G.R. No. 149295.

September 23, 2003

PHILIPPINE NATIONAL BANK,, Petitioner, v. GENEROSO DE JESUS, represented by his Attorney-in-Fact,

CHRISTIAN DE JESUS, respondent.

DECISION

VITUG, J.:

Petitioner Philippine National Bank disputes the decision handed down by the Court of Appeals
promulgated on 23 March 2001 in CA-G.R. CV No. 56001, entitled Generoso De Jesus, represented by his
Attorney-in-Fact, Christian De Jesus, versus Philippine National Bank. The assailed decision has affirmed
the judgment rendered by the Regional Trial Court, Branch 44, of Mamburao, Occidental Mindoro,
declaring respondent Generoso de Jesus as being the true and lawful owner of the 124-square-meter
portion of the land covered by Transfer Certificate of Title (TCT) No. T-17197 and ordering petitioner
bank to vacate the premises, to deliver possession thereof to respondent, and to remove the
improvement thereon.

It would appear that on 10 June 1995, respondent filed a complaint against petitioner before the
Regional Trial Court of Occidental Mindoro for recovery of ownership and possession, with damages,
over the questioned property. In his complaint, respondent stated that he had acquired a parcel of land
situated in Mamburao, Occidental Mindoro, with an area of 1,144 square meters covered by TCT No. T-
17197, and that on 26 March 1993, he had caused a verification survey of the property and discovered
that the northern portion of the lot was being encroached upon by a building of petitioner to the extent
of 124 square meters. Despite two letters of demand sent by respondent, petitioner failed and refused
to vacate the area.

Petitioner, in its answer, asserted that when it acquired the lot and the building sometime in 1981 from
then Mayor Bienvenido Ignacio, the encroachment already was in existence and to remedy the situation,
Mayor Ignacio offered to sell the area in question (which then also belonged to Ignacio) to petitioner at
P100.00 per square meter which offer the latter claimed to have accepted. The sale, however, did not
materialize when, without the knowledge and consent of petitioner, Mayor Ignacio later mortgaged the
lot to the Development Bank of the Philippines.
The trial court decided the case in favor of respondent declaring him to be the rightful owner of the
disputed 124-square-meter portion of the lot and ordering petitioner to surrender possession of the
property to respondent and to cause, at its expense, the removal of any improvement thereon.

The Court of Appeals, on appeal, sustained the trial court but it ordered to be deleted the award to
respondent of attorneys fees, as well as moral and exemplary damages, and litigation expenses.

Petitioner went to this Court, via a petition for review, after the appellate court had denied the banks
motion for reconsideration, here now contending that -

1. THE COURT OF APPEALS GRAVELY ERRED IN LAW IN ADJUDGING PNB A BUILDER IN BAD FAITH OVER
THE ENCROACHED PROPERTY IN QUESTION;

2. THE COURT OF APPEALS GRAVELY ERRED IN LAW IN NOT APPLYING IN FAVOR OF PNB THE PROVISION
OF ARTICLE 448 OF THE CIVIL CODE AND THE RULING IN TECNOGAS PHILIPPINES MANUFACTURING
CORP. VS. COURT OF APPEALS, G.R. No. 108894, February 10, 1997, 268 SCRA 7.1cräläwvirtualibräry

The Regional Trial Court and the Court of Appeals have both rejected the idea that petitioner can be
considered a builder in good faith. In the context that such term is used in particular reference to Article
448, et seq., of the Civil Code, a builder in good faith is one who, not being the owner of the land, builds
on that land believing himself to be its owner and unaware of any defect in his title or mode of
acquisition.

The various provisions of the Civil Code, pertinent to the subject, read:

Article 448. The owner of the land on which anything has been built, sown, or planted in good faith, shall
have the right to appropriate as his own the works, sowing or planting, after payment of the indemnity
provided for in Articles 546 and 548, or to oblige the one who built or planted to pay the price of the
land, and the one who sowed, the proper rent. However, the builder or planter cannot be obliged to buy
the land if its value is considerably more than that of the building or trees. In such a case, he shall pay
reasonable rent, if the owner of the land does not choose to appropriate the building or trees after
proper indemnity. The parties shall agree upon the terms of the lease and in case of disagreement, the
court shall fix the terms thereof.

