G.R. No. 108346 . July 11, 2001.
Spouses MARIANO Z. VELARDE and AVELINA D. VELARDE, petitioners, vs. COURT OF APPEALS, DAVID A. RAYMUNDO and GEORGE RAYMUNDO, respondents.

FACTS

Petitioners Spouses Mariano and Avelina Velarde entered into a Deed of Sale with Assumption of Mortgage with respondent David Raymundo (owner) for a property in Dasmariñas Village, Makati. The total consideration was P2.6 million: P800,000.00 paid to David Raymundo and the assumption of an existing mortgage with the Bank of the Philippine Islands (BPI) for P1.8 million. An accompanying Undertaking executed by the Velardes stipulated that pending BPI’s approval of the assumption, they would continue paying the monthly interest on the loan. The Undertaking further provided that if the Velardes violated any terms of the mortgage, their P800,000.00 downpayment and all payments made to BPI would be forfeited in favor of Raymundo as liquidated damages, and the sale would be deemed automatically cancelled. The Velardes paid the monthly interest for September, October, and November 1986. In December 1986, BPI disapproved the application for assumption of mortgage. Consequently, the Velardes stopped further payments. On January 5, 1987, Raymundo, through counsel, informed the Velardes that their non-payment constituted non-performance. The Velardes’ counsel responded on January 7, 1987, offering to pay the P1.8 million balance in cash by January 21, 1987, provided Raymundo delivered possession, caused the release of the title from BPI, and executed an absolute deed of sale free from liens. On January 8, 1987, Raymundo sent a notarial notice of cancellation/rescission of the sale. The Velardes filed a complaint for specific performance. The trial court initially dismissed the complaint but later granted the Velardes’ motion for reconsideration and ordered Raymundo to execute the deed of sale. The Court of Appeals reversed this order and reinstated the original dismissal. The Velardes elevated the case to the Supreme Court.

ISSUE

Whether the Court of Appeals erred in upholding the rescission of the contract by respondent David Raymundo.

RULING

The Supreme Court denied the petition and affirmed the Court of Appeals’ Decision with modification. The Court ruled that the rescission was valid. The contract created reciprocal obligations: the Velardes’ obligation to pay, and Raymundo’s obligation to transfer ownership. The Velardes’ failure to pay the monthly amortizations after BPI’s disapproval of the assumption constituted a substantial breach of their reciprocal obligation, which entitled Raymundo to rescind the contract under Article 1191 of the Civil Code. The Court found that the Velardes’ offer to pay the balance in cash was a new proposal that materially altered the terms of the original agreement, which was predicated on the assumption of the existing mortgage. This new offer did not constitute valid tender of payment and could not cure their prior breach. The forfeiture clause in the Undertaking was declared a penalty clause. Applying Article 2227 of the Civil Code, the Court reduced the forfeiture to the amount of proven damages. Since Raymundo failed to prove any actual damage from the breach, he was not entitled to retain the payments. The Court ordered mutual restitution, requiring Raymundo to return to the Velardes the total amount of P874,150.00 (P800,000.00 downpayment plus P74,150.00 in interest payments to BPI) with legal interest from the date of rescission, January 8, 1987.