Civil Law Review 2 | Atty.

Legarda 1
Case Digest 2018 - LEASE

TAN SIOK KUAN AND PUTE CHING v. FELICISIMO "BOY" HO, Ruling:

RODOLFO C. RETURTA, VICENTE M. SALAS, AND LOLITA
MALONZO, G.R. No. 175085, June 01, 2016, PEREZ, J. No.

In the present case, petitioners failed to establish that the
defendants alleged implied admission of a lessor-lessee relationship falls
under the exceptions to the principle of res inter alios acta as to make such
admission binding upon respondents.
Facts:
Except for petitioners' bare claims, they have not shown any evidence of a
lease between them and respondents, be it express or implied. As keenly
observed by the CA, there was no mention of how and when the alleged
contract of lease started, there was no proof of prior payment of rentals
or any prior demand for such payment considering petitioners' allegation
that respondents failed to pay rentals since 1997 and that the case was
instituted only in 2003.

The case at bar stems from seven (7) separate complaints for unlawful
Moreover, there is merit in respondents' invocation of the principle of res
detainer filed by petitioners Tan Siu Kuan and Pute Ching against
inter alios acta or that principle which states that "the right of a party
defendants Avelino Bombita (Bombita), Felix Gagarin (Gagarin),
cannot be prejudiced by an act, declaration or omission of another, except
Bernardo Napolitano (Napolitano), Felicisimo "Boy" Ho (Ho), Rodolfo
as hereinafter provided, among which are: (1) admission by third party,
Returta (Returta), Vicente Salas (Salas), and Lolita Malonzo (Malonzo).
(2) admission by co-partner or agent, (3) admission by conspirator, and
(4) admission by privies."30
In their Complaints, petitioners averred that they are the owners of a
parcel of land, along with the improvements therein, located at Apollo
In the case of Tamargo v. Awingan, the Court expounded on the rationale
Street, San Francisco del Monte, Quezon City, and covered by Transfer
behind the principle of res inter alios acta. Citing People v. vda. De Ramos,
Certificate of Title (TCT) Nos. 279014 and 279015; that they have been
the Court held that:
leasing portions of said property to the defendants since 1972; and that
on February 7, 2003 they notified defendants in writing of their failure to
(O)n a principle of good faith and mutual convenience, a man's own acts
pay rentals.
are binding upon himself, and are evidence against him. So are his
conduct and declarations. Yet it would not only be rightly inconvenient,
but also manifestly unjust, that a man should be bound by the acts of
Defendants were given ten (10) days to pay the rentals due or else to
mere unauthorized strangers; and if a party ought not to be bound by the
vacate the premises and turn over the possession thereof to petitioners,
acts of strangers, neither ought their acts or conduct be used as evidence
but defendants allegedly ignored petitioners' demand, warranting the
against him.
filing of the complaints for unlawful detainer.

For their part, Bombita, Gagarin, and Napolitano (defendants) argued that In the present case, petitioners failed to establish that the
the lease agreements they have executed with petitioners are void ab defendants alleged implied admission of a lessor-lessee relationship falls
initio, petitioners being Chinese nationals who are not entitled to own under the exceptions to the principle of res inter alios acta as to make
real property in the Philippines. Moreover, they claimed to have been in such admission binding upon respondents. Although defendants and
possession of the subject premises since 1968 or some 35 years ago, thus respondents were all defendants in the complaints for unlawful detainer
plaintiffs action cannot be one for ejectment or unlawful detainer, filed by petitioners, it is very clear that defendants and respondents
but accion publiciana which must be filed before the RTC. espoused different defenses. Contrary to defendants' position,
respondents, as early as the filing of their response to petitioners'
On the other hand, Ho, Returta, Salas, and Malonzo, herein respondents, demand letter, firmly and consistently denied the existence of any lease
maintained that they have been in possession of the subject premises for contract between them and petitioners over the subject land.
37 years without any rentals being paid to any landlord or his agents, and
that there are no existing lease contracts between respondents and
petitioners. In fact, in separate letters to petitioners, in response to the
latter's demand letters, respondents categorically denied renting the
subject premises.12 Respondents also asserted that they have started
possessing said property in 1966 by building residential houses, and that
they have been in continuous possession since then. Additionally,
respondents claimed that petitioners presented only photocopies of the
subject TCTs and that when they presented such to the Register of Deeds
of Quezon City for verification as to how such were transferred from the
mother titles TCT Nos. 12505 and 12506, said office informed them that
there is no single transaction recorded in the aforesaid mother
titles. Lastly, respondents argued that even assuming that petitioners'
titles are authentic, their cause of action should have been accion
publiciana considering that respondents are in possession and that no
lease contract exists between the parties.

Issue:

Whether or not a lessor-lessee relationship between the parties was

properly established
 Civil Law Review 2 | Atty. Legarda 2
Case Digest 2018 - LEASE

Topic: Distinction between Assignment of Lease and Sublease
Eduardo Manlapat vs. Simeon Salazar
No. L-8221, January 31, 1956, Reyes, A.J.
In an assignment of lease, the lessee makes an absolute transfer of his
interest as such lessee, thus dissociating himself from the original contract
of lease, so that his personality disappears and there remains only in the
juridical relation two persons, the lessor and the assignee, who is converted
into a lessee; whereas, if he retains a reversionary interest, however small,
the transfer is deemed a mere sublease.
Facts: This is an appeal from a judgment of the Court of First Instance
of Bulacan, dismissing Plaintiff’s action for the recovery of a fishpond
through annulment of certain contracts of lease and sublease.
The fishpond in question formerly belonged to three co-owners who had
taken turns in leasing it to the same person, Bernardo Enriquez. The last
lease was signed in 1931 and was to last “until June 1, 1967.” After the
death of Bernardo Enriquez, his widow, Esperanza Guillen, subleased the
fishpond, first, to Dr. Macario Cuerpo Cruz and thereafter to the present
Defendant Simeon Salazar, the sublease to the latter to commence from
May 31, 1947 and last until May 31, 1967. In 1952, with the co-owners of
the fishpond already dead, their sole heir, Plaintiff Eduardo Manlapat,
brought the present action in the Court of First Instance of Bulacan
against the subleasee Simeon Salazar to recover possession of the
fishpond, alleging that the sublease to the Defendant, as well as the leases
executed by Plaintiff’s predecessors in interest, was null and void.
Manlapat impugns the validity of the sublease to the Salazar on the theory
that it is not really a sublease, — which, under both the old and the new
Civil Code, would be valid even though entered into without the consent
of the lessors since there was no prohibition against it in the contract of
lease — but a veritable assignment of lease, which, in Manlapat’s opinion,
is void for want of such consent.
to transfer her entire interest in the lease. The argument, however, is
based upon mere conjecture. Actually, the sublessor has not transferred
her interest for the entire period of the original lease, and this may well
be due to a desire to repossess the fishpond earlier so that she could
prepare it for delivery to the owner.
The terms of the sublease Exhibit “5”, also furnish further proof that the
lessee, now sublessor, has not dissociated herself from the original lease
and that, as Manresa would say, her personality has not disappeared.
Condition No. 2, which binds her to respect the sublease and to pay
damages should she again sublease the fishpond to another person, is
inconsistent with the idea that she had entirely given up her interest in
the estate. Equally inconsistent with this idea are condition No. 3, in
which the sublessor binds herself to pay the land taxes on the fishpond
and such other taxes as may be exacted by the Government; condition No.
4, which forbids the cutting of any tree in the fishpond without the
sublessor’s written consent; and lastly, condition No. 5, which requires
the sublessee to return the fishpond upon the expiration of the sublease
in as good a condition as when he took possession of it. With regard to the
condition last named, Appellant observes that it does not specify that it is
to the sublessor that the fishpond is to be returned by the sublessee. But
how could the sublessor determine the condition of the fishpond if the
same were not to be returned to her ? Moreover, as the contract is
between sublessor and sublessee, the return of the property object of the
contract would naturally, in the absence of a different stipulation, have to
be made to the sublessor.
Notice may also be taken of the fact that the sublessor has, in her contract
with the sublessee, used the Tagalog word pabubuwisan (will lease). She
says: “ aking isasalin, ililipat at pabubuwisan ang aking posicion at
pamumuwisan sa nabanguit na palaisdaan cralaw “ This clause clearly
means that the lessee is transferring possession of the fishpond under
lease to her and renting it (i.e. subleasing it) to the transferee.

Issue: WON the contract in question is one of sublease or an

assignment of lease.

Ruling: SUBLEASE

To determine then whether a given contract constitutes an assignment of

lease and not a mere sublease, the test is whether the lessee has by said
contract made an absolute transfer of his interest as such lessee, thus
dissociating himself from the original contract of lease, so that, as
Manresa would say, his personality disappears and there remain only in
the juridical relation two persons, the lessor and the assignee, who is
converted into a lessee.

The same test is applied, at common law, where the transfer of a

leasehold by the lessee is deemed an assignment of lease only if he cedes
his entire interest in the estate; whereas, if he retains a reversionary
interest, however small, the transfer is deemed a mere sublease. (32 Am.
Jur. 290; chan roblesvirtualawlibrary51 C.J. S. 553.) So, if the lessee
underlets for a period less than the entire term or reserves for himself a
reversionary interest in the term, the transaction is a subletting. (51 C.J. S.
555.)

With the above distinction in mind, it seems obvious from an examination

of the terms of the document executed by Esperanza Guillen in favor of
the Appellee that the said document is one of sublease. In the first place,
the original lease is, as already stated, to last “until June 1, 1967.” On the
other hand, the sublease is to last only until May 31 of that year. The
sublease is thus for a shorter period than the original lease. A reservation
of even so short a period as the last day of the term is enough to make the
transfer a sublease. (35 C.J. 990; Davis vs. Morris, 36 NY 569.) Indeed, it is
held that “the mere fact that the lessor is to receive a surrender of the
premises on the last day of the term prevents the transfer from being an
assignment.” (Murdock et al. vs. Fishel et al., 121 NYS 624; C.J. 989.) It is
true that the sublessor states that her possession under the original lease
would last up to May 31, 1967 (“tatagal pa hanggang sa Mayo 31, 1967”),
and from this Appellant argues that in fixing the term of the sublease so
that it would expire on May 31, 1967, the sublessor must have intended
 Civil Law Review 2 | Atty. Legarda 3
Case Digest 2018 - LEASE

Topic: Distinction between Assignment of Lease and Sublease
G. P. Nava vs I. Yaptinchay
No. 472-R, October 21, 1947, Paredes, J.
Facts: Plaintiff Nava was a lessee on the premises owned by Spouses
Quillen located at Taft Avenue, Pasay City. Nava paid the corresponding
rent for three months, from May 15 to August 14, 1945, it having been
understood by them that Nava could stay in the premises for at least one
year. About the end of April 1945, Defendant Yatinchay proposed to buy
Nava’s right to occupancy to the house. Through a letter addressed to
Yaptinchay, Nava agreed to the said proposal. Pursuant to the agreement,
Yaptinchay paid the first installment but failed to satisfy the balance.
Yaptinchay alleged that Mr. Quillen (owner) objected to his staying in the
apartment after August 1945 for he considered the premises not subject
to sublease, having made it plain by the notices he posted on the
premises. As a consequence, Mr. Quillen took over the control thereof and
entered into a separate agreement with Yaptinchay, whereby the latter
could continue on a monthly rental of P125, which he had been paying to
Mr. Quillen.
payment by plaintiff for the account of the __. The posting by the owner of
the premises of signs prohibiting sublease thereof cannot alter the
situation, Quillen himself stated that he never had any conversation with
the plaintiff concerning the latter’s right to sublease the property;
moreover, in order that prohibition to sublease may be held binding upon
the lessee, the (same) must be contained expressly in the contract of
lease, which, in the instant case, did (not) appear; and if it did, was
waived by Quillen when he (allowed) defendant to stay in the premises
and accepted rentals from him. ___ the plaintiff had the right to sublease
the property or assign his leasehold right to another is not a proper __ for
the defendant, not only because defendant is a (stranger) to the lease
contract between plaintiff and the owner of the house who alone can
enforce or waive it. __ because the defendant, being a privy of plaintiff,
cannot attack the lease collaterally, for the simple reason that a tenant is
not permitted to deny the title of his landlord.

