May a mortgage contract provide: (a) that the mortgagor cannot sell the mortgaged property without first obtaining the consent of the mortgagee and that, otherwise, the sale made without the mortgagee’s consent shall be invalid; and (b) for a right of first refusal in favor of the mortgagee? YNARES-SANTIAGO, J

The controversy stems from loans obtained by the spouses Litonjua from L & R Corporation in the aggregate sum of P400,000.00; P200,000.00 of which was obtained on August 6, 1974 and the remaining P200,000.00 obtained on March 27, 1978. The loans were secured by a mortgage1 [See Exhibits "14" & "15", Deed and Amendment of Real Estate Mortgage, respectively, Folder of Exhibits.] constituted by the spouses upon their two parcels of land and the improvements thereon located in Cubao, Quezon City covered by Transfer Certificates of Title No. 197232 and 197233, with an area of 599 and 1,436 square meters, respectively. The mortgage was duly registered with the Register of Deeds of Quezon City.

On July 14, 1979, the spouses Litonjua sold to Philippine White House Auto Supply, Inc. (PWHAS) the parcels of land they had previously mortgaged to L & R Corporation for the sum of P430,000.00.2 [See Exhibit "U", Deed of Absolute Sale, id.] The sale was annotated at the back of the respective certificates of title of the properties.3 [See Exhibits "3-A" & "4-A", Annotations on Transfer Certificates of Title Nos. 197232 and 197233, respectively, id.]

Meanwhile, with the spouses Litonjua having defaulted in the payment of their loans, L & R Corporation initiated extrajudicial foreclosure proceedings with the Ex-Oficio Sheriff of Quezon City. On July 23, 1980, the mortgaged properties were sold at public auction to L & R Corporation as the only bidder for the amount of P221,624.58.4 [See Exhibits "C" & "5", Certificate of Sale, id.] When L & R Corporation presented its corresponding Certificate of Sale issued by Deputy Sheriff Roberto B. Garcia, to the Quezon City Register of Deeds for registration on August 15, 1980, it learned for the first time of the prior sale of the properties made by the spouses Litonjua to PWHAS upon seeing the inscription at the back of the certificates of title. Thus, on August 20, 1980, it wrote a letter5 [Exhibit "18", id.] to the Register of Deeds of Quezon City requesting for the cancellation of the annotation regarding the sale to PWHAS. L & R Corporation invoked a provision in its mortgage contract with the spouses Litonjua stating that the mortgagee’s prior written consent was necessary in case of subsequent encumbrance or alienation of the subject properties. Thus, it argued that since the sale to PWHAS was made without its prior written consent, the same should not have been registered and/or annotated.

On March 10, 1981, or seven months after the foreclosure sale, PWHAS, for the account of the spouses Litonjua, tendered payment of the full redemption price to L & R Corporation in the form of China Bank Manager’s Check No. HOF-M O12623 in the amount of P238,468.04.6 [See Exhibits "G" & "2", Letter of PWHAS to L & R Corporation, id.] L & R Corporation, however, refused to accept the payment, hence, PWHAS was compelled to redeem the mortgaged properties through the Ex-Oficio Sheriff of Quezon City. On March 31, 1981, it tendered payment of the redemption price to the Deputy Sheriff through China Bank Manager’s Check No. HOF-O14750 in the amount of P240,798.94.7 [See Exhibit "D", Letter of PWHAS to Sheriff Roberto Garcia, id.] The check was deposited with the Branch Clerk of Court who issued Receipt No. 75224848 [See Exhibit "X", id.] for the full redemption price of the mortgaged properties. Accordingly, the Deputy Sheriff issued a Certificate of Redemption in favor of the spouses Litonjua dated March 31, 1981.9 [Exhibit "F", id.]

In a letter of the same date, the Deputy Sheriff informed L & R Corporation of the payment by PWHAS of the full redemption price and advised it that it can claim the payment upon surrender of its owner’s duplicate certificates of title.10 [See Exhibit "E", Letter of Sheriff Roberto Garcia to L & R Corporation, id.]

On April 2, 1981, the spouses Litonjua presented for registration the Certificate of Redemption issued in their favor to the Register of Deeds of Quezon City. The Certificate also informed L & R Corporation of the fact of redemption and directed the latter to surrender the owner’s duplicate certificates of title within five days.11 [See Exhibit "I", Letter of the Register of Deeds of Quezon City to L & R Corporation, id.]

