The law on double sales

Imagine you bought a parcel of land from a seller sometime in 2019. Because of the lockdowns due to the pandemic, you were not able to possess it and register the sale. More recently you notice that a second buyer, who has actual knowledge of the sale to you, is residing on your land. This second buyer says that he bought the subject land from the seller in 2021 and registered its sale, so he has become the rightful owner of the same.

So who has the superior right to the subject property?

Buying a property for whatever purposes is supposed to give some measure of security for the buyer, whether it be for investment, for inheritance for passing down to their the next of kin, or for immediate use such as for one’s family home or a small business.

But as with all transactions, buying a property is not headache-proof. It is indeed lamentable when the security expected of the sale turns into an insecurity due to legal issues.

One of the more common ways a sale of property reaches the courts and ties the party to many years of litigation is the case of double sales.

Double sales are governed by Article 1544 of the New Civil Code. Under this Article, if the same personal or movable property is sold to different buyers, the first buyer to take possession of the movable or personal property in good faith.

However, if it involves real or immovable property such as a piece of land, ownership of an immovable property which is the subject of a double sale shall be deemed vested and ownership will be transferred:

(1) to the buyer acquiring it who in good faith first recorded it in the Registry of Property;

(2) in default thereof, the buyer who in good faith was first in possession; and (3) in default thereof, the buyer who presents the oldest title, provided there is good faith on his/her end.

The requirement of the law is two-fold: acquisition in good faith and registration in good faith.

Good faith must concur with the registration. If it would be shown that a buyer was in bad faith, the alleged registration they have made amounted to no registration at all. (Rosaroso vs. Soria, G.R. No. 194846, June 19, 2013)

Good faith means that registrant must have no knowledge of the defect or lack of title of the seller, or must not have been aware of facts which should have put him upon such inquiry and investigation as might be necessary to acquaint him with the defects in the title of his seller.

This rule on double sales rule likewise makes reference to the familiar principle of primus tempore, potior jure (first in time, stronger in right).

Hence, for immovable property, the one who acquires it and first records it in the Registry of Property, both made in good faith, shall be deemed the owner.

But before these rules apply, one must check first if there is a double sale in the first place. There is a double sale if the following are met:

• There are two or more sales transactions pertaining to exactly the same subject matter

• The sales transactions are valid

• There are two (or more) buyers at odds over the rightful ownership of the subject matter must, and each represent conflicting interests; and

• The two (or more) buyers at odds over the rightful ownership of the subject matter must each have bought from the very same seller.

Article 1544 only applies to instances of double sales, and not where one contract is some other transaction, such as a contract to sell, even if the latter concurs with a contract of sale over the same realty. For instance, in the 2016 case of Desiderio vs. Manzano (G.R. No. 201883, November 16, 2016), the Supreme Court ruled that if the contract between parties therein is a contract of sale, then Article 1544 of the Civil Code applies, for there is an apparent case of double sale.

However, if the contract is merely a contract to sell, the propriety of applying Art. 1544 falters.

In Desiderio, the contract was a mere contract to sell because the same is conditioned upon full payment of the agreed purchase price.

Since petitioners failed to pay the purchase price in full, while the subsequent buyer did and thereafter she was able to register her purchase and obtain a new certificate of title in her name, clearly there is only one sale – and that is, the one in the subsequent buyer’s favor.

Since failure to pay the price in full in a contract to sell renders the same ineffective and without force and effect, then there is no prior sale to speak of. There is only one valid sale, hence the rule on double sales under Article 1544 of the Civil Code does not apply.

Hence, ownership of the subject land pertains to you.

Source: Coventus law

Is a survey plan necessary for identification of land?

In recovering a parcel of land, it is essential that the property must be identified.

This is in consonance with Article 434 of the New Civil Code of the Philippines which states that: "In an action to recover, the property must be identified, and the plaintiff must rely on the strength of his title and not on the weakness of the defendant's claim. (n)"

The certificate of title containing the technical description may not be sufficient to prove the identity of your land. This finds support in the case of Gemina vs. Heirs of Espejo Jr. (GR 232682, Sept. 13, 2021) where the Supreme Court stated that:

"If only to shed light on a few questions of law to serve as guide, Article 434 of the Civil Code is controlling in this case. It provides that '[i]n an action to recover, the property must be identified, and the plaintiff must rely on the strength of his title and not on the weakness of the defendant's claim.' It is hornbook doctrine that the entitlement to the possession of real property belongs to its registered owner. However, the registered owner must seek proper judicial remedy and comply with the requisites of the chosen action in order to recover possession of a real property from the occupant who has actual and physical possession thereof. Furthermore, it must be emphasized that the plaintiff must not bank on the weakness of the defendant's title, hence, must establish his title and the identity of the property because of the possibility that neither the plaintiff nor the defendant is entitled or even more the true owner of the property in dispute.

"It appears on record that the identity of the subject property was ascertained by the trial court and the appellate court based on the technical description stated in TCT 93309 and the Judicial Affidavit of Ma. Teresa R. Espejo which merely identified TCT 93809 as one registered in the names of Gerardo and Nenafe. To our mind, the technical description that provides for the metes and bounds of a parcel of land cannot stand alone, much more be considered as foolproof evidence exactly pointing to the subject property. The identity of the disputed land sought to be recovered or of the subject property in this case may be established through a survey plan of the said property. Absent such evidence or any other proof to such effect. We cannot subscribe hook, line and sinker to the conclusion that the subject property had been sufficiently identified."