Issue: (1) WON the contract entered into by Nava and Yaptinchay
was a sublease or an assignment of right to occupy the premises;
(2) WON Nava is authorized to sublease the premises;

Ruling: (1) SUBLEASE

It is clear from the evidence adduced and the terms of Exhibit A that a
contract of sublease, and not of cession or assignment of right to use and
occupy the same, was entered into by the parties in this case.

In the agreement, it was provided that all rents to be paid to the owner
within the period of ten months shall be for the account of the plaintiff
(Nava), thereby making the plaintiff, and not the defendant, responsible
directly to the owner for obligations arising out of the agreement; the
installments were so distributed as to make the rentals payable by the
defendant I the sum of P200 a month to the plaintiff; and the defendant
should not deliver the possession of said premises to anyone under any
and all circumstances except to the plaintiff, which conditions and terms
are inconsistent with the concept of cession or assignment. In other
words, in said contract, the plaintiff’s personality as lessee does not
disappear; the plaintiff does not transmit absolutely his rights and
obligations to the defendant and the defendant does not have any direct
action against the owner of the premises as lessor, to require the
compliance of the obligations contracted with the plaintiff as lessee, or
vice versa. Moreover, the alleged assignment or cession could not have
been held valid in this case, because the owner of the premises did not
give his express consent to the substitution of the defendant in lieu of the
plaintiff.

(2) YES

The lease contract between the plaintiff and Quillen was not terminated
after Augsut 14, 1945, upon the last payment of the rent by the plaintiff to
Quillen. The monthly rental agreed by the two, being a monthly basis
without specifying the period up to which plaintiff should occupy the
house, the lease is to be considered for an indefinite period, automatically
renewable at the end of every month and terminable upon the tacit or
express will of the parties. Had Quillen desire to terminated the lease on
August 14, 1945, he could not have allowed defendant to continue staying
in the premises, after the latter had been placed there by plaintiff under
terms of Exhibit A, and he would not have accepted from the defendant
the subsequent monthly rentals of P125. The plaintiff had occupied the
premises on January 1945, at the time when the forces of liberation was
already at a handsthrow from Pasay and everything was chaos and
uncertain, with the acquiescence of Mrs. Quillen who then wanted
someone to stay in the Apartment vacated by the Japanese in order to
save them from sabotage and looting, and who made the plaintiff
understand that said occupation was to be, more or less, for an indefinite
period of time, as was subsequently confirmed by the conduct of Quillen
when he was released from the concentration camp. The defendant, being
a privy of the plaintiff, payments made by him of rentals to Quillen is

SIME DARBY PILIPINAS, INC. vs. GOODYEAR PHILIPPINES, INC. and
MACGRAPHICS CARRANZ INTERNATIONAL CORPORATION
GOODYEAR PHILIPPINES, INC. vs. SIME DARBY PILIPINAS, INC. and
MACGRAPHICS CARRANZ INTERNATIONAL CORPORATION
G.R. No. 182148 June 8, 2011 J. Mendoza
The lessee cannot assign the lease without the consent of the lessor, unless
there is a stipulation to the contrary (Art. 1649). In an assignment of a
lease, there is a novation by the substitution of the person of one of the
parties – the lessee.24The personality of the lessee, who dissociates from the
lease, disappears. Thereafter, a new juridical relation arises between the
two persons who remain – the lessor and the assignee who is converted into
the new lessee. The objective of the law in prohibiting the assignment of the
lease without the lessor’s consent is to protect the owner or lessor of the
leased property.
Facts:
The Magallanes billboard wasleased by Macgraphics to Sime Darby in
April 1994 at a monthly rental of ₱120,000.00.6 The lease had a term of
four years and was set to expire on March 30, 1998.
On May 9, 1996, Sime Darby and Goodyear executed a deed entitled
"Deed of Assignment in connection with Microwave Communication
Facility and in connection with Billboard Advertising in Makati City and
Pulilan, Bulacan" (Deed of Assignment),8 through which Sime Darby
assigned, among others, its leasehold rights and deposits made to
Macgraphics pursuant to its lease contract over the Magallanes billboard.
Sime Darby then notified Macgraphics of the assignment of the
Magallanes billboard in favor of Goodyear through a letter-notice dated
May 3, 1996.
After submitting a new design for the Magallanes billboard to feature its
name and logo, Goodyear requested that Macgraphics submit its
proposed quotation for the production costs of the new design. In a letter
dated June 21, 1996 Macgraphics informed Goodyear that the monthly
rental of the Magallanes billboard is ₱250,000.00 and explained that the
increase in rental was in consideration of the provisions and technical
aspects of the submitted design.
Goodyear replied on July 8, 1996 stating that due to budget constraints, it
could not accept Macgraphics’ offer to integrate the cost of changing the
design to the monthly rental. Goodyear stated that it intended to honor
the ₱120,000.00 monthly rental rate given by Macgraphics to Sime Darby.
It then requested that Macgraphics send its quotation for the simple
background repainting and re-lettering of the neon tubing for the
Magallanes billboard.
Macgraphics then sent a letter to Sime Darby, dated July 11, 1996,
informing the latter that it could not give its consent to the assignment of
lease to Goodyear. Macgraphics explained that the transfer of Sime
Darby’s leasehold rights to Goodyear would necessitate drastic changes
to the design and the structure of the neon display of the Magallanes
billboard and would entail the commitment of manpower and resources
that it did not foresee at the inception of the lease.
Attaching a copy of this letter to a correspondence dated July 15, 1996,
Macgraphics advised Goodyear that any advertising service it intended to
get from them would have to wait until after the expiration or valid pre-
termination of the lease then existing with Sime Darby.
On September 23, 1996, due to Macgraphics’ refusal to honor the Deed of
Assignment, Goodyear sent Sime Darby a letter, via facsimile, demanding
Civil Law Review 2 | Atty. Legarda 4
Case Digest 2018 - LEASE
partial rescission of the Deed of Assignment and the refund of
₱1,239,000.00, the pro-rata value of Sime Darby’s leasehold rights over
the Magallanes billboard.
As Sime Darby refused to accede to Goodyear’s demand for partial
rescission, the latter commenced Civil Case No. 97-561 with the RTC. In
its complaint, Goodyear alleged that Sime Darby [1] was unable to deliver
the object of the Deed of Assignment and [2] was in breach of its
warranty under Title VII, Section B, paragraph 2 of the MOA, stating that
"no consent of any third party with whom Sime Darby has a contractual
relationship is required in connection with the execution and delivery of
the MOA, or the consummation of the transactions contemplated therein."
Issue: WON Macgraphics is bound by the assignment of the leasehold
rights?
Ruling: NO.
Whether Macgraphics gave its consent to the assignment of leasehold
rights of Sime Darby is a question of fact. It is not reviewable. On this
score alone, the petition of Sime Darby fails.
Even if the Court should sidestep this otherwise fatal miscue, the petition
of Sime Darby remains bereft of any merit. Article 1649 of the New Civil
Code provides:
Art. 1649. The lessee cannot assign the lease without the
consent of the lessor, unless there is a stipulation to the
contrary. (n)
In an assignment of a lease, there is a novation by the substitution of the
person of one of the parties – the lessee. 24The personality of the lessee,
who dissociates from the lease, disappears. Thereafter, a new juridical
relation arises between the two persons who remain – the lessor and the
assignee who is converted into the new lessee. The objective of the law in
prohibiting the assignment of the lease without the lessor’s consent is to
protect the owner or lessor of the leased property. 25
Broadly, a novation may either be extinctive or modificatory. It is
extinctive when an old obligation is terminated by the creation of a new
obligation that takes the place of the former; it is merely modificatory
when the old obligation subsists to the extent it remains compatible with
the amendatory agreement. An extinctive novation results either by
changing the object or principal conditions (objective or real), or by
substituting the person of the debtor or subrogating a third person in the
rights of the creditor (subjective or personal). Under this mode, novation
would have dual functions—one to extinguish an existing obligation, the
other to substitute a new one in its place. This requires a conflux of four
essential requisites: (1) a previous valid obligation; (2) an agreement of
all parties concerned to a new contract; (3) the extinguishment of the old
obligation; and (4) the birth of a valid new obligation. 26
While there is no dispute that the first requisite is present, the Court,
after careful consideration of the facts and the evidence on record, finds
that the other requirements of a valid novation are lacking. A review of
the lease contract between Sime Darby and Macgraphics discloses no
stipulation that Sime Darby could assign the lease without the consent of
Macgraphics.
Moreover, contrary to the assertions of Sime Darby, the records are bereft
of any evidence that clearly shows that Macgraphics consented to the
assignment of the lease. As aptly found by the RTC and the CA,
Macgraphics was never part of the negotiations between Sime Darby and
Goodyear. Neither did it give its conformity to the assignment after the
execution of the Deed of Assignment.
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The consent of the lessor to an assignment of lease may indeed be given

expressly or impliedly. It need not be given simultaneously with that of
the lessee and of the assignee. Neither is it required to be in any specific
or particular form.27 It must, however, be clearly given.

Indeed, Macgraphics and Goodyear never came to terms as to the

conditions that would govern their relationship. While it is true, that
Macgraphics and Goodyear exchanged proposals, there was never a
meeting of minds between them. Contrary to the assertions of Sime
Darby, the negotiations between Macgraphics and Goodyear did not
translate to its (Macgraphics’) consent to the assignment. Negotiations is
just a part or a preliminary phase to the birth of an obligation.

