G.R. No. 130722, December 9, 1999
SPS. REYNALDO K. LITONJUA and ERLINDA P. LITONJUA and PHIL. WHITE HOUSE AUTO SUPPLY, INC., petitioners, vs. L & R CORPORATION, VICENTE M. COLOYAN in his capacity as Acting Registrar of the Deeds of Quezon City thru Deputy Sheriff ROBERTO R. GARCIA, respondents.

FACTS

Spouses Litonjua obtained loans from L & R Corporation, secured by a real estate mortgage over two parcels of land. The mortgage contract contained stipulations requiring the mortgagor to obtain the mortgagee’s written consent before selling the property and granting the mortgagee a right of first refusal. Despite these stipulations, the Litonjuas sold the mortgaged properties to Philippine White House Auto Supply, Inc. (PWHAS) without L & R’s consent. Subsequently, due to the Litonjuas’ default, L & R extrajudicially foreclosed the mortgage and purchased the properties at the auction sale. Upon discovery of the prior sale to PWHAS, L & R refused to recognize it. PWHAS then attempted to redeem the properties by tendering payment, which L & R also refused. PWHAS subsequently redeemed through the sheriff, and a Certificate of Redemption was issued. L & R, however, executed an Affidavit of Consolidation of Ownership, leading to the cancellation of the original titles and the issuance of new ones in its name.

ISSUE

May a mortgage contract validly provide (a) that a sale of the mortgaged property without the mortgagee’s consent is invalid, and (b) for a right of first refusal in favor of the mortgagee?

RULING

Yes, but with qualifications. The Supreme Court, speaking through Justice Ynares-Santiago, affirmed the validity of such contractual stipulations, ruling they are not contrary to law, morals, good customs, public order, or public policy. A mortgage is an accessory contract, and the parties may establish such terms as long as they do not contravene legal norms. The stipulation requiring consent is a valid negative covenant, and the right of first refusal is a valid property right. However, the Court clarified that a sale made in violation of the consent requirement is not automatically void. Instead, it is valid between the seller and the buyer but unenforceable against the mortgagee. The mortgagee’s remedy is an action for damages against the mortgagor for breach of contract, not a declaration of the sale’s nullity. Consequently, the sale between the Litonjuas and PWHAS was declared rescissible due to the violation of the mortgage terms. The Court modified the lower court’s decision, ordering the rescission of that sale, the return of the purchase price to PWHAS, and the disallowance of the redemption made by PWHAS. L & R Corporation was allowed to retain title to the foreclosed properties but was ordered to pay the Litonjuas the difference between the foreclosure price and the rescinded sale price.