Article 449. He who builds, plants, or sows in bad faith on the land of another, loses what is built, planted
or sown without right to indemnity.

Article 450. The owner of the land on which anything has been built, planted or sown in bad faith may
demand the demolition of the work, or that the planting or sowing be removed, in order to replace
things in their former condition at the expense of the person who built, planted or sowed; or he may
compel the builder or planter to pay the price of the land, and the sower the proper rent.

A builder in good faith can, under the foregoing provisions, compel the landowner to make a choice
between appropriating the building by paying the proper indemnity or obliging the builder to pay the
price of the land. The choice belongs to the owner of the land, a rule that accords with the principle of
accession, i.e., that the accessory follows the principal and not the other way around.2 Even as the
option lies with the landowner, the grant to him, nevertheless, is preclusive. He much choose one. He
cannot, for instance, compel the owner of the building to instead remove it from the land.3 In order,
however, that the builder can invoke that accruing benefit and enjoy his corresponding right to demand
that a choice be made by the landowner, he should be able to prove good faith on his part.

Good faith, here understood, is an intangible and abstract quality with no technical meaning or statutory
definition, and it encompasses, among other things, an honest belief, the absence of malice and the
absence of design to defraud or to seek an unconscionable advantage. An individuals personal good faith
is a concept of his own mind and, therefore, may not conclusively be determined by his protestations
alone. It implies honesty of intention, and freedom from knowledge of circumstances which ought to put
the holder upon inquiry.4 The essence of good faith lies in an honest belief in the validity of ones right,
ignorance of a superior claim, and absence of intention to overreach another.5 Applied to possession,
one is considered in good faith if he is not aware that there exists in his title or mode of acquisition any
flaw which invalidates it.6cräläwvirtualibräry

Given the findings of both the trial court and the appellate court, it should be evident enough that
petitioner would fall much too short from its claim of good faith. Evidently, petitioner was quite aware,
and indeed advised, prior to its acquisition of the land and building from Ignacio that a part of the
building sold to it stood on the land not covered by the land conveyed to it.
Equally significant is the fact that the building, constructed on the land by Ignacio, has in actuality been
part of the property transferred to petitioner. Article 448, of the Civil Code refers to a piece of land
whose ownership is claimed by two or more parties, one of whom has built some works (or sown or
planted something) and not to a case where the owner of the land is the builder, sower, or planter who
then later loses ownership of the land by sale or otherwise for, elsewise stated, where the true owner
himself is the builder of works on his own land, the issue of good faith or bad faith is entirely
irrelevant.7cräläwvirtualibräry

In fine, petitioner is not in a valid position to invoke the provisions of Article 448 of the Civil Code. The
Court commiserates with petitioner in its present predicament; upon the other hand, respondent, too, is
entitled to his rights under the law, particularly after having long been deprived of the enjoyment of his
property. Nevertheless, the Court expresses hope that the parties will still be able to come up with an
arrangement that can be mutually suitable and acceptable to them.

WHEREFORE, the decision of the Court of Appeals in CA-G.R. CV No. 56001 is AFFIRMED. No costs.

SO ORDERED.

G.R. No. 167017 June 22, 2009

SERAFIN CHENG, Petitioner,

vs.

SPOUSES VITTORIO and MA. HELEN DONINI, Respondents.

DECISION
CORONA,J.:

The subject of this petition is an oral lease agreement that went sour. Petitioner Serafin Cheng agreed to
lease his property located at 479 Shaw Blvd., Mandaluyong City to respondents, Spouses Vittorio and
Ma. Helen Donini, who intended to put up a restaurant thereon. They agreed to a monthly rental of
₱17,000, to commence in December 1990.

Bearing an Interim Grant of Authority executed by petitioner, respondents proceeded to introduce

improvements in the premises. The authority read:

I, Serafin Cheng, of legal age and with office address at Room 310 Federation Center Building Muelle de
Binondo, Manila, owner of the building/structure located at 479 Shaw Boulevard, Mandaluyong, Metro
Manila, pursuant to a lease agreement now being finalized and to take effect December 1, 1990, hereby
grants VITTORIO DONINI (Prospective Lessee) and all those acting under his orders to make all the
necessary improvements on the prospective leased premises located at 479 Shaw Blvd., Mandaluyong,
Metro Manila, and for this purpose, to enter said premises and perform, all such works and activities to
make the leased premises operational as a restaurant or similar purpose.