"In general, contracts undergo three distinct stages, to wit: negotiation;

perfection or birth; and consummation. Negotiation begins from the time
the prospective contracting parties manifest their interest in the contract
and ends at the moment of agreement of the parties. Perfection or birth of
the contract takes place when the parties agree upon the essential
elements of the contract. Consummation occurs when the parties fulfill or
perform the terms agreed upon in the contract, culminating in the
extinguishment thereof."28

Regarding laches, it is an issue raised by Sime Darby for the first time only
in this Court. Basic is the rule that issues not raised below cannot be
raised for the first time on appeal. Points of law, theories, issues and
arguments not brought to the attention of the lower court need not be,
and ordinarily will not be, considered by the reviewing court, as they
cannot be raised for the first time at that late stage. Basic considerations
of due process impel the adoption of this rule.29

Notwithstanding, the Court finds that the doctrine of laches cannot be

applied in this case.

Laches is the failure or neglect, for an unreasonable and unexplained

length of time, to do that which, by exercising due diligence, could or
should have been done earlier; it is negligence or omission to assert a
right within a reasonable time, warranting the presumption that the
party entitled to assert it either has abandoned or declined to assert
it.30 There is no absolute rule as to what constitutes laches or staleness of
demand; each case is to be determined according to its particular
circumstances, with the question of laches addressed to the sound
discretion of the court. Because laches is an equitable doctrine, its
application is controlled by equitable considerations and should not be
used to defeat justice or to perpetuate fraud or injustice. 31

From the records, it appears that Macgraphics first learned of the

assignment when Sime Darby sent its letter-notice dated May 3, 1996.
From the letters sent by Macgraphics to Goodyear, it is apparent that
Macgraphics had to study and determine both the legal and practical
implications of entertaining Goodyear as a client. After review,
Macgraphics found that consenting to the assignment would entail the
commitment of manpower and resources that it did not foresee at the
inception of the lease. It thereafter communicated its non-conformity to
the assignment. To the mind of the Court, there was never a delay.

In sum, it is clear that by its failure to secure the consent of Macgraphics

to the assignment of lease, Sime Darby failed to perform what was
incumbent upon it under the Deed of Assignment. The rescission of the
Deed of Assignment pursuant to Article 1191 of the New Civil Code is,
thus, justified.
 Civil Law Review 2 | Atty. Legarda 6
Case Digest 2018 - LEASE

LOMISES ALUDOS, deceased, substituted by FLORA ALUDOS vs. evidence was presented and formally offered showing that any and all
JOHNNY M. SUERTE improvements in the market stalls shall be owned by the Baguio City
Government.
G.R. No. 165285 June 18, 2012 J. Brion
Likewise unsupported by evidence is Lomises claim that the stalls
Assignment of the leasehold rights over the two market stalls was void since themselves were the only improvements. Hence, the CA found it proper to
it was made without the consent of the lessor, the Baguio City Government, order the remand of the case for the RTC to determine the value of the
as required under Article 1649 of the Civil Code. improvements on the market stalls existing as of September 8, 1984. We
agree with the CAs order of remand. We note, however, that Lomises had
already returned the P68,000.00 and receipt of the amount has been duly
Facts:
acknowledged by Johnnys mother, Domes. Johnny testified on October 6,
1986 that the money was still with his mother. Thus, upon determination
Lomises acquired from the Baguio City Government the right to occupy
by the RTC of the actual value of the improvements on the market stalls,
two stalls in the Hangar Market in Baguio City, as evidenced by a permit
the heirs of Johnny Suerte should pay the ascertained value of these
issued by the City Treasurer.
improvements to Lomises, who shall thereafter be required to execute
the deed of sale over the improvements in favor of the heirs of Johnny
On September 8, 1984, Lomises entered into an agreement with
respondent Johnny M. Suerte for the transfer of all improvements and
rights over the two market stalls (Stall Nos. 9 and 10) for the amount of
P260,000.00. Johnny gave a down payment of P45,000.00 to Lomises,
who acknowledged receipt of the amount in a document executed on the
same date as the agreement.

Before full payment could be made, however, Lomises backed out of the
agreement and returned the P68,000.00 to Domes and Jaime Suerte, the
mother and the father of Johnny, respectively. The return of the
P68,000.00 down payment was embodied in a handwritten receipt dated
October 9, 1985. Through a letter dated October 15, 1985, Johnny
protested the return of his money, and insisted on the continuation and
enforcement of his agreement with Lomises. When Lomises refused
Johnnys protest, Johnny filed a complaint against Lomises before the
Regional Trial Court (RTC), Branch 7, Baguio City, for specific
performance with damages.

Issue: WON the assignment of the leasehold rights is valid?

Ruling: NO. Void.

Both the RTC and the CA correctly declared that the assignment of the
leasehold rights over the two market stalls was void since it was made
without the consent of the lessor, the Baguio City Government, as
required under Article 1649 of the Civil Code. Neither party appears to
have contested this ruling.

Lomises, however, objects to the CA ruling upholding the validity of the

agreement insofar as it involved the sale of improvements on the stalls.
Lomises alleges that the sale of the improvements should similarly be
voided because it was made without the consent of the Baguio City
Government, the owner of the improvements, pursuant to the May 1,
1985 lease contract. Lomises further claims that the stalls themselves are
the only improvements on the property and a transfer of the stalls cannot
be made without transferring the leasehold rights. Hence, both the
assignment of leasehold rights and the sale of improvements should be
voided.

The CA has already rejected the evidentiary value of the May 1, 1985
lease contract between the Baguio City Government and Lomises, as it
was not formally offered in evidence before the RTC; in fact, the CA
admonished Lomises lawyer, Atty. Lockey, for making it appear that it
was part of the records of the case. Under Section 34, Rule 132 of the
Rules of Court, the court shall consider no evidence which has not been
formally offered. The offer of evidence is necessary because it is the duty
of the court to rest its findings of fact and its judgment only and strictly
upon the evidence offered by the parties. Unless and until admitted by
the court in evidence for the purpose or purposes for which such
document is offered, the same is merely a scrap of paper barren of
probative weight.[22] Although the contract was referred to in Lomises
answer to Johnnys complaint[23] and marked as Exhibit 2 in his pre-trial
brief,[24] a copy of it was never attached. In fact, a copy of the May 1,
1985 lease contract surfaced only after Lomises filed a motion for
reconsideration of the CA decision. What was formally offered was the
1969 permit, which only stated that Lomises was permitted to occupy a
stall in the Baguio City market and nothing else.[25] In other words, no

VSD Realty & Development Corporation vs. Uniwide Sales, Inc and
Dolores Baello Tejada
G.R. No. 170677 October 24, 2012 J. Peralta
It is noted that when the contract of lease was executed, Uniwide was
unaware that the property leased by it was owned by another person other
than Dolores Baello. Nevertheless, Uniwide cannot avail of the rights of a
builder in good faith under Article 448 of the Civil Code, in relation to
Article 546 of the same Code, which provides for full reimbursement of
useful improvements and retention of the premises until reimbursement is
made, as the said provisions apply only to a possessor in good faith who
builds on land with the belief that he is the owner thereof. It does not apply
where one’s only interest is that of a lessee under a rental contract.
Facts:
petitioner VSD Realty and Development Corporation (VSD) filed a
Complaint2 for annulment of title and recovery of possession of property
against respondents Uniwide Sales, Inc. (Uniwide) and Dolores Baello.
Petitioner alleged that it is the registered owner of a parcel of land in
Caloocan City, with an area of 2,835.30 square meters, more or less, and
covered by TCT No. T-2853125 of the Register of Deeds of Caloocan City.
Petitioner also alleged that its right to the subject property and the
validity and correctness of the technical description and location of the
property are duly established in LRC Case No. C-3288.
Petitioner alleged that respondent Baello is the holder and registered
owner of a parcel of land covered by TCT No. (35788) 12754 in the
Register of Deeds for the Province of Rizal. By virtue of the said title,
Baello claims ownership and has possession of the property covered by
petitioner’s title, and she entered into a contract of lease with respondent
Uniwide.
In its Answer,9 respondent Uniwide alleged that on July 15, 1988, it
entered into a Contract of Lease10 with respondent Baello involving a
parcel of land with an area of about 2,834 square meters, located in
Caloocan City, which property is covered by TCT No. 35788 in the name
of Baello. As a consequence of the lease agreement, it constructed a
building worth at least P200,000,000.00 on the said property. It prayed
that judgment be rendered dismissing the complaint for lack of cause of
action against Uniwide; declaring the contract of lease as valid and
enforceable; and ordering petitioner to pay Uniwide moral and
exemplary damages, among others.
Baello alleged that during her open and public possession of the subject
property spanning over 40 years, nobody came forward to contest her
title thereto. It was only in September 1994, when Baello was absent from
the Philippines that petitioner demanded rentals from Uniwide, asserting
ownership over the land.
Issue: WON Uniwide is a lessor in good faith?
Ruling: NO.
The Court holds that petitioner was able to establish through
documentary and testimonial evidence that the technical description of
its Torrens title covers the property that is being occupied by respondent
Uniwide by virtue of a lease contract with respondent Baello.
In this case, petitioner proved his title over the property in dispute as
well as the identity of the said property; hence, it is entitled to recover the
possession of the property from respondents. Considering that Uniwide
constructed a building on the subject parcel of land, is Uniwide entitled to
recover from VSD the cost of its improvement on the land? It is noted that
when the contract of lease was executed, Uniwide was unaware that the
property leased by it was owned by another person other than Dolores
Baello. Nevertheless, Uniwide cannot avail of the rights of a builder in
good faith under Article 44849 of the Civil Code, in relation to Article 546
of the same Code, which provides for full reimbursement of useful
improvements and retention of the premises until reimbursement is
made, as the said provisions apply only to a possessor in good faith who
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builds on land with the belief that he is the owner thereof.50 It does not
apply where one’s only interest is that of a lessee under a rental
contract.51
Parilla v. Pilar 52 held:
Jurisprudence is replete with cases which categorically declare that
Article 448 covers only cases in which the builders, sowers or planters
believe themselves to be owners of the land or, at least, have a claim of
title thereto, but not when the interest is merely that of a holder, such as a
mere tenant, agent or usufructuary. A tenant cannot be said to be a
builder in good faith as he has no pretension to be owner.
In a plethora of cases, this Court has held that Articles 448 of
the Civil Code, in relation to Article 546 of the same Code,
which allows full reimbursement of useful improvements and
retention of the premises until reimbursement is made, applies
only to a possessor in good faith, i.e., one who builds on land
with the belief that he is the owner thereof. It does not apply
where one’s only interest is that of a lessee under a rental
contract; otherwise, it would always be in the power of the
tenant to “imp
Based on the foregoing, Uniwide cannot recover the cost of its
improvement on the land from VSD under Article 448 of the Civil Code.
Further, petitioner prays that the Decision of the Court of Appeals be
reversed and the Decision of the trial court be reinstated. An examination
of the dispositive portion of the trial court’s decision shows that some
modifications are in order. First, the trial court declared the title of
respondent Dolores Baello, TCT No. (35788) 12754, to be null and void.
The Court, however, holds that the title of respondent Dolores Baello
cannot be nullified, because the records show that petitioner failed to
present any proof that the title was issued through fraud, and Baello’s
title covers a different property from that described in petitioner’s title.
Second, the trial court ordered respondents Baello and Uniwide to pay,
jointly and severally, a just and reasonable compensation of
P1,200,000.00 per month with legal interest for the occupancy and use of
petitioner’s land from the time petitioner acquired ownership of the land
on September 12, 1994 until the land is actually vacated by respondents.
The Court notes that the trial court did not state in its decision how it
determined the amount of P1.2 million as monthly compensation for the
occupation and use of petitioner’s property from the time petitioner
acquired ownership of the property until it is vacated by respondents,
particularly Uniwide which is in possession of the property. Although
petitioner, in its Complaint, prayed for the payment of P1.5 million as
compensation for the occupancy and use of the subject property, it did
not present evidence to prove that it is entitled to such amount. The only
basis for compensation for the use of the subject property is the contract
of lease between Uniwide and Dolores Baello covering a period of 25
years from July 1, 1988 to June 30, 2013,54 renewable for another 25
years, with the agreement that upon termination of the lease, the
ownership of whatever buildings and improvements constructed by the
lessee on the leased premises shall automatically be owned by the
lessor.55 The lease contract provides payment of rent in the amount of
P700,000.00 per annum,56 or a monthly rental of P58,333.30. The Court
holds that the payment of P58,333.30 per month is a reasonable
compensation for the occupation and use by respondents of the subject
property from the time petitioner acquired ownership of the land on
September 12, 1994. The monthly compensation of P58,333.30 shall earn
an interest of six percent (6% ) per annum57 from the filing of the
Complaint on June 8, 199558 until the award is final and executory, after
which the interest rate shall be 12 percent (12%) per annum from the
date the award becomes final and executory until fully paid.59 However,
Uniwide should not be made to pay jointly and severally with Baello just
compensation for the occupancy and use of petitioner’s land from June 8,
1995, the date of the filing of the complaint, up to the finality of this
Decision, since Uniwide already paid rentals to Baello. However, Baello
and Uniwide may be held jointly and severally liable to VSD for the
payment of rentals from the finality of this Decision until the possession
of the subject property is returned to VSD, since Uniwide would not yet
have paid rentals during that time.

