Warranties attached to a contract of sale

Under a contract of sale involving real property, the seller is obliged to deliver it and transfer its ownership, upon the buyer’s payment of the price agreed upon.

The seller is deemed to have delivered the property when he transfers to the buyer the control and possession thereof, and executes a public instrument evidencing the sale.

Besides these obligations, the seller shall warrant the property being sold. In this regard, the Supreme Court referred to the seller’s warranties as statements or representations—contemporaneously and as part of the contract of sale, that refers to the character, quality or title of the goods or property to be sold.

Warranties are issued to promise or undertake to insure that certain facts are or shall be as the seller represents them.

Warranties are not the same as conditions imposed in a contract of sale. To be sure, warranties go into the performance of the seller’s obligation, while conditions go into the existence of the sale transaction itself.

Warranties may be agreed upon by the contracting parties—that is, express warranties, or by provision of law—that is, implied warranties, while conditions must be imposed by said parties.

An express warranty in a contract of sale involving real property exists when: (a) it affirms a fact or relates to any promise by the seller relating to the property; (b) the affirmation or promise naturally induced the buyer to purchase the property; and (c) the buyer purchases the property, relying on that affirmation or promise.

A seller’s opinion does not constitute an express warranty, unless he expressed his opinion as an expert and it was relied upon by the buyer.

Moreover, an express warranty may either be written into the contract or orally agreed upon by the parties.

Meanwhile, the Supreme Court held that an implied warranty is one which the law derives by application or inference from the nature of the transaction or the relative situation or circumstances of the parties.

Thus, unless a contrary intention appears, the following implied warranties attach to a contract of sale:

(a) the seller has a right to sell the property at the time when the ownership is to pass, while the buyer shall from that time have and enjoy the legal and peaceful possession of the property;

(b) the property shall be free from any hidden faults or defects, or any charge or encumbrance not declared or known to the buyer; and

(c) warranty against eviction, where the buyer would be deprived of the whole or part of the property purchased upon a final judgment based on a right prior to the sale or an act imputable to the seller.

The parties may increase, diminish or suppress the seller’s warranty against eviction. Any stipulation exempting the seller from the obligation to answer for eviction, however, shall be void, if he acted in bad faith.

The seller shall be liable for eviction arising from the prior sale of property for nonpayment of taxes due, which the buyer was not made known of at the time of the current sale.

Likewise, the seller’s liability arises from eviction in judicial sales, unless it is otherwise decreed in the judgment.

Meanwhile, the seller shall not be liable for eviction when adverse possession of the property had been commenced before the sale but the prescriptive period is completed after the transfer of ownership to the buyer.

If the buyer renounced the right to warranty in case of eviction, and eviction should take place, the seller shall only pay the value which the property had at the time of the eviction. But, the seller shall not be liable for eviction if the buyer waived said right with knowledge of the risks of eviction, and assumed the consequences thereof.

Whether the parties expressly agreed upon the warranty against eviction, in case eviction occurs, the buyer may demand the seller the:

(a) return of the value of the property sold at the time of the eviction, be it greater or less than the price of the sale;

(b) income or fruits, if the buyer was directed to deliver them to the party who won the suit against him;

(c) costs of the suit which caused the eviction and in a proper case, those of the suit brought against the seller for the warranty;

(d) expenses of the contract, if the buyer paid them; and

(e) damages and interests and ornamental expenses, if the sale was made in bad faith.

The buyer may demand the rescission of the contract of sale, while being obliged to return the property without other encumbrances than those which it had when he acquired it in the following instances:

(a) when the buyer loses, by reason of eviction, a part of the property sold of such importance, in relation to the whole, that he would not have bought it without said part; and

(b) when two or more properties or things have been sold for a lump sum, or for a separate price for each of them, if it should clearly appear that the buyer would not have purchased one without the other.

The warranty against eviction can only be enforced upon the promulgation of a final judgment, in which the buyer loses the property acquired or a part thereof. Moreover, the seller shall not be obliged to make good the proper warranty, unless he is summoned in the suit for eviction, at the purchaser’s instance.

