G.R. No. 159212 September 12, 2005
Navotas Industrial Corporation, represented by Daniel L. Bautista, Petitioner, vs. German D. Cruz, et al., Respondents.

FACTS

Carmen Vda. de Cruz owned a parcel of land in Navotas. On December 31, 1974, she executed a Deed of Absolute Sale with Assumption of Mortgage over the property in favor of her children. The vendees presented this deed for registration on June 27, 1977. On June 29, 1977, they executed and registered an Affidavit of Adverse Claim on the title to protect their interest, as the mortgagee bank, holding the owner’s duplicate certificate, refused to surrender it per Carmen’s instructions. The bank executed a Cancellation of Real Estate Mortgage on the same day, but this was not immediately registered.
Subsequently, on July 30, 1977, Carmen and the petitioner, Navotas Industrial Corporation (NIC), with whom she had a prior lease, executed a Supplementary Lease Agreement extending the lease term and granting NIC an option to buy. This agreement was presented for registration only on September 14, 1977, after which it and the earlier lease contracts were annotated on the title. The Deed of Sale to the Cruz children was registered later, leading to the issuance of a new title in their names. The Cruz children then demanded that NIC vacate the property.

ISSUE

The core issue is whether the registered adverse claim executed by the Cruz children prevails over the subsequently registered Supplementary Lease Agreement executed by Carmen Cruz in favor of NIC, thereby rendering NIC’s leasehold rights subordinate to the ownership rights of the Cruz children.

RULING

The Supreme Court ruled in favor of the Cruz children, affirming the Court of Appeals. The Court held that the registered adverse claim created a legal lien on the property effective from its inscription on June 30, 1977. This annotation served as constructive notice to the whole world of the vendees’ claim of ownership pursuant to the prior deed of sale. Consequently, any transaction involving the land executed by the registered owner after such annotation, including the July 30, 1977 Supplementary Lease Agreement between Carmen and NIC, is subject to the outcome of the vendees’ claim.
The subsequent registration of the lease agreements on September 14, 1977, did not negate the priority of the adverse claim. NIC, as a lessee, was charged with the duty to investigate the status of the title and was bound by the notice created by the prior annotation. Since the Cruz children’s claim was ultimately proven valid and they were recognized as the rightful owners, NIC’s leasehold rights, which were derived from Carmen after she had already sold the property, could not be enforced against them. The petition was denied for lack of merit.