G.R. No. 124242 ; January 21, 2005
SAN LORENZO DEVELOPMENT CORPORATION, petitioner, vs. COURT OF APPEALS, PABLO S. BABASANTA, SPS. MIGUEL LU and PACITA ZAVALLA LU, respondents.

FACTS

Respondents Spouses Lu owned two parcels of land. Respondent Pablo Babasanta claimed a prior contract to sell over the properties, having made partial payments totaling ₱200,000. He filed a complaint for specific performance against the spouses after learning of a subsequent sale. The spouses contended the agreement with Babasanta was rescinded due to his failure to pay the full balance and his request for a price reduction. Meanwhile, petitioner San Lorenzo Development Corporation (SLDC) intervened, asserting it was a buyer in good faith. SLDC had entered into an Option to Buy with the spouses in February 1989 and later a Deed of Absolute Sale with Mortgage in May 1989, paying substantial sums and receiving clean titles.
The Regional Trial Court ruled in favor of SLDC, declaring its title superior. The Court of Appeals reversed, holding that Babasanta’s prior contract, though unregistered, created an equitable interest that took precedence over SLDC’s subsequent registered title, as SLDC was allegedly in bad faith for failing to investigate the property’s status before purchase.

ISSUE

Whether the Court of Appeals erred in ruling that Babasanta’s unregistered prior contract to sell prevails over SLDC’s subsequent registered title acquired under the Torrens system.

RULING

Yes, the Court of Appeals erred. The Supreme Court reversed its decision and reinstated the trial court’s ruling in favor of SLDC. The legal logic centers on the principles governing double sales under the Civil Code and the Torrens system. For Article 1544 of the Civil Code to apply, there must be two valid sales transactions. The Court found that no valid first sale to Babasanta existed. The agreement between Babasanta and the Spouses Lu was merely a contract to sell, not a contract of sale, where ownership is retained by the seller until full payment of the price. Babasanta failed to pay the full purchase price, a positive suspensive condition, thus no ownership passed to him. Consequently, the Spouses Lu remained the owners and could validly sell the property to SLDC.
Furthermore, SLDC was a purchaser in good faith and for value. It exercised due diligence by verifying the certificates of title, which were clean and free from any lien or encumbrance. There was no annotation of Babasanta’s claim, and SLDC had no duty to investigate beyond the title. The Torrens system’s integrity requires that a bona fide purchaser for value who relies on a clean certificate of title must be protected. Since there was no valid first sale to Babasanta, there was no double sale, and Article 1544 did not apply. SLDC’s registered title, acquired in good faith, must prevail.