Meanwhile, the buyer may demand the rescission of the contract or the appropriate indemnity, if the property sold should be encumbered with any non-apparent burden or servitude, of such nature that it must be presumed that the buyer would not have acquired it had he been aware thereof, but which was not mentioned in the contract.

The buyer may bring the action for rescission or damages within one year, to be computed from the execution of the deed. One year having elapsed, he may only bring an action for damages with an equal period, to be counted from the date on which he discovered the burden or servitude.

Meanwhile, should the buyer be disturbed in the possession or ownership of the property, or should he have reasonable grounds to fear such disturbance, by vindicatory action or foreclosure of mortgage, he may suspend the payment of the price until the seller has caused the disturbance or danger to cease.

The seller, however, may give security for the return of the price in a proper case, or it has been stipulated that, despite such contingency, the buyer shall be bound to make the payment. A mere act of trespass shall not authorize the suspension of the payment of the price.

In this regard, as held by the Supreme Court in one case, the pendency of a suit over the property sold justifies the buyer in suspending the payment of the balance of the purchase price. The sellers’ assurances that buyer need not worry about the suit because it was pure and simple harassment is not the kind of security that the seller may give to prevent the suspension of said payment.

Besides the implied warranties that usually attach to a contract of sale of real property, the contracting parties should also be mindful of the seller’s warranty against hidden defects, which applies to both movable and immovable properties. Thus, the seller shall be responsible for this warranty when the hidden defects:

(a) render the property unfit for the use for which it is intended; or

(b) diminish the property’s fitness for such use to the extent that, had the buyer been aware thereof, he would not have acquired it or would have given a lower price for it.

The seller shall not be liable for breach of this warranty, however, in the case of patent defects, or those which may be visible, or for those which are not visible if the buyer is an expert who, by reason of his trade or profession, should have known them.

The seller is responsible to the buyer for any hidden faults or defects in the property, even though he was not aware thereof. The seller shall not be so held liable, however, if the contrary was stipulated, and he was not aware of said faults or defects.

The warranty against hidden defects shall apply to judicial sales, except that the judgment debtor shall not be liable for damages.

In case of a breach of the warranty against hidden defects, the buyer may elect between withdrawing from the contract and demanding a proportionate reduction of the price, with damages in either case. Furthermore, actions arising from the warranty against hidden defects should be initiated within six months from the delivery of the property sold, as defined by law.

Source: Inquirer

Buying a residential condominium unit on installment

According to statistics found online, the Philippines has 154,700 condominium units as of 2023. This number is expected to reach 200,000 units by the end of 2025.

Based on this estimate, we can expect 45,000 more condominium units to be built in the next two years.

The rise in the number of condominium units has a direct correlation with condo prices. From 2017 to 2023, prices of residential condominium units have increased yearly by an average of about 8.55 percent a year.  The exception was in 2021 when prices decreased by 1 percent.

The thousands of condominium units being built and yet to be built by property developers will mostly be funded by loans from the banking sector.

Last year, the Bangko Sentral ng Pilipinas released data indicating that in the first three months of 2023, the banking industry extended P3 trillion worth of investments and loans to the real estate sector, which was 5.3 percent higher than the P2.85 trillion in the same period for 2022.

While some in the real estate sector have intimated that developers are scaling back residential developments in favor of commercial and office projects, the size of the residential condominium property sector will remain significant.

Considering that almost all property developers will finance their projects through loans and financing, it is but natural for a buyer, after having entered into a contract with the property developer for the purchase of a condominium unit, to worry that the developer may not comply with the promised specifications, or worse, might not even complete the project.

For those who can remember the financial crisis of 1997 and 2009, there were many unfinished structures that were promised to be beautiful high-rise residential condominium buildings.

Accordingly, it would be wise for potential buyers of condominium units, and those already paying for their units through regular installment payments, to be familiar with Presidential Decree No. 957 (“PD 957”).

