G.R. No. L-55350 March 28, 1983
OLIMPIA FERNANDEZ VDA. DE ZULUETA (Substituted by JOSEFINA, LIBERTY and GREGORIO all surnamed ZULUETA) petitioners, vs. ISAURO B. OCTAVIANO and AURELIO B. OCTAVIANO, respondents.

FACTS

On November 25, 1952, Olimpia Fernandez Vda. de Zulueta, as registered owner, executed a Deed of Absolute Sale (Exhibit “E”) over a 5.5-hectare riceland in favor of Aurelio B. Octaviano for P8,600.00. The deed stipulated that Aurelio would pay Olimpia P2,000.00 upon execution and assume the responsibility of redeeming the property from a third-party creditor, Maximino Gumayan, by paying the latter P6,600.00 on or before May 21, 1955. The instrument stated it was an “absolute and definite sale” and authorized the cancellation of Olimpia’s title and issuance of a new one to Aurelio upon redemption from Gumayan. On the same date, Aurelio signed a separate, unregistered document (Exhibit “F”) granting Olimpia an “option to repurchase” the property at any time after May 1958 but not later than May 1960 for the same price. Aurelio took possession. Disputes later arose regarding additional debts of Olimpia to Gumayan not covered by the sale, leading Aurelio to offer Olimpia the option to repurchase, which she did not immediately accept.

ISSUE

Whether the transaction between the parties, evidenced by the two documents executed on the same date, constitutes an absolute sale with an option to repurchase or a sale with pacto de retro (equitable mortgage).

RULING

The Supreme Court ruled the transaction is an absolute sale with an option to repurchase, not an equitable mortgage. The legal logic is anchored on the explicit terms of the principal document, Exhibit “E”, which is clear, definite, and couched in the language of an absolute sale. It transferred all rights and interests in the property to the vendee upon its execution, subject only to the vendee’s obligation to extinguish the existing liens. The separate, unregistered document, Exhibit “F”, created a unilateral promise granting the vendor a separate right to repurchase within a specified period, which is a distinct and independent contract. The Court emphasized that the two instruments must be construed together, but their separateness does not automatically convert the sale into a mortgage. For a transaction to be declared an equitable mortgage, the law requires clear, convincing, and conclusive evidence of circumstances such as gross inadequacy of price, the vendor remaining in possession, or the vendee retaining part of the purchase price. No such evidence was presented. The vendor’s failure to exercise the option within the stipulated period extinguished her right to repurchase. The Court of Appeals’ decision, which had reversed the Trial Court and declared the transaction an equitable mortgage, was itself reversed. The Supreme Court reinstated the Trial Court’s judgment recognizing the absolute nature of the sale.