G.R. No.

176405 August 20, 2008

LEO WEE, petitioner,

vs.
GEORGE DE CASTRO (on his behalf and as attorney-in-fact of ANNIE DE CASTRO
and FELOMINA UBAN) and MARTINIANA DE CASTRO, respondents.

Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Revised
Rules of Court filed by petitioner Leo Wee, seeking the reversal and setting aside of
the Decision2 dated 19 September 2006 and the Resolution3 dated 25 January 2007
of the Court of Appeals in CA-G.R. SP No. 90906. The appellate court, in its assailed
Decision, reversed the dismissal of Civil Case. No. 1990, an action for ejectment
instituted by respondent George de Castro, on his own behalf and on behalf of Annie
de Castro, Felomina de Castro Uban and Jesus de Castro4 against petitioner, by the
Municipal Trial Court (MTC) of Alaminos City, which was affirmed by the Regional
Trial Court (RTC), Branch 54, Alaminos City, Pangasinan; and, ruling in favor of the
respondents, ordered the petitioner to vacate the subject property. In its assailed
Resolution dated 25 January 2007, the Court of Appeals refused to reconsider its
earlier Decision of 19 September 2006.

In their Complaint5 filed on 1 July 2002 with the MTC of Alaminos City, docketed as
Civil Case No. 1990, respondents alleged that they are the registered owners of the
subject property, a two-storey building erected on a parcel of land registered under
Transfer Certificate of Title (TCT) No. 16193 in the Registry of Deeds of Pangasinan,
described and bounded as follows:

A parcel of land (Lot 13033-D-2, Psd-01550-022319, being a portion of Lot 13033-D,

Psd-018529, LRC Rec. No. ____) situated in Pob., Alaminos City; bounded on the NW.
along line 1-2 by Lot 13035-D-1 of the subdivision plan; on the NE. along line 2-3 by
Vericiano St.; on the SE. along line 3-4 by Lot 13033-D-2 of the subdivision plan; on
the SW. along line 4-1 by Lot 575, Numeriano Rabago. It is coverd by TCT No. 16193
of the Register of Deeds of Pangasinan (Alaminos City) and declared for taxation
purposes per T.D. No. 2075, and assessed in the sum of P93,400.00.6

Respondents rented out the subject property to petitioner on a month to month

basis for P9,000.00 per month.7 Both parties agreed that effective 1 October 2001,
the rental payment shall be increased from P9,000.00 to P15,000.00. Petitioner,
however, failed or refused to pay the corresponding increase on rent when his rental
obligation for the month of 1 October 2001 became due. The rental dispute was
brought to the Lupon Tagapagpamayapa of Poblacion, Alaminos, Pangasinan, in an
attempt to amicably settle the matter but the parties failed to reach an agreement,
resulting in the issuance by the Barangay Lupon of a Certification to file action in
court on 18 January 2002. On 10 June 2002, respondent George de Castro sent a
letter to petitioner terminating their lease agreement and demanding that the latter
vacate and turn over the subject property to respondents. Since petitioner
stubbornly refused to comply with said demand letter, respondent George de Castro,
together with his siblings and co-respondents, Annie de Castro, Felomina de Castro
Uban and Jesus de Castro, filed the Complaint for ejectment before the MTC.

It must be noted, at this point, that although the Complaint stated that it was being
filed by all of the respondents, the Verification and the Certificate of Non-Forum
Shopping were signed by respondent George de Castro alone. He would
subsequently attach to his position paper filed before the MTC on 28 October 2002
the Special Powers of Attorney (SPAs) executed by his sisters Annie de Castro and
Felomina de Castro Uban dated 7 February 2002 and 14 March 2002 respectively,
authorizing him to institute the ejectment case against petitioner.

Petitioner, on the other hand, countered that there was no agreement between the
parties to increase the monthly rentals and respondents' demand for an increase
was exorbitant. The agreed monthly rental was only for the amount of P9,000.00 and
he was religiously paying the same every month. Petitioner then argued that
respondents failed to comply with the jurisdictional requirement of conciliation
before the Barangay Lupon prior to the filing of Civil Case. No. 1990, meriting the
dismissal of their Complaint therein. The Certification to file action issued by the
Barangay Lupon appended to the respondents' Complaint merely referred to the
issue of rental increase and not the matter of ejectment. Petitioner asserted further
that the MTC lacked jurisdiction over the ejectment suit, since respondents'
Complaint was devoid of any allegation that there was an "unlawful withholding" of
the subject property by the petitioner.8

During the Pre-Trial Conference9 held before the MTC, the parties stipulated that in
May 2002, petitioner tendered to respondents the sum of P9,000.00 as rental
payment for the month of January 2002; petitioner paid rentals for the months of
October 2001 to January 2002 but only in the amount of P9,000.00 per month;
respondents, thru counsel, sent a letter to petitioner on 10 June 2002 terminating
their lease agreement which petitioner ignored; and the Barangay Lupon did issue a
Certification to file action after the parties failed to reach an agreement before it.

After the submission of the parties of their respective Position Papers, the MTC, on
21 November 2002, rendered a Decision10 dismissing respondents' Complaint in
Civil Case No. 1990 for failure to comply with the prior conciliation requirement
before the Barangay Lupon. The decretal portion of the MTC Decision reads:

WHEREFORE, premised considered, judgment is hereby rendered ordering the

dismissal of this case. Costs against the [herein respondents].

On appeal, docketed as Civil Case No. A-2835, the RTC of Alaminos, Pangasinan,
Branch 54, promulgated its Decision11 dated 27 June 2005 affirming the dismissal
of respondents' Complaint for ejectment after finding that the appealed MTC
Decision was based on facts and law on the matter. The RTC declared that since the
original agreement entered into by the parties was for petitioner to pay only the sum
of P9.000.00 per month for the rent of the subject property, and no concession was
reached by the parties to increase such amount to P15.000.00, petitioner cannot be
faulted for paying only the originally agreed upon monthly rentals. Adopting
petitioner's position, the RTC declared that respondents' failure to refer the matter
to the Barangay court for conciliation process barred the ejectment case, conciliation
before the Lupon being a condition sine qua non in the filing of ejectment suits. The
RTC likewise agreed with petitioner in ruling that the allegation in the Complaint
was flawed, since respondents failed to allege that there was an "unlawful
withholding" of possession of the subject property, taking out Civil Case No. 1990
from the purview of an action for unlawful detainer. Finally, the RTC decreed that
respondents' Complaint failed to comply with the rule that a co-owner could not
maintain an action without joining all the other co-owners. Thus, according to the
dispositive portion of the RTC Decision:

WHEREFORE the appellate Court finds no cogent reason to disturb the findings of
the court a quo. The Decision dated November 21, 2002 appealed from is hereby
AFFIRMED IN TOTO.12

Undaunted, respondents filed a Petition for Review on Certiorari13 with the Court of
Appeals where it was docketed as CA-G.R. SP No. 90906. Respondents argued in
their Petition that the RTC gravely erred in ruling that their failure to comply with
the conciliation process was fatal to their Complaint, since it is only respondent
George de Castro who resides in Alaminos City, Pangasinan, while respondent Annie
de Castro resides in Pennsylvania, United States of America (USA); respondent
Felomina de Castro Uban, in California, USA; and respondent Jesus de Castro, now
substituted by his wife, Martiniana, resides in Manila. Respondents further claimed
that the MTC was not divested of jurisdiction over their Complaint for ejectment
because of the mere absence therein of the term "unlawful withholding" of their
subject property, considering that they had sufficiently alleged the same in their
Complaint, albeit worded differently. Finally, respondents posited that the fact that
only respondent George de Castro signed the Verification and the Certificate of Non-
Forum Shopping attached to the Complaint was irrelevant since the other
respondents already executed Special Powers of Attorney (SPAs) authorizing him to
act as their attorney-in-fact in the institution of the ejectment suit against the
petitioner.

On 19 September 2006, the Court of Appeals rendered a Decision granting the

respondents' Petition and ordering petitioner to vacate the subject property and
turn over the same to respondents. The Court of Appeals decreed:

WHEREFORE, premises considered, the instant petition is GRANTED. The assailed

Decision dated June 27, 2005 issued by the RTC of Alaminos City, Pangasinan,
Branch 54, is REVERSED and SET ASIDE. A new one is hereby rendered ordering
[herein petitioner] Leo Wee to SURRENDER and VACATE the leased premises in
question as well as to pay the sum of P15,000.00 per month reckoned from March,
2002 until he shall have actually turned over the possession thereof to petitioners
plus the rental arrearages of P30,000.00 representing unpaid increase in rent for the
period from October, 2001 to February, 2002, with legal interest at 6% per annum to
be computed from June 7, 2002 until finality of this decision and 12% thereafter
until full payment thereof. Respondent is likewise hereby ordered to pay petitioners
the amount of P20,000.00 as and for attorney's fees and the costs of suit.14

In a Resolution dated 25 January 2007, the appellate court denied the Motion for
Reconsideration interposed by petitioner for lack of merit.

Petitioner is now before this Court via the Petition at bar, making the following
assignment of errors:

I.

THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN DECLARING THAT

CONCILIATION PROCESS IS NOT A JURISDICTIONAL REQUIREMENT THAT NON-
COMPLIANCE THEREWITH DOES NOT AFFECT THE JURISDICTION IN EJECTMENT
CASE;

II.

THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN UPHOLDING THE

SUFFICIENCY OF THE ALLEGATIONS IN THE COMPLAINT FOR EJECTMENT
DESPITE THE WANT OF ALLEGATION OF "UNLAWFUL WITHOLDING PREMISES"
(sic) QUESTIONED BY PETITIONER;

III.

THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN RULING THAT THE

FILING OF THE COMPLAINT OF RESPONDENT GEORGE DE CASTRO WITHOUT
JOINING ALL HIS OTHER CO-OWNERS OVER THE SUBJECT PROPERTY IS PROPER;

IV.

THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN NOT APPLYING

SUPREME COURT CIRCULAR NO. 10 WHICH DIRECTS A PLEADER TO INDICATE IN
HIS PLEADINGS HIS OFFICIAL RECEIPT OF HIS PAYMENT OF HIS IBP DUES.15

Petitioner avers that respondents failed to go through the conciliation process

before the Barangay Lupon, a jurisdictional defect that bars the legal action for
ejectment. The Certification to file action dated 18 January 2002 issued by the
Barangay Lupon, appended by the respondents to their Complaint in Civil Case No.
1990, is of no moment, for it attested only that there was confrontation between the
parties on the matter of rental increase but not on unlawful detainer of the subject
property by the petitioner. If it was the intention of the respondents from the very
beginning to eject petitioner from the subject property, they should have brought up
the alleged unlawful stay of the petitioner on the subject property for conciliation
before the Barangay Lupon.

The barangay justice system was established primarily as a means of easing up the
congestion of cases in the judicial courts. This could be accomplished through a
proceeding before the barangay courts which, according to the one who conceived of
the system, the late Chief Justice Fred Ruiz Castro, is essentially arbitration in
character; and to make it truly effective, it should also be compulsory. With this
primary objective of the barangay justice system in mind, it would be wholly in
keeping with the underlying philosophy of Presidential Decree No. 1508
(Katarungang Pambarangay Law), which would be better served if an out-of-court
settlement of the case is reached voluntarily by the parties.16 To ensure this
objective, Section 6 of Presidential Decree No. 1508 requires the parties to undergo
a conciliation process before the Lupon Chairman or the Pangkat ng
Tagapagkasundo as a precondition to filing a complaint in court subject to certain
exceptions. The said section has been declared compulsory in nature.17

Presidential Decree No. 1508 is now incorporated in Republic Act No. 7160 (The
Local Government Code), which took effect on 1 January 1992.

The pertinent provisions of the Local Government Code making conciliation a

precondition to the filing of complaints in court are reproduced below:

SEC. 412. Conciliation.- (a) Pre-condition to filing of complaint in court. - No

complaint, petition, action, or proceeding involving any matter within the authority
of the lupon shall be filed or instituted directly in court or any other government
office for adjudication, unless there has been a confrontation between the parties
before the lupon chairman or the pangkat, and that no conciliation or settlement has
been reached as certified by the lupon secretary or pangkat secretary as attested to
by the lupon or pangkat chairman or unless the settlement has been repudiated by
the parties thereto.

(b) Where parties may go directly to court. - The parties may go directly to court in
the following instances:

(1) Where the accused is under detention;

(2) Where a person has otherwise been deprived of personal liberty calling for
habeas corpus proceedings;
(3) Where actions are coupled with provisional remedies such as preliminary
injunction, attachment, delivery of personal property, and support pendente lite;
and

(4) Where the action may otherwise be barred by the statute of limitations.

(c) Conciliation among members of indigenous cultural communities. - The customs

and traditions of indigenous cultural communities shall be applied in settling
disputes between members of the cultural communities.

SEC. 408. Subject Matter for Amicable Settlement; Exception Thereto. - The lupon of
each barangay shall have authority to bring together the parties actually residing in
the same city or municipality for amicable settlement of all disputes except:

(a) Where one party is the government or any subdivision or instrumentality

thereof;

(b) Where one party is a public officer or employee, and the dispute relates to the
performance of his official functions;

(c) Offenses punishable by imprisonment exceeding one (1) year or a fine exceeding
Five thousand pesos (P5,000.00);

(d) Offenses where there is no private offended party;

(e) Where the dispute involves real properties located in different cities or
municipalities unless the parties thereto agree to submit their differences to
amicable settlement by an appropriate lupon;

(f) Disputes involving parties who actually reside in barangays of different cities or
municipalities, except where such barangay units adjoin each other and the parties
thereto agree to submit their differences to amicable settlement by an appropriate
lupon;

(g) Such other classes of disputes which the President may determine in the interest
of justice or upon the recommendation of the Secretary of Justice.

There is no question that the parties to this case appeared before the Barangay
Lupon for conciliation proceedings. There is also no dispute that the only matter
referred to the Barangay Lupon for conciliation was the rental increase, and not the
ejectment of petitioner from the subject property. This is apparent from a perusal of
the Certification to file action in court issued by the Barangay Lupon on 18 January
2002, to wit:

CERTIFICATION TO FILE COMPLAINTS

This is to certify that:

1. There was personal confrontation between parties before the barangay Lupon
regarding rental increase of a commercial building but conciliation failed;

2. Therefore, the corresponding dispute of the above-entitled case may now be filed
in Court/Government Office.18 (Emphasis ours.)