Applying the above-cited decision, the technical description as reflected in the certificate of title (Torrens Title) which provides for the metes and bounds of the land cannot stand alone in an action for recovery of the same. The identity of the land may be established through a survey plan of the property.

Source: Manila Times

Pros and cons in owning property through a corporation

When investing in a property, giving careful consideration on ownership structure could prove to be crucial. Buying directly the property, or setting up a corporation to buy the property, may have its own advantages and disadvantages. Needless to say, one has to weigh on its upsides and downsides before deciding to buy, because investing in properties could cost quite a buck. Thus, it is best to have an informed choice before making such purchase.

Advantages of ownership through a corporation

Limited Liability. Corporations are considered as persons, and with personality separate and distinct from that of the directors, officers, and stockholders. Unless there are fraudulent transactions involved, there would be no basis under the law to pierce the veil of corporate fiction. This separate corporate personality therefore shields personally-owned assets from any liability which may otherwise be incurred only by the corporation who owns the property.

Easy transfer by subscription of shares. Since the corporation owns the property, one would have to acquire shares of stocks in order to acquire interest over said property. This would be much easier because anyone who wish to acquire interest over the property would not have to deal anymore with the cumbersome process of property registration before the Registry of Deeds. Stock transfer is enough, and all it needs is for such stock transfer to be recorded in the books of the corporation.

Taxes only on declared dividends. Subject to the provisions on the Tax Code on Improperly Accumulated Earnings Tax (IAET), income taxes are due only on such dividends actually declared. A shareholder can use this to determine his individual income in a particular year, considering that the corporation may or may not declare dividends depending on the discretion of the Board of Directors, and taxes shall be due only if dividends are declared.

Control by the Board of Directors. Despite the fact that various persons may have indirectly acquired an interest over the property by subscription to shares of stock, one may still retain the power to manage the property owned by the corporation by being a member of the Board of Directors, as all corporate powers are exercised by the Board under Section 23 of the Corporation Code.

Disadvantages of ownership through a corporation

Higher income tax rate for a corporation. A corporation is subject to only a single rate of corporate income tax, which is currently at 30% of the gross income. The rule is different for individuals, as they are subject to income tax in graduated rates, which means that the shareholders, as individuals, shall pay taxes at a lower rate if the corporate property makes lower profits. Just take note, however, that this particular disadvantage may turn into an advantage when the corporate income already exceeds P2,000,000.00 per annum, because individuals could now be subjected to higher tax rates than corporation when such income threshold is exceeded. Under the TRAIN Law (R.A. No. 10963), individuals can now be taxed at 32% to 35% on net income when the said threshold is exceeded, as opposed to only 30% flat rate on net income for corporations.

Applicability of the Minimum Corporate Income Tax. After the fourth year, the corporation shall already be subject to Minimum Corporate Income Tax (MCIT) at 2% of the gross income under Section 27(e) of the Tax Code, whether or not the corporation has actual earnings. This is not the case for individual owners, whose income will be taxed strictly based on its net income.

Higher tax rates on transfer of shares. Since it is the corporation who owns the property, anyone who would wish to acquire an interest on said property may do so by subscribing to shares of stock in the corporation. Under the TRAIN Law, however, capital gains on transfer of shares is now taxed at a fixed rate of 15%, as opposed to capital gains tax of only 6% flat rate that individuals incur in transferring ownership over the property itself.

Double taxation. If the corporation makes a profit, the government will take a big chunk of such profits through corporate income taxation. Once the dividends are taken out of the corporation, then the shareholder will ultimately have to pay for his own income tax. In such case, the corporation’s earnings shall be taxed twice.

Additional costs. Forming a corporation will necessarily entail additional cost for processing and payment of fees.

Weighing in on the pros and cons

In sum, forming a corporation for the purpose of buying properties has its own pros and cons. However, depending upon the circumstances, one may take full advantage of the pros and minimize the cons. It must be noted that the cons mentioned above focus more on possible tax treatment and additional cost. Therefore, the following should be taken into consideration.

If the property to be purchased is not expected to earn profits, it would be more advisable to form a corporation that would purchase and own the property. Since no profits are expected, there would be no reason to worry about being assessed of huge amounts of taxes despite having a fixed rate of 30% corporate income tax, or being subjected to 2% MCIT whenever applicable. There would also be no expectation of dividend declaration that may subject an individual shareholder to income tax.

Forming a corporation would even provide a shield that would prevent the stockholders’ individual properties from being subjected to liability, provided that there are no fraudulent transactions and/or bad faith in dealing with third persons. This is an advantage individual property owners will never have.

More importantly, the owner of the property will be able to avoid being taxed twice on the very same earnings that the property has produced, which taxes would have amounted in huge values given the fact of earning profits, and the huge applicable rates that such earnings may be subjected to. Twice.

Given the advantages and disadvantages of owning a property through a corporation, one has to give serious thoughts as to the ownership structure. It is so because the simple difference in its ownership can spell the difference between saving big, or paying additional costs.

Source: Alburolaw