34.1 Sales: Warranties, Installment Sales, and Redemption

Sales: Warranties, Installment Sales, and Redemption

This section continues the law on sales with the seller's express and implied warranties (title, eviction, hidden defects), the installment sales laws for personal property (Recto Law) and residential real property (Maceda Law), PD 957 and the Condominium Act, and the extinguishment of sale through conventional and legal redemption, including equitable mortgages.

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1. Warranties in Contracts of Sale

Express Warranties (Article 1546)

Any affirmation of fact or any promise by the seller relating to the thing is an express warranty if the natural tendency of such affirmation or promise is to induce the buyer to purchase the thing, and if the buyer purchases the thing relying thereon. No affirmation of the value of the thing, nor any statement purporting to be a statement of the seller's opinion only, shall be construed as a warranty, unless the seller made such affirmation or statement as an expert and it was relied upon by the buyer.

Implied Warranties (Article 1547)

Under the Civil Code, the vendor gives two fundamental implied warranties by operation of law, unless a contrary intention appears:

1. Implied Warranty of Title and Against Eviction (Articles 1548-1560)

Eviction takes place whenever by a final judgment based on a right prior to the sale or an act imputable to the vendor, the vendee is deprived of the whole or of a part of the thing purchased.

• Requisites of Eviction:
  1. Final judgment;
  2. Vendee is deprived of whole or part of the thing sold;
  3. Deprivation is based on a right prior to sale or an act imputable to the vendor;
  4. Vendor was summoned and made co-defendant in the suit for eviction at the instance of the vendee.
• Vendor's Liability upon Eviction (VICED):
  • V - Value of the thing at the time of eviction;
  • I - Income or fruits if vendee was ordered to deliver them to the adjudicating party;
  • C - Costs of the suit which caused the eviction;
  • E - Expenses of the contract paid by the vendee;
  • D - Damages and interests, if the vendor acted in bad faith.
• Waiver of Warranty Against Eviction:
  • Waiver Consciente: Vendee makes the waiver without knowledge of the risk of eviction. Vendor is liable only for the value of the thing at the time of eviction.
  • Waiver Intencionada: Vendee makes the waiver with knowledge of the risk of eviction and assumes its consequences. Vendor is completely exempt from all liability, provided the vendor did not act in bad faith.

2. Implied Warranty Against Hidden Defects & Encumbrances (Articles 1561-1571)

The vendor warrants that the thing sold is free from hidden faults or defects which make it unfit for the use for which it is intended, or diminish its fitness for such use to such an extent that, had the vendee been aware thereof, he would not have acquired it or would have given a lower price for it.

• Remedies of Vendee (Alternative):
  1. Accion Redhibitoria: Rescission of the contract with damages;
  2. Accion Quanti Minoris: Proportionate reduction of the price with damages.
• Prescription Period: Actions for breach of warranty against hidden defects prescribe in six (6) months from the date of delivery of the thing sold (Article 1571).

Redhibitory Defects of Animals (Articles 1576-1581)

• A redhibitory defect is a hidden defect of an animal of such nature that expert knowledge is insufficient to discover it.
• Prescription Period: The redhibitory action based on the faults or defects of animals must be brought within forty (40) days from the date of delivery to the vendee.
• Void Sales: The sale of animals suffering from contagious diseases is void. A sale of animals is also void if they are found to be unfit for the use or service for which they were purchased as indicated in the contract.

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2. Installment Sales Laws: Recto Law & Maceda Law

Installment sales are subject to strict statutory consumer protection frameworks designed to prevent predatory vendor practices and unjust forfeitures.

1. Recto Law: Sale of Personal Property on Installments (Articles 1484-1486)

The Recto Law governs contracts of sale of personal property the price of which is payable in installments, as well as leases of personal property with option to buy.

                               Recto Law Remedies (Article 1484)
                                                │
         ┌──────────────────────────────────────┼──────────────────────────────────────┐
         ▼                                      ▼                                      ▼
Exact Fulfillment                      Cancellation of Sale                   Foreclosure of Chattel Mortgage
• Failure to pay ANY installment       • Default of 2 OR MORE installments     • Default of 2 OR MORE installments
• Sue for specific performance         • Mutual restitution of thing & price  • Foreclose on personal property sold
• Deficiency judgment is ALLOWED       • Seller may retain reasonable rent    • STRICT DEFICIENCY RECOVERY BAR:
• Can attach mortgaged thing or        • Forfeiture clause is VALID unless      No deficiency judgment allowed!
  other general debtor assets            unconscionable (Art. 1486)             Cannot sue for unpaid balance