Manila, 31 October 1990.1

However, before respondents’ business could take off and before any final lease agreement could be
drafted and signed, the parties began to have serious disagreements regarding its terms and conditions.
Petitioner thus wrote respondents on January 28, 1991, demanding payment of the deposit and rentals,
and signifying that he had no intention to continue with the agreement should respondents fail to pay.
Respondents, however, ignoring petitioner’s demand, continued to occupy the premises until April 17,
1991 when their caretaker voluntarily surrendered the property to petitioner.

Respondents then filed an action for specific performance and damages with a prayer for the issuance of
a writ of preliminary injunction in the Regional Trial Court (RTC) of Pasig City, Branch 67, docketed as Civil
Case No. 60769. Respondents prayed that petitioner be ordered to execute a written lease contract for
five years, deducting from the deposit and rent the cost of repairs in the amount of ₱445,000, or to
order petitioner to return their investment in the amount of ₱964,000 and compensate for their
unearned net income of ₱200,000 with interest, plus attorney’s fees.2
Petitioner, in his answer, denied respondents’ claims and sought the award of moral and exemplary
damages, and attorney’s fees.3

After trial, the RTC rendered its decision in favor of petitioner, the dispositive portion of which provided:

WHEREFORE, in view of all the foregoing, this Court finds the preponderance of evidence in favor of the
[petitioner] and hereby renders judgment as follows:

1. The Complaint is dismissed.

2. On the counterclaim, [respondents] are ordered, jointly and severally, to pay the [petitioner]
₱500,000.00 as moral damages; ₱100,000.00 as exemplary damages; and ₱50,000.00 as attorney’s fees.

3. [Respondents] are likewise ordered to pay the costs.

SO ORDERED.4

Respondents appealed to the Court of Appeals (CA) which, in its decision5 dated March 31, 2004,
recalled and set aside the RTC decision, and entered a new one ordering petitioner to pay respondents
the amount of ₱964,000 representing the latter’s expenses incurred for the repairs and improvements of
the premises.6

Petitioner filed a motion for reconsideration on the ground that the award of reimbursement had no
factual and legal bases,7 but this was denied by the CA in its resolution dated February 21, 2005.8

Hence, this petition for certiorari under Rule 45 of the Rules of Court, with petitioner arguing that:
THE COURT OF APPEALS DECIDED THIS CASE NOT IN ACCORD WITH LAW AND WITH APPLICABLE
DECISIONS OF THIS HONORABLE COURT. PUT OTHERWISE:

A. BY ORDERING PETITIONER TO REIMBURSE RESPONDENTS THE FULL VALUE OF EXPENSES FOR THEIR
ALLEGED REPAIRS AND IMPROVEMENTS OF THE LEASED PREMISES, THE COURT OF APPEALS
ERRONEOUSLY CONSIDERED RESPONDENTS NOT AS MERE LESSEES BUT POSSESSORS IN GOOD FAITH
UNDER ARTICLES 448 AND 546 OF THE CIVIL CODE.

B. THE COURT OF APPEALS DECIDED THIS CASE NOT IN ACCORD WITH ARTICLE 1678 OF THE CIVIL CODE
WHICH GIVES THE LESSOR THE OPTION TO REIMBURSE THE LESSEE ONE-HALF OF THE VALUE OF USEFUL
IMPROVEMENTS OR, IF HE DOES NOT WANT TO, ALLOW THE LESSEE TO REMOVE THE IMPROVEMENTS.

C. LIKEWISE, BY ORDERING PETITIONER TO REIMBURSE THE VALUE OF ORNAMENTAL EXPENSES, THE

COURT OF APPEALS CONTRAVENED THE SECOND PARAGRAPH OF ARTICLE 1678.

