G.R. No. 26085, August 12, 1927
SEVERINO TOLENTINO and POTENCIANA MANIO, plaintiffs-appellants, vs. BENITO GONZALEZ SY CHIAM, defendant-appellee.

FACTS

Plaintiffs-appellants Severino Tolentino and Potenciana Manio purchased a property from Luzon Rice Mills, Inc., with a final payment due on November 30, 1922. Unable to pay the balance of P16,965.09, they sought a loan from defendant-appellee Benito Gonzalez Sy Chiam. On November 28, 1922, the parties executed a document titled a “pacto de retro” (sale with right to repurchase). Under this contract, Sy Chiam paid the appellants P17,500 (covering their debt and additional cash). The appellants, as vendors, retained the right to repurchase the property within five years for the same price. Concurrently, they entered into a lease agreement with Sy Chiam, obligating themselves to pay monthly rent of P375 for the use of the property. The contract stipulated that default in rent payment for two consecutive months would terminate the lease and forfeit their right of repurchase. The appellants failed to pay the rent and subsequently filed an action, arguing that the contract was not a true pacto de retro but an equitable mortgage securing a usurious loan, as the monthly rent effectively constituted excessive interest on the P17,500 principal.

ISSUE

1. Whether the contract is a true pacto de retro or an equitable mortgage.
2. Whether the stipulation for monthly rent in a pacto de retro, where the vendor remains as a tenant, can constitute usury if the rent amounts to a rate of interest higher than that allowed by law.
3. Whether parol evidence is admissible to modify the terms of the written contract.

RULING

The Supreme Court AFFIRMED the lower court’s decision, upholding the contract as a valid pacto de retro and not an equitable mortgage.

1. On the Nature of the Contract: The Court ruled the contract was a true pacto de retro, not an equitable mortgage. The document was clear, unambiguous, and explicitly stated it was a sale with a right of repurchase. The appellants failed to present clear and convincing evidence to prove that the parties intended it as a loan with security. The simultaneous lease agreement, while creating a close relationship between the parties, did not by itself negate the sale. The Court emphasized that parties are bound by the terms of their clear and voluntary agreements.

2. On the Issue of Usury: The Court held that the monthly rent of P375 could not be considered usurious interest. The contract involved two distinct agreements: a sale with right to repurchase and a contract of lease. The rent was compensation for the use and enjoyment of the property, not interest on a loan. Since the transaction was deemed a true sale, the Usury Law (Act No. 2655), which applies to loans or forbearances of money, was not applicable. The vendor’s continued possession as a lessee was a separate contractual incident and did not convert the sale into a loan.

3. On the Admissibility of Parol Evidence: The Court disallowed parol evidence to vary the terms of the written contract. The language of the pacto de retro was explicit and required no explanation. The appellants could not introduce oral testimony to contradict the clear intent of the document as a sale. The Court reiterated the parol evidence rule, which prohibits the alteration of a written agreement by prior or contemporaneous oral statements when the writing is intended as the complete and final expression of the parties’ agreement.

DISSENTING OPINION (Justice Malcolm):
Justice Malcolm dissented, arguing that the contract was a “clever device” to conceal a usurious loan. He viewed the pacto de retro coupled with the lease agreement at a high monthly rent as a subterfuge, where the rent effectively functioned as excessive interest. He believed the oral testimony indicated a loan transaction and voted to treat the contract as an equitable mortgage, subject to the Usury Law.