The question now to be resolved by this Court is whether the Certification dated 18
January 2002 issued by the Barangay Lupon stating that no settlement was reached
by the parties on the matter of rental increase sufficient to comply with the prior
conciliation requirement under the Katarungang Pambarangay Law to authorize the
respondents to institute the ejectment suit against petitioner.

The Court rules affirmatively.

While it is true that the Certification to file action dated 18 January 2002 of the
Barangay Lupon refers only to rental increase and not to the ejectment of petitioner
from the subject property, the submission of the same for conciliation before the
Barangay Lupon constitutes sufficient compliance with the provisions of the
Katarungang Pambarangay Law. Given the particular circumstances of the case at
bar, the conciliation proceedings for the amount of monthly rental should logically
and reasonably include also the matter of the possession of the property subject of
the rental, the lease agreement, and the violation of the terms thereof.

We now proceed to discuss the meat of the controversy.

The contract of lease between the parties did not stipulate a fixed period. Hence, the
parties agreed to the payment of rentals on a monthly basis. On this score, Article
1687 of the Civil Code provides:

Art. 1687. If the period for the lease has not been fixed, it is understood to be from
year to year, if the rent agreed upon is annual; from month to month, if it is monthly;
from week to week, if the rent is weekly; and from day to day, if the rent is to be paid
daily. However, even though a monthly rent is paid, and no period for the lease has
been set, the courts may fix a longer term for the lease after the lessee has occupied
the premises for over one year. If the rent is weekly, the courts may likewise
determine a longer period after the lessee has been in possession for over six
months. In case of daily rent, the courts may also fix a longer period after the lessee
has stayed in the place for over one month. (Emphasis supplied.)

The rentals being paid monthly, the period of such lease is deemed terminated at the
end of each month. Thus, respondents have every right to demand the ejectment of
petitioners at the end of each month, the contract having expired by operation of
law. Without a lease contract, petitioner has no right of possession to the subject
property and must vacate the same. Respondents, thus, should be allowed to resort
to an action for ejectment before the MTC to recover possession of the subject
property from petitioner.

Corollarily, petitioner's ejectment, in this case, is only the reasonable consequence of

his unrelenting refusal to comply with the respondents' demand for the payment of
rental increase agreed upon by both parties. Verily, the lessor's right to rescind the
contract of lease for non-payment of the demanded increased rental was recognized
by this Court in Chua v. Victorio19:

The right of rescission is statutorily recognized in reciprocal obligations, such as

contracts of lease. In addition to the general remedy of rescission granted under
Article 1191 of the Civil Code, there is an independent provision granting the
remedy of rescission for breach of any of the lessor or lessee's statutory obligations.
Under Article 1659 of the Civil Code, the aggrieved party may, at his option, ask for
(1) the rescission of the contract; (2) rescission and indemnification for damages; or
(3) only indemnification for damages, allowing the contract to remain in force.

Payment of the rent is one of a lessee's statutory obligations, and, upon non-
payment by petitioners of the increased rental in September 1994, the lessor
acquired the right to avail of any of the three remedies outlined above. (Emphasis
supplied.)

Petitioner next argues that respondent George de Castro cannot maintain an action
for ejectment against petitioner, without joining all his co-owners.

Article 487 of the New Civil Code is explicit on this point:

ART. 487. Any one of the co-owners may bring an action in ejectment.

This article covers all kinds of action for the recovery of possession, i.e., forcible
entry and unlawful detainer (accion interdictal), recovery of possession (accion
publiciana), and recovery of ownership (accion de reivindicacion). As explained by
the renowned civilist, Professor Arturo M. Tolentino20:

A co-owner may bring such an action, without the necessity of joining all the other
co-owners as co-plaintiffs, because the suit is deemed to be instituted for the benefit
of all. If the action is for the benefit of the plaintiff alone, such that he claims
possession for himself and not for the co-ownership, the action will not prosper.
(Emphasis added.)

In the more recent case of Carandang v. Heirs of De Guzman,21 this Court declared
that a co-owner is not even a necessary party to an action for ejectment, for
complete relief can be afforded even in his absence, thus:
In sum, in suits to recover properties, all co-owners are real parties in interest.
However, pursuant to Article 487 of the Civil Code and the relevant jurisprudence,
any one of them may bring an action, any kind of action for the recovery of co-owned
properties. Therefore, only one of the co-owners, namely the co-owner who filed the
suit for the recovery of the co-owned property, is an indispensable party thereto.
The other co-owners are not indispensable parties. They are not even necessary
parties, for a complete relief can be afforded in the suit even without their
participation, since the suit is presumed to have been filed for the benefit of all co-
owners.

Moreover, respondents Annie de Castro and Felomina de Castro Uban each executed
a Special Power of Attorney, giving respondent George de Castro the authority to
initiate Civil Case No. 1990.

A power of attorney is an instrument in writing by which one person, as principal,

appoints another as his agent and confers upon him the authority to perform certain
specified acts or kinds of acts on behalf of the principal. The written authorization
itself is the power of attorney, and this is clearly indicated by the fact that it has also
been called a "letter of attorney."22

Even then, the Court views the SPAs as mere surplusage, such that the lack thereof
does not in any way affect the validity of the action for ejectment instituted by
respondent George de Castro. This also disposes of petitioner's contention that
respondent George de Castro lacked the authority to sign the Verification and the
Certificate of Non-Forum Shopping. As the Court ruled in Mendoza v. Coronel23:

We likewise hold that the execution of the certification against forum shopping by
the attorney-in-fact in the case at bar is not a violation of the requirement that the
parties must personally sign the same. The attorney-in-fact, who has authority to
file, and who actually filed the complaint as the representative of the plaintiff co-
owner, pursuant to a Special Power of Attorney, is a party to the ejectment suit. In
fact, Section 1, Rule 70 of the Rules of Court includes the representative of the owner
in an ejectment suit as one of the parties authorized to institute the proceedings.
(Emphasis supplied.)

Failure by respondent George de Castro to attach the said SPAs to the Complaint is
innocuous, since it is undisputed that he was granted by his sisters the authority to
file the action for ejectment against petitioner prior to the institution of Civil Case
No. 1990. The SPAs in his favor were respectively executed by respondents Annie de
Castro and Felomina de Castro Uban on 7 February 2002 and 14 March 2002; while
Civil Case No. 1990 was filed by respondent George de Castro on his own behalf and
on behalf of his siblings only on 1 July 2002, or way after he was given by his siblings
the authority to file said action. The Court quotes with approval the following
disquisition of the Court of Appeals:
Moreover, records show that [herein respondent] George de Castro was indeed
authorized by his sisters Annie de Castro and Felomina de Castro Uban, to prosecute
the case in their behalf as shown by the Special Power of Attorney dated February 7,
2002 and March 14, 2002. That these documents were appended only to
[respondent George de Castro's] position paper is of no moment considering that
the authority conferred therein was given prior to the institution of the complaint in
July, 2002. x x x.24

Respondent deceased Jesus de Castro's failure to sign the Verification and Certificate
of Non-Forum Shopping may be excused since he already executed an Affidavit25
with respondent George de Castro that he had personal knowledge of the filing of
Civil Case No. 1990. In Torres v. Specialized Packaging Development Corporation,26
the Court ruled that the personal signing of the verification requirement was
deemed substantially complied with when, as in the instant case, two out of 25 real
parties-in-interest, who undoubtedly have sufficient knowledge and belief to swear
to the truth of the allegations in the petition, signed the verification attached to it.

In the same vein, this Court is not persuaded by petitioner's assertion that
respondents' failure to allege the jurisdictional fact that there was "unlawful
withholding" of the subject property was fatal to their cause of action.

It is apodictic that what determines the nature of an action as well as which court
has jurisdiction over it are the allegations in the complaint and the character of the
relief sought. In an unlawful detainer case, the defendant's possession was originally
lawful but ceased to be so upon the expiration of his right to possess. Hence, the
phrase "unlawful withholding" has been held to imply possession on the part of
defendant, which was legal in the beginning, having no other source than a contract,
express or implied, and which later expired as a right and is being withheld by
defendant.27

In Barba v. Court of Appeals,28 the Court held that although the phrase "unlawfully
withholding" was not actually used by therein petitioner in her complaint, the Court
held that her allegations, nonetheless, amounted to an unlawful withholding of the
subject property by therein private respondents, because they continuously refused
to vacate the premises even after notice and demand.

In the Petition at bar, respondents alleged in their Complaint that they are the
registered owners of the subject property; the subject property was being occupied
by the petitioner pursuant to a monthly lease contract; petitioner refused to accede
to respondents' demand for rental increase; the respondents sent petitioner a letter
terminating the lease agreement and demanding that petitioner vacate and turn
over the possession of the subject property to respondents; and despite such
demand, petitioner failed to surrender the subject property to respondents.29 The
Complaint sufficiently alleges the unlawful withholding of the subject property by
petitioner, constitutive of unlawful detainer, although the exact words "unlawful
withholding" were not used. In an action for unlawful detainer, an allegation that the
defendant is unlawfully withholding possession from the plaintiff is deemed
sufficient, without necessarily employing the terminology of the law.30

Petitioner's averment that the Court of Appeals should have dismissed respondents'
Petition in light of the failure of their counsel to attach the Official Receipt of his
updated payment of Integrated Bar of the Philippines (IBP) dues is now moot and
academic, since respondents' counsel has already duly complied therewith. It must
be stressed that judicial cases do not come and go through the portals of a court of
law by the mere mandate of technicalities.31 Where a rigid application of the rules
will result in a manifest failure or miscarriage of justice, technicalities should be
disregarded in order to resolve the case. 32

Finally, we agree in the ruling of the Court of Appeals that petitioner is liable for the
payment of back rentals, attorney's fees and cost of the suit. Respondents must be
duly indemnified for the loss of income from the subject property on account of
petitioner's refusal to vacate the leased premises.

WHEREFORE, premises considered, the instant Petition is DENIED. The Decision

dated 19 September 2006 and Resolution dated 25 January 2007 of the Court of
Appeals in CA-G.R. SP No. 90906 are hereby AFFIRMED in toto. Costs against
petitioner.

SO ORDERED.

G.R. No. 174154 October 17, 2008

JESUS CUENCO, petitioner,

vs.
TALISAY TOURIST SPORTS COMPLEX, INCORPORATED AND MATIAS B. AZNAR
III, respondents.

Before the Court is a petition for review on certiorari under Rule 45 of the Rules of
Court assailing the Decision dated April 18, 2005 and the Resolution dated August
15, 2006 of the Court of Appeals (CA) in CA-G.R. CV No. 65773.

The Facts

The antecedent facts of the case are as follows:

On May 25, 1992, petitioner leased from respondents for a period of two (2) years,
from May 8, 1992 to May 8, 1994, the Talisay Tourist Sports Complex, to be operated
as a cockpit. The lease was extended for another four (4) years, or until May 8, 1998.

Under the Contract of Lease,1 it was stipulated that petitioner shall, like a good
father of the family, maintain in good condition the furniture, chattels and all other
equipment and shall, at all times, keep the leased premises clean and sanitary. For
this purpose, petitioner would allow the respondents building supervisor or his
authorized representative to make a regular spot inspection of the leased premises
to see to it that these stipulations are strictly implemented.2 Any damage caused to
the furniture, chattels, equipment and parts of the leased premises shall be the
responsibility of petitioner to repair and compensate.3 Furthermore, petitioner
would give a deposit equivalent to six (6) months rental to answer for whatever
damages may be caused to the premises during the period of the lease.4

Upon expiration of the contract, respondent company conducted a public bidding for
the lease of the property. Petitioner participated in the bidding. The lease was
eventually awarded to another bidder, Mr. Rex Cuaqui Salud.5 Thereafter, petitioner
wrote four (4) demand letters to respondents.

The first letter, dated June 8, 1998, reads:

Dear Mr. Aznar:

I was so disheartened that after going through with the supposed public bidding,
haggling with the terms and conditions of a new lease agreement and after full
compliance of ALL your requirements and the handshakes signifying the clinching of
the deal, the contract was awarded to another party. Though I believe I deserve a
renewal, I had to accept your decision with a heavy heart.

It is now my desire to be released quickly from whatever liability or responsibility

under our previous contract. Repair works on some damaged portions were already
done. Based on our contract, par. 5 thereof, it is my understanding that I am
answerable to all damages caused to furnitures (sic), chattels and other equipments
and minor parts of the leased premises. Once cleared, I want the return of my
deposit of P500,000.00.

Kindly send your inspector to determine by actual ocular inspection if the

restoration work is to your satisfaction.

Very truly yours,

JESUS C. CUENCO [signed]6

Obviously, the letter was not answered, because on June 17, 1998 petitioner found it
necessary to write respondents a second letter reiterating his request for the return
of the deposit. The second demand letter reads:

Dear Mr. Aznar:

It has been more than a week since my letter dated 8 June 1998 requesting the
return of my deposit of P500,000.00. I would assume your representative had
already conducted an ocular inspection and you were satisfied on the restoration
works made on the premises. As Ive stated in my said letter, I want to be released as
soon as possible.

I need to know immediately if I still have other things to comply with as pre-
condition for the release of the deposit. As far as I know, I have already done my
part.

Very truly yours,

JESUS C. CUENCO [signed]7

With still no response from respondents, petitioner, on August 14, 1998, sent a third
demand letter which read:

Dear Mr. Aznar:

I am surprised by the unreasonable delay in the release of my deposit of

P500,000.00 in spite of my full compliance as to repair works on minor damage to
the premises during my term as lessee. Twice I requested in writing for the
immediate release of my deposit but until now it remains unheeded. And the so-
called "inventory" which your lawyer Atty. Algoso8 promised to give has not been
given. Frankly, I am doubtful of the accuracy of said inventory, if any, considering the
full blast major renovation now being conducted on the complex by the new
concessionaire. I think its about time we close the last chapter of the book, in a
manner of speaking, so we can proceed in our separate distinct ways.

I reiterate my request to please release right now my deposit of P500,000.00.

