the deed of sale in favor of the Bonnevies; and not passing upon the counterclaim. Reynosa has not appealed.

The Court has examined the
petitioner’s contentions and finds them to be untenable.

Reynoso claimed to have sent the November 3, 1976
letter by registered mail, but
the registry return card was not in
offered in evidence. What she
presented instead was a copy of the said letter with a photocopy
of only the face of a registry return card claimed to refer to the said letter. A copy
of the other side of the card showing
the signature of the person who received the letter and the
date of the receipt was not submitted. There is thus no satisfactory proof that the letter was received by the Bonnevies.

Even if the letter had indeed been sent to and received by the
private respondents and they did not exercise
their right of first priority, Reynoso
would still be guilty of violating Paragraph 20 of the Contract of Lease which specifically stated that
the private respondents could exercise the right of first priority, “all
things and conditions being equal.” The Court reads this to mean that
there should be identity of the terms and conditions to be offered to the
Bonnevies and all other prospective buyers, with the Bonnevies to enjoy the
right of first priority.

The selling price quoted to the Bonnevies was P600,000.00, to be fully paid in cash
less only the mortgage lien of P100,000.00.^[2] On
the other hand, the selling price offered to and accepted by the petitioner was
only P400,000.00, and only P137,500.00 was paid in cash while the balance of
P272,500.00 was to be paid “when the property (was) cleared of tenants or
occupants.”^[3]

The fact that the Bonnevies had financial problems at that time
was no justification for denying them the first option to buy the subject
property. Even if the Bonnevies could
not buy it at the price quoted,
Reynoso could not sell it to
another for a lower price and under more favorable terms and conditions. Only if the Bonnevies failed to exercise their right of
first priority could Reynoso lawfully
sell the subject property to others, and at
that only under the same terms and conditions offered
to the Bonnevies.

The Court agrees
with the respondent court that it was
not necessary to secure the approval
by the probate court of the Contract of Lease because it did not involve an
alienation of real property of the estate nor did the term of the lease exceed
one year so as to make it fall under Article 1878(8) of the Civil Code. Only if Paragraph 20 of the Contract of
Lease was activated and the said property was intended to be sold would it be
required of the administratrix to secure the approval of the probate court
pursuant to Rule 89 of the Rules of Court.

As a strict legal
proposition, no judgment of the probate court was reviewed and eventually
annulled collaterally by the respondent court as contended by the
petitioner. The order authorizing the
sale in its favor was duly issued by the probate court, which thereafter
approved the Contract of Sale resulting in the eventual issuance of title in
favor of the petitioner. That order was
valid insofar as it recognized the existence of all the essential elements of a
valid contract of sale, but without regard to the special provision in the
Contract of Lease giving another party the right of first priority.

Even if the order of the probate court was valid, the private
respondents still had a right to rescind the Contract of Sale because of the
failure of Reynoso to comply with her duty to give them the first opportunity
to purchase the subject property.

The petitioner argues that assuming the Contract of Sale to be
voidable, only the parties thereto could bring an action to annul it pursuant
to Article 1397 of the Civil Code. It is stressed that private respondents are strangers to
that agreement and therefore have no personality to seek its annulment.

The respondent court correctly held that the Contract of Sale was
not voidable but rescissible. Under Article 1380 to 1381(3) of the Civil Code, a contract otherwise
valid may nonetheless be subsequently rescinded by reason of injury to third
persons, like creditors. The status of
creditors could be validly accorded the Bonnevies for they had substantial
interests that were prejudiced by the sale of the subject property to the
petitioner without recognizing their right of first priority under the Contract
of Lease.