On April 22, 1981, L & R Corporation wrote a letter to the Sheriff, copy furnished to the Register of Deeds, stating: (1) that the sale of the mortgaged properties to PWHAS was without its consent, in contravention of paragraphs 8 and 9 of their Deed of Real Estate Mortgage; and (2) that it was not the spouses Litonjua, but PWHAS, who was seeking to redeem the foreclosed properties, when under Articles 1236 and 1237 of the New Civil Code, the latter had no legal personality or capacity to redeem the same.12 [See Exhibits "Y" and "13", Letter of L & R Corporation to Sheriff Roberto Garcia, id.]

On the other hand, on May 8 and June 8, 1981, the spouses Litonjua asked the Register of Deeds to annotate their Certificate of Redemption as an adverse claim on the titles of the subject properties on account of the refusal of L & R Corporation to surrender the owner’s duplicate copies of the titles to the subject properties. With the refusal of the Register of Deeds to annotate their Certificate of Redemption, the Litonjua spouses filed a Petition13 [Exhibit "J", id.] on July 17, 1981 against L & R Corporation for the surrender of the owner’s duplicate of Transfer Certificates of Title No. 197232 and 197233 before the then Court of First Instance of Quezon City, Branch IV, docketed as Civil Case No. 32905.

On August 15, 1981, while the said case was pending, L & R Corporation executed an Affidavit of Consolidation of Ownership.14 [Exhibit "O" and "8", id.] Thereafter, on August 20, 1981, the Register of Deeds cancelled Transfer Certificates of Title No. 197232 and 197233 and in lieu thereof, issued Transfer Certificates of Title No. 28005415 [Exhibit "P" and "9", id.] and 2805516 [Exhibit "Q" and "10", id.] in favor of L & R Corporation, free of any lien or encumbrance.

With titles issued in its name, L & R Corporation advised the tenants of the apartments situated in the subject parcels of land that being the new owner, the rental payments should be made to them, and that new lease contracts will be executed with interested tenants before the end of August, 1981.17 [See Annex "O" of Complaint; Records, p. 38.] Upon learning of this incident from their tenants, the spouses Litonjua filed an adverse claim18 [Exhibit "V", id.] and a notice of lis pendens19 [Exhibit "W", id.] with the Register of Deeds. In the process, they learned that the prior sale of the properties in favor of PWHAS was not annotated on the titles issued to L & R.

A complaint for Quieting of Title, Annulment of Title and Damages with preliminary injunction was filed by the spouses Litonjua and PWHAS against herein respondents before the then Court of First Instance of Quezon City, Branch 9, docketed as Civil Case No. Q-33362.20 [Records, pp. 1-39.] On February 10, 1987, the lower court rendered its Decision21 [Id., pp. 437-447.] dismissing the Complaint upon its finding that the sale between the spouses Litonjua and PWHAS was null and void and unenforceable against L & R Corporation and that the redemption made was also null and void.

On appeal, the decision of the trial court was set aside by the Court of Appeals in its Decision dated June 22, 1994,22 [Petition, Annex "B"; Rollo, pp. 69-81.] on the ground that the sale made to PWHAS as well as the redemption effected by the spouses Litonjua were valid. However, the same was subsequently reconsidered and set aside in an Amended Decision dated September 11, 1997.23 [Petition, Annex "A"; Rollo, pp. 46-68.]

Hence, the instant Petition on the following issues:

Paragraphs 8 and 9 of the subject Deed of Real Estate Mortgage read as follows –

There is no question that the spouses Litonjua violated both the aforesaid provisions, selling the mortgaged properties to PWHAS without the prior written consent of L & R Corporation and without giving the latter notice of such sale nor priority over PWHAS.

Petitioners defend the validity of the sale between them by arguing that paragraph 8 violates Article 2130 of the New Civil Code which provides that "(A) stipulation forbidding the owner from alienating the immovable mortgaged shall be void."