D. THE COURT OF APPEALS ERRED IN APPLYING THE PRINCIPLE OF EQUITY IN FAVOR OF THE
RESPONDENTS.

E. THE COURT OF APPEALS ERRED IN NOT AFFIRMING THE DECISION OF THE TRIAL COURT AWARDING
DAMAGES TO PETITIONER.

F. THE COURT OF APPEALS SERIOUSLY ERRED AND/OR GRAVELY ABUSED ITS DISCRETION IN FIXING THE
AMOUNT OF ₱961,000.009 CONTRARY TO RESPONDENTS’ OWN REPRESENTATION AND EVIDENCE.10

Respondents were required to file their comment on the petition but their counsel manifested that he
could not file one since his clients’ whereabouts were unknown to him.11 Counsel also urged the Court
to render a decision on the basis of the available records and documents.12 Per resolution dated August
30, 2006, copies of the resolutions requiring respondents to file their comment were sent to their last
known address and were deemed served. The order requiring respondents’ counsel to file a comment in
their behalf was reiterated.13
In their comment, respondents argued that they were possessors in good faith, hence, Articles 448 and
546 of the Civil Code applied and they should be indemnified for the improvements introduced on the
leased premises. Respondents bewailed the fact that petitioner was going to benefit from these
improvements, the cost of which amounted to ₱1.409 million, in contrast to respondents’ rental/deposit
obligation amounting to only ₱34,000. Respondents also contended that petitioner’s rescission of the
agreement was in bad faith and they were thus entitled to a refund.14

In settling the appeal before it, the CA made the following findings and conclusions:

1. there was no agreement that the deposit and rentals accruing to petitioner would be deducted from
the costs of repairs and renovation incurred by respondents;

2. respondents committed a breach in the terms and conditions of the agreement when they failed to
pay the rentals;

3. there was no valid rescission on the part of petitioner;

4. respondents were entitled to reimbursement for the cost of improvements under the principle of
equity and unjust enrichment; and

5. the award of damages in favor of petitioner had no basis in fact and law.15

As the correctness of the CA’s ruling regarding (1) the lack of agreement on the deposit and rentals; (2)
respondents’ breach of the terms of the verbal agreement and (3) the lack of valid rescission by
petitioner was never put in issue, this decision will be confined only to the issues raised by petitioner,
that is, the award of reimbursement and the deletion of the award of damages. It need not be stressed
that an appellate court will not review errors that are not assigned before it, save in certain exceptional
circumstances and those affecting jurisdiction over the subject matter as well as plain and clerical errors,
none of which is present in this case.16
Remarkably, in ruling that respondents were entitled to reimbursement, the CA did not provide any
statutory basis therefor and instead applied the principles of equity and unjust enrichment, stating:

It would be inequitable to allow the defendant-appellee, as owner of the property to enjoy perpetually
the improvements introduced by the plaintiffs-appellants without reimbursing them for the value of the
said improvements. Well-settled is the rule that no one shall be unjustly enriched or benefitted at the
expense of another.17

Petitioner, however, correctly argued that the principle of equity did not apply in this case. Equity, which
has been aptly described as "justice outside legality," is applied only in the absence of, and never against,
statutory law or judicial rules of procedure.18 Positive rules prevail over all abstract arguments based on
equity contra legem.19 Neither is the principle of unjust enrichment applicable since petitioner (who
was to benefit from it) had a valid claim.20

The relationship between petitioner and respondents was explicitly governed by the Civil Code
provisions on lease, which clearly provide for the rule on reimbursement of useful improvements and
ornamental expenses after termination of a lease agreement. Article 1678 states:

If the lessee makes, in good faith, useful improvements which are suitable to the use for which the lease
is intended, without altering the form or substance of the property leased, the lessor upon the
termination of the lease shall pay the lessee one-half of the value of the improvements at that time.
Should the lessor refuse to reimburse said amount, the lessee may remove the improvements, even
though the principal thing may suffer damage thereby. He shall not, however, cause any more
impairment upon the property leased than is necessary.

With regard to ornamental expenses, the lessee shall not be entitled to any reimbursement, but he may
remove the ornamental objects, provided no damage is caused to the principal thing, and the lessor
does not choose to retain them by paying their value at the time the lease is extinguished.

