Ejectment After Contract to Sell Rescission: Demand to Pay Not Required

In a significant ruling for sellers and buyers alike, the Supreme Court has clarified the rules on ejectment cases that arise from a rescinded contract to sell. The case of Union Bank of the Philippines v. Philippine Rabbit Bus Lines, Inc. (G.R. No. 205951, July 4, 2016) settles a common point of confusion: when a buyer fails to pay under a contract to sell and the contract is rescinded, the seller does not need to send a separate demand to pay before filing an ejectment case. A demand to vacate is sufficient.

The Dispute

Union Bank owned property in Alaminos, Pangasinan, that Philippine Rabbit Bus Lines occupied after losing it through foreclosure. In 2001, the parties executed a contract to sell, allowing the bus company to repurchase the property through quarterly installment payments. The contract contained a forfeiture clause, stating that if the buyer defaulted, all payments made would be forfeited as penalty and liquidated damages, and applied as rentals for the buyer's continued use of the property.

Philippine Rabbit failed to pay its amortizations. Union Bank sent a demand letter in December 2003, giving the buyer 30 days to pay the arrears or the contract would be deemed automatically rescinded. When the buyer failed to pay, the contract was rescinded in February 2004. The buyer then issued postdated checks, but only one cleared. Union Bank applied that amount as rental payment and sent a demand to vacate in May 2004. When the buyer refused to leave, Union Bank filed an ejectment case in the Municipal Trial Court in Cities (MTCC).

The Procedural Question

The lower courts dismissed the ejectment case, ruling that the MTCC lacked jurisdiction. They reasoned that under Section 2, Rule 70 of the Rules of Court, a demand to pay and a demand to vacate must both be made before an ejectment suit can proceed. Since Union Bank's demand letter was only for vacating the premises, the courts held the jurisdictional requirement was not met.

The Supreme Court disagreed. It explained that the requirement of a demand to pay applies specifically to lease agreements. An ejectment case is not limited to landlord-tenant disputes. It is also available against anyone who withholds possession after the expiration or termination of their right to possess under any express or implied contract, including a contract to sell.

The Ruling

The Court held that in a contract to sell, the full payment of the purchase price is a positive suspensive condition. This means that ownership does not transfer to the buyer until the price is fully paid. When the buyer fails to pay, this is not a breach of contract but an event that prevents the seller from conveying title. The contract simply becomes ineffective and without force and effect.

Because the contract was already rescinded due to non-payment, the buyer lost its right to possess the property. The seller's cause of action was not based on unpaid rent but on the buyer's unlawful withholding of possession after the contract had been terminated. Therefore, no demand to pay was necessary. The demand to vacate, which the buyer received, was sufficient to make its continued possession unlawful.

The Court also outlined the four essential allegations in a valid ejectment complaint: (1) the defendant originally had lawful possession by contract or tolerance; (2) the possession became illegal upon notice of termination of the right to possess; (3) the defendant remained in possession; and (4) the complaint was filed within one year from the unlawful withholding. Union Bank's complaint satisfied all these requirements.

Practical Takeaways

• In a contract to sell, non-payment does not require a demand to pay before ejectment. Once the contract is rescinded, the buyer's right to possess ends, and a demand to vacate is the jurisdictional prerequisite.
• Ejectment is a versatile remedy. It is not only for lease agreements but also for any situation where possession is unlawfully withheld after the termination of a contractual right to possess.
• The one-year rule is critical. An ejectment case must be filed within one year from the unlawful deprivation or withholding of possession.
• Forfeiture clauses matter. A contract provision that applies payments as rentals can strengthen a seller's claim for rental arrears after rescission.
• Precise drafting of demand letters is essential. The demand to vacate must be clear and unequivocal, and it must be properly served on the occupant.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.