Preliminary understanding

Can a Letter of Intent to Buy and Sell a property be considered either as a Contract to Sell or a Contract of Sale? This is the question resolved in this case between an association of urban poor squatters (UMCUPAI) and a sea food manufacturing company (SFC), the owner of a parcel of land with an area of 61,736 square meters (Lot 300).

 On October 4, 1991, after proper negotiations UMCUPAI and SFC executed a Letter of Intent to Buy and Sell Lot 300 (letter of intent) to accommodate UMCUPAI and facilitate its loan application with the National Home Mortgage Finance Corporation (NHMFC) under the community mortgage program. Pursuant to the letter of intent, SFC expressly declared its intention to sell Lot 300 to UMCUPAI at the price of P105 per square meter free from all liens and encumbrances while UMCUPAI also expressly declared its intention to buy the same at the said price. The letter also provided that upon full payment of the purchase price a Deed of Absolute Sale will be executed, signed and delivered by SFC which will also shoulder the capital gains and other charges and fees.

 Due to the inability of UMCUPAI to obtain the loan as not all its members were willing to join the undertaking, UMCUPAI proposed the subdivision of Lot 300 into three lots. Thus the Lot 300 was subdivided into three parts covered by separate titles: Lot 300-A with an area of 41,460 sq.m.; Lot 300-B with an area of 1,405 sq.m. and Lot 300-C with an area of 18,872 sq.m.

Thereafter, or on January 11, 1995, UMCUPAI was able to purchase Lot 330-A for P4,350,801.58. In turn Lot 300-B was constituted as a road right of way and donated to the local government. For lack of more funds UMCUPAI failed to acquire Lot 300-C despite the three months extension given to it. Thus SFC sold the said lot to a realty development company (BRYC) for P2,547,585.

A year later, UMCUPAI sued SFC and BRYC seeking to annul the sale of Lot 300-C. According to UMCUPAI, the letter of intent granted it a prior, better and preferred right over BRYC in the purchase of lot 300-C. The said letter of intent is equivalent to a conditional contract of sale subject only to a suspensive condition of payment of the purchase price and not to a contract to sell which must be supported by a consideration distinct from the price, UMCUPAI contended. Was UMCUPAI correct?

No. UMCUPAI confuses contract of sale under Article 1458 of the Civil Code with Contract to Sell under Article 1479 of the same code.

In a contract to sell, the prospective seller, while expressly reserving ownership of the subject property despite delivery thereof to the prospective buyer, binds himself to sell the said property exclusively to the prospective buyer upon the fulfillment of the condition agreed upon, that is the full payment of the purchase price. Ownership will not automatically transfer to the buyer although the property may have been previously delivered to him because the prospective seller still has to convey the title to him by executing a deed of absolute sale. In a conditional contract of sale which is subject to a suspensive condition, the contract is completely abated when said condition is not fulfilled. However if the conditioned is fulfilled, the contract of sale is thereby perfected such that if there had already been previous delivery of the subject property to the buyer, ownership thereof automatically transfers to the buyer by operation of law.

In this case however, the parties executed a letter of intent which is neither a contract to sell nor a conditional contract of sale. It was executed to accommodate UMCUPAI and facilitate its loan application with NHMFC. It does not state that SFC relinquishes its title over the property, subject only to the condition of complete payment of the purchase price; nor, at the least, that SFC, although expressly retaining ownership thereof, binds itself to sell the property exclusively to UMCUPAI.

A letter of intent is customarily employed to reduce to writing a preliminary understanding of parties who intend to enter into a contract. It is a brief memorandum of the preliminary understanding of parties who intend to enter into a contract. In this case SFC merely declared its intention to sell and UMCUPAI, its intention to buy the subject property. An intention is a mere idea, goal or plan. It simply signifies a course of action that one proposes to follow, to do or accomplish. A mere intention cannot give rise to an obligation to give, to do or not to do (Article 1156, Civil Code). One cannot be bound by what he proposes or plans to accomplish (United Muslim and Christian etc. vs. BRYC-V Development Corp, Sea Foods Corp. et. al. G.R. 179653, July 31, 2009).

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