SEVERINO TOLENTINO and POTENCIANA MANIO (Plaintiffs-Appellants)

Vs.
BENITO GONZALEZ SY CHIAM (Defendants-Appellee)
G.R. No. 260085, August 12, 1927
FACTS:
Before November 28, 1922, appellants Tolentino and Manio purchased land from Luzon Rice
Mills, Inc., for Php25,000 payable in three installments. The following stipulations of the
agreement (Contract of Purchase) were as follows:
1) The first installment of P2,000 was due on or before the May 2, 1921.
2) The second installment of P8,000 was due on or before May 31, 1921.
3) The balance of P15,000 at 12% interest was due and payable on or about November 30,
1922.
4) The failure of the purchaser (plaintiffs-appellants) to pay the balance of said purchase
price or any of the installments on the date agreed upon would result to the property
bought being reverted to the original owner.
The following events transpired as follows:
1) The first and second installments were paid so far as the record shows upon the due dates.
2) The balance of P15,000 due on said Contract of Purchase was paid on or about December
1, 1922.
3) On the date when the balance of P15,000 with interest was paid, the vendor of said
property had issued from the sellers Transfer Certificate of Title (TCT) No. 40 to that of
the buyers (TCT No. 528).
4) On November 7, 1922, the representative of the vendor of the property in question wrote
a letter to the appellant Potenciana Manio, notifying the latter that if the balance of said
indebtedness was not paid, an action would be brought for the purpose of recovering the
property, together with damages from non-compliance with the condition of the Contract
of Purchase.
In order to pay his obligation, appellant Tolentino applied for loan from Gonzalez on condition
that he would execute a pacto de retro sale on the property in favor of appellee Gonzalez. Upon
maturity of the loan, Tolentino defaulted. Hence, appellee Gonzalez demanded recovery of the
land. Tolentino contends that the pacto de retro sale is a mortgage and not an absolute sale. The
appellee filed an action before the Court of First Instance, which ruled in favor of him, and
against
Tolentino.
Hence,
the
latter
raised
this
appeal.
THE ISSUES:
1) Whether the second contract in question executed by appellant Tolentino and
appellee Gonzales constituted a pacto de retro or a mortgage.

2) Whether a tenant may charge his landlord with a violation of the Usury Law, upon
the ground that the amount of rent he pays, based upon the real value of the
property, amounts to a usurious rate of interest.

THE RULING OF THE SUPREME COURT:

The Supreme Court affirmed the ruling of the CFI. It ordered appellant to pay the costs of suit.

HELD:
1) Yes. The second contract in question executed by appellant Tolentino and appellee
Gonzales constituted a pacto de retro, not a mortgage.
a) The language of the contract is clear. The purpose of the contract is expressed clearly
in its quotation that the purpose of the plaintiff is to sell the property in question,
reserving the right only to repurchase the same.
b) The contract of pacto de retro is an absolute sale of the property with the right to
repurchase and not a mortgage. By virtue of the said contract, the vendor became the
tenant of the purchaser, under the conditions mentioned in Paragraph 3 of the said
contract.
c) The plaintiffs agree in their complaint that the contract in question is a pacto de retro.
They admitted that they signed it, and sold the property in question with the right to
repurchase.
d) The transaction cannot be considered as a loan, since the purchase and sale that is
consummated, is a contract which by its nature transfers the ownership and other
rights in the thing sold. The object is to transfer the property to the vendee. On the
other hand, the deed of pacto de retro sale is an absolute sale with right of repurchase
and not a mortgage. Thus, Gonzalez is the owner of the land and Tolentino is only
holding it as a tenant by virtue of a contract of lease.
2) No. A tenant cannot charge his landlord with a violation of the Usury Law, upon the
ground that the amount of rent he pays, based upon the real value of the property,
amounts to a usurious rate of interest.
a) In the present case, the vendor became the tenant of the property by virtue of the
pacto de retro sale.
b) A contract of loan differs materially from a contract of rent. In a contract of rent, the
owner of the property does not lose his ownership. He simply loses his control over
the property rented during the period of the contract. The relation between the
contractors is that of obligor and oblige.
c) On the other hand, in a contract of rent, the thing still remains the property of the
lessor. The relation between the contractors is that of landlord and tenant.
d) Since the Usury Law refers only to contracts of loan, it is not applicable to the present
case.