Key rules governing the Recto Law:

• Mutually Exclusive: The three remedies are strictly alternative. The selection of one bars the exercise of the others.
• Forfeiture of Installments (Article 1486): When the seller cancels the sale or forecloses, a stipulation that installments already paid will not be returned to the buyer is valid, as long as it is not unconscionable under the circumstances. Courts may reduce an unconscionable forfeiture.
• Foreclosure Deficiency Bar: If the vendor forecloses the chattel mortgage on the thing sold, he shall have no further action against the purchaser to recover any unpaid balance of the price. Any agreement to the contrary is void. If the vendor chooses to sue for specific performance instead, he can obtain a deficiency judgment against the buyer's other assets because he did not foreclose the chattel mortgage.

2. Maceda Law: Realty Installment Buyer Protection Act (Republic Act No. 6552)

The Maceda Law protects buyers of residential real estate (subdivision lots, condominium units, residential apartments) sold on installment plans, including financing transactions. It explicitly excludes industrial lots, commercial buildings, and sales to tenants under agrarian reform laws.

$\text{Cash Surrender Value (CSV)} = \min\left[50\% + 5\% \times (\text{Years Paid} - 5), 90\%\right] \times \text{Total Payments Made}$

CPALE Rule: Under the Maceda Law, down payments, deposits, and reservation fees are included in the computation of "Total Payments Made" for determining the years paid and the cash surrender value.

3. PD 957 and the Condominium Act (RA 4726)

PD 957 (Subdivision and Condominium Buyers' Protective Decree) regulates developers of subdivision and condominium projects:

• The project must be registered and the developer must obtain a license to sell from the housing regulator (now the Department of Human Settlements and Urban Development, DHSUD) before selling units.
• Section 23: No installment payments are forfeited when the buyer, after due notice to the developer, stops paying because the developer failed to develop the project according to the approved plans and within the time limit. The buyer may also demand a refund of payments made.
• Section 25: The developer must deliver the title to the buyer upon full payment.
• A developer may not mortgage a unit or lot without the regulator's prior written approval.

RA 4726 (Condominium Act): A condominium unit owner holds exclusive ownership of the unit and an undivided interest in the common areas, usually held by a condominium corporation of which the unit owners are shareholders or members. Because land ownership is reserved to Filipinos, foreigners may own condominium units only as long as foreign ownership in the condominium corporation does not exceed 40%.

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3. Extinguishment of Sale: Conventional & Legal Redemption

Sales are extinguished by the same causes as all other obligations (payment, loss, condonation, confusion, compensation, novation), and by Conventional Redemption or Legal Redemption (Article 1600).

Conventional Redemption (Pacto de Retro Sale)

Conventional redemption takes place when the vendor reserves the right to repurchase the thing sold, with the obligation to return to the vendee the price of the sale, expenses of the contract, necessary and useful expenses made on the thing sold (Article 1616).

• Period of Redemption (Article 1606):
  • If no period is agreed upon: The redemption period is four (4) years from the date of the contract.
  • If a period is agreed upon: The period cannot exceed ten (10) years.

Presumption of Equitable Mortgage (Article 1602)

A contract purporting to be an absolute sale or a sale with right to repurchase (pacto de retro) is legally presumed to be an Equitable Mortgage in any of the following six statutory instances:

1. The price of the sale with right to repurchase is unusually inadequate;
2. The vendor remains in physical possession of the thing sold as lessee or otherwise;
3. 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. The purchaser retains for himself a part of the purchase price;
5. 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.

Consequence of Equitable Mortgage: In case of doubt, a contract purporting to be a sale with pacto de retro is construed as an equitable mortgage. The apparent seller is not divested of title; the apparent buyer must foreclose the mortgage to recover his debt.

Legal Redemption (Retracto Legal)

Legal redemption is 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:

1. Co-owners (Article 1620): A co-owner of a thing may exercise the right of redemption in case the shares of all the other co-owners or of any of them are sold to a third person. If two or more co-owners desire to exercise redemption, they may only do so in proportion to their shares.
2. Adjoining Owners of Rural Land (Article 1621): Owners of adjoining rural land have redemption rights when a piece of rural land with an area not exceeding one (1) hectare is alienated, unless the grantee does not own rural land.
3. Adjoining Owners of Urban Land (Article 1622): Right of pre-emption/redemption for urban land so small and situated that a major portion cannot be used for practical purposes, bought merely for speculation.

• Notice Requirement (Article 1623): The right of legal pre-emption or redemption must be exercised within thirty (30) days from written notice given by the vendor or prospective vendor.