In the case of Philippine Industrial Co. v. El Hogar Filipino and Vallejo,25 [G.R. No. 20482, 45 Phil. 336 (1923)] a stipulation prohibiting the mortgagor from entering into second or subsequent mortgages was held valid. This is clearly not the same as that contained in paragraph 8 of the subject Deed of Real Estate Mortgage which also forbids any subsequent sale without the written consent of the mortgagee. Yet, in Arancillo v. Rehabilitation Finance Corporation,26 [G.R. No. 4602, 89 Phil. 801 (1951)] the case of Philippine Industrial Co., supra, was erroneously cited to have held that the prohibition in a mortgage contract against the encumbrance, sale or disposal of the property mortgaged without the consent of the mortgagee is valid. No similar prohibition forbidding the owner of mortgaged property from (subsequently) mortgaging the immovable mortgaged is found in our laws, making the ruling in Philippine Industrial Co., supra, perfectly valid. On the other hand, to extend such a ruling to include subsequent sales or alienation runs counter not only to Philippine Industrial Co., itself, but also to Article 2130 of the New Civil Code.

Meanwhile in De la Paz v. Macondray & Co., Inc.,27 [G.R. No. 44072, 66 Phil. 402 (1938)] it was held that while an agreement of such nature does not nullify the subsequent sale made by the mortgagor, the mortgagee is authorized to bring the foreclosure suit against the mortgagor without the necessity of either notifying the purchaser or including him as a defendant. At the same time, the purchaser of the mortgaged property was deemed not to have lost his equitable right of redemption.

In Bonnevie v. Court of Appeals,28 [G.R. No. 49101, 125 SCRA 122, 135 (1983)] where a similar provision appeared in the subject contract of mortgage, the petitioners therein, to whom the mortgaged property were sold without the written consent of the mortgagee, were held as without the right to redeem the said property. No consent having been secured from the mortgagee to the sale with assumption of mortgage by petitioners therein, the latter were not validly substituted as debtors. It was further held that since their rights were never recorded, the mortgagee was charged with the obligation to recognize the right of redemption only of the original mortgagors-vendors. Without discussing the validity of the stipulation in question, the same was, in effect, upheld.

Again, in Cruz v. Court of Appeals,29 [G.R. No. 90369, 191 SCRA 170, 173 (1990)] while a similar provision was recognized and applied, no discussion as to its validity was made since the same was not raised as an issue.

On the other hand, in Tambunting v. Rehabilitation Finance Corporation,30 [G.R. Nos. 54224-25, 176 SCRA 493, 502-503 (1989)] the validity of a similar provision was specifically raised and discussed and found as invalid. It was there ratiocinated that --

Earlier, in PNB v. Mallorca,31 [G.R. No. 22538, 128 SCRA 747 (1967)] it was reiterated that a real mortgage is merely an encumbrance; it does not extinguish the title of the debtor, whose right to dispose – a principal attribute of ownership – is not thereby lost. Thus, a mortgagor had every right to sell his mortgaged property, which right the mortgagee cannot oppose.

In upholding the validity of the stipulation in question, the amended Decision relied on the cases of Cruz v. Court of Appeals, supra, and Medida v. Court of Appeals.32 [G.R. No. 98334, 208 SCRA 887 (1992)] According to the Court of Appeals, said cases, are not only more recent that that of Tambunting, supra, but are also more applicable to the issue at bar.

We are not convinced.

As we have mentioned, although a similar provision was recognized and applied in Cruz v. Court of Appeals, supra, no discussion as to its validity was made since the same was not raised as an issue. Thus, it cannot be said that the specific pronouncement in the Tambunting case that such a stipulation can only be construed as against subsequent mortgages or encumbrances but not to an alienation of the immovable itself, which is prohibited under Article 2130, was abandoned thereby. On the other hand, the facts in the case of Medida v. Court of Appeals, are different from those in the present case for what was in issue in the said case was a second mortgage over a foreclosed property during the period of redemption. Thus, the ruling in Medida quoted in the Amended Decision that "what is delimited is not the mortgagor’s jus dispodendi, as an attribute of ownership, but merely the rights conferred by such act of disposal which may correspondingly be restricted," actually refers to the fact that the only rights which a mortgagor can legally transfer, cede and convey after the foreclosure of his properties are the right to redeem the land, and the possession use and enjoyment of the same during the period of redemption. It has no connection or reference to the right of a mortgagor to sell his mortgaged property without the required consent of the mortgagee. To be sure, there is absolutely nothing in Medida that upholds the validity of the stipulation in controversy.