ANALITA P. INOCENCIO, substituting for RAMON INOCENCIO
(Deceased) v. HOSPICIO DE SAN JOSE
G.R. No. 201787, 25 September 2013, SECOND DIVISION (Carpio, J.)
Assignment or transfer of lease, which is covered by Article 1649
of the Civil Code, is different from a sublease arrangement, which is
governed by Article 1650 of the same Code. In a sublease, the lessee
becomes in turn a lessor to a sublessee. The sublessee then becomes liable to
pay rentals to the original lessee. However, the juridical relation between
the lessor and lessee is not dissolved. The parties continue to be bound by
the original lease contract. Thus, in a sublease arrangement, there are at
least three parties and two distinct juridical relations.
FACTS:
In 1946, Hospicio de San Jose (HDSJ) leased a parcel of land
located in Pasay City to German Inocencio (German). The lease contract,
which contained a non-transferability clause, was effective for a period of
one year, and was renewed for one-year periods several times. The last
written contract was executed on 31 May 1951.   Thereafter, German
constructed two buildings on the parcel of land which he subleased. He
designated his son Ramon Inocencio (Ramon) to administer the said
property.
In 1990, HDSJ informed German that it would be increasing its
rentals. In 1997, German passed away. Ramon did not notify HDSJ of
German’s death. After German’s passing, Ramon collected the rentals
from the sublessees, and paid the rentals to HDSJ. In 2001, HDSJ’s
property administrator, Five Star Multi-Services, Inc., notified Ramon that
HDSJ is terminating the lease contract. Ramon then sent a letter to HDSJ
suggesting that the lease contract be renegotiated for the welfare of the
sublessees occupying the parcel of land.  HDSJ notified Ramon that the
lease contract shall not be renewed because Ramon has “continually
subleased the subject premises to about 20 families (in addition to a
commercial establishment) x x x without the knowledge and consent of
the lessor, [HDSJ].” Thereafter, HDSJ refused to accept Ramon’s tender of
payment of rentals. HDSJ sent another letter to Ramon reiterating its
stand that the lease contract was already terminated and giving him and
his sublessees 30 days to vacate the premises. HDSJ also posted a
Patalastas stating that it is willing to work out an amicable arrangement
with the sublessees, although the latter are not considered as legal
occupants or tenants of the property.  Because of this, some of the
sublessees refused to pay rentals to Ramon.
HDSJ filed a Complaint for unlawful detainer against Ramon
and his sublessees.  Since Ramon died during the pendency of the case,
his wife, Analita, substituted him in the proceedings. The MeTC ruled in
favor of HDSJ. It held that the lease contract could not be transmitted to
Ramon as German’s heir in view of the express stipulation found therein.
Since there was “no lease contract between [HDSJ] and Ramon x x x the
latter cannot sublease the property.” The RTC affirmed and held that
“even before the termination of the contract, [Ramon] had no right to
sublease the said property due to the intransferability clause in the
contract.” The CA affirmed.
ISSUES:
(1) WON the sublease contracts were valid. – YES.
(2) WON Ramon can claim ownership over the buildings. – NO.
RULING:
(1) The Court has previously ruled that lease contracts, by
their nature, are not personal. The general rule, therefore, is lease
contracts survive the death of the parties and continue to bind the heirs
except if the contract states otherwise.  In Sui Man Hui Chan v. Court of
Appeals, the Court held that:
A lease contract is not essentially personal in character. Thus,
the rights and obligations therein are transmissible to the
heirs. The general rule, therefore, is that heirs are bound by
contracts entered into by their predecessors-in-interest except
when the rights and obligations arising therefrom are not
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transmissible by (1) their nature, (2) stipulation or (3)
provision of law. In the subject Contract of Lease, not only
were there no stipulations prohibiting any transmission of
rights, but its very terms and conditions explicitly provided for
the transmission of the rights of the lessor and of the lessee to
their respective heirs and successors. The contract is the law
between the parties. The death of a party does not excuse
nonperformance of a contract, which involves a property right,
and the rights and obligations thereunder pass to the
successors or representatives of the deceased. Similarly,
nonperformance is not excused by the death of the party when
the other party has a property interest in the subject matter of
the contract.
Section 6 of the lease contract provides that “this contract is
nontransferable unless prior consent of the lessor is obtained in
writing.” Section 6 refers to transfers inter vivos and not transmissions
mortis causa. What Section 6 seeks to avoid is for the lessee to substitute
a third party in place of the lessee without the lessor’s consent. This
merely reiterates what Article 1649 of the Civil Code provides:
Art. 1649. The lessee cannot assign the lease without the
consent of the lessor, unless there is a stipulation to the
contrary.
In any case, HDSJ also acknowledged that Ramon is its month-
to-month lessee. Thus, the death of German did not terminate the lease
contract executed with HDSJ, but instead continued with Ramon as the
lessee. HDSJ recognized Ramon as its lessee in a letter dated 1 March
2001:
We acknowledge the fact that Hospicio de San Jose has been
accepting the payment of your rentals since the demise of Mr.
[German] Inocencio. Hence, an implied contract of lease
between the two of you exists. However, since there is no
stipulation as to the period of the contract and you are paying a
monthly rental to our client, the period for the lease is on a
month-to-month basis (Art. 1687). Thus as of this date, your
contract should expire on March 31, 2001.
Section 6 of the lease contract requires written consent of the
lessor before the lease may be assigned or transferred. In Tamio v.
Tecson, the Court explained the nature of an assignment of lease:
In the case of cession or assignment of lease rights on real
property, there is a novation by the substitution of the person
of one of the parties — the lessee. The personality of the lessee,
who dissociates from the lease, disappears; only two persons
remain in the juridical relation — the lessor and the assignee
who is converted into the new lessee.
Assignment or transfer of lease, which is covered by Article
1649 of the Civil Code, is different from a sublease arrangement, which is
governed by Article 1650 of the same Code. In a sublease, the lessee
becomes in turn a lessor to a sublessee. The sublessee then becomes
liable to pay rentals to the original lessee. However, the juridical relation
between the lessor and lessee is not dissolved. The parties continue to be
bound by the original lease contract. Thus, in a sublease arrangement,
there are at least three parties and two distinct juridical relations.
Ramon had a right to sublease the premises since the lease
contract did not contain any stipulation forbidding subleasing. Article
1650 of the Civil Code states:
Art. 1650. When in the contract of lease of things there is no
express prohibition, the lessee may sublet the thing leased, in
whole or in part, without prejudice to his responsibility for the
performance of the contract toward the lessor.
Therefore, the Court holds that the sublease contracts executed
by Ramon were valid.
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(2) The Inocencios claim ownership over the buildings since

these are separate and distinct from the land on which they are erected.
Thus, as owners of the buildings, they have a right to lease the buildings
to third persons, even after termination of the lease contract with HDSJ.
To bolster their claim of ownership, the Inocencios presented the
following evidence: (1) the building permit; (2) the receipt for the
payment of the permit fee; (3) the Tax Declarations; and (4) the proof of
payment of insurance. The Inocencios also claimed that:

as the Inocencios owned the Subject Buildings, it is respectfully

submitted, and it should be clear that when they entered into
lease contracts with tenants for the lease of portions of the said
buildings, these contracts were independent contracts of lease
over their own building and not sub-leases of the parcel of land
which they leased from Respondent. It is Respondent’s
inaccurate characterization of the leasing by the Inocencios of
portions of their own building that has obfuscated the legal
issues in this case and partially led to the incorrect decisions of
the courts a quo.

The Court does not agree. In Duellome v. Gotico and Caleon v.

Agus Development Corporation, the Court held that the lease of a building
includes the lease of the lot and consequently, the rentals of the building
include the rentals of the lot. As correctly pointed out by HDSJ in its
Comment:

x x x When the Inocencios leased the buildings to third parties,

they also “leased” to the third parties the plot of land on which
the buildings stood — either by implied transfer of the lease
covering the plot of the land, or by sublease. Either way, x x x
the Inocencios themselves must have a valid lease contract
with [HDSJ] over the land. However, when the lease contract x
x x with HDSJ ended on 31March 2001, Ramon lost his status
as lessee of the land, and therefore, had no authority to
transfer the lease or sublease the land. x x x.

However, the Court finds that the CA erred in not applying

Article 1678 of the Civil Code which provides:

Art. 1678. 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.

The foregoing provision applies if the improvements were: (1)

introduced in good faith; (2) useful; and (3) suitable to the use for which
the lease is intended, without altering the form and substance.