Article 1678 modified the (old) Civil Code provision on reimbursement where the lessee had no right at
all to be reimbursed for the improvements introduced on the leased property, he being entitled merely
to the rights of a usufructuary – the right of removal and set-off but not to reimbursement.21
Contrary to respondents’ position, Articles 448 and 546 of the Civil Code did not apply. Under these
provisions, to be entitled to reimbursement for useful improvements introduced on the property,
respondents must be considered builders in good faith. Articles 448 and 546, which allow full
reimbursement of useful improvements and retention of the premises until reimbursement is made,
apply only to a possessor in good faith or one who builds on land in the belief that he is the owner
thereof. A builder in good faith is one who is unaware of any flaw in his title to the land at the time he
builds on it. 22

But respondents cannot be considered possessors or builders in good faith. As early as 1956, in Lopez v.
Philippine & Eastern Trading Co., Inc.,23 the Court clarified that a lessee is neither a builder nor a
possessor in good faith –

x x x This principle of possessor in good faith naturally cannot apply to a lessee because as such lessee he
knows that he is not the owner of the leased property. Neither can he deny the ownership or title of his
lessor. Knowing that his occupation of the premises continues only during the life of the lease contract
and that he must vacate the property upon termination of the lease or upon the violation by him of any
of its terms, he introduces improvements on said property at his own risk in the sense that he cannot
recover their value from the lessor, much less retain the premises until such reimbursement. (Emphasis
supplied)

Being mere lessees, respondents knew that their right to occupy the premises existed only for the
duration of the lease.24 Cortez v. Manimbo25 went further to state that:

If the rule were otherwise, ‘it would always be in the power of the tenant to improve his landlord out of
his property.

These principles have been consistently adhered to and applied by the Court in many cases.26

Under Article 1678 of the Civil Code, the lessor has the primary right (or the first move) to reimburse the
lessee for 50% of the value of the improvements at the end of the lease. If the lessor refuses to make the
reimbursement, the subsidiary right of the lessee to remove the improvements, even though the
principal thing suffers damage, arises. Consequently, on petitioner rests the primary option to pay for
one-half of the value of the useful improvements. It is only when petitioner as lessor refuses to make the
reimbursement that respondents, as lessees, may remove the improvements. Should petitioner refuse to
exercise the option of paying for one-half of the value of the improvements, he cannot be compelled to
do so. It then lies on respondents to insist on their subsidiary right to remove the improvements even
though the principal thing suffers damage but without causing any more impairment on the property
leased than is necessary.

As regards the ornamental expenses, respondents are not entitled to reimbursement. Article 1678 gives
respondents the right to remove the ornaments without damage to the principal thing. But if petitioner
appropriates and retains said ornaments, he shall pay for their value upon the termination of the lease.

The fact that petitioner will benefit from the improvements introduced by respondents is beside the
point. In the first place, respondents introduced these improvements at their own risk as lessees.
Respondents were not forced or obliged to splurge on the leased premises as it was a matter of necessity
as well as a business strategy.27 In fact, had respondents only complied with their obligation to pay the
deposit/rent, there would have been no dispute to begin with. If they were able to shell out more than a
million pesos to improve the property, the measly ₱34,000 deposit demanded by petitioner was a mere
"drop in the bucket," so to speak. More importantly, the unequivocal terms of Article 1678 of the Civil
Code should be the foremost consideration.

The Court notes that the CA pegged the total value of the improvements made on the leased premises at
₱964,000, which was apparently based on the allegation in respondents’ complaint that it was their total
investment cost.28 The CA lumped together all of respondents’ expenses, which was a blatant error. A
qualification should have been made as to how much was spent for useful improvements (or those
which were suitable to the use for which the lease was intended) and how much was for ornamental
expenses. Respondent Vittorio Donini testified that he spent ₱450,000 for necessary repairs, while
₱500,000 was spent for adornments.29 The evidence on record, however, showed respondents’
expenses for useful improvements to be as follows:

Expense Amount

Electrical ₱31,893.65

Exh. "F", et seq. 30

Roofing ₱14,856.00

Exhibit "O"31
Labor ₱19,909.75

Exh. "P", et seq.32

Ceiling ₱65,712.00

Exh. "Q", et seq.33

Labor ₱38,689.20

Exh. "R", et seq.34

Electrical (phase 2) ₱76,539.10

Exh. "S", et seq.35

Door ₱41,371.75

Exh. "T", et seq.36

Labor ₱25,126.00

Exh. "U", et seq.37

Water ₱ 8,031.00

Exhs. "W" & "W-1"38

Gutters ₱ 35,550.05

Exhs. "X" & "X-1"39

Outside Wall ₱ 24,744.00

Exh. "X-2"40

Inside Wall ₱ 22,186.10

Exh. "X-3"41

Electrical (phase 3) ₱ 88,698.30

Exhs. "X-8" to "X-11"42

Labor ₱ 19,995.00

Exhibit "Y"43

Total ₱513,301.90

Accordingly, the 50% value of the useful improvements to be reimbursed by petitioner, if he chose to do
so, should be based on ₱513,301.90. Since petitioner did not exercise his option to retain these useful
improvements, then respondents could have removed the same. This was the legal consequence of the
application of Article 1678 under ordinary circumstances.

