G.R. No. 126699 August 7, 1998
AYALA CORPORATION, petitioner, vs. RAY BURTON DEVELOPMENT CORPORATION, respondent.

FACTS

Petitioner Ayala Corporation (AYALA) is the owner of the Ayala estate in Makati City. On March 20, 1984, it sold a parcel of land (Lot 26, Block 2, Salcedo Village) to Karamfil Import-Export Company Ltd. (KARAMFIL). The Deed of Sale contained Deed Restrictions, including: (a) a total building height not exceeding forty-two (42) meters and a total gross floor area not more than five (5) times the lot area; and (b) sewage disposal via connection to the area’s sewerage system. It also contained Special Conditions, including: (a) the vendee must obtain final approval from AYALA of building plans; (b) the lot shall not be sold without the building having been completed; and (c) any breach entitles AYALA to rescission. These conditions were annotated on the Transfer Certificate of Title. KARAMFIL sold the lot to Palmcrest Development and Realty Corporation (PALMCREST) on February 18, 1988, and AYALA gave its written conformity subject to the same conditions. PALMCREST, in turn, sold the lot to respondent Ray Burton Development Corporation (RBDC) on April 11, 1988. AYALA again gave its conformity, subject to RBDC’s compliance with the same Special Conditions and Deed Restrictions, which were annotated on the new title.
In June 1989, RBDC submitted to AYALA for approval architectural plans for a 5-storey building (25.85 meters high, 4,989.402 sq.m. floor area), which AYALA approved as it was within the restrictions. However, in June 1990, RBDC submitted a new set of plans to the Makati City Engineer’s Office for a 26-storey building (98.60 meters high, 28,600 sq.m. floor area), obtained the necessary permits, and began construction. AYALA discovered this through a magazine feature and demanded RBDC cease construction. RBDC failed to comply.
Meanwhile, on November 28, 1989, RBDC and others had filed a complaint before the Housing and Land Use Regulatory Board (HLRB) seeking to nullify the Deed Restrictions. The HLRB upheld the restrictions and dismissed the case. RBDC appealed to the Office of the President. While this appeal was pending, on July 11, 1990, the majority of lot owners approved “Consolidated and Revised Deed Restrictions” which abolished direct height limits in favor of floor area ratios (FARs). For office buildings in Salcedo Village, the maximum gross floor area was set at eight (8) times the lot area. RBDC did not vote for this revision.
AYALA filed a complaint for Specific Performance or Rescission against RBDC before the Regional Trial Court (RTC). The RTC ruled in favor of AYALA, ordering RBDC to demolish the excess portions of the building and, alternatively, ordering rescission of the sale and reconveyance of the lot if RBDC failed to comply. It also awarded damages and attorney’s fees to AYALA. RBDC appealed to the Court of Appeals (CA). The CA modified the RTC decision, holding that while RBDC violated the restrictions, the proper remedy was not demolition but for RBDC to pay development charges under the Revised Deed Restrictions. It deleted the order for demolition/rescission but sustained the award of exemplary damages and attorney’s fees to AYALA. AYALA filed the present petition.

ISSUE

Whether the Court of Appeals erred in not ordering the demolition of the portions of the building constructed in violation of the Deed Restrictions and in not ordering the rescission of the sale.

RULING

Yes, the Court of Appeals erred. The Supreme Court reversed the CA decision and reinstated the RTC decision with modifications.
The Supreme Court held that the Deed Restrictions constituted valid and binding contractual obligations. RBDC was fully aware of these restrictions, as evidenced by AYALA’s annotations of conformity on the deeds of sale and the annotations on the certificates of title. RBDC’s act of submitting the initial 5-storey plan to AYALA for approval and its participation in the HLRB case seeking to nullify the restrictions conclusively prove its knowledge and recognition of the restrictions.
The Court rejected RBDC’s arguments that the restrictions were unreasonable, contrary to law, or had been superseded by zoning laws. It ruled that the restrictions were valid restrictive covenants intended to preserve the value and orderly development of the Ayala estate, akin to those in a subdivision, and were not contrary to law, morals, or public policy.
The Court found that RBDC deliberately and in bad faith violated the restrictions by constructing a 26-storey building after having obtained approval for a 5-storey one. This constituted a substantial breach. The proper remedy under the contract and the law was specific performance, i.e., compliance with the restrictions by demolishing the excess portions. The Court held that the CA erred in applying the Revised Deed Restrictions (FAR system) to RBDC, as RBDC did not vote for their approval and therefore remained bound by the original restrictions. The award of development charges under the revised scheme was improper.
The Court also held that rescission was a proper alternative remedy under Article 1191 of the Civil Code, as the breach was substantial. However, since the RTC’s order for demolition was affirmed, the alternative order for rescission was set aside.
The Supreme Court modified the RTC decision by: (1) ordering RBDC to demolish the portions of Trafalgar Plaza exceeding the 42-meter height and 5,940 sq.m. (5x lot area) floor area limits; (2) ordering RBDC to pay AYALA exemplary damages of P2,500,000.00 and attorney’s fees of P250,000.00; and (3) deleting the order for RBDC to pay development charges.