The Court finds that the aforementioned requisites are

satisfied in this case. The buildings were constructed before German’s
demise, during the subsistence of a valid contract of lease. It does not
appear that HDSJ prohibited German from constructing the buildings.
Thus, HDSJ should have reimbursed German (or his estate) half of the
value of the improvements as of 2001. If HDSJ is not willing to reimburse
the Inocencios, then the latter should be allowed to demolish the
buildings.

ANTONIO LOCSIN, II v. MEKENI FOOD CORPORATION
G.R. No. 192105, 9 December 2013, SECOND DIVISION (Del
Castillo, J.)
Installments made on the car plan may be treated as rentals only
when there is an express stipulation in the car plan agreement to such
effect.
FACTS:
Respondent Mekeni Food Corporation (Mekeni) offered
petitioner Antonio Locsin II the position of Regional Sales Manager to
oversee Mekeni’s National Capital Region Supermarket/Food Service and
South Luzon operations. In addition to a compensation and benefit
package, Mekeni offered petitioner a car plan, under which one-half of the
cost of the vehicle is to be paid by the company and the other half to be
deducted from petitioner’s salary. When petitioner resigned, a total of
₱112,500.00 had been deducted from his monthly salary and applied as
part of the employee’s share in the car plan. Petitioner made personal
and written follow-ups regarding his unpaid salaries, commissions,
benefits, and offer to purchase his service vehicle. Mekeni replied that
the company car plan benefit applied only to employees who have been
with the company for five years; for this reason, the balance that
petitioner should pay on his service vehicle stood at ₱116,380.00 if he
opts to purchase the same.
Petitioner filed against Mekeni and/or its President, Prudencio
S. Garcia, a Complaint for the recovery of monetary claims and recovery
of monthly salary deductions which were earmarked for his cost-sharing
in the car plan. The LA rendered a decision directing Mekeni to turn-over
to Locsin the subject vehicle upon the latter’s payment of the sum of
P100,435.84. The NLRC reversed and held that petitioner’s amortization
payments on his service vehicle amounting to ₱112,500.00 should be
reimbursed; if not, unjust enrichment would result, as the vehicle
remained in the possession and ownership of Mekeni.
The CA treated petitioner’s monthly contributions in the total
amount of ₱112,500.00 as rentals for the use of his service vehicle for the
duration of his employment with Mekeni. The CA applied Articles 1484-
1486 of the Civil Code, and added that the installments paid by petitioner
should not be returned to him inasmuch as the amounts are not
unconscionable. Moreover, the CA held that petitioner cannot recover
Mekeni’s corresponding share in the purchase price of the service vehicle,
as this would constitute unjust enrichment on the part of petitioner at
Mekeni’s expense.
ISSUE:
WON petitioner’s monthly contributions should be treated as
rentals for the use of his service vehicle for the duration of his
employment with Mekeni. – NO.
RULING:
From the evidence on record, it is seen that the Mekeni car
plan offered to petitioner was subject to no other term or condition than
that Mekeni shall cover one-half of its value, and petitioner shall in turn
pay the other half through deductions from his monthly salary. Mekeni
has not shown, by documentary evidence or otherwise, that there are
other terms and conditions governing its car plan agreement with
petitioner. There is no evidence to suggest that if petitioner failed to
completely cover one-half of the cost of the vehicle, then all the
deductions from his salary going to the cost of the vehicle will be treated
as rentals for his use thereof while working with Mekeni, and shall not be
refunded. Indeed, there is no such stipulation or arrangement between
them. Thus, the CA’s reliance on Elisco Tool is without basis, and its
conclusions arrived at in the questioned decision are manifestly
mistaken. To repeat what was said in Elisco Tool –
First. Petitioner does not deny that private respondent
Rolando Lantan acquired the vehicle in question under a car
plan for executives of the Elizalde group of companies. Under a
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typical car plan, the company advances the purchase price of a
car to be paid back by the employee through monthly
deductions from his salary. The company retains ownership of
the motor vehicle until it shall have been fully paid for.
However, retention of registration of the car in the company’s
name is only a form of a lien on the vehicle in the event that the
employee would abscond before he has fully paid for it. There
are also stipulations in car plan agreements to the effect that
should the employment of the employee concerned be
terminated before all installments are fully paid, the vehicle
will be taken by the employer and all installments paid shall be
considered rentals per agreement. 
It was made clear in the above pronouncement that
installments made on the car plan may be treated as rentals only when
there is an express stipulation in the car plan agreement to such effect. It
was therefore patent error for the appellate court to assume that, even in
the absence of express stipulation, petitioner’s payments on the car plan
may be considered as rentals which need not be returned.
Indeed, the Court cannot allow that payments made on the car
plan should be forfeited by Mekeni and treated simply as rentals for
petitioner’s use of the company service vehicle. Nor may they be retained
by it as purported loan payments, as it would have this Court believe. In
the first place, there is precisely no stipulation to such effect in their
agreement. Secondly, it may not be said that the car plan arrangement
between the parties was a benefit that the petitioner enjoyed; on the
contrary, it was an absolute necessity in Mekeni’s business operations,
which benefited it to the fullest extent: without the service vehicle,
petitioner would have been unable to rapidly cover the vast sales
territory assigned to him, and sales or marketing of Mekeni’s products
could not have been booked or made fast enough to move Mekeni’s
inventory. Poor sales, inability to market Mekeni’s products, a high rate
of product spoilage resulting from stagnant inventory, and poor
monitoring of the sales territory are the necessary consequences of lack
of mobility. Without a service vehicle, petitioner would have been placed
at the mercy of inefficient and unreliable public transportation; his
official schedule would have been dependent on the arrival and departure
times of buses or jeeps, not to mention the availability of seats in them.
Clearly, without a service vehicle, Mekeni’s business could only prosper at
a snail’s pace, if not completely paralyzed. Its cost of doing business
would be higher as well.
Any benefit or privilege enjoyed by petitioner from using the
service vehicle was merely incidental and insignificant, because for the
most part the vehicle was under Mekeni’s control and supervision. Free
and complete disposal is given to the petitioner only after the vehicle’s
cost is covered or paid in full. Until then, the vehicle remains at the beck
and call of Mekeni. Given the vast territory petitioner had to cover to be
able to perform his work effectively and generate business for his
employer, the service vehicle was an absolute necessity, or else Mekeni’s
business would suffer adversely. Thus, it is clear that while petitioner was
paying for half of the vehicle’s value, Mekeni was reaping the full benefits
from the use thereof.
In light of the foregoing, it is unfair to deny petitioner a refund
of all his contributions to the car plan.  Under Article 22 of the Civil Code,
“[e]very person who through an act of performance by another, or any
other means, acquires or comes into possession of something at the
expense of the latter without just or legal ground, shall return the same to
him.” Article 2142 of the same Code likewise clarifies that there are
certain lawful, voluntary and unilateral acts which give rise to the
juridical relation of quasi-contract, to the end that no one shall be
unjustly enriched or benefited at the expense of another. In the absence
of specific terms and conditions governing the car plan arrangement
between the petitioner and Mekeni, a quasi-contractual relation was
created between them. Consequently, Mekeni may not enrich itself by
charging petitioner for the use of its vehicle which is otherwise absolutely
necessary to the full and effective promotion of its business. It may not,
under the claim that petitioner’s payments constitute rents for the use of
the company vehicle, refuse to refund what petitioner had paid, for the
reasons that the car plan did not carry such a condition; the subject
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vehicle is an old car that is substantially, if not fully, depreciated; the car
plan arrangement benefited Mekeni for the most part; and any personal
benefit obtained by petitioner from using the vehicle was merely
incidental.

Conversely, petitioner cannot recover the monetary value of

Mekeni’s counterpart contribution to the cost of the vehicle; that is not
property or money that belongs to him, nor was it intended to be given to
him in lieu of the car plan. In other words, Mekeni’s share of the vehicle’s
cost was not part of petitioner’s compensation package. To start with, the
vehicle is an asset that belonged to Mekeni. Just as Mekeni is unjustly
enriched by failing to refund petitioner’s payments, so should petitioner
not be awarded the value of Mekeni’s counterpart contribution to the car
plan, as this would unjustly enrich him at Mekeni’s expense.