Also known as the Subdivision and Condominium Buyers’ Protective Decree, its declared objective is “to provide a protective mantle over helpless citizens who may fall prey to the razzmatazz of what P.D. 957 termed ‘unscrupulous subdivision and condominium sellers…” (Francel Realty Corporation v. Sycip, G.R. No. 154684, 8 September 2005).

The practice of mortgaging the condominium project, defined by PD 957 as “the entire parcel of real property divided or to be divided primarily for residential purposes into condominium units, including all structures thereon”, to a bank, financial institution, or other creditors (“mortgage creditor”) is common practice.

While the availability of credit has helped the property sector to grow, there have been cases where fully paid buyers have had difficulty in consolidating the title to their condominium units or obtaining clean titles thereto.

Some mortgage creditors have refused to release the mortgage they hold over the condominium units on the ground that the mortgage debt has not been paid by the property developer.

In that regard, Section 18 of PD 957 specifically regulates the right of a developer to mortgage and encumber the condominium project. The law provides that the Housing and Land Use Regulatory Board (“HLURB”), now the Department of Human Settlements and Urban Development and Human Settlements Adjudication Commission pursuant to Republic Act No. 11201, must approve in writing any such mortgage or encumbrance for the same to be valid.

Mortgage of condominium units

In addition, PD 957 provides that: (a) proceeds of the loan should be used for the development of the condominium project, (b) effective measures have been provided to ensure such utilization, (c) buyers of condominium units must be notified before release of the loan, (c) buyers must be given the opportunity to pay their purchase price directly to the mortgage creditor who, in turn, shall apply such payments to the corresponding mortgage indebtedness and, (d) when fully paid, buyers have the right to the title and insist on the release of the mortgage as to their unit.

Mortgages of condominium projects that have not been approved by the HLURB are void (Home Bankers Savings and Trust Co. v. Court of Appeals, et al., G.R. No. 128354, 26 April 2005).

In one case, the Supreme Court declared void the mortgage of a condominium unit by the developer to a bank for non-compliance with PD 957.

The bank failed to check whether the developer secured the HLURB’s prior written approval, which approval is required by PD 957, before it accepted the properties as collateral and whether any of the properties offered as collateral already had corresponding buyers at the time the Mortgage Agreement was executed.

Even if the mortgage agreement between the bank and property developer was executed before the contract to sell and deed of absolute sale with the buyer, since the buyer paid its reservation fee four months before the execution of the mortgage agreement the court found that the bank should have verified with the developer if the unit already had a buyer. (Prudential Bank (now Bank of the Philippine Islands) v. Rapanot, et al., GR 191636, January 16, 2017))

Moreover, buyers must also verify whether the developer has mortgaged the condominium project, not only the specific unit, as it is also not a defense that the subject of the mortgage loan was for the entire land or building and not the individual subdivided units of the condominium project.

In a case, the court declared that the unit was also mortgaged when the entire parcel of land or building, of which it was a part, was mortgaged (Far East Bank & Trust Co. v. Marquez, G.R. No. 155344, 20 January 2004).

If the project or unit was mortgaged by the developer, the buyer may demand that they be allowed to pay the purchase price directly to the mortgage creditor, who shall apply the payments to the corresponding mortgage indebtedness, so that when fully paid, they would have the right to insist on the release of the mortgage of their unit and transfer title to their names.

On the other hand, in the event the property developer has not developed the condominium project according to the approved plans, or has not completed the construction within the agreed time limit, the buyer may stop paying their installments by giving notice to the owner or developer, and demand reimbursement on amounts already paid (Section 23, PD 957).

The right to stop payment is immediately effective upon giving due notice to the owner or developer, or upon filing a complaint before the HLRUB against the erring developer (Francel Realty Corporation v. Sycip, G.R. No. 154684, 8 September 2005).

When all is said and done, buyers must make sure that they know their rights under PD 957, and choose financially stable, socially-responsible and trustworthy developers, with whom to invest their hard-earned cash.