The reality on the ground ought to be recognized. For one, as disclosed by respondents’ counsel, he no
longer knows the exact whereabouts of his clients, only that they are now in Europe and he has no
communication with them at all.44 For another, it appears that as soon as respondents vacated the
premises, petitioner immediately reclaimed the property and barred respondents from entering it.
Respondents also alleged, and petitioner did not deny, that the property subject of this case had already
been leased to another entity since 1991.45 This is where considerations of equity should come into
play. It is obviously no longer feasible for respondents to remove the improvements from the property, if
they still exist. The only equitable alternative then, given the circumstances, is to order petitioner to pay
respondents one-half of the value of the useful improvements (50% of ₱513,301.90) introduced on the
property, or ₱256,650.95. To be off-set against this amount are respondents’ unpaid ₱17,000 monthly
rentals for the period of December 1990 to April 1991,46 or ₱85,000. Petitioner should, therefore,
indemnify respondents the amount of ₱171,650.95. This is in accord with the law’s intent of preventing
unjust enrichment of a lessor who now has to pay one-half of the value of the useful improvements at
the end of the lease because the lessee has already enjoyed the same, whereas the lessor can enjoy
them indefinitely thereafter.47

Respondents are not entitled to reimbursement for the ornamental expenses under the express
provision of Article 1678. Moreover, since they failed to remove these ornaments despite the
opportunity to do so when they vacated the property, then they were deemed to have waived or
abandoned their right of removal.

The CA also erred when it deleted the awards of moral and exemplary damages and attorney’s fees.

Petitioner is entitled to moral damages but not in the amount of ₱500,000 awarded by the RTC, which
the Court finds to be excessive. While trial courts are given discretion to determine` the amount of moral
damages, it "should not be palpably and scandalously excessive."48 Moral damages are not meant to
enrich a person at the expense of the other but are awarded only to allow the former to obtain means,
diversion or amusements that will serve to alleviate the moral suffering he has undergone due to the
other person’s culpable action.49 It must always reasonably approximate the extent of injury and be
proportional to the wrong committed.50 The award of ₱100,000 as moral damages is sufficient and
reasonable under the circumstances.

The award of ₱100,000 as exemplary damages is likewise excessive. Exemplary damages are imposed not
to enrich one party or impoverish another but to serve as a deterrent against or as a negative incentive
to curb socially deleterious actions.51 We think ₱50,000 is reasonable in this case.1avvphi1

Finally, Article 2208 of the Civil Code allows recovery of attorney's fees when exemplary damages are
awarded or when the defendant's act or omission has compelled the plaintiff to litigate with third
persons or to incur expenses to protect his interest.52 Petitioner is entitled to it since exemplary
damages were awarded in this case and respondents’ act in filing Civil Case No. 60769 compelled him to
litigate. The amount of ₱25,000 is in accord with prevailing jurisprudence.53

WHEREFORE, the petition is PARTIALLY GRANTED. The decision dated March 31, 2004 rendered by the
Court of Appeals in CA-G.R. CV No. 54430 is hereby MODIFIED in that –
(1) petitioner Serafin Cheng is ORDERED to pay respondents, spouses Vittorio and Ma. Helen Donini, the
amount of ₱171,650.95 as indemnity for the useful improvements; and

(2) respondents, spouses Vittorio and Ma. Helen Donini, are ORDERED to pay petitioner Serafin Cheng
the following sums:

a) ₱100,000.00 moral damages;

b) ₱50,000.00 exemplary damages and

c) ₱25,000.00 attorney’s fees.

Let copies of this decision be furnished respondents, spouses Vittorio and Ma. Helen Donini, at their last
known address, and their counsel of record.

SO ORDERED.