MANUEL JUSAYAN,ALFREDO JUSAYAN, AND MICHAEL JUSAYAN v.
JORGE SOMBILLA
January 21, 2015 (BERSAMIN, J.)
FACTS
Wilson Jesena (Wilson) owned four parcels of land situated in New
Lucena, Iloilo. On June 20, 1970, Wilson entered into an agreement with
respondent Jorge Sombilla (Jorge), wherein Wilson designated Jorge as
his agent to supervise the tilling and farming of his riceland in crop year
1970-1971. On August 20, 1971, before the expiration of the agreement,
Wilson sold the four parcels of land to Timoteo Jusayan (Timoteo). Jorge
and Timoteo verbally agreed that Jorge would retain possession of the
parcels of land and would deliver 110 cavans of palay annually to
Timoteo without need for accounting of the cultivation expenses
provided that Jorge would pay the irrigation fees. From 1971 to 1983,
Timoteo and Jorge followed the arrangement. In 1975, the parcels of land
were transferred in the names of Timoteo’s sons (petitioners). In 1984,
Timoteo sent several letters to Jorge terminating his administration and
demanding the return of the possession of the parcels of land.
Due to the failure of Jorge to render accounting and to return the
possession of the parcels of land despite demands, Timoteo filed on June
30, 1986 a complaint for recovery of possession and accounting against
Jorge in the RTC. Following Timoteo’s death, the petitioners substituted
him as the plaintiffs.
In his answer, Jorge asserted that he enjoyed security of tenure as the
agricultural lessee of Timoteo; and that he could not be dispossessed of
his landholding without valid cause.
RTC upheld the contractual relationship of agency between Timoteo and
Jorge; and ordered Jorge to deliver the possession of the parcels of land to
the petitioners. CA reversed the RTC and dismissed the case.
ISSUE: Whether or not the relationship between the petitioners and
respondent is that of agency or agricultural leasehold.
HELD: AGRICULTURAL LEASEHOLD
In agency, the agent binds himself to render some service or to do
something in representation or on behalf of the principal, with the
consent or authority of the latter. The basis of the civil law relationship of
agency is representation, the elements of which are, namely: (a) the
relationship is established by the parties’ consent, express or implied; (b)
the object is the execution of a juridical act in relation to a third person;
(c) the agent acts as representative and not for himself; and (d) the agent
acts within the scope of his authority. Whether or not an agency has been
created is determined by the fact that one is representing and acting for
another. The law does not presume agency; hence, proving its existence,
nature and extent is incumbent upon the person alleging it.
The claim of Timoteo that Jorge was his agent contradicted the verbal
agreement he had fashioned with Jorge. By assenting to Jorge’s
possession of the land sans accounting of the cultivation expenses and
actual produce of the land provided that Jorge annually delivered to him
110 cavans of palay and paid the irrigation fees belied the very nature of
agency, which was representation. The verbal agreement between
Timoteo and Jorge left all matters of agricultural production to the sole
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discretion of Jorge and practically divested Timoteo of the right to
exercise his authority over the acts to be performed by Jorge. While in
possession of the land, therefore, Jorge was acting for himself instead of
for Timoteo. Unlike Jorge, Timoteo did not benefit whenever the
production increased, and did not suffer whenever the production
decreased. Timoteo’s interest was limited to the delivery of the 110
cavans of palay annually without any concern about how the cultivation
could be improved in order to yield more produce.
On the other hand, to prove the tenancy relationship, Jorge presented
handwritten receipts indicating that the sacks of palay delivered to and
received by one Corazon Jusayan represented payment of rental. In this
regard, rental was the legal term for the consideration of the lease.
Consequently, the receipts substantially proved that the contractual
relationship between Jorge and Timoteo was a lease.
The lease of an agricultural land can be either a civil law or an
agricultural lease. In the civil law lease, one of the parties binds himself to
give to another the enjoyment or use of a thing for a price certain, and for
a period that may be definite or indefinite. In the agricultural lease, also
termed as a leasehold tenancy, the physical possession of the land
devoted to agriculture is given by its owner or legal possessor
(landholder) to another (tenant) for the purpose of production through
labor of the latter and of the members of his immediate farm household,
in consideration of which the latter agrees to share the harvest with the
landholder, or to pay a price certain or ascertainable, either in produce or
in money, or in both. Specifically, in Gabriel v. Pangilinan, this Court
differentiated between a leasehold tenancy and a civil law lease in the
following manner, namely: (1) the subject matter of a leasehold tenancy
is limited to agricultural land, but that of a civil law lease may be rural or
urban property; (2) as to attention and cultivation, the law requires the
leasehold tenant to personally attend to and cultivate the agricultural
land; the civil law lessee need not personally cultivate or work the thing
leased; (3) as to purpose, the landholding in leasehold tenancy is devoted
to agriculture; in civil law lease, the purpose may be for any other lawful
pursuits; and(4) as to the law that governs, the civil law lease is governed
by the Civil Code, but the leasehold tenancy is governed by special laws.
The sharing of the harvest in proportion to the respective contributions
of the landholder and tenant, otherwise called share tenancy, was
abolished on August 8, 1963 under Republic Act No. 3844. To date, the
only permissible system of agricultural tenancy is leasehold tenancy, a
relationship wherein a fixed consideration is paid instead of
proportionately sharing the harvest as in share tenancy.
In Teodoro v. Macaraeg, this Court has synthesized the elements of
agricultural tenancy to wit: (1) the object of the contract or the
relationship is an agricultural land that is leased or rented for the
purpose of agricultural production; (2) the size of the landholding is such
that it is susceptible of personal cultivation by a single person with the
assistance of the members of his immediate farm household; (3) the
tenant-lessee must actually and personally till, cultivate or operate the
land, solely or with the aid of labor from his immediate farm household;
and (4) the landlord-lessor, who is either the lawful owner or the legal
possessor of the land, leases the same to the tenant-lessee for a price
certain or ascertainable either in an amount of money or produce.
It can be gleaned that in both civil law lease of an agricultural land and
agricultural lease, the lessor gives to the lessee the use and possession of

the land for a price certain. Although the purpose of the civil law lease
and the agricultural lease may be agricultural cultivation and production,
the distinctive attribute that sets a civil law lease apart from an
agricultural lease is the personal cultivation by the lessee. An agricultural
lessee cultivates by himself and with the aid of those of his immediate
farm household. Conversely, even when the lessee is in possession of the
leased agricultural land and paying a consideration for it but is not
personally cultivating the land, he or she is a civil law lessee.
Section 7 of Republic Act No. 3844 provides that once there is an
agricultural tenancy, the agricultural tenant’s right to security of tenure is
recognized and protected. The landowner cannot eject the agricultural
SPOUSES CRISPIN AQUINO and TERESA V. AQUINO v. SPOUSES
EUSEBIO AGUILAR and JOSEFINA V. AGUILAR
June 29, 2015 (SERENO, CJ)
As builders in bad faith, respondents are not entitled to reimbursement of
useful expenses. However, pursuant to Article 452 of the Civil Code, a
builder in bad faith is entitled to recoup the necessary expenses incurred for
the preservation of the land. Provided however, that they do not have the
right of retention over the premises.
FACTS
Teresa Vela Aquino (Teresa) and her husband, Crispin Aquino, are the
owners of a house and lot located at Guadalupe. Since 1981, this property
has been occupied by Teresa's sister, Josefina Vela Aguilar and her family.
It appears from the record that respondents stayed on the property with
the consent and approval of petitioners, who were then residing in the
United States.
While respondents were in possession of the property, the house
previously constructed therein was demolished, and a three-storey
building built in its place. Respondents occupied half of the third floor of
this new building for the next 20 years without payment of rental.
On 22 September 2003, petitioners sent a letter to respondents informing
them that an immediate family member needed to use the premises and
demanding the surrender of the property within 10 days from notice.
Respondents failed to heed this demand, prompting petitioners to file a
Complaint for ejectment against them. The parties attempted to reach an
amicable settlement but these efforts proved unsuccessful.
On 19 November 2003, petitioner spouses Aquino filed a Complaint with
the MeTC of Makati City praying that respondents be ordered to (a)
vacate the portion of the building they were then occupying; and (b) pay
petitioner a reasonable amount for the use and enjoyment of the
premises from the time the formal demand to vacate was made.
Respondents claimed that they had contributed to the improvement of
the property and the construction of the building, both in terms of money
and management/ supervision services. Petitioners purportedly agreed
to let them contribute to the costs of construction in exchange for the
exclusive use of a portion of the building.
Respondents averred that it was never an act of generosity, liberality and
tolerance. It was one of the implied co-ownership or partnership, because
aside from the fact that defendants, who were then peacefully residing in
Laguna, made unquantifiable contributions in terms of money and
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tenant from the land unless authorized by the proper court for causes
provided by law. Section 36 of Republic Act No. 3844, as amended by
Republic Act No. 6389, enumerates the several grounds for the valid
dispossession of the tenant. It is underscored, however, that none of such
grounds for valid dispossession of landholding was attendant in Jorge’s
case.
services arising from his uncompensated management and supervision
over the entire subject property while plaintiffs are abroad. By legal
implications he is an industrial partner responsible for the development
and improvements of the subject property. His contribution was never
without the consent of plaintiffs. Whatever contribution defendants
introduced over the said property was made and built in good faith.
Furthermore, they claimed that since they were allegedly co-owners of
the building and builders in good faith, respondents claimed that they had
the right to be compensated for the current value of their contribution.
Accordingly, they prayed for the dismissal of the Complaint and the
award of ₱5 million as compensation for their contributions to the
construction of the building, as well as moral damages, attorney's fees
and costs of litigation.
ISSUE: Whether or not the Spouses Aguilar were builders in good faith
and entitled to a refund of the improvement they introduced on the land.
HELD: BUILDERS IN BAD FAITH
The term "builder in good faith" as used in reference to Article 448 of the
Civil Code, refers to one who, not being the owner of the land, builds on
that land believing himself to be its owner and unaware of the land,
builds on that land, believing himself to be its owner and unaware of the
defect in h is title or mode of acquisition. The essence of good faith lies in
an honest belief in the validity of one's right, ignorance of a superior
claim, and absence of intention to overreach another.
In the instant case, the Spouses Aguilar cannot be considered as builders
in good faith on account of their admission that the subject lot belonged
to the Spouses Aquino when they constructed the building. At the onset,
petitioners were aware of a flaw in their title and a limit to their right to
possess the property. By law, 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.
Article 1678 is not applicable to this case. By its express provision, Article
1678 of the Civil Code applies only to lessees who build useful
improvements on the leased property. It does not apply to those who
possess property by mere tolerance of the owners, without a contractual
right.
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According to the Court in the case of Calubayan, the analogy between a Art. 451. In the cases of the two preceding articles, the
tenant whose term of lease has expired and a person who occupies the landowner is entitled to damages from the builder, planter or sower.
land of another at the latter's tolerance lies in their implied obligation to
vacate the premises upon demand of the owner.

In this case, there is absolutely no evidence of any lease contract between
the parties. In fact, respondents themselves never alleged that they were
lessees of the lot or the building in question. Quite the opposite, they
insisted that they were co-owners of the building and builders in good
faith under Article 448 of the Civil Code. For that reason, respondents
argue that it was erroneous for the CA to consider them as lessees and to
determine their rights in accordance with Article 1678.
As builders in bad faith, respondents are not entitled to reimbursement of
useful expenses. Furthermore, the absence of good faith on their part
prevents them from invoking the provisions of Article 1678.
However, pursuant to Article 452 of the Civil Code, a builder in bad faith
is entitled to recoup the necessary expenses incurred for the preservation
of the land. The respondents in this case are similarly entitled to this
reimbursement. However, being builders in bad faith, they do not have
the right of retention over the premises.
While the evidence before this Court does not establish the amount of
necessary expenses incurred by respondents during their stay in the
property, we note that even petitioners do not deny that such expenses
were incurred. In this light, it is proper to order the remand of this case to
the court a quo for the purpose of determining the amount of necessary
expenses to be reimbursed to respondents.

We are aware that in some instances, this Court has allowed the
application of Article 448 to a builder who has constructed improvements
on the land of another with the consent of the owner. In those cases, the
Court found that the owners knew and approved of the construction of
improvements on the property. Hence, we ruled therein that the
structures were built in good faith, even though the builders knew that
they were constructing the improvement on land owned by another.

Although the factual circumstances in the instant case are somewhat

similar, there is one crucial factor that warrants a departure from the
above-described rulings: the presence of evidence that petitioners
prohibited respondents from building their own structure on a portion of
the property. Based on the findings of fact, petitioners had already
warned respondents not to build a structure on the property as early as
1983. Defendants are undoubtedly builders in bad faith for despite the
prohibition made upon them, they continued their construction activities
upon respondents' property. The prohibition is considered extant and
continuing since there is no evidence that this letter was ever withdrawn
or modified.

In view of the foregoing, this Court's previous rulings on Article 448

cannot be applied to this case. Hence, we hold that petitioners, as the
owners of the land, have the right to appropriate what has been built on
the property, without any obligation to pay indemnity therefor; and that
respondents have no right to a refund of any improvement built therein,
pursuant to Articles 449 and 450 of the Civil Code:

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

Art. 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.