Source: Inquirer

The potential impact of the Real Property Valuation Act

The Real Property Valuation and Assessment Reform Act (RPVARA) under Senate Bill No. 2386 was ratified by Congress in March 2024 and is awaiting the President’s signature.

The RPVARA—part of Package 3 of the Department of Finance’s (DOF) Comprehensive Tax Reform Program—aims to promote an objective, standardized valuation of real property based on internationally accepted principles.

What are the implications when it passes into law?

Single value base

Real property valuation or appraisal determines the value of real property, and the type of value determined depends on where and how it will be used. In RPVARA, the market value of properties will be determined using internationally accepted valuation methods, for taxation and other real property-related government transactions.

Currently, different government agencies prepare valuations for multiple different purposes, such as taxation, expropriation, road-right-of-way acquisitions, and mortgage lending, among others. Apart from the costs and time allocated by different agencies involved, doing multiple different valuations can cause confusion and disputes in values, their bases, and even in methodologies.

The RPVARA intends to address this by establishing a single value base. It can also bring about other benefits including improved fiscal autonomy of local government units with potential increase in real property tax revenues; updated valuations that meet international standards; accessible centralized real property transactions database; improved ease of doing business; and higher investor confidence.

The Bureau of Local Government Finance (BLGF), under DOF, will lead the implementation of the RPVARA. It will develop and maintain the planned centralized real property transactions database, wherein the offices of the Register of Deeds, Bureau of Internal Revenue, notaries public, officials issuing building permits, and geodetic engineers conducting surveys within a locality are required to electronically submit relevant transactions data quarterly.

Impact on real property taxes

How will the RPVARA affect real property taxes then?

Real property taxes (RPT) are computed by multiplying the market value of a property by its assessment level and tax rate (basic RPT). There will also be an additional levy on real property for the Special Education fund at 1 percent of the assessed value, on top of the basic RPT.

Assessors will prepare a schedule of market values (SMV) where they base the market values of properties indicated in tax declarations. Proposed SMVs will be submitted to the BLGF, subjected to mandatory public consultations, and eventually approved by the DOF Secretary.

The SMV will be updated no earlier than every three years—with penal provisions for noncompliance with the periodic updates.

Assessors shall recommend “off-schedule” SMV revisions when there is a material change in property market values because of “…introduction of road right of way or similar infrastructure, in times of calamities, disasters, whether man-made or natural, during a pandemic or a declared public health emergency, whether national or localized, and other analogous adverse circumstances, or where corrections of errors and inequalities in the SMV is deemed necessary.” (SB 2386, Article III, Chapter 1, Section 19, Paragraph 2).

Assessors may suspend the conduct of revisions in case of a national emergency declared by the president or a local state of calamity declared by the local chief executive.

After the SMV is approved, assessors will then determine the assessment levels and tax rates, subject to the maximum levels identified in the Local Government Code of 1991, Book II (LGC). Since the SMV lists updated market values, the base values for computing assessed values will be higher.

The potential impact of changes in market values on real property taxes can be managed at this stage by regulating assessment levels and tax rates.

Impact to property owners

At present, valuations are not updated as often as mandated, resulting in lower RPT due from property owners.

With the penal provisions in RPVARA, LGUs will need to ensure that assessed values are updated to reflect current market values no earlier than every three years, or when there is a significant change in market values.

Assessors will then need to propose the assessment levels to be applied to different property types. When determining the assessment levels, LGUs should consider the impact of updated market values on property owners, adjusting assessment levels to ease the strain and facilitate the transition for taxpayers.

Execution is key

The RPVARA will certainly address the years-long issues we have been experiencing.

However, like any other law, we have yet to see if the Implementing Rules and Regulations are in keeping with the law’s original provisions, will address the objectives of the law, and if the implementation and execution of the provisions will be applied consistently.

Hopefully, moving forward, the new system will foster a more consistent, reliable, equitable, and transparent valuation system that will improve the ease of doing business in the country, making the Philippines even more attractive to potential investors.

Source: Inquirer