According to Tolentino, rescission is a remedy granted by law to
the contracting parties and even to third persons, to secure reparation
for damages caused to them by a contract, even if this should be valid, by
means of the restoration of things to their condition at the moment prior to
the celebration of said contract.^[4] It is
a relief allowed for the protection of one of the contracting parties and even third persons from all
injury and damage the contract may cause,
or to protect some incompatible and preferent right created by the contract.^[5]
Rescission implies a contract which, even if initially valid, produces a lesion
or pecuniary damage to someone
that justifies its invalidation for reasons
of equity.^[6]

It is true that the acquisition by a third person of the property
subject of the contract is an obstacle to the action for its rescission where it
is shown that such third person is in lawful possession of the subject of the
contract and that he did not act in bad faith.^[7]
However, this rule is not applicable in the case before us because the
petitioner is not considered a third party in relation to the Contract of Sale
nor may its possession of the subject property be regarded as acquired lawfully
and in good faith.

Indeed, Guzman, Bocaling and Co. was the vendee in the
Contract of Sale. Moreover, the
petitioner cannot be deemed a purchaser in good faith for the record shows that
it categorically admitted it was aware of the lease in favor of the Bonnevies,
who were actually occupying the subject property at the time it was sold to
it. Although the Contract of Lease was
not annotated on the transfer certificate of title in the name of the late Jose
Reynoso and Africa Reynoso, the petitioner cannot deny actual knowledge of such
lease which was equivalent to and indeed more binding than presumed notice by
registration.

A purchaser in good faith and for value is one who buys the
property of another without notice that some other person has a right to or
interest in such property and pays a full and fair price for the same at the
time of such purchase or before he has notice of the claim or interest of some
other person in the property.^[8] Good
faith connotes an honest intention to abstain from taking unconscientious
advantage of another.^[9]
Tested by these principles, the petitioner cannot tenably claim to be a buyer
in good faith as it had notice of the lease of the property by the Bonnevies
and such knowledge should have cautioned it to look deeper into the agreement
to determine if it involved stipulations that would prejudice its own
interests.

The petitioner insists that it was not aware of the right of
first priority granted by the Contract of Lease. Assuming this to be true, we nevertheless agree with the
observation of the respondent court that:

If Guzman-Bocaling failed to inquire about the terms of the Lease
Contract, which includes Par. 20 on priority right given to the Bonnevies, it
had only itself to blame. Having known
that the property it was buying was under lease, it behooved it as a prudent
person to have required Reynoso or the broker to show to it the Contract of
Lease in which Par. 20 is contained.

Finally, the petitioner also cannot invoke the Compromise
Agreement which it says canceled the right of first priority granted to the
Bonnevies by the Contract of Lease. This agreement was set aside by the parties thereto, resulting in the
restoration of the original rights of the private respondents under the
Contract of Lease. The Joint Motion to
Remand filed by Reynoso and the private respondents clearly declared inter
alia:

That without going into the merits of instant petition, the parties
have agreed to SET ASIDE the compromise agreement, dated September 24, 1979 and
remand Civil Case No. 043851 of the City Court of Manila to Branch IX thereof
for trial on the merits.^[10]

We find, in sum, that the respondent court did not commit the
errors imputed to it by the petitioner. On the contrary, its decision is conformable to the established facts
and the applicable law and jurisprudence and so must be sustained.

WHEREFORE, the petition is DENIED, with costs against the
petitioner. The challenged decision is
AFFIRMED in toto. It is
so ordered.

Narvasa, C.J., Griño-Aquino, and
Medialdea, JJ., concur.

^[1]
Rollo, pp. 45-60; Penned by Mendoza, J., with Paras and Limcaoco,
JJ., concurring.

^[2]
Exhibit “5,” Original Records,
p. 88.

^[3]
Exhibit “B.” Original Records, p.
99.

^[4]
Tolentino, Commentaries and Jurisprudence
on the Civil Code of the
Philippines, Vol. IV, p. 571.

^[5]
Aquino v. Tañedo, 39
Phil. 517.

^[6]
Id., p. 572.

^[7]
Cordovero and Alcazar v. Villaruz and Borromeo, 46 Phil. 473.

^[8]
De Santos v. IAC, 157 SCRA 295.

^[9]
De la Cruz v. IAC, 157 SCRA 660; Cui and Joven v. Henson, 51
Phil. 606.

^[10]
Rollo, p. 182.