COMGLASCO CORPORATION/AGUILA GLASS v. SANTOS CAR CHECK
CENTER CORPORATION, G.R. No. 202989, March 25, 2015, REYES, J.
Facts:
On August 16, 2000, respondent Santos Car Check Center Corporation
(Santos), owner of a showroom located at 75 Delgado Street, in Iloilo City,
leased out the said space to petitioner Comglasco Corporation
(Comglasco), an entity engaged in the sale, replacement and repair of
automobile windshields, for a period of five years at a monthly rental of
P60,000.00 for the first year, P66,000.00 on the second year, and
P72,600.00 on the third through fifth years.
On October 4, 2001, Comglasco advised Santos through a letter that it was
pre-terminating their lease contract effective December 1, 2001.  Santos
refused to accede to the pre-termination, reminding Comglasco that their
contract was for five years.  On January 15, 2002, Comglasco vacated the
leased premises and stopped paying any further rentals.  Santos sent
several demand letters, which Comglasco completely ignored.  On
September 15, 2003, Santos sent its final demand letter, which Comglasco
again ignored.  On October 20, 2003, Santos filed suit for breach of
contract.
Paragraph 15 of the parties’ lease contract permits pre-termination with
cause in the first three years and without cause after the third year. Citing
business reverses which it ascribed to the 1997 Asian financial crisis,
Comglasco insists that under Article 1267 of the Civil Code it is exempted
from its obligation under the contract, because its business setback is the
“cause” contemplated in their lease which authorized it to pre-terminate
the same.  Article 1267 provides:
Art. 1267. When the service has become so difficult as to be manifestly
beyond the contemplation of the parties, the obligor may also be released
therefrom, in whole or in part.
Comglasco argues that it cannot be said to have admitted in its Answer
the material allegations of the complaint precisely because it invoked
therein a valid cause for its decision to pre-terminate the lease before the
lapse of three years; that therefore, in view of its pleaded “cause” for
reneging on its rentals (the 1997 Asian financial crisis), the RTC should
have ordered the reception of evidence for this purpose, after which a
summary judgment would then have been proper, not a judgment on the
pleadings.  After all, Santos has claimed in its Motion for Summary
Judgment that Comglasco’s cited “cause” for pre-termination was
fictitious or a sham, whereas in truth the prevailing business climate
which ensued after the 1997 currency crisis resulted in great difficulty on
its part to comply with the terms of the lease “as to be manifestly beyond
the contemplation of the parties”; thus, Comglasco should be deemed
released from the lease.
Next, Comglasco insists that its advance rentals and deposit totaling
P309,000.00 should be deducted from any sum awarded to Santos while
it also insists that there is no factual and legal basis for the award of
damages.
Issue:
Whether or not Comglasco pre-termination of its lease contract with
Santos is justified
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Ruling:
No.
In Philippine National Construction Corporation v. CA (PNCC), which also
involves the termination of a lease of property by the lessee “due to
financial, as well as technical, difficulties,” the Court ruled:
The obligation to pay rentals or deliver the thing in a contract of lease
falls within the prestation “to give”; hence, it is not covered within the
scope of Article 1266.  At any rate, the unforeseen event and causes
mentioned by petitioner are not the legal or physical impossibilities
contemplated in said article.  Besides, petitioner failed to state specifically
the circumstances brought about by “the abrupt change in the political
climate in the country” except the alleged prevailing uncertainties in
government policies on infrastructure projects.
The principle of rebus sic stantibus neither fits in with the facts of the
case.  Under this theory, the parties stipulate in the light of certain
prevailing conditions, and once these conditions cease to exist, the
contract also ceases to exist.  This theory is said to be the basis of Article
1267 of the Civil Code, which provides:
Art. 1267. When the service has become so difficult as to be manifestly
beyond the contemplation of the parties, the obligor may also be released
therefrom, in whole or in part.
This article, which enunciates the doctrine of unforeseen events, is not,
however, an absolute application of the principle of rebus sic stantibus,
which would endanger the security of contractual relations.  The parties
to the contract must be presumed to have assumed the risks of
unfavorable developments.  It is therefore only in absolutely exceptional
changes of circumstances that equity demands assistance for the debtor.
In this case, petitioner wants this Court to believe that the abrupt change
in the political climate of the country after the EDSA Revolution and its
poor financial condition “rendered the performance of the lease contract
impractical and inimical to the corporate survival of the petitioner.”
This Court cannot subscribe to this argument.  As pointed out by private
respondents:
x x x x
Anent petitioner’s alleged poor financial condition, the same will neither
release petitioner from the binding effect of the contract of lease. As held
in Central Bank v. Court of Appeals, cited by private respondents, mere
pecuniary inability to fulfill an engagement does not discharge a
contractual obligation, nor does it constitute a defense to an action for
specific performance.
Relying  on  Article  1267  of  the  Civil  Code  to  justify  its  decision to
pre-terminate its lease with Santos, Comglasco invokes the 1997 Asian
currency crisis as causing it much difficulty in meeting its obligations. 
But in PNCC, the Court held that the payment of lease rentals does not
involve a prestation “to do” envisaged in Articles 1266 and 1267 which
has been rendered  legally  or  physically  impossible  without  the  fault 
of  the obligor-lessor.  Article 1267 speaks of a prestation involving
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service which has been rendered so difficult by unforeseen subsequent

events as to be manifestly beyond the contemplation of the parties.  To be
sure, the Asian currency crisis befell the region from July 1997 and for
sometime thereafter, but Comglasco cannot be permitted to blame its
difficulties on the said regional economic phenomenon because it entered
into the subject lease only on August 16, 2000, more than three years
after it began, and by then Comglasco had known what business risks it
assumed when it opened a new shop in Iloilo City.

This situation is no different from the Court’s finding in PNCC wherein

PNCC cited the assassination of Senator Benigno Aquino Jr. (Senator
Aquino) on August 21, 1983 and the ensuing national political and
economic crises as putting it in such a difficult business climate that it
should be deemed released from its lease contract.  The Court held that
the political upheavals, turmoils, almost daily mass demonstrations,
unprecedented inflation, and peace and order deterioration which
followed Senator Aquino’s death were a matter of judicial notice, yet
despite this business climate, PNCC knowingly entered into a lease with
therein respondents on November 18, 1985, doing so with open eyes of
the deteriorating conditions of the country.  The Court rules now, as in
PNCC, that there are no “absolutely exceptional changes of circumstances
that equity demands assistance for the debtor.”

As found by the CA, Comglasco’s Answer admitted the material

allegations in the complaint, to wit: a) that Santos holds absolute title to a
showroom space; b) that Comglasco leased the said showroom from
Santos; c) that after a little over a year, Comglasco pre-terminated the
lease; d) that, disregarding Santos’ rejection of the pre-termination of
their lease, Comglasco vacated the leased premises on January 15, 2002;
e) that Comglasco never denied the existence and validity of the parties’
lease contract.  Specifically, the CA noted that Paragraph 2 of the Answer
admitted the allegations in Paragraphs 2, 3 and 4 of the complaint that
the lease was for five years, starting on August 16, 2000 and to expire on
August 15, 2005, at a monthly rental of P60,000.00 on the first year,
P66,000.00 on the second year, and P72,600.00 on the third up to the fifth
year.