Very truly yours,

JESUS C. CUENCO [signed]9

Finally, on August 18, 1998, petitioner, thru his counsel, wrote respondents a final
demand letter as follows:

Dear Mr. Aznar:

For ignoring the two letters of my client Mr. Jesus C. Cuenco, dated June 8 and 17,
1998 regarding his request for the return of his deposit in the sum of P500, 000.00,
he has decided to endorse the matter to this office for appropriate action.

It appears that when Mr. Cuenco leased the cockpit complex he was required to put
up a deposit to answer for damages that may be caused to furnitures (sic), chattels
and other equipments and minor repairs on the leased premises. When the lease
expired and he failed to get a renewal, Mr. Cuenco in fulfillment of his obligation
under the contract caused the repair of minor damage to the premises after which
your attention was invited to get your reaction to the restoration work. And since he
did not receive any objection, it can be safely premised that the restoration was to
the lessors satisfaction.

Mr. Cuenco informed me that the new concessionaire has undertaken a full blast
major renovation of the complex. Under this condition and in the absence of an
accurate inventory conducted in the presence of both parties, it would be doubly
difficult, if not impossible, to charge Mr. Cuenco of any violation of his undertaking
especially as to deficiency in the furnitures (sic), chattels and other equipments in
the premises.

In view of all the foregoing, it is consequently demanded that you return to Mr.
Cuenco the aforesaid sum of P500,000.00 within THREE (3) DAYS from notice
hereof; otherwise, he may be constrained to seek judicial relief for the return of the
deposit plus interest, damages and attorneys fees.

Your compliance is enjoined.

Very truly yours, At my instance:

FEDERICO C. CABILAO (signed) JESUS C. CUENCO (signed)

Counsel for Mr. Jesus C. Cuenco10
As all of his demand letters remained unheeded, on October 21, 1998, petitioner
filed a Complaint11 for sum of money, damages and attorneys fees. He maintained
that respondents acted in bad faith in withholding the amount of the deposit
without any justifiable reason.12

In their Answer,13 respondents countered that petitioner caused physical damage to

some portions of the leased premises and the cost of repair and replacement of
materials amounted to more than P500,000.00.14 They also averred that
respondent Matias B. Aznar III (Aznar) cannot be sued personally under the contract
of lease since a corporation has a separate and distinct personality from its officers
and stockholders, and there was no allegation that Aznar, who is the President of the
corporation, signed the contract in his personal capacity.15
On March 8, 1999, the RTC issued a Pre-trial Order,16 the pertinent portions of
which reads:

The following facts were admitted by the [respondents]:

1. There is no inventory of damages up to this time;

2. [Petitioner] deposited the amount of P500,000.00;

3. [Petitioner] sends (sic) several letters of demand to [respondents] but said letters
were not answered.

4. There was a renovation of the Talisay Tourist Sports Complex with a qualification
that the renovation is only 10% of the whole amount.

The main issues in this case are as follows:

1. Whether or not [petitioner] is entitled to the return of the deposit of P500,000.00,

with interest;

2. Whether or not some portions of the complex sustained physical damage during
the operation of the same by the [petitioner].17

On May 24, 1999, the RTC issued an Order18 admitting the exhibits of petitioner,
consisting of the contract of lease dated May 4, 1994 and the four (4) demand
letters.

On July 29, 1999, an Order19 was issued by the same court formally admitting the
respondents following exhibits: the lease contract, inventory of the leased property
as of June 4, 1998, inventory of the sports complex dated June 24, 1995, ocular
inspection report dated January 15, 1998 and various receipts mostly in the name of
Southwestern University incurred in different months of 1998.

On August 11, 1999, the RTC rendered a Decision20 in favor of petitioner, the
dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of [petitioner] and against the

[respondents], directing the latter jointly and severally to return to [petitioner] the
sum of P500,000.00, representing the deposit mentioned in the Complaint, plus 3%
interest per month from August 18, 1998 until full payment thereof.

The latter are, likewise, directed to pay [petitioner] the sum of P15,000.00 as and for
litigation expenses.

With costs against the [respondents].

SO ORDERED.21

The RTC ratiocinated that respondents failure to reply to the letters of petitioner
raises a presumption that petitioner has complied with his end of the contract. The
lower court gave credence to the testimony of respondents witness, Ateniso
Coronado (Coronado), the property custodian of the respondents, that the sports
complex was repaired and renovated by the new lessee. The court also considered
the admission of respondents counsel during the pre-trial that no inventory of the
property was conducted on the leased premises. The RTC debunked the inventory
presented by the respondents during trial as a mere afterthought to bolster their
claim against petitioner.22

Respondents appealed. On April 18, 2005, the CA rendered a Decision23 reversing

and setting aside the decision of the RTC. The fallo of the CA decision reads:

WHEREFORE, with the foregoing, the Decision of the Regional Trial Court, Branch
13, Cebu City, dated August 11, 1999, is REVERSED and SET ASIDE, and a new one
entered finding this case in favor of defendants-appellants Talisay Tourists Sports
Complex and Matias Aznar III. Consequently, Civil Case No. CEB-22847 for sum of
money, damages, and attorneys fees involving herein parties, as well as all other
claims and counterclaims are hereby DISMISSED for lack of factual and legal basis.

No pronouncement as to costs.

SO ORDERED.24

The CA ruled in favor of respondents on the basis of: (1) Coronados testimony that
petitioner continued to hold cockfights two months after the expiration of the lease
contract which was not refuted by petitioner; (2) the summary of repairs made on
the property showing that respondents spent the amount of P573,710.17
immediately prior to the expiration of the lease contract and shortly thereafter; and
(3) the new lessor incurred expenses amounting to over P3 million when he
shouldered the rest of the repair and renovation of the subject property.25

Hence, the instant petition.

The Issues

Petitioner raised the following issues for resolution of the Court: (1) whether a
judicial admission is conclusive and binding upon a party making the admission; and
(2) whether such judicial admission was properly rejected by the CA.26

On the other hand, respondents posed the following: (1) whether the findings of the
CA that the cockpit sustained damage during the period of the lease was rendered
not in accord with law or with the applicable decisions of the Court; (2) whether the
CA committed an error of law in ruling that petitioner is not entitled for the return
of the deposit.27

The ultimate question we must resolve is whether petitioner is entitled to the return
of the amount deposited.

The Ruling of the Court

We rule in the affirmative. Respondents failed to present sufficient proof to warrant

the retention of the full amount of the deposit given by petitioner.

The Supreme Court is not a trier of facts, and as a rule, does not weigh anew the
evidence presented by the parties. However, the instant case is one of the exceptions
to the rule because of the conflicting decisions of the RTC and the CA based on
contradictory factual findings. Thus, we have reviewed the records in order to arrive
at a judicious resolution of the case at bench.

Petitioner questions the CAs finding that there was damage caused the premises
while the lease was still in force. Such finding could only have been based on alleged
inventory of the property conducted by the respondents. Petitioner takes exception
to this evidence because of the earlier judicial admission made by respondents
counsel that no inventory was conducted and, accordingly, any evidence adduced by
the respondents contrary to or inconsistent with the judicial admission should be
rejected.

Indeed, at the pre-trial conference, respondents counsel made an admission that no

inventory was made on the leased premises, at least up to that time. This admission
was confirmed in the Pre-Trial Order issued by the trial court on March 8, 1999 after
the lease expired on May 8, 1998.

Yet, on July 1, 1999, respondents witness Coronado testified, as follows:

ATTY. VASQUEZ:

Q Why do you know the defendants?

A Because Talisay Sports Complex is owned by Aznar Brothers Realty Corporation of

which I am employed as (sic) in charge of the realty department.

Q How about Matias Aznar III, the defendant here?

A He is the Chairman of the Board.

Q Board of what?
A Of the Aznar Brothers Realty Corporation.

Q Is he the Chairman of Talisay Tourist Sports Complex?

A Yes, sir.

Q You said that you are in charge of the realty department, what is your function
with respect to the properties of Talisay Tourist and Sports Complex?

A I am the in-charge of the administration and overseeing of the complex owned by

Talisay Sports Complex.

Q When you said that you are in charge of the administration and overseeing of the
complex, what does it includes (sic)?

A It includes collection of rentals of complex and routine inspection to determine

that there are missing or damage of (sic) the properties.

Q How long have you been employed with the Aznar Brothers Realty Company?

A 25 years.

xxxx

Q In your earlier testimony, you said that part of your function is to conduct routine
inspection of the complex. Now, was there a routine inspection conducted during the
period of the lease contract between plaintiff and the defendant?

A Yes, we conducted inspection sometime in January 1998.

Q For what purpose was that inspection?

A The purpose is to determine if there are damage sustained by the complex.

Q And what was the result of the inspection.

A There were missing and destroyed fixtures and physical damage sustained by the
complex.

xxxx

COURT

xxxx
Q W[h]y did you not take photographs of the damage sustained by the complex?

A We did not take pictures, Your Honor, because in fact their personnel were in our
presence (sic) during the inspection, they were accompanied by us, because we can
not conduct inspection without the presence of the personnel of Jesus Cuenco, Your
Honor, the lessee.

Q Did the personnel of Jesus Cuenco sign any paper acknowledging receipt of any
report?

A There was no refusal, but we did not initiate to let them sign and confirm.

COURT

Q So, we have to rely on your testimony?

A Yes, sir.28

Obviously, it was on Coronados testimony, as well as on the documentary

evidence29 of an alleged property inventory conducted on June 4, 1998, that the CA
based its conclusion that the amount of damage sustained by the leased premises
while in the possession of petitioner exceeded the amount of petitioners deposit.
This contradicts the judicial admission made by respondents counsel which should
have been binding on the respondents.

Section 4, Rule 129 of the Rules of Court provides:

SEC. 4. Judicial admissions. An admission, verbal or written, made by a party in the

course of the proceedings in the same case, does not require proof. The admission
may be contradicted only by a showing that it was made through palpable mistake
or that no such admission was made.

A party may make judicial admissions in (1) the pleadings, (2) during the trial, by
verbal or written manifestations or stipulations, or (3) in other stages of the judicial
proceeding.30 The stipulation of facts at the pre-trial of a case constitutes judicial
admissions. The veracity of judicial admissions require no further proof and may be
controverted only upon a clear showing that the admissions were made through
palpable mistake or that no admissions were made. Thus, the admissions of parties
during the pre-trial, as embodied in the pre-trial order, are binding and conclusive
upon them.

Respondents did not deny the admission made by their counsel, neither did they
claim that the same was made through palpable mistake. As such, the stipulation of
facts is incontrovertible and may be relied upon by the courts. The pre-trial forms
part of the proceedings and matters dealt therein may not be brushed aside in the
process of decision-making. Otherwise, the real essence of compulsory pre-trial
would be rendered inconsequential and worthless.31 Furthermore, an act
performed by counsel within the scope of a "general or implied authority" is
regarded as an act of the client which renders respondents in estoppel. By estoppel
is meant that an admission or representation is conclusive upon the person making
it and cannot be denied or disproved as against the person relying thereon.32

Thus, respondents are bound by the admissions made by their counsel at the pre-
trial. Accordingly, the CA committed an error when it gave ample evidentiary weight
to respondents evidence contradictory to the judicial admission.

The appellate courts findings that the damage in the premises exceeded the amount
of the deposit is further sought to be justified, thus:

Verily, a perusal of the summary of repairs amounting to P573,710.17 claimed to

have been made by appellants over the property at about that time immediately
prior to the expiration of the lease contract and shortly thereafter, would show that
the repairs pertained to repairs on the drainage, sewage, immediate premises and
structure of the complex. We find the same highly credible and meritorious
considering that as earlier admitted by appellee, the repairs he made were minor
and were confined only to certain portions of the complex, although substantial
repairs were done on the cockhouses only, and that said repairs were done because
of a coming big time derby and not to satisfy the provisions of the lease contract.
Also, by implication, appellee is stating that the new lessor incurred expenses
amounting to over P3 million when he shouldered the rest of the repair and
renovation of the complex after the term of lease of appellee.33

Yet, upon perusal of the receipts presented by respondents, we found that majority
of the receipts are under the name of Southwestern University. In their
Memorandum,34 respondents aver that Southwestern University and respondent
corporation are sister companies.35 Even if true, this matter is of no consequence
because respondent company and Southwestern University have distinct and
separate legal personalities, and Southwestern University is not a party to this case.
Thus, we cannot just accept respondents argument that the receipts paid in the
name of Southwestern University should be credited to respondent company. In any
event, they were not able to prove that those receipts were in fact used for the repair
or maintenance of the respondents complex.

Furthermore, respondents are not entitled the full amount of the deposit because
the repair and renovation of the sports complex after the expiration of petitioners
lease were undertaken not by respondents but by the new lessee. This can be
gleaned from Coronados testimony on cross-examination, viz.:

Q You do not know. Mr. Witness, is it not a fact that the new lessee was Wacky Salud?
A Yes, sir.

Q And that was sometime of July or August of 1998?

A They were about to conduct three months repair of the complex?

Q So, Mr. Wacky Salud conducted, did you say repair or renovation? Is it renovation
or repair?

A There was a renovation and repair.

Q Renovation including repair?

A Yes, sir.

COURT

Q In other words, after the expiration of the contract of Mr. Cuenco, Wacky Salud
took over?

A Yes, he took over that repair and renovation were no longer included in this
presentation, that is at his own expense.

Q Precisely. In other words, some repairs were made by Mr. Salud and not by Aznar
Brothers Realty?

A Yes, sir.36

Finally, the Court observes that the inventories presented by respondents were not
countersigned by petitioner or were they presented to the latter prior to the filing of
the case in the RTC. Thus, we are more inclined to agree with the trial court that the
"inventory was made as an afterthought,"37 in a vain attempt of the respondents to
establish their case.

However, Coronados testimony that petitioner extended the operation of the sports
complex for a period of two months after the expiration of the lease without the
respondents authority and without the payment of rentals, remains unrebutted.
Enlightening is the following testimony:

Q I observed here in No. 16 of your summary, two months arrears rentals, June to
July, how come? The contract was supposed to expire May 1998?