Insofar as the validity of the questioned stipulation prohibiting the mortgagor from selling his mortgaged property without the consent of the mortgagee is concerned, therefore, the ruling in the Tambunting case is still the controlling law. Indeed, we are fully in accord with the pronouncement therein that such a stipulation violates Article 2130 of the New Civil Code. Both the lower court and the Court of Appeals in its Amended Decision rationalize that since paragraph 8 of the subject Deed of Real Estate Mortgage contains no absolute prohibition against the sale of the property mortgaged but only requires the mortgagor to obtain the prior written consent of the mortgagee before any such sale, Article 2130 is not violated thereby. This observation takes a narrow and technical view of the stipulation in question without taking into consideration the end result of requiring such prior written consent. True, the provision does not absolutely prohibit the mortgagor from selling his mortgaged property; but what it does not outrightly prohibit, it nevertheless achieves. For all intents and purposes, the stipulation practically gives the mortgagee the sole prerogative to prevent any sale of the mortgaged property to a third party. The mortgagee can simply withhold its consent and thereby, prevent the mortgagor from selling the property. This creates an unconscionable advantage for the mortgagee and amounts to a virtual prohibition on the owner to sell his mortgaged property. In other words, stipulations like those covered by paragraph 8 of the subject Deed of Real Estate Mortgage circumvent the law, specifically, Article 2130 of the New Civil Code.

Being contrary to law, paragraph 8 of the subject Deed of Real Estate Mortgage is not binding upon the parties. Accordingly, the sale made by the spouses Litonjua to PWHAS, notwithstanding the lack of prior written consent of L & R Corporation, is valid.

Coming now to the issue of whether the redemption offered by PWHAS on account of the spouses Litonjua is valid, we rule in the affirmative. The sale by the spouses Litonjua of the mortgaged properties to PWHAS is valid. Therefore, PWHAS stepped into the shoes of the spouses Litonjua on account of such sale and was in effect, their successor-in-interest. As such, it had the right to redeem the property foreclosed by L & R Corporation. Again, Tambunting, supra, clarifies that –

"x x x. The acquisition by the Hernandezes of the Escuetas’ rights over the property carried with it the assumption of the obligations burdening the property, as recorded in the Registry of Property, i.e., the mortgage debts in favor of the RFC (DBP) and the Tambuntings. The Hernandezes, by stepping into the Escuetas’ shoes as assignees, had the obligation to pay the mortgage debts, otherwise, these debts would and could be enforced against the property subject of the assignment. Stated otherwise, the Hernandezes, by the assignment, obtained the right to remove the burdens on the property subject thereof by paying the obligations thereby secured; that is to say, they had the right of redemption as regards the first mortgage, to be exercised within the time and in the manner prescribed by law and the mortgage deed; and as regards the second mortgage, sought to be judicially foreclosed but yet unforeclosed, they had the so-called equity of redemption."

The redemption of PWHAS to redeem the subject properties finds support in Section 6 of Act 3135 itself which gives not only the mortgagor-debtor the right to redeem, but also his successors-in-interest. As vendee of the subject properties, PWHAS qualifies as such a successor-in-interest of the spouses Litonjua.

It is clear from the records that PWHAS offered to redeem the subject properties seven (7) months after the date of registration of the foreclosure sale, well within the one year period of redemption.

While petitioners question the validity of paragraph 8 of their mortgage contract, they appear to be silent insofar as paragraph 9 thereof is concerned. Said paragraph 9 grants upon L & R Corporation the right of first refusal over the mortgaged property in the event the mortgagor decides to sell the same. We see nothing wrong in this provision. The right of first refusal has long been recognized as valid in our jurisdiction. The consideration for the loan-mortgage includes the consideration for the right of first refusal. L & R Corporation is in effect stating that it consents to lend out money to the spouses Litonjua provided that in case they decide to sell the property mortgaged to it, then L & R Corporation shall be given the right to match the offered purchase price and to buy the property at that price. Thus, while the spouses Litonjua had every right to sell their mortgaged property to PWHAS without securing the prior written consent of L & R Corporation, it had the obligation under paragraph 9, which is a perfectly valid provision, to notify the latter of their intention to sell the property and give it priority over other buyers. It is only upon failure of L & R Corporation to exercise its right of first refusal could the spouses Litonjua validly sell the subject properties to others, under the same terms and conditions offered to L & R Corporation.