G.R. No. 188467
RENATO MA. R. PERALTA vs JOSE ROY RAVAL
x-----------------------x
JOSE ROY B. RAVAL vs. RENATO MA. R. PERALTA
By being the assignee under the deed, Raval obtained the rights, interests
and privileges of his predecessors-in-interest over the property, including
the right to seek the rescission of the agreement, should valid grounds exist
to support it.
Facts:
The controversy involves a lease agreement over two parcels of
residential land, particularly Lot Nos. 9128-A and 9128-B, situated in San
Jose, Laoag, Ilocos Norte mid previously covered by Transfer Certificate of
Title (TCT) Nos. T-2406 and T-3538 issued by the Register of Deeds for
Ilocos Norte under the names of spouses Flaviano Arzaga, Sr. and
Magdalena Agcaoili-Arzaga (Spouses Arzaga). Each lot measures 660
square meters, more or less.
On February 19, 1974, the Spouses Arzaga, as lessors, entered into a
Contract of Lease with Peralta, as lessee, over the subject lots and the
improvements thereon, more particularly described in their contract as
follows:
B. x x x the whole of Lot No. 9128-A, with an area of 660 square meters;
the northern portion of Lot No. 9128-B with an inclusive approximate
area of 317 square meters; the first floor of the residential house found
thereon with an approximate area of 160 square meters, consisting of a
porch, a receiving room, three (3) bedrooms, a toilet and small room used
as a bodega, the land area occupied by the garage and the driveway of
157 square meters, more or less, specifically situated at the southern
portion of Lot No. 9128-B, including the room above the garage; a kitchen
with an area of 18 square meters; and the water tank built thereon
together with its accessories x x x.8
Spouses Arzaga and Peralta agreed on a lease term of 40 years, for
monthly rentals at the following rates: (a) ₱500.00 beginning May 1974;
(b) ₱600.00 after the 10th year; (c) ₱700.00 after the 20th year; and (d)
₱800.00 after the 30th year and until the termination of the lease. Under
the lease contract, Peralta was also to construct on the leased land a
building that should become property of the Spouses Arzaga upon lease
termination, to pay realty taxes for both lots, and to develop a water
system for the use of both parties to the lease contract.
Sometime in May 1988, Flaviano Arzaga, Jr. (Flaviano Jr.), being an
adopted son and heir of the Spouses Arzaga, filed with the RTC of Laoag
City a complaint for annulment of lease contract against Peralta, who
allegedly breached in his obligations under the contract of lease. The
complaint was eventually dismissed by the RTC on December to, 1990.
The RTC decision was later affirmed by the CA while the CA ruling was no
longer appealed by Flaviano Jr. to the Supreme Court.
Raval came into the picture after Flaviano Jr. assigned to him via a Deed
of Assignment dated July 28, 1995 all his interests, rights and
participation in the subject properties for a consideration of ₱500,000.00.
Peralta refused to recognize the validity of the assignment to Raval,
prompting him to still deposit his rental payments for the account of
Flaviano Jr., more specifically to bank accounts that were opened by
Peralta's wife, Gloria Peralta, under the name "Gloria F. Peralta [in-trust-
for] (ITF): Flaviano Arzaga, Jr."
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Beginning August 1995, Raval demanded from Peralta compliance with
the lease contract's terms and conditions. On October 2, 1995, Raval's
father and counsel, Atty. Castor Raval (Castor), wrote a letter to Peralta
demanding the removal of the structures that the latter built on a portion
of Lot No. 9128-B, as he claimed that it was not covered by the lease
agreement. This demand was reiterated by Castor in a letter dated
November 4, 1995, by which he also sought access to the residential
house's second floor and an updated accounting of rentals already paid.
Peralta's refusal to heed to the demands of Castor prompted the latter to
send several other demand letters and, eventually, to refer the matter to
barangay for conciliation.
When the parties still failed to settle the issue, Castor sent another letter
to Peralta on June 14, 1996, informing the latter that a lessee was to
occupy the second storey of the house and demanding that the area be
cleared for that purpose. On June 22, 1996, Castor again pointed out to
Peralta the structures on Lot No. 9128-B that were allegedly not part of
the lease agreement. He claimed that Peralta had become a builder in bad
faith, such that the improvements made were to be already considered as
properties of Raval.
After several more demands and another barangay conciliation, Raval
eventually filed in 1998 the subject complaint for rescission of lease with
the RTC of Laoag City against Peralta. He alleged that Peralta failed to
comply with the terms of the lease contract and his demands as a lessor.
Raval's complaint ended with a prayer for the rescission of the lease
agreement, an order upon Peralta to vacate the subject properties,
payment of back rentals, and award of moral, exemplary and nominal
damages, plus attorney's fees and costs of suit.
Peralta opposed the complaint and sought its dismissal, as he insisted
that Raval was not his lessor, and thus was not a real party-in-interest to
the case. The supposed assignment between Flaviano Jr. and Raval was
allegedly void considering that he was not consulted thereon and his
prior approval thereto was not obtained. Moreover, notwithstanding an
assignment, Raval did not have the right, power and authority to seek the
rescission of the contract of lease that was executed 24 years prior to the
filing of the complaint. Peralta had also faithfully complied with his
obligations under the lease.
Issue:
Whether or not Raval has a right to seek the rescission of the contract of
lease
Ruling:
YES.
Rights and Interests of Raval
It is crucial to determine, at the outset, the rights and interests of Raval
over the disputed properties, specifically as he invokes the deed of
assignment that was executed in his favor by Flaviano Jr.
Peralta insists that the deed is void and thus cannot be deemed to have
conferred to Raval the rights of a new owner and lessor. Contrary to these
assertions, however, the Court sustains the validity of the assignment.
Raval cannot be deemed a "total stranger" to Peralta's contract of lease
with the Spouses Arzaga because by the subsequent transfers of rights
over the leased premises, Peralta became the original lessors' successor-
in-interest. It is material that the lone heir of the Spouses Arzaga,
Flaviano Jr., has executed the subject deed of assignment.
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In his petition, Peralta vehemently assails the validity and enforceability (2) To use the thing leased as a diligent father of a family, devoting it to
of the deed of assignment, as he likewise questions the ensuing right of the use stipulated; and in the absence of stipulation, to that which may be
Raval to seek the rescission of the contract of lease. On this matter, the inferred from the nature of the thing leased, according to the custom of
Court refers to the outcome of a separate petition for the registration of the place;
the deed of assignment and cancellation of TCT Nos. T-3538 and T-240p
that was filed by Raval with the RTC of Laoag City, Branch 15, and
(3) To pay expenses for the deed of lease.
docketed as Cad. Case No. 51. On April 17, 1998, the deed of assignment
between Flaviano Jr. and Raval was declared valid by the trial court, as it
ordered the cancellation of the Spouses Arzaga's TCTs, and the issuance Given the rules that exclusively apply to leases, the other provisions of
of new titles under Raval's name. This decision had become final and the NCC that deal with the issue of rescission may not be applicable to
executory. Accordingly, TCT Nos. T-30107 and T-30108 under Raval's contracts of lease. To illustrate, Peralta's reference to Article 1389, when
name were issued by the Register of Deeds. he argued that Raval's action had already prescribed for having been filed
more than four years. after the execution of the lease contract in 1974, is
misplaced. For the same reason, Peralta erred in arguing that Raval's
The ruling in Cad. Case No. 51 resulted in an acknowledgment of Raval's
action should only be deemed a subsidiary remedy, such that it could not
rights over the property, his interest in the court action and entitlement
have been validly instituted if there were other legal means for
to monthly rentals from Peralta. New TCTs were· issued by virtue of the
reparation. Article 1389 applies to rescissions in Articles 1380 and 1381,
decision. When later called upon to rule on the petition for rescission of
which are distinct from rescissions of lease under Article 1659.
lease, the RTC then correctly rejected Peralta's claim against the
agreement's legality, as it cited the prohibition against a collateral attack
on the land titles. The nature of an action filed under Article 1389, as well as the
prescriptive period of four years that is provided under the provision, do
not apply to all rescissible contracts but are limited to specific cases,
Similarly, the Court sustains the validity of the deed of assignment upon
particularly:
which Raval anchored his claims against the subject properties and
contract of lease. By being the assignee under the deed, Raval obtained
the rights, interests and privileges of his predecessors-in-interest over Article 1389 specifically refers to rescissible contracts as, clearly, this
the property, including the right to seek the rescission of the agreement, provision is under the chapter entitled "Rescissible Contracts."
should valid grounds exist to support it. Peralta's defenses against Raval's
claim of rights, in effect, challenge the prior decision of the trial court to
In a previous case, this Court has held that Article 1389: applies to
recognize the deed of assignment and more importantly, the ruling that
rescissible contracts, as enumerated and defined in Articles 1380
ordered the issuance of the TCTs under Raval's name. Essentially, it is
and 1381. We must stress however, that the "rescission" in Article 13 81
also a challenge upon the TCTs that were already issued by the Register
is not akin to the te1111 "rescission" in Article 1191 and Article 1592. In
of Deeds. By law and jurisprudence, these TCTs that have been issued by
Articles 1191 and 1592, the rescission is a principal action which seeks
virtue of the assignment, however, cannot be collaterally attacked by
the resolution or cancellation of the contract while in Article 1381, the
Peralta in this case.
action is a subsidiary one limited to cases of rescission for lesion as
enumerated in said article.
Rescission of Lease Contracts
The prescriptive period applicable to rescission on under Articles 1191
Considering that the subject contract of lease provided for a 40-year term and 1592, is found in Article 1144, which provides that the action upon a
and was executed in 1974, the agreement had already terminated in written contract should be brought within ten years from the time the
2014. The issue of whether or not the lease should be ordered rescinded right of action accrues. (Citation omitted and emphasis ours)
at this point in time, to the end that it would be declared of no further
effect, is thus already moot and academic. "A moot and academic case is
The same prescriptive period of 10 years, counted from the time that the
one that ceases to present a justiciable controversy by virtue of
right of action accrues, applies in the case at bar. Raval's cause of action
supervening events, so that a declaration thereon would be of no practical
did not refer to Article 1389, yet one that was based on a written contract.
value. As a rule, courts decline jurisdiction over such case, or dismiss it on
Thus, contrary to Peralta' s insistent claim, the action for rescission had
ground of mootness." The Court, nonetheless, still finds it needed to
not yet prescribed at the time of its filing in 1998. Raval's cause of action
address other matters that are intertwined with the issue of rescission,
accrued not on the date of the lease agreement's execution in 197 4, but
especially as the termination of the lease is not the only necessary
from the time that there was a violation and default by Peralta in his
consequence of rescission. These other issues include the allegations of
obligations under the lease agreement.
prescription, the award of unpaid rentals plus moral damages, and
Peralta's counterclaim against Raval.
On this matter, Raval's complaint specified the violations that were
allegedly committed by Peralta as a lessee, Specifically, rescission was
It must be emphasized though that specifically on the matter of rescission
sought because of Peralta's alleged refusal to render an accounting of
of lease agreements, Article 1659 of the NCC applies as a rule. It reads:
unpaid monthly rentals, to vacate the second storey of the house, to
remove the improvements constructed on the areas not covered by the
Article 1659. If the lessor or the lessee should not comply with the lease, to operate and provide a water system and to refund the taxes paid
obligations set forth in Articles 1654 and 1657, the aggrieved party may by Flaviano Jr. These violations happened either immediately prior to
ask for the rescission of the contract and indemnification for damages, or Raval's repeated extrajudicial demands that began in August 1995; or
only the latter, allowing the contract to remain in force. after Peralta's refusal to heed to the demands. There was no indication
that the violations dated back from the first few years of the lease
agreement's effectivity in the 1970s. Clearly, the filing of the action for
Article 1654 referred to in Article 1659 pertains to the obligations of a
rescission in 1998 was within the 10-year prescriptive period that
lessor in a lease agreement. Article 1657, on the other hand, enumerates
applies to the suit.
the obligations of a lessee, as it provides:

Unpaid Rentals and Moral Damages

Article 1657. The lessee is obliged:

Under Article 1659 of the NCC, an aggrieved party in a lease contract may
(1) to pay the price of the lease according to the terms stipulated;
ask for any of the following remedies: (1) the rescission of the contract;
(2) rescission and indemnification for damages; and (3) only
indemnification for damages, allowing the contract to remain in force.
 Civil Law Review 2 | Atty. Legarda 19
Case Digest 2018 - LEASE

Although the CA declared Raval not entitled to rescission, it nonetheless

still ordered Peralta to pay what were supposedly unpaid rentals from
August 1998 until full payment, plus 12% interest per annum and moral
damages. The Court finds it necessary to delete these awards, and to
instead sustain the RTC's decision to deny Raval of his monetary claims.

It is not disputed that at one point during the effectivity of the lease,
Peralta began depositing his rental payments in an account that was
maintained "in trust for" Flaviano Jr. The RTC provided the following
factual findings in its Decision dated May 17, 2005:

The evidence for [Peralta] reveals a historical antecedent where Mrs.

Gloria F. Peralta, wife of [Peralta], earlier adopted a modus-vivendi in the
erstwhile lease contract with [Flaviano Jr.], by which payments were
made to lessor. This mode of settling the monthly rentals was through the
facility of the banking system. Mrs. Peralta successively opened bank
accounts with several banks. The name invariably appearing as depositor
in the passbooks issued by said banks is as follows; "Gloria F. Peralta ITF
Flaviano Arzaga, Jr." The letters ITF mean: "in-trust-for". By virtue of this
banking arrangement, lessee paid lessor his periodic obligations by
depositing the needed amount with the bank, which the latter withdrew
from said bank in satisfaction of the farmer's obligation.

There is no question that the money for the rental was in the bank. So to
speak, 'it was there for the taking'. It was therefore, incumbent upon
[Flaviano Jr.] and [Raval] to arrange between them on how to withdraw
the money from the bank, to be paid to the rightful payee or beneficiary.
From the standpoint of lessee, he has already complied with his
obligation to pay the monthly rentals due to the fact that his mode of
payment was earlier sustained as proper by the [CA] in the precursor
case. xxx.

Even as the Court now declares Raval to be a valid assignee under the
deed that bound Peralta as a lessee, all payments made by the latter for
the account of Flaviano Jr. could not be simply disregarded for the
purpose of determining Peralta's compliance with his obligation to pay
the monthly rentals. The RTC itself sustained the acceptability of such
measure. Thus, the mechanism negated the supposed failure to pay, as
well as the alleged blatant refusal of Peralta to satisfy his obligation as a
lessee.

All payments made by Peralta through the bank accounts in trust for
Flaviano Jr. shall be deemed valid payments for the monthly rentals. Since
the records confirmed that Peralta has been paying his monthly rentals
up to the time and even after the complaint for rescission was filed in
1998, the prayer in the complaint for unpaid rentals should have been
denied.