A Yes, because it had happened on this extension of the lease because they are still
occupying until July after the expiration of the contract.
COURT

Q You mean to say that they still use the complex for the purpose for which it was
intended, which is for cockfighting?

WITNESS

A Yes, they are still doing their usual operation.

ATTY. VASQUEZ

Q You mean to say that there were still cockfighting held in the complex even after
May 1998?

A Yes, sir.38

This two (2) months over-stay of petitioner in the leased premises should be
charged against the deposit. Because there was no renewal of the lease contract, it is
understood that the continued use of the premises is on a monthly basis with the
rental in the amount previously agreed upon by the parties, in accordance with
Articles 167039 and 168740 of the Civil Code.

In the Contract of Lease of petitioner and respondent company, it was agreed that
the rental to be paid shall be the following:

WHEREAS, the FIRST PARTY is the owner of the Talisay Tourist Sports Complex, Inc.
located at Tabunok, Talisay, Cebu;

WHEREAS, the SECOND PARTY has expressed his desire to lease said complex
(cockpit) and the FIRST PARTY have agreed to lease/let the same to the SECOND
PARTY subject to the following term and condition, to wit:

1. In consideration of this lease, the SECOND PARTY agrees to pay the FIRST PARTY a
lump sum of ONE MILLION PESOS (P1,000,000.00) representing advance rental for
the first year, the same to be paid on May 8, 1994. Thereafter, the rental shall be as
follows:

Second year

P1,050,000.00 or P87,500.00/month

Third year
-

1,100,000.00 or P91,666.67/month

Fourth year

1,175,000.00 or P97,916.67/month41

Thus, by way of rental for the two-month overstay, the amount of P195,833.34
should be deducted from the amount of deposit paid by petitioner to respondent
company.

As to petitioners claim of interest of three percent (3%) per month on the amount
due him, the same is without legal basis. We note that no amount of interest was
previously agreed upon by the parties in the contract of lease.

Under Article 2213 of the Civil Code, "interest cannot be recovered upon
unliquidated claims or damages, except when the demand can be established with
reasonable certainty." In the instant case, the claim of petitioner is unliquidated or
cannot be established with reasonable certainty upon his filing of the case in the
RTC. This is because of the contending claims of the parties, specifically, the claim of
petitioner for the return of the P500,000.00 deposit vis-a-vis the claim of
respondents on the arrears in rentals and on the damage to the premises. It is only
now that the amount that should be returned is ascertained, i.e., P500,000.00 less
the two-months arrears in rentals amounting to P195,833.34, the sum of which will
earn

interest at the legal rate of six percent (6%) per annum42 from the time the case
was filed in the RTC on October 21, 1998.43 Upon finality of this decision, the rate of
interest shall be twelve percent (12%) per annum from such finality until full
satisfaction. The foregoing interest rate is based on the guidelines set by the Court in
Eastern Shipping Lines v. CA, viz.:

I. When an obligation, regardless of its source, i.e., law, contracts, quasi-contracts,

delicts or quasi-delicts is breached, the contravenor can be held liable for damages.
The provisions under Title XVIII on "Damages" of the Civil Code govern in
determining the measure of recoverable damages.

II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:
1. When the obligation is breached, and it consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the absence of stipulation, the
rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169
of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached,

an interest on the amount of damages awarded may be imposed at the discretion of
the court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169, Civil Code) but when such certainty cannot be
so reasonably established at the time the demand is made, the interest shall begin to
run only from the date of the judgment of the court is made (at which time the
quantification of damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any case, be on the
amount of finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit.44

Concerning the solidary liability of respondents, we hold that respondent Matias

Aznar III is not solidarily liable with respondent company. His function as the
President of the company does not make him personally liable for the obligations of
the latter. A corporation, being a juridical entity, may act only through its directors,
officers and employees. Obligations incurred by them while acting as corporate
agents, are not their personal liability but the direct accountability of the
corporation they represent.45

WHEREFORE, the petition is PARTLY GRANTED. The Decision of the Court of

Appeals is hereby REVERSED AND SET ASIDE. The Decision of the RTC in Civil Case
No. CEB-22847 is hereby REINSTATED with the following modifications:

(1) Talisay Sports Complex, Inc. is solely liable to return the amount of the deposit
after deducting the amount of the two-months arrears in rentals; and

(2) The rate of legal interest to be paid is SIX PERCENT (6%) on the amount due
computed from October 21, 1998, and TWELVE PERCENT (12%) interest, thereon
upon finality of this decision until full payment thereof.
SO ORDERED

G.R. No. 171891 February 24, 2009

HERNANIA "LANI" LOPEZ, Petitioner,

vs.
GLORIA UMALE-COSME, Respondent.

Before us is a petition for review on certiorari under Rule 45 seeking a review of the
Decision1 and Resolution2 of the Court of Appeals (CA) in CA G.R. SP No. 82808
reversing the decision3 of the Regional Trial Court (RTC), Branch 218, Quezon City.

Respondent Gloria Umale-Cosme is the owner of an apartment building at 15

Sibuyan Street, Sta. Mesa Heights, Quezon City, while the petitioner is a lessee of one
of the units therein. She was paying a monthly rent of P1,340.00 as of 1999.

On April 19, 1999, respondent filed a complaint for unlawful detainer against
petitioner before Branch 43 of the Metropolitan Trial Court (MeTC) of Quezon City
on the grounds of expiration of contract of lease and nonpayment of rentals from
December 1998. In her answer, petitioner denied that she defaulted in the payment
of her monthly rentals, claiming that respondent did not collect the rentals as they
fell due in order to make it appear that she was in arrears. Petitioner also alleged
that she had been depositing her monthly rentals in a bank in trust for respondent
since February 1999.

On March 19, 2003, the MeTC, Branch 43, rendered judgment in favor of respondent,
the dispositive portion of which reads:

WHEREFORE, premises considered, the Court finds for the plaintiff and the
defendant Hernania "Lani" B. Lopez and all persons claiming rights under her or
instructions are hereby ordered:

1. to vacate the leased premises located at 15-1, Sibuyan Street, Sta. Mesa Heights,
Quezon City Quezon City (sic), Metro Manila;

2. to pay the plaintiff monthly rent in the amount of P1,340.00 starting December,
1998 up to the time that they shall have vacated and surrendered the leased
premises to the plaintiff;

3. to pay the plaintiff the amount of P20,000.00 as and be (sic) way of attorneys
fees; and
4. costs of suit.4

On appeal, the RTC reversed the decision of the MeTC and ruled that the contract of
lease between respondent and petitioner lacked a definite period. According to the
RTC, the lessee may not be ejected on the ground of termination of the period until
the judicial authorities have fixed such period. It ratiocinated:

Under the law, there is a noticeable change on the grounds for judicial ejectment as
to expiration of the period. Paragraph (f) of Section 5, only speaks of expiration of
the period of lease contract, deleting the phrase "of a written lease contract."
However, under its Sec. 6, it provides:

SECTION 6. Application of the Civil Code and Rules of Court of the Philippines.
Except when the lease is for a definite period, the provisions of paragraph (1) of
Article 1673 of the Civil Code of the Philippines, insofar as they refer to residential
units covered by this Act, shall be suspended during the effectivity of this Act, but
other provisions of the Civil Code and the Rules of Court on lease contracts, insofar
as they are not in conflict with the provisions of this Act shall apply.

BP Blg. 877 was extended by RA No. 6643, RA No. 6828, RA No. 7644, and RA No.
8437 approved 22 December 1997 extending the law up to 31 December 2001,
without changed (sic) in the provision of the law except as to the period of
maximum increase allowable.

The condition about the expiration of the period as provided for under Act 877 was
never change (sic) despite the several extensionary (sic) laws to it.

The law is so perspicuous to allow other (sic) interpretation. It suspends the

provisions of the first paragraph of Article 1673 of the Civil Code, except when the
lease is for a definite period. Thus, if the lease has no period but to be fixed yet by
the judicial authorities, the lessee may not be ejected on ground of termination of
the period.lawphil.net

This particular provision compliments the very purpose of the law prohibiting
increase in rentals more than the rates provided therefor.

If they could be ejected with ease just the same by simply interpreting that if a lessee
is paying his rentals monthly, the lease is considered month to month, and month to
month lease contract is with a definite period, then what part of Article 1673 was
suspended?

The amendatory provisions of the Rent Control Law, which the lawmakers had
deemed proper to extend everytime (sic) it is about to expire, is nothing but illusory!
In light of the above reasoning, plaintiff-appellees ground based on the expiration of
the lease contract must fail. BP Blg. 877 as amended suspends the ejectment of
lessees based on the expiration of lease contract where there was no agreement as
to a definite lease period.

Finally, the plaintiff has, in effect, abandoned her other ground of non-payment of
rental having stipulated on the consignation by defendant of the back rental from
December 1998 to September 2002 during the pre-trial.

WHEREFORE, premises considered, the assailed decision is REVERSED and SET

ASIDE. The case is DISMISSED.

SO ORDERED.5

Respondents motion for reconsideration was denied by the RTC in a Resolution

dated February 2, 2004.

Aggrieved, respondent repaired to the CA, which found merit in her appeal, thus:

It is worthy to note that in her answer, respondent admitted the allegations in

paragraph 5 of the complaint that the apartment unit was leased to her by petitioner
on a month to month basis.

Article 1673 (1) of the Civil Code provides that the lessor may judicially eject the
lessee when the period agreed upon, or that which is fixed for the duration of leases
under articles 1682 and 1687, has expired. Article 1687 of the same Code provides
that if the period for the lease has not been fixed, it is understood to be from year to
year, if the rent agreed upon is annual; from month to month, if it is monthly; from
week to week, if the rent is weekly; and from day to day, if the rent is to be paid daily.

On the other hand, Section 6 of Batas Pambansa Bilang 877 reads:

Sec. 6: Application of the Civil Code and Rules of Court of the Philippines. Except
when the lease is for a definite period, the provisions of paragraph (1) of Article
1673 of the Civil Code of the Philippines, insofar as they refer to residential units
covered by this Act, shall be suspended during the effectivity of this Act, but other
provisions of the Civil Code and the Rules of Court on lease contracts, insofar as they
are not in conflict with the provisions of the Act shall apply.

In Acab v. Court of Appeals, it was held that Section 6 of B.P. Blg. 877 does not
suspend the effects of Article 1687 of the Civil Code. Lease agreements with no
specified period, but in which rentals are paid monthly, are considered to be on a
month-to-month basis. They are for a definite period and expire after the last day of
any given thirty-day period, upon proper demand and notice by the lessor to vacate.
In the case at bench, petitioner had shown that written notices of termination of
lease and to vacate were sent by her to respondent, but the latter refused to
acknowledge receipt thereof. In view thereof, he caused the posting of said notice on
the leased premises in the presence of the barangay security officers on March 1,
1999.6

The CA denied petitioners Motion for Reconsideration in a resolution dated March

13, 2006. As a consequence, petitioner filed the instant petition for review, where
she argues that the CA gravely erred when it ruled that she may be ejected on the
ground of termination of lease contract.

The petition is utterly bereft of merit.

It is well settled that where a contract of lease is verbal and on a monthly basis, the
lease is one with a definite period which expires after the last day of any given
thirty-day period.7 In the recent case of Leo Wee v. De Castro where the lease
contract between the parties did not stipulate a fixed period,8 we ruled:

The rentals being paid monthly, the period of such lease is deemed terminated at the
end of each month. Thus, respondents have every right to demand the ejectment of
petitioners at the end of each month, the contract having expired by operation of
law. Without a lease contract, petitioner has no right of possession to the subject
property and must vacate the same. Respondents, thus, should be allowed to resort
to an action for ejectment before the MTC to recover possession of the subject
property from petitioner.

Corollarily, petitioners ejectment, in this case, is only the reasonable consequence of

his unrelenting refusal to comply with the respondents demand for the payment of
rental increase agreed upon by both parties. Verily, the lessors right to rescind the
contract of lease for non-payment of the demanded increased rental was recognized
by this Court in Chua v. Victorio:

The right of rescission is statutorily recognized in reciprocal obligations, such as

contracts of lease. x x x under Article 1659 of the Civil Code, the aggrieved party may,
at his option, ask for (1) the rescission of the contract; (2) rescission and
indemnification for damages; or (3) only indemnification for damages, allowing the
contract to remain in force. Payment of the rent is one of a lessees statutory
obligations, and, upon non-payment by petitioners of the increased rental in
September 1994, the lessor acquired the right to avail of any of the three remedies
outlined above. (citations omitted)

In the case at bar, it has been sufficiently established that no written contract existed
between the parties and that rent was being paid by petitioner to respondent on a
month-to-month basis. As the CA noted, petitioner admitted the lack of such written
contract in her complaint.9 Moreover, in the instant petition for review, petitioner
herself alleged that she has been occupying the leased premises and paying the
monthly rentals without fail since 1975.10 Hence, petitioners argument that the
contract of lease between her and respondent lacked a definite periodand that
corollarily, she may not be ejected on the ground of termination of perioddoes not
hold water. Petitioner was merely grasping at straws when she imputed grave error
upon the CAs decision to eject her from the leased premises.

IN VIEW WHEREOF, the instant petition is DENIED. The decision of the Court of
Appeals is AFFIRMED.

SO ORDERED.

G.R. No. 172384 September 12, 2007

ERMINDA F. FLORENTINO, Petitioner,

vs.
SUPERVALUE, INC., Respondent.