What then is the status of the sale made to PWHAS in violation of L & R Corporation’s contractual right of first refusal? On this score, we agree with the Amended Decision of the Court of Appeals that the sale made to PWHAS is rescissible. The case of Guzman, Bocaling & Co v. Bonnevie33 [G.R. No. 86150, 206 SCRA 668, 675 (1992)] is instructive on this point –

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. It is a relief allowed for one of the contracting parties and even third persons from all injury and damage the contract may cause, or to protect some incompatible and preferential right created by the contract. 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." (underscoring, Ours)

It was then held that the Contract of Sale there, which violated the right of first refusal, was rescissible.

In the case at bar, PWHAS cannot claim ignorance of the right of first refusal granted to L & R Corporation over the subject properties since the Deed of Real Estate Mortgage containing such a provision was duly registered with the Register of Deeds. As such, PWHAS is presumed to have been notified thereof by registration, which equates to notice to the whole world.

We note that L & R Corporation had always expressed its willingness to buy the mortgaged properties on equal terms as PWHAS. Indeed, in its Answer to the Complaint filed, L & R Corporation expressed that it was ready, willing and able to purchase the subject properties at the same purchase price of P430,000.00, and was agreeable to pay the difference between such purchase price and the redemption price of P249,918.77, computed as of August 13, 1981, the expiration of the one-year period to redeem. That it did not duly exercised its right of first refusal at the opportune time cannot be taken against it, precisely because it was not notified by the spouses Litonjua of their intention to sell the subject property and thereby, to give it priority over other buyers.

All things considered, what then are the relative rights and obligations of the parties? To recapitulate:, the sale between the spouses Litonjua and PWHAS is valid, notwithstanding the absence of L & R Corporation’s prior written consent thereto. Inasmuch as the sale to PWHAS was valid, its offer to redeem and its tender of the redemption price, as successor-in-interest of the spouses Litonjua, within the one-year period should have been accepted as valid by L & R Corporation. However, while the sale is, indeed, valid, the same is rescissible because it ignored L & R Corporation’s right of first refusal.

Foreseeing a possible rescission of the sale, the spouses Litonjua contend that with the restoration of the original status quo, with no sale having been made, they should now be allowed to redeem the subject properties, the period of redemption having been suspended during the period of litigation. In effect, the spouses Litonjua want to retain ownership of the same. We cannot, however, sanction this belated reversal of the spouses Litonjua’s decision to sell. To do so would afford them undue advantage on account of the appreciation of the value of the subject properties in the intervening years when they precisely were the ones who violated and ignored the right of first refusal of L & R Corporation over the same. Moreover, it must be stressed that in rescinding the sale made to PWHAS, the purpose is to uphold and enforce the right of first refusal of L & R Corporation.

WHEREFORE, the Decision appealed from is hereby AFFIRMED with the following MODIFICATIONS:

(a).......Ordering the rescission of the sale of the mortgaged properties between petitioners spouses Reynaldo and Erlinda Litonjua and Philippine White House Auto Supply, Inc. and ordering said spouses to return to Philippine White House Auto Supply, Inc. the purchase price of P430,000.00;

(c).......Disallowing, due to the rescission of the sale made in its favor, the redemption made by Philippine White House Auto Supply, Inc. and ordering Quezon City Sheriff Roberto Garcia to return to it the "redemption" check of P240,798.94;

(d).......Allowing respondent L & R Corporation to retain its consolidated titles to the foreclosed properties but ordering it to pay to the Litonjua spouses the additional sum of P189,201.96 representing the difference from the purchase price of P430,000.00 in the rescinded sale;

(e).......Deleting the awards for moral and exemplary damages and attorney’s fees to the respondents.

No pronouncement as to costs.

Bellosillo, Melo, Puno, Kapunan, Panganiban, Quisumbing, Purisima, Pardo, Buena, Gonzaga-Reyes, and De Leon, Jr., JJ., concur.

Vitug, J., see concurring and dissenting.

Davide, Jr., C.J., and Mendoza, J., joins J. Vitug in his concurring and dissenting opinion.