Before this Court is a Petition for Review on Certiorari under Rule 45 of the Revised
Rules of Court, filed by petitioner Erminda F. Florentino, seeking to reverse and set
aside the Decision,1 dated 10 October 2003 and the Resolution,2 dated 19 April
2006 of the Court of Appeals in CA-G.R. CV No. 73853. The appellate court, in its
assailed Decision and Resolution, modified the Decision dated 30 April 2001 of the
Regional Trial Court (RTC) of Makati, Branch 57, in Civil Case No. 00-1015, finding
the respondent Supervalue, Inc., liable for the sum of P192,000.00, representing the
security deposits made by the petitioner upon the commencement of their Contract
of Lease. The dispositive portion of the assailed appellate courts Decision thus
reads:

WHEREFORE, premises considered, the appeal is PARTLY GRANTED. The April 30,
2001 Decision of the Regional Trial Court of Makati, Branch 57 is therefore
MODIFIED to wit: (a) the portion ordering the [herein respondent] to pay the
amount of P192,000.00 representing the security deposits and P50,000.00 as
attorneys fees in favor of the [herein petitioner] as well as giving [respondent] the
option to reimburse [petitioner] of the value of the improvements introduced by
the [petitioner] on the leased [premises] should [respondent] choose to appropriate
itself or require the [petitioner] to remove the improvements, is hereby REVERSED
and SET ASIDE; and (b) the portion ordering the return to [petitioner] the
properties seized by [respondent] after the former settled her obligation with the
latter is however MAINTAINED.3

The factual and procedural antecedents of the instant petition are as follows:
Petitioner is doing business under the business name "Empanada Royale," a sole
proprietorship engaged in the retail of empanada with outlets in different malls and
business establishments within Metro Manila.4

Respondent, on the other hand, is a domestic corporation engaged in the business of

leasing stalls and commercial store spaces located inside SM Malls found all
throughout the country.5

On 8 March 1999, petitioner and respondent executed three Contracts of Lease

containing similar terms and conditions over the cart-type stalls at SM North Edsa
and SM Southmall and a store space at SM Megamall. The term of each contract is for
a period of four months and may be renewed upon agreement of the parties.6

Upon the expiration of the original Contracts of Lease, the parties agreed to renew
the same by extending their terms until 31 March 2000.7

Before the expiration of said Contracts of Lease, or on 4 February 2000, petitioner

received two letters from the respondent, both dated 14 January 2000, transmitted
through facsimile transmissions.8

In the first letter, petitioner was charged with violating Section 8 of the Contracts of
Lease by not opening on 16 December 1999 and 26 December 1999.9

Respondent also charged petitioner with selling a new variety of empanada called
"mini-embutido" and of increasing the price of her merchandise from P20.00 to
P22.00, without the prior approval of the respondent.10

Respondent observed that petitioner was frequently closing earlier than the usual
mall hours, either because of non-delivery or delay in the delivery of stocks to her
outlets, again in violation of the terms of the contract. A stern warning was thus
given to petitioner to refrain from committing similar infractions in the future in
order to avoid the termination of the lease contract.11

In the second letter, respondent informed the petitioner that it will no longer renew
the Contracts of Lease for the three outlets, upon their expiration on 31 March
2000.12

In a letter-reply dated 11 February 2000, petitioner explained that the "mini-

embutido" is not a new variety of empanada but had similar fillings, taste and
ingredients as those of pork empanada; only, its size was reduced in order to make it
more affordable to the buyers.13

Such explanation notwithstanding, respondent still refused to renew its Contracts of

Lease with the petitioner. To the contrary, respondent took possession of the store
space in SM Megamall and confiscated the equipment and personal belongings of the
petitioner found therein after the expiration of the lease contract.14

In a letter dated 8 May 2000, petitioner demanded that the respondent release the
equipment and personal belongings it seized from the SM Megamall store space and
return the security deposits, in the sum of P192,000.00, turned over by the
petitioner upon signing of the Contracts of Lease. On 15 June 2000, petitioner sent
respondent another letter reiterating her previous demands, but the latter failed or
refused to comply therewith. 15

On 17 August 2000, an action for Specific Performance, Sum of Money and Damages
was filed by the petitioner against the respondent before the RTC of Makati, Branch
57.16

In her Complaint docketed as Civil Case No. 00-1015, petitioner alleged that the
respondent made verbal representations that the Contracts of Lease will be renewed
from time to time and, through the said representations, the petitioner was induced
to introduce improvements upon the store space at SM Megamall in the sum of
P200,000.00, only to find out a year later that the respondent will no longer renew
her lease contracts for all three outlets.17

In addition, petitioner alleged that the respondent, without justifiable cause and
without previous demand, refused to return the security deposits in the amount of
P192,000.00.18

Further, petitioner claimed that the respondent seized her equipment and personal
belongings found inside the store space in SM Megamall after the lease contract for
the said outlet expired and despite repeated written demands from the petitioner,
respondent continuously refused to return the seized items.19

Petitioner thus prayed for the award of actual damages in the sum of P472,000.00,
representing the sum of security deposits, cost of improvements and the value of the
personal properties seized. Petitioner also asked for the award of P300,000.00 as
moral damages; P50,000.00 as exemplary damages; and P80,000.00 as attorneys
fees and expenses of litigation.20

For its part, respondent countered that petitioner committed several violations of
the terms of their Contracts of Lease by not opening from 16 December 1999 to 26
December 1999, and by introducing a new variety of empanada without the prior
consent of the respondent, as mandated by the provision of Section 2 of the Contract
of Lease. Respondent also alleged that petitioner infringed the lease contract by
frequently closing earlier than the agreed closing hours. Respondent finally averred
that petitioner is liable for the amount P106,474.09, representing the penalty for
selling a new variety of empanada, electricity and water bills, and rental adjustment,
among other charges incidental to the lease agreements. Respondent claimed that
the seizure of petitioners personal belongings and equipment was in the exercise of
its retaining lien, considering that the petitioner failed to settle the said obligations
up to the time the complaint was filed.21

Considering that petitioner already committed several breaches of contract, the

respondent thus opted not to renew its Contracts of Lease with her anymore. The
security deposits were made in order to ensure faithful compliance with the terms
of their lease agreements; and since petitioner committed several infractions
thereof, respondent was justified in forfeiting the security deposits in the latters
favor.

On 30 April 2001, the RTC rendered a Judgment22 in favor of the petitioner and
found that the physical takeover by the respondent of the leased premises and the
seizure of petitioners equipment and personal belongings without prior notice were
illegal. The decretal part of the RTC Judgment reads:

WHEREFORE, premises duly considered, judgment is hereby rendered ordering the

[herein respondent] to pay [herein petitioner] the amount of P192,000.00
representing the security deposits made by the [petitioner] and P50,000.00 as and
for attorneys fees.

The [respondent] is likewise ordered to return to the [petitioner] the various

properties seized by the former after settling her account with the [respondent].

Lastly, the [respondent] may choose either to reimburse the [petitioner] one half
(1/2) of the value of the improvements introduced by the plaintiff at SM Megamall
should [respondent] choose to appropriate the improvements to itself or require the
[petitioner] to remove the improvements, even though the principal thing may suffer
damage thereby. [Petitioner] shall not, however, cause anymore impairment upon
the said leased premises than is necessary.

The other damages claimed by the plaintiff are denied for lack of merit.

Aggrieved, the respondent appealed the adverse RTC Judgment to the Court of
Appeals.

In a Decision23 dated 10 October 2003, the Court of Appeals modified the RTC
Judgment and found that the respondent was justified in forfeiting the security
deposits and was not liable to reimburse the petitioner for the value of the
improvements introduced in the leased premises and to pay for attorneys fees. In
modifying the findings of the lower court, the appellate court declared that in view
of the breaches of contract committed by the petitioner, the respondent is justified in
forfeiting the security deposits. Moreover, since the petitioner did not obtain the
consent of the respondent before she introduced improvements on the SM Megamall
store space, the respondent has therefore no obligation to reimburse the petitioner
for the amount expended in connection with the said improvements.24 The Court of
Appeals, however, maintained the order of the trial court for respondent to return to
petitioner her properties after she has settled her obligations to the respondent. The
appellate court denied petitioners Motion for Reconsideration in a Resolution25
dated 19 April 2006.

Hence, this instant Petition for Review on Certiorari26 filed by the petitioner
assailing the Court of Appeals Decision. For the resolution of this Court are the
following issues:

I. Whether or not the respondent is liable to return the security deposits to the
petitions.

II. Whether or not the respondent is liable to reimburse the petitioner for the sum of
the improvements she introduced in the leased premises.

III. Whether or not the respondent is liable for attorneys fees.27

The appellate court, in finding that the respondent is authorized to forfeit the
security deposits, relied on the provisions of Sections 5 and 18 of the Contract of
Lease, to wit:

Section 5. DEPOSIT. The LESSEE shall make a cash deposit in the sum of SIXTY
THOUSAND PESOS (P60,000.00) equivalent to three (3) months rent as security for
the full and faithful performance to each and every term, provision, covenant and
condition of this lease and not as a pre-payment of rent. If at any time during the
term of this lease the rent is increased[,] the LESSEE on demand shall make an
additional deposit equal to the increase in rent. The LESSOR shall not be required to
keep the deposit separate from its general funds and the deposit shall not be entitled
to interest. The deposit shall remain intact during the entire term and shall not be
applied as payment for any monetary obligations of the LESSEE under this contract.
If the LESSEE shall faithfully perform every provision of this lease[,] the deposit shall
be refunded to the LESSEE upon the expiration of this Lease and upon satisfaction of
all monetary obligation to the LESSOR.

xxxx

Section 18. TERMINATION. Any breach, non-performance or non-observance of the

terms and conditions herein provided shall constitute default which shall be
sufficient ground to terminate this lease, its extension or renewal. In which event,
the LESSOR shall demand that LESSEE immediately vacate the premises, and
LESSOR shall forfeit in its favor the deposit tendered without prejudice to any such
other appropriate action as may be legally authorized.28
Since it was already established by the trial court that the petitioner was guilty of
committing several breaches of contract, the Court of Appeals decreed that she
cannot therefore rightfully demand the return of the security deposits for the same
are deemed forfeited by reason of evident contractual violations.

It is undisputed that the above-quoted provision found in all Contracts of Lease is in

the nature of a penal clause to ensure petitioners faithful compliance with the terms
and conditions of the said contracts.

A penal clause is an accessory undertaking to assume greater liability in case of

breach. It is attached to an obligation in order to insure performance and has a
double function: (1) to provide for liquidated damages, and (2) to strengthen the
coercive force of the obligation by the threat of greater responsibility in the event of
breach.29 The obligor would then be bound to pay the stipulated indemnity without
the necessity of proof of the existence and the measure of damages caused by the
breach.30 Article 1226 of the Civil Code states:

Art. 1226. In obligations with a penal clause, the penalty shall substitute the
indemnity for damages and the payment of interests in case of noncompliance, if
there is no stipulation to the contrary. Nevertheless, damages shall be paid if the
obligor refuses to pay the penalty or is guilty of fraud in the fulfillment of the
obligation.

The penalty may be enforced only when it is demandable in accordance with the
provisions of this Code.

As a general rule, courts are not at liberty to ignore the freedoms of the parties to
agree on such terms and conditions as they see fit as long as they are not contrary to
law, morals, good customs, public order or public policy. Nevertheless, courts may
equitably reduce a stipulated penalty in the contracts in two instances: (1) if the
principal obligation has been partly or irregularly complied with; and (2) even if
there has been no compliance if the penalty is iniquitous or unconscionable in
accordance with Article 1229 of the Civil Code which clearly provides:

Art. 1229. The judge shall equitably reduce the penalty when the principal
obligation has been partly or irregularly complied with by the debtor. Even if there
has been no performance, the penalty may also be reduced by the courts if it is
iniquitous or unconscionable.31

In ascertaining whether the penalty is unconscionable or not, this court set out the
following standard in Ligutan v. Court of Appeals,32 to wit:

The question of whether a penalty is reasonable or iniquitous can be partly

subjective and partly objective. Its resolution would depend on such factor as, but
not necessarily confined to, the type, extent and purpose of the penalty, the nature of
the obligation, the mode of breach and its consequences, the supervening realities,
the standing and relationship of the parties, and the like, the application of which, by
and large, is addressed to the sound discretion of the court. xxx.

In the instant case, the forfeiture of the entire amount of the security deposits in the
sum of P192,000.00 was excessive and unconscionable considering that the gravity
of the breaches committed by the petitioner is not of such degree that the
respondent was unduly prejudiced thereby. It is but equitable therefore to reduce
the penalty of the petitioner to 50% of the total amount of security deposits.

It is in the exercise of its sound discretion that this court tempered the penalty for
the breaches committed by the petitioner to 50% of the amount of the security
deposits. The forfeiture of the entire sum of P192,000.00 is clearly a usurious and
iniquitous penalty for the transgressions committed by the petitioner. The
respondent is therefore under the obligation to return the 50% of P192,000.00 to
the petitioner.

Turning now to the liability of the respondent to reimburse the petitioner for one-
half of the expenses incurred for the improvements on the leased store space at SM
Megamall, the following provision in the Contracts of Lease will enlighten us in
resolving this issue:

Section 11. ALTERATIONS, ADDITIONS, IMPROVEMENTS, ETC. The LESSEE shall not
make any alterations, additions, or improvements without the prior written consent
of LESSOR; and all alterations, additions or improvements made on the leased
premises, except movable or fixtures put in at LESSEEs expense and which are
removable, without defacing the buildings or damaging its floorings, shall become
LESSORs property without compensation/reimbursement but the LESSOR reserves
the right to require the removal of the said alterations, additions or improvements
upon expiration of the lease.

The foregoing provision in the Contract of Lease mandates that before the petitioner
can introduce any improvement on the leased premises, she should first obtain
respondents consent. In the case at bar, it was not shown that petitioner previously
secured the consent of the respondent before she made the improvements on the
leased space in SM Megamall. It was not even alleged by the petitioner that she
obtained such consent or she at least attempted to secure the same. On the other
hand, the petitioner asserted that respondent allegedly misrepresented to her that it
would renew the terms of the contracts from time to time after their expirations,
and that the petitioner was so induced thereby that she expended the sum of
P200,000.00 for the improvement of the store space leased.

This argument was squarely addressed by this court in Fernandez v. Court of

Appeals,33 thus:
The Court ruled that the stipulation of the parties in their lease contract "to be
renewable" at the option of both parties stresses that the faculty to renew was given
not to the lessee alone nor to the lessor by himself but to the two simultaneously;
hence, both must agree to renew if a new contract is to come about.

Petitioners contention that respondents had verbally agreed to extend the lease
indefinitely is inadmissible to qualify the terms of the written contract under the
parole evidence rule, and unenforceable under the statute of frauds.34

Moreover, it is consonant with human experience that lessees, before occupying the
leased premises, especially store spaces located inside malls and big commercial
establishments, would renovate the place and introduce improvements thereon
according to the needs and nature of their business and in harmony with their
trademark designs as part of their marketing ploy to attract customers. Certainly, no
inducement or misrepresentation from the lessor is necessary for this purpose, for it
is not only a matter of necessity that a lessee should re-design its place of business
but a business strategy as well.

In ruling that the respondent is liable to reimburse petitioner one half of the amount
of improvements made on the leased store space should it choose to appropriate the
same, the RTC relied on the provision of 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.

While it is true that under the above-quoted provision of the Civil Code, the lessor is
under the obligation to pay the lessee one-half of the value of the improvements
made should the lessor choose to appropriate the improvements, Article 1678
however should be read together with Article 448 and Article 546 of the same
statute, which provide:

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

xxxx

Art. 546. Necessary expenses shall be refunded to every possessor; but only
possessor in good faith may retain the thing until he has been reimbursed therefor.

Useful expenses shall be refunded only to the possessor in good faith with the same
right of retention, the person who has defeated him in the possession having the
option of refunding the amount of the expenses or of paying the increase in value
which the thing may have acquired by reason thereof.

Thus, to be entitled to reimbursement for improvements introduced on the property,

the petitioner must be considered a builder in good faith. Further, Articles 448 and
546 of the Civil Code, which allow full reimbursement of useful improvements and
retention of the premises until reimbursement is made, apply only to a possessor in
good faith, i.e., one who builds on land with the belief that he is the owner thereof. A
builder in good faith is one who is unaware of any flaw in his title to the land at the
time he builds on it.35 In this case, the petitioner cannot claim that she was not
aware of any flaw in her title or was under the belief that she is the owner of the
subject premises for it is a settled fact that she is merely a lessee thereof.1a wphi1

In Geminiano v. Court of Appeals,36 this Court was emphatic in declaring that

lessees are not possessors or builders in good faith, thus:

Being mere lessees, the private respondents knew that their occupation of the
premises would continue only for the life of the lease. Plainly, they cannot be
considered as possessors nor builders in good faith.

In a plethora of cases, this Court has held that Article 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
"improve" his landlord out of his property.

Since petitioners interest in the store space is merely that of the lessee under the
lease contract, she cannot therefore be considered a builder in good faith.
Consequently, respondent may appropriate the improvements introduced on the
leased premises without any obligation to reimburse the petitioner for the sum
expended.
Anent the claim for attorneys fees, we resolve to likewise deny the award of the
same. Attorneys fees may be awarded when a party is compelled to litigate or to
incur expenses to protect its interest by reason of unjustified act of the other.37

In the instant petition, it was not shown that the respondent unjustifiably refused to
grant the demands of the petitioner so as to compel the latter to initiate legal action
to enforce her right. As we have found herein, there is basis for respondents refusal
to return to petitioner the security deposits and to reimburse the costs of the
improvements in the leased premises. The award of attorneys fees is therefore not
proper in the instant case.

WHEREFORE, premises considered, the instant Petition is PARTLY GRANTED. The

Court of Appeals Decision dated 10 October 2003 in CA-G.R. CV No. 73853 is hereby
AFFIRMED with the MODIFICATION that the respondent may forfeit only 50% of the
total amount of the security deposits in the sum of P192,000.00, and must return the
remaining 50% to the petitioner. No costs.

SO ORDERED.

G.R. No. 174971 October 15, 2008

LAND BANK OF THE PHILIPPINES, petitioners,

vs.
AMS FARMING CORPORATION, respondents.

Before this Court is a Petition for Review on Certiorari1 under Rule 45 of the Rules
of Court filed by petitioner Land Bank of the Philippines (LBP) seeking the reversal
and setting aside of (1) the Decision2 dated 28 March 2006 of the Court of Appeals
which dismissed the Petition for Review of LBP in CA-G.R. SP No. 77520; and (2) the
Resolution3 dated 26 September 2006 of the appellate court which denied the
Motion for Reconsideration of LBP. In its assailed Decision, the Court of Appeals
effectively affirmed the Decision4 dated 11 March 2003 of the Regional Trial Court
(RTC), Tagum City, Davao del Norte, Branch 2, acting as a Special Agrarian Court in
Special Agrarian Case No. 61-2000, ordering the Department of Agrarian Reform
(DAR), through the LBP, to pay respondent AMS Farming Corporation (AMS) just
compensation for the standing crops and various improvements it introduced on the
land owned by Totco Credit Corporation (TOTCO), all fees and expenses of the Court-
appointed Commissioners, and attorneys fees.

The Antecedent Facts

There is no controversy as to the antecedent facts that gave rise to the Petition at
bar.

The Lease Agreements

The National Abaca and Other Fibers Corporation (NAFCO) was the owner of a piece
of agricultural land with an area of 73.7 hectares, more or less, located in Barrio
Sampao, Municipality of Kapalong, Province of Davao. On 21 September 1970,
NAFCO leased a 51-hectare portion of said land to AMS for a period of 15 years.5
When Apeco Motors Corporation (APECO) acquired ownership of the land, the said
lease agreement was registered and annotated on its certificate of title.

Upon the expiration of the first lease agreement, APECO and AMS executed on 21
February 1986 a new Lease Agreement6 over 51.15 hectares of the same
agricultural land, for a period of 10 years, beginning on 1 November 1985 and
ending on 31 October 1995. Again, the Lease Agreement was registered and
annotated on the certificate of title of APECO.

Sometime during the effectivity of the lease, ownership of the afore-mentioned

agricultural land was transferred to TOTCO.

Also, on 15 June 1988, just a little over two years from the execution of the Lease
Agreement between APECO and AMS, Republic Act No. 6657, otherwise known as
the Comprehensive Agrarian Reform Law (CARL), took effect. The CARL espoused
the policy of the State to pursue a Comprehensive Agrarian Reform Program (CARP),
whereby the State undertook the just distribution of all agricultural lands, subject to
the priorities and retention limits set forth in the CARL and to the payment of just
compensation.7

On 8 August 1991, four years before the expiration of the existing Lease Agreement,
TOTCO and AMS executed a Memorandum of Agreement (MOA) wherein they agreed
to increase the area leased to 61.65 hectares, and renew the lease for another 25
years, commencing on 1 November 1991 and expiring on 31 October 2016. Unlike
the previous lease agreements, however, the MOA was never registered.

As the lessee of a significant portion of the agricultural land, AMS developed a

banana plantation thereon, cultivating and planting on the leased property
Cavendish banana for export, and introducing the necessary improvements and
infrastructures.

DAR Case No. 52-99

On 9 September 1996, TOTCO submitted to the DAR a voluntary offer to sell (VOS) of
its agricultural land, including the area leased to AMS. Adopting the valuation made
by the LBP, the DAR issued a notice of valuation and acquisition offering the amount
of P1,806,754.83 as just compensation for the property. When TOTCO rejected the
proffered amount, the matter was endorsed to the DAR Adjudication Board
(DARAB), where it was docketed as DARAB Case No. LV-XI-1713-DN-97. The DARAB,
in a Decision dated 3 November 1998, upheld the valuation of just compensation
made by the LBP.

Still unsatisfied with the amount of just compensation being offered for its
agricultural land, TOTCO filed on 23 April 1999 with the RTC, acting as a Special
Agrarian Court, a Complaint against the DAR and LBP for the determination of just
compensation. The Complaint was docketed as DAR Case No. 52-99.

The DAR failed to file its Answer and upon motion of TOTCO, it was declared by the
RTC to be in default on 20 July 1999.

The RTC appointed a panel of Commissioners to conduct a fair valuation of the

property, and submit its findings and Report, including its Recommendation on the
just compensation. The panel of Commissioners submitted its Appraisal Report for
approval of the RTC on 21 January 2000. In its Report, the panel found acceptable
the valuation presented by TOTCO of P328,026.85 per hectare of the agricultural
land planted with Cavendish banana. Pertinent portions of the Report are
reproduced below:

This Commission is aware of an existing Order promulgated by the Honorable Judge

Bernardo V. Saludares of the Special Agrarian Court, Tagum City, in a certain DAR
Case, a property engaged in banana production for export also located in Kapalong
wherein the Provincial Agrarian Reform Adjudicator appraised said land at
P205,774.80 per hectare for the entire 20.1362 hectares as the new fair and just
reasonable compensation for the subject landholdings or for a total valuation of
P4,143,325 (Provincial Agrarian Reform Adjudicator Atty. Danica L. Aminin on
March 12, 1998, in DARAB Case No. LV-XI-0690-96 regarding a 20.1362 hectare
banana land of landowner, BALMAR FARMS, INC.) Exh. "E", page 27, par. 2
(marginally-lined of a decision of Hon. Bernardo V. Saludares.)

In that same decision the same Honorable Judge allowed P140,000 per hectare as
appraised value for developments/improvements that is, Road Networks, Bridges,
Drainage Canals, Cableways and Aerial Proppings (Exh. "F", page 31, decision
promulgated by Hon. Bernardo V. Saludares.)

So we have the following as the total value per hectare for a land with the same
industry and undertaking, within the same Municipality:

Land with standing banana plants

P205,774.90
For developments and improvements

140,000.00

T O T A L P345,774.90

vvvvvvvvvv

This can be favorably compared to the P328,026.85 claimed by [AMS].

The actual area acquired by the DAR and valued

LBP is70.8118 has.

Area planted to native

variety and others. 8.0000 has.

Thus: 62.8118 has. x P328,026.85 = P20,603,903

8.0000 has. x 100,000.00 = _800,000.00

70.8118 has. for a total of = P21,403,9038

On 8 March 2000, the RTC rendered its Decision9 in DAR Case No. 52-99, adopting
the amount of just compensation recommended by the panel of Commissioners. The
dispositive portion of the said Decision reads:

WHEREFORE, consistent with all the foregoing premises, judgment is hereby

rendered providing for the fair, just and reasonable compensation of plaintiff-
[TOTCOs] titled banana lands and improvements as follows:

First: -- For defendants-DAR as Expropriator and Land Bank of the Philippines,

jointly and severally, to pay the plaintiff-TOTCO CREDIT CORPORATION (FORMERLY
APECO MOTORS CORP.) the determined, as herein the fixed valuation as the fair, just
and reasonable compensation of its titled banana lands at Sampao, Kapalong, Davao
del Norte, including its improvements thereon, the total amount of P21,403,903.00
or Twenty-one Million Four Hundred Three Thousand Nine Hundred Three Pesos,
Philippine Currency, with interest which shall be based on the rate of interest of the
90-Day Treasury Bills as provided for under Sec. 18, par. 4(a) of RA 6657, and as
expressly prayed for in [TOTCOs] complaint;

Second: -- For defendants-DAR as Expropriator and Land Bank of the Philippines,

jointly and severally, to pay all fees due to the Commissioners to be taxed as part of
the costs pursuant to Section 12, Rule 67, of the 1997 RCP, as amended, which shall
be claimed in a Bill of Costs to be submitted to the Court for its evaluation and
proper action thereto;

Third: -- For the defendants-DAR, as Expropriator, and Land Bank of the Philippines,
jointly and severally, to pay plaintiff-[TOTCO] the reasonable attorneys fees, also to
be taxed as part of the costs which should be claimed in a Bill of Costs to be
submitted to the Court for its evaluation and proper action; and

Fourth: -- For the Defendant-DAR, as Expropriator, and Land Bank of the Philippines,
jointly and severally, to pay the entire costs of the suit.10 (Emphasis supplied.)

Since the valuation of the just compensation awarded by the RTC to TOTCO in its
Decision dated 8 March 2000 included the standing crops and improvements
introduced by AMS on the leased property, AMS President Alberto M. Soriano
(Soriano) filed an Affidavit in (sic) Third Party Claim dated 19 May 2000 before the
RTC in DAR Case No. 52-99. In his Affidavit, Soriano asserted that AMS was the
owner of the standing crops and all the improvements inherent in the operation of a
banana plantation on the land owned by TOTCO; that the RTC Decision of 8 March
2000 in DAR Case No. 52-99 was null and void in so far as the standing crops and
improvements were concerned since these were owned by AMS, although the land
was owned and titled in the name of TOTCO; that the said Decision did not bind AMS
for it was never a party in the case; that AMS was denied due process; and that the
total valuation of the standing crops and improvements amounted to
P54,453,576.54. In the end, Soriano requested the Deputy Sheriff and LBP not to
deposit or pay in the name of TOTCO the portion of the just compensation awarded
in DAR Case No. 52-99 which corresponded to the value of the standing crops and
improvements.

On 6 June 2000, the RTC issued in DAR Case No. 52-99 an Order11 granting the
Motion filed by TOTCO for the immediate execution of its judgment, even before the
expiration of the period to appeal, considering that the property of TOTCO was
already acquired, distributed, and awarded by the DAR; subject, however, to
Sorianos Affidavit of Third Party Claim.

Since the period to appeal the 8 March 2000 Decision of the RTC in DAR Case No. 52-
99 lapsed without any appeal being taken therefrom, the said Decision eventually
became final.

On 4 September 2000, the counsel for AMS wrote LBP a letter12 calling its attention
to the Third Party Claim of AMS on the award of just compensation to TOTCO in DAR
Case No. 52-99. AMS requested that TOTCO be paid just compensation for the land
only, and that the balance of the award be remitted by check to AMS. LBP, however,
did not act on the request of AMS.
TOTCO subsequently filed a Motion to expunge Sorianos Affidavit from the records
of DAR Case No. 52-99, but the RTC, after hearing, denied the said Motion in an
Order13 dated 26 September 2000, ruling therein that:

This Court painstakingly considers the arguments adduced in the Motion to expunge
the Third Party Claim and the opposition thereto. There is no cogent reason to
deprive the Third Party Claimant of his right to file an Affidavit of Third Party Claim.
The Third Party Claimant should be given an opportunity to prove his claim in a trial
where all issues are properly ventilated.

WHEREFORE, in view thereof, the motion to expunge the Affidavit in (sic) Third
Party Claim of Alberto M. Soriano is hereby denied.14

Special Agrarian Case No. 61-2000

On 23 April 1999, TOTCO filed with the RTC its Complaint for just compensation,
docketed as DAR Case No. 52-99.

Learning that the agricultural land it was leasing was already the subject of a
pending VOS made by TOTCO, but apparently still unaware of the pendency of DAR
Case No. 52-99, AMS wrote LBP a letter dated 22 November 1999 submitting its own
VOS of the banana crops planted on the 61.65 hectares of land owned by TOTCO.

On 8 March 2000, the RTC promulgated its Decision in DAR Case No. 52-99 awarding
just compensation to TOTCO for its land, as well as the standing crops and
improvements found thereon. AMS did not receive a copy of the said Decision since
it was not a party in DAR Case No. 52-99. AMS was merely furnished a copy thereof
by the LBP Land Valuation Office in Davao City, when one of its employees followed
up on the status of its VOS on 3 May 2000.

This prompted AMS President Soriano to file with the RTC, in DAR Case No. 52-99,
an Affidavit in (sic) Third Party Claim dated 19 May 2000.

With the issuance of a writ of execution in DAR Case No. 52-99, AMS filed with the
RTC, acting as a Special Agrarian Court, its own Petition15 for determination of just
compensation with application for a writ of preliminary injunction and temporary
restraining order, naming the DAR and/or LBP and TOTCO as respondents. The
Petition was docketed as Special Agrarian Case No. 61-2000. In its Petition before
the RTC, AMS essentially made the same allegations in Sorianos "Affidavit in (sic)
Third Party Claim" filed in DAR Case No. 52-99; but added the contention that the
implementation of the RTC Decision dated 8 March 2000 in said case would cause
great and irreparable injury, would work injustice to AMS, and complicate,
aggravate, and multiply the issues of the present case. AMS then sought from the
RTC the following:
PRAYER

WHEREFORE, it is most respectfully prayed of this Honorable Court that an order BE

ISSUED for fixing the true and real value of [AMSs] property consisting of standing
crops and improvements based on the reasons aforecited, and to appoint
Commissioners forthwith to accomplish said purpose; and to order defendants Land
Bank of the Philippines and Department of Agrarian Reform jointly and severally to
pay [AMS] aside from just compensation as heretofore claimed, attorney[]s fees
equivalent to 25% of the total claims and such other fees as may be required by law.

Pending final determination of this case, payments of court fees, docket fees and
other fees relative to the filing of the instant petition be given first and prior lien on
the amounts to be awarded as just compensation in this case; thus, [AMS] further
pray[s] that the instant petition be received and admitted by the Court.

Immediately enjoining the defendants Land Bank of the Philippines from MAKING
DEPOSIT/PAYMENT in favor of Totco Credit Corporation the amount corresponding
to the valuation of standing crops and improvements as described in DAR Case No.
52-99; and for this purpose, petition prays for a temporary restraining order to
restrain defendant Land Bank from making any deposit/payment in favor of Totco
Credit Corporation; and for this purpose [AMS] offers a bond subject to the approval
of this Honorable Court the sum of P309,224.17 representing the value of the
standing crops and improvements;

After trial, making the injunction above-mentioned permanent and ordering

defendants Land Bank of the Philippines and the Department of Agrarian Reform
NOT TO DEPOSIT/PAY Totco Credit Corporation the amount intended for the
standing crops and improvements to be determined during trial as above-mentioned
and with such further orders that are just and equitable in the premises.16

In its Answer,17 TOTCO denied that AMS was still the owner of the standing crops
and improvements on its land. The 21 February 1986 Lease Agreement and the 8
August 1991 MOA were invalid for failure of AMS to comply with Section 6 of the
CARL requiring all contracts of lease executed prior to the CARL be registered with
the Register of Deeds within three months from the date of effectivity of the said law
on 15 June 1988. Even assuming that the said contracts were valid, they were
terminated by operation of law on 15 June 1988 when the property of TOTCO was
placed under the coverage of the CARL. Still assuming that the contracts were valid,
according to the very terms thereof, AMS, as the lessee, only had "the right but not
the obligation" to remove the buildings, improvements, facilities, equipment, and
machineries from the leased property upon the termination of the lease. Given that
AMS did not exercise such right to remove and left the standing crops and
improvements on the property of TOTCO, these were now owned by TOTCO. Hence,
TOTCO prayed that the Petition of AMS be dismissed.
LBP also filed its Answer and an Amended Answer with Affirmative Defenses and
Motion to Dismiss. LBP pointed out that the standing crops and improvements
subject of Special Agrarian Case No. 61-2000 were the same as those in DAR Case
No. 52-99. The just compensation for the standing crops and improvements was
previously determined in the Decision dated 8 March 2000 of the RTC in DAR Case
No. 52-99, and the said decision was already executed pursuant to the writ of
execution issued by the same court. AMS should have asserted and proven its Third
Party Claim in DAR Case No. 52-99. It could not bring another case for just
compensation without first nullifying the proceedings in DAR Case No. 52-99 for the
second case shall be barred by prior judgment. AMS also could not claim that it was
totally unaware that the agricultural land it was leasing from TOTCO was being
placed under the CARP, because being in possession thereof, it presumably knew of
the activities undertaken by DAR officials on the said property pursuant to the CARP,
such as identification of the land and its beneficiaries. Moreover, the panel of
Commissioners appointed by the RTC in DAR Case No. 52-99 also conducted several
ocular inspections of the property. Even assuming that AMS had no knowledge of the
proceedings in DAR Case No. 52-99, the said case was a real action and the decision
rendered therein bound the property and the whole world. Finally, since the MOA
dated 8 August 1991 renewing the lease was not registered, it was null and void
under Section 6 of the CARL. Same as TOTCO, LBP prayed for the dismissal of the
Petition of AMS in Special Agrarian Case No. 61-2000.

The DAR filed a Manifestation adopting the Amended Answer with Affirmative
Defenses and Motion to Dismiss of LBP.

In its Reply, AMS argued that there was nothing in Section 6 of the CARL which
rendered null and void a lease which had been in existence prior to the effectivity of
said law. AMS began leasing the agricultural land as early as 21 September 1970 and
had only been renewing its lease. TOTCO was regularly billing AMS for the rentals on
the leased property even after the effectivity of the CARL, and AMS religiously paid
the same until 1998 or 1999. TOTCO knew who was the real owner of the standing
crops and improvements on its land, but it only wanted to unjustly enrich itself by
accepting the compensation for something it did not work for, produce, or introduce
on its property.

On 10 January 2001, the RTC appointed a panel of Commissioners to determine the

value of just compensation for the standing crops and improvements claimed by
AMS. Incidentally, the composition of the panel was exactly the same as that in DAR
Case No. 52-99. The panel of Commissioners submitted its Appraisal Report to the
RTC on 21 August 2001. In its Report, the panel determined the total actual market
value of all existing improvements introduced by AMS on the land owned by TOTCO
to be P48,952,473.28, computed as follows:
This Commission hereby arrived at a total of P48,952,473.28 for all the existing
improvements introduced by Petitioner under DAR Case No. 61-2000, illustrated
below:

1. Standing Crops. P41,844,919.44

(P862,504.42 X 48.5156 hectares)

11. Machineries.. P7,107,553.84

a. Cableways, roads and

Canals. P4,342,164.64

(P89,500.38 X 48.5156 has.)

b. Aerial Propping.. P2,765,389.20

(P57,000.00 X 48.5156 has.)18

After the conduct of hearings and the formal offer of evidence by the parties, Special
Agrarian Case No. 61-2000 was submitted for decision. The RTC promulgated its
Decision on 11 March 2003, ruling in favor of AMS. In essence, the RTC found that
the standing crops and improvements were indeed owned by AMS. There was no
basis for LBP to pay TOTCO just compensation for the said standing crops and
improvements, and the recovery of the value thereof already paid to TOTCO shall be
the responsibility of the DAR and LBP. AMS had the right to just compensation,
equivalent to the market value of its standing crops and improvements, as
determined by the panel of Commissioners. The RTC, thus, adjudged:

WHEREFORE, premises considered, judgment is hereby rendered in favor of the

petitioner AMS Farming Corporation, as follows:

First. The fair, just and reasonable compensation of various improvements

consisting of standing banana crops, cableways, road networks and canals and aerial
proppings, introduced and owned by petitioner AMS Farming Corporation, on the
48.5156 hectares of land owned by Respondent-Totco Credit Corporation is hereby
determined and fixed at FORTY EIGHT MILLION NINE HUNDRED FIFTY TWO
THOUSAND FOUR HUNDRED SEVENTY THREE & 28/100 (P48,952,473.28) PESOS,
Philippine Currency, and in order to make such fixed and computed amount of just
compensation truly just as the same should have been paid to [AMS] at the time of
the acquisition of the land, on which they exist, by the Respondents-DAR and LBP on
November 24, 1997 which is the date the title of the land had been transferred in the
name of the Republic of the Philippines, a properly-computed adjustment to make
such valuation of just compensation at par with the current true value of the
Philippine Peso vis-a -vis the U.S. Dollar be added to said determined and fixed
amount supra; plus legal interest thereon pegged at 12% per annum computed from
the date of acquisition of the land as hereinabove indicated until full payment to
[AMS] is made or deposited in the Court, the totality of which the Respondent-
Department of Agrarian Reform, thru the Respondent-Land Bank of the Philippines,
are hereby ordered to pay, jointly and severally to [AMS] hereof;

Second. Hereby ordering the Respondent-Department of Agrarian Reform, through

the Respondent-Land bank (sic) of the Philippines, to pay jointly and severally, all
fees and expenses payable to the Court-appointed Commissioners which shall be
taxed as part of the costs as expressly mandated under Section 12, of Rule 67, of the
1997 Rules of Civil Procedure, as amended, to be claimed by [AMS] in a Bill of Costs
to be submitted for consideration and action by the Court;

Third. Hereby ordering the Respondent-Department of Agrarian Reform, through

the Respondent-Land Bank of the Philippines, to pay jointly and severally, to [AMS]
the attorneys fees equivalent to Ten (10%) percent of the total amount herein fixed
as just compensation and interests, including the re-computed readjustment amount
added thereto, likewise to be claimed in a Bill of Costs which [AMS] shall submit for
the proper consideration and action by this Court;

Fourth. Except for the above, no further pronouncement as to costs.19

The RTC denied the Motion for Reconsideration of LBP in an Order dated 25 April
2003.

LBP subsequently appealed the judgment of the RTC in Special Agrarian Case No. 61-
2000 to the Court of Appeals, where it was docketed as CA-G.R. SP No. 77520. It
turned out that the DAR also appealed the same judgment to the Court of Appeals,
which was assigned the docket number CA-G.R. SP No. 76724.

In the meantime, during the pendency of CA-G.R. SP No. 77520 before the Court of
Appeals, AMS filed with the RTC, in Special Agrarian Case No. 61-2000, a Motion for
Execution Pending Appeal and its Bill of Costs. In its Order dated 26 June 2003, the
RTC granted execution of its Decision dated 11 March 2003 even pending appeal
thereof. The writ of execution was issued in Special Agrarian Case No. 61-2000 on
18 July 2003 and served on LBP on 24 July 2003. AMS then moved for the issuance
of a writ of levy and attachment, which was again granted by the RTC in an Order
dated 11 August 2003. Several real properties of LBP were levied upon and sold at a
public auction held on 29 September 2003 in favor of AMS, for its bid of
P100,922,861.43.

After the parties submitted the necessary pleadings, the Court of Appeals rendered
its Decision in CA-G.R. SP No. 77520 on 28 March 2006, dismissing the appeal of LBP.
The Court of Appeals upheld the validity of the MOA dated 8 August 1991 and by
virtue thereof, declared AMS as the owner of the standing crops and improvements
it introduced on the leased property. The MOA was not rendered inoperative by the
last paragraph of Section 6 of the CARL. Section 6 speaks of retention limits, and the
last paragraph thereof cannot be construed separately from the preceding
paragraphs. The lease or transfer of possession of private agricultural lands should
be deemed null and void only if they violate the provisions of the CARL on retention
limits. The last paragraph of Section 6 itself recognizes the validity of a lease
agreement already in existence prior to the CARL, provided that it had been
registered within three months from the effectivity of the said law. Section 72(a) of
the CARL likewise acknowledges the validity and continuity of a lease agreement
after the effectivity of the said law, and even after the agricultural land had already
been distributed to qualified beneficiaries.

Considering that the proceedings in DAR Case No. 52-99 were more quasi in rem
than in rem, and AMS was excluded therefrom, the Court of Appeals ruled that the
judgment of the RTC in said case should not bind AMS. Also taking into account that
the same judgment already attained finality, the appellate court pronounced that it
would only be a formality for AMS to still pursue its VOS before the DAR.

The Court of Appeals further found that the appeal of LBP was dismissible on
technical grounds. According to the appellate court, LBP violated the rule on non-
forum shopping for failing to inform it of the pendency of CA-G.R. SP No. 76724. In
addition, LBP was not the real party-in-interest, being only the depositary of the
Agrarian Reform Fund and the financial intermediary for purposes of the CARL. For
the same reason, LBP could not institute CA-G.R. SP No. 77520 without the
concurrence of the Republic of the Philippines, through the Office of the Solicitor
General (OSG). The Agrarian Reform Fund belonged to the Republic and it is the one
which stood to be injured by execution against the said fund.

The Court of Appeals finally decreed:

FOR THESE REASONS, the petition is DISMISSED for lack of merit.

Costs against [LBP].20

Acting on the Motion for Reconsideration of the LBP, the Court of Appeals issued a
Resolution dated 26 September 2006. In said Resolution, the appellate court did not
give much credence to the argument of LBP that AMS used the wrong mode in
seeking payment for its standing crops and improvements on the leased property. It
took note that LBP did not bother to appeal the RTC Decision dated 8 March 2000 in
DAR Case No. 52-99, awarding just compensation to TOTCO for the land, as well as
the standing crops and improvements thereon. The bad faith of LBP was displayed
when it resisted and totally ignored the valid claim of AMS over the standing crops
and improvements. It took LBP to task for proceeding to fully pay TOTCO the award
of just compensation in DAR Case No. 52-99 despite the Third Party Claim of AMS.
As a result, the Court of Appeals refused to reconsider its earlier Decision.

LBP is presently before this Court via this Petition for Review on Certiorari, raising
the following issues:

WHETHER OR NOT THE APPELLATE COURT GRAVELY ERRED IN SUSTAINING THE

[RTCS] DECISION AWARDING JUST COMPENSATION IN FAVOR OF AMS FARMS
([SPECIAL AGRARIAN] CASE NO. 61-2000) FOR THE IMPROVEMENTS INTRODUCED
ON THE LANDHOLDINGS AFTER IT EARLIER AWARDED JUST COMPENSATION TO
TOTCO (DAR CASE NO. 52-99) FOR THE SAME IMPROVEMENTS.

WHETHER OR NOT THE APPELLATE COURT GRAVELY ERRED IN RULING THAT

[AMSS] INTEREST OVER THE IMPROVEMENTS (CAVENDISH BANANA)
INTRODUCED ON THE LANDHOLDING OF TOTCO CANNOT BE PREJUDICED BY THE
DECISION RENDERED BY THE [RTC] IN THE CASE ENTITLED TOTCO VS. DAR/LBP,
DAR CASE NO. 52-99 FOR JUST COMPENSATION.

WHETHER OR NOT THE APPELLATE COURT GRAVELY ERRED IN THE

INTERPRETATION AND APPLICATION OF SEC. 6 IN RELATION TO SEC. 73, RA 6657
BY SUSTAINING THE VALIDITY OF THE MEMORANDUM OF AGREEMENT
EXECUTED ON 8 AUGUST 1991 AFTER THE EFFECTIVITY OF THE ACT.

WHETHER OR NOT THE APPELLATE COURT GRAVELY ERRED WHEN IT RULED

THAT THE VOLUNTARY OFFER TO SELL (VOS) IS NOT REQUIRED SINCE IT WOULD
BE AN EXERCISE IN FUTILITY.

WHETHER OR NOT THE APPELLATE COURT GRAVELY ERRED (A) IN DECLARING

THAT LBP IS NOT THE REAL PARTY-IN-INTEREST AND, (B) IT VIOLATED THE RULE
ON FORUM SHIPPING (sic) BECAUSE OF THE PENDENCY OF THE CASE ENTITLED
DAR VS. AMS FARMING, (sic) CORPORATION, CA-G.R. SP NO. 76724, COURT OF
APPEALS.

F
WHETHER OR NOT THE APPEALLATE COURT GRAVELY ERRED IN NOT RESOLVING
THE ISSUE ON THE [RTC] GRANTING THE FOLLOWING AWARDS, TO WIT:

1. PESO-DOLLAR RATE ADJUSTMENT;

2. INTEREST RATE OF TWELVE (12%) PER ANNUM RECKONED FROM NOVEMBER

24, 1997 (DATE OF ISSUANCE OF TITLE IN THE NAME OF THE REPUBLIC
CANCELING TITLE OF TOTCO CREDIT CORP.);

3. ATTORNEYS FEE EQUIVALENT TO 10% OF THE JUDGMENT, INTEREST PLUS

PESO-DOLLAR RATE READJUSTMENT.

II

The Ruling of this Court

The Court shall first address the procedural and/or technical issues before
proceeding to the substantive issues raised by LBP.

A. Procedural/technical issues

The LBP is a real party-in-interest which could file its own appeal, represented by its
Legal Department as the collaborating counsel of the Government Corporate
Counsel.

The Court of Appeals was indeed in error for denying LBP its right to file an appeal
on the ground that it was not a real party-in-interest, since it did not stand to lose or
gain anything from the RTC Decision dated 11 March 2003 in Special Agrarian Case
No. 61-2000. It is worthy to note that in making its pronouncement that LBP was a
mere depositary of the Agrarian Reform Fund and the financial intermediary for
purposes of the CARL, the appellate court was unable to cite any statutory or
jurisprudential basis therefor.

To the contrary, the Court had already recognized in Sharp International Marketing
v. Court of Appeals21 that the LBP plays a significant role under the CARL and in the
implementation of the CARP, thus:

As may be gleaned very clearly from EO 229, the LBP is an essential part of the
government sector with regard to the payment of compensation to the landowner. It
is, after all, the instrumentality that is charged with the disbursement of public
funds for purposes of agrarian reform. It is therefore part, an indispensable cog, in
the governmental machinery that fixes and determines the amount compensable to
the landowner. Were LBP to be excluded from that intricate, if not sensitive, function
of establishing the compensable amount, there would be no amount "to be
established by the government" as required in Sec. 6, EO 229. This is precisely why
the law requires the [Deed of Absolute Sale (DAS)], even if already approved and
signed by the DAR Secretary, to be transmitted still to the LBP for its review,
evaluation and approval.

It needs no exceptional intelligence to understand the implications of this

transmittal. It simply means that if LBP agrees on the amount stated in the DAS, after
its review and evaluation, it becomes its duty to sign the deed. But not until then.
For, it is only in that event that the amount to be compensated shall have been
"established" according to law. Inversely, if the LBP, after review and evaluation,
refuses to sign, it is because as a party to the contract it does not give its consent
thereto. This necessarily implies the exercise of judgment on the part of LBP, which
is not supposed to be a mere rubber stamp in the exercise. Obviously, were it not so,
LBP could not have been made a distinct member of [Presidential Agrarian Reform
Council (PARC)], the super body responsible for the successful implementation of
the CARP. Neither would it have been given the power to review and evaluate the
DAS already signed by the DAR Secretary. If the function of the LBP in this regard is
merely to sign the DAS without the concomitant power of review and evaluation, its
duty to "review/evaluate" mandated in Adm. Order No. 5 would have been a mere
surplus age, meaningless, and a useless ceremony.

xxxx

Even more explicit is R.A. 6657 with respect to the indispensable role of LBP in the
determination of the amount to be compensated to the landowner. Under Sec. 18
thereof, "the LBP shall compensate the landowner in such amount as may be agreed
upon by the landowner and the DAR and LBP, in accordance with the criteria
provided in Secs. 16 and 17, and other pertinent provisions hereof, or as may be
finally determined by the court, as the just compensation for the land."

Without the signature of the LBP President, there was simply no contract between
Sharp and the Government. The Deed of Absolute Sale dated January 9, 1989, was
incomplete and therefore had no binding effect at all. Consequently, Sharp cannot
claim any legal right thereunder that it can validly assert in a petition for mandamus.
(Emphasis supplied.)

The issue of whether LBP can file an appeal on its own, separately and
independently of the DAR, in land valuation and just compensation cases, had been
squarely addressed by the Court in Gabatin v. Land Bank of the Philippines,22 where
it ruled:

It must be observed that once an expropriation proceeding for the acquisition of

private agricultural lands is commenced by the DAR, the indispensable role of Land
Bank begins.
Even in the preliminary stage of the valuation and the determination of just
compensation, the respondents task is inseparably interwoven with that of the DAR,
thus:

. . . under the law, the Land Bank of the Philippines is charged with the initial
responsibility of determining the value of lands placed under agrarian reform and
compensation to be paid for their taking (Section 1, E.O. 405). Through the notice
sent to the landowner pursuant to 16(a) of R.A. No. 6657, the DAR makes an offer.
In case the landowner rejects the offer, a summary administrative proceeding is held
and afterward, the provincial (PARAD), the regional (RARAD) or the central
(DARAB) adjudicator as the case maybe, depending on the value of the land, fixes the
price to be paid for the land. If the landowner does not agree to the price fixed, he
may bring the matter to the RTC acting as Special Agrarian Court.

E.O. No. 405 provides that the DAR is required to make use of the determination of
the land valuation and compensation by the Land Bank as the latter is primarily
responsible for the determination of the land valuation and compensation for all
private lands under Rep. Act No. 6657.

In Sharp International Marketing v. Court of Appeals, this Court even went on to say
that without the Land Bank, there would be no amount to be established by the
government for the payment of just compensation, thus:

xxxx

More telling is the fact that Land Bank can disagree with the decision of the DAR in
the determination of just compensation, and bring the matter to the RTC designated
as a [Special Agrarian Court] for final determination of just compensation.

The foregoing clearly shows that there would never be a judicial determination of
just compensation absent respondent Land Banks participation. Logically, it follows
that respondent is an indispensable party in an action for the determination of just
compensation in cases arising from agrarian reform program.

Assuming arguendo that respondent is not an indispensable party but only a

necessary party as is being imposed upon us by the petitioners, we find the
argument of the petitioners that only indispensable parties can appeal to be
incorrect.

There is nothing in the Rules of Court that prohibits a party in an action before the
lower court to make an appeal merely on the ground that he is not an indispensable
party. The Rules of Court does not distinguish whether the appellant is an
indispensable party or not. To avail of the remedy, the only requirement is that the
person appealing must have a present interest in the subject matter of the litigation
and must be aggrieved or prejudiced by the judgment. A party, in turn, is deemed
aggrieved or prejudiced when his interest, recognized by law in the subject matter of
the lawsuit, is injuriously affected by the judgment, order or decree. The fact that a
person is made a party to a case before the lower court, and eventually be made
liable if the judgment be against him, necessarily entitles him to exercise his right to
appeal. To prohibit such party to appeal is nothing less than an outright violation of
the rules on fair play. (Emphasis supplied.)

It is evident from the afore-quoted jurisprudence that the role of LBP in the CARP is
more than just the ministerial duty of keeping and disbursing the Agrarian Reform
Funds. As the Court had previously declared, the LBP is primarily responsible for the
valuation and determination of compensation for all private lands. It has the
discretion to approve or reject the land valuation and just compensation for a
private agricultural land placed under the CARP. In case the LBP disagrees with the
valuation of land and determination of just compensation by a party, the DAR, or
even the courts, the LBP not only has the right, but the duty, to challenge the same,
by appeal to the Court of Appeals or to this Court, if appropriate. Moreover, the fact
that the LBP was impleaded as a party in Special Agrarian Case No. 61-2000 before
the RTC, and made liable under the Decision dated 11 March 2003 in said case,
necessarily entitled it to exercise its right to appeal therefrom, and to prohibit the
same "is nothing less than an outright violation of the rules on fair play."

The Court likewise cannot sustain the ruling of the Court of Appeals that LBP needed
to secure first the concurrence of the Republic and to be represented only by the
OSG in its appeal.

The Court has already settled in the preceding paragraphs that the LBP could file the
appeal in CA-G.R. SP No. 77520 on its own behalf and in the protection of its own
interest.

Furthermore, LBP is a government-owned and controlled corporation (GOCC).23

Book IV, Title III, Chapter 3, Section 10 of Executive Order No. 292, otherwise known
as the Administrative Code of 1987, provides that the Office of the Government
Corporate Counsel (OGCC) shall act as the principal law office of all GOCCs, their
subsidiaries, other corporate off-springs, and government acquired asset
corporations. Administrative Order No. 130, issued by the Office of the President on
19 May 1994, delineating the functions and responsibilities of the OSG and the
OGCC, clarifies that all legal matters pertaining to GOCCs, their subsidiaries, other
corporate offsprings, and government acquired asset corporations shall be
exclusively referred to and handled by the OGCC, unless their respective charters
expressly name the OSG as their legal counsel. Nonetheless, the GOCC may hire the
services of a private counsel in exceptional cases with the written conformity and
acquiescence of the Government Corporate Counsel, and with the concurrence of the
Commission on Audit (COA).24
The Government Corporate Counsel, in its letter of authority,25 had given its
conformity and acquiescence for the LBP Legal Department to appear as its
collaborating counsel in all LBP cases, including the present case. And there was no
need for the concurrence of the COA since the LBP was being represented by its own
Legal Department and was not incurring additional cost for the said legal services.
The authority of the LBP Legal Department herein to represent the bank in its
appeal before the Court of Appeals and this Court is, thus, indisputable.

The LBP did not commit forum shopping.

It cannot also be said that the LBP violated the proscription on forum shopping for
failing to inform the Court of Appeals in CA-G.R. SP No. 77520 of the pendency of the
appeal of DAR in CA-G.R. SP No. 76724 before the same court.

Forum shopping is manifest whenever a party "repetitively avail[s] of several

judicial remedies in different courts, simultaneously or successively, all substantially
founded on the same transactions and the same essential facts and circumstances,
and all raising substantially the same issues either pending in, or already resolved
adversely by, some other court." It has also been defined as "an act of a party against
whom an adverse judgment has been rendered in one forum of seeking and possibly
getting a favorable opinion in another forum, other than by appeal or the special
civil action of certiorari, or the institution of two or more actions or proceedings
grounded on the same cause on the supposition that one or the other court would
make a favorable disposition." Considered a pernicious evil, it adversely affects the
efficient administration of justice since it clogs the court dockets, unduly burdens
the financial and human resources of the judiciary, and trifles with and mocks
judicial processes.26

There is forum shopping when, in the two or more cases pending, there is identity of
parties, rights or causes of action and relief sought. Forum shopping exists where
the elements of litis pendentia are present or when a final judgment in one case will
amount to res judicata in the other. For litis pendentia to exist, the following
requisites must be present:

1. Identity of parties, or at least such parties as those representing the same

interests in both actions;

2. Identity of rights asserted and reliefs prayed for, the reliefs being founded on the
same facts;

3. Identity with respect to the two preceding particulars in the two cases, such that
any judgment that may be rendered in the pending case, regardless of which party is
successful, would amount to res judicata in the other case.27
While it may be true that CA-G.R. SP No. 77520 and CA-G.R. SP No. 76724 were both
appeals of the 11 March 2003 Decision of the RTC in Special Agrarian Case No. 61-
2000, the former was interposed by the LBP while the latter was filed by the DAR.
Obviously, the DAR and the LBP are not the same parties. Neither can it be easily
presumed that they represent the same interests in their appeals. It should be
remembered that the LBP, in land valuation and just compensation cases, exercises
authority and discretion separate and independent of the DAR, and may even
disagree with and take a position contrary to that of the DAR. That the LBP and the
DAR, in this instance, both assert in their respective appeal that AMS has no right to
just compensation, can be said to be merely coincidental and may not be true at all
times; hence, it does not merge their personalities and their interests, as to compel
them to appeal together.

Was the LBP under the obligation to inform the Court of Appeals in CA-G.R. SP No.
77520 that the DAR filed its own appeal in CA-G.R. SP No. 76724? Given the
circumstances obtaining in this case, the Court answers in the negative. Again, it
must be emphasized that although both the DAR and the LBP are government
agencies/instrumentalities responsible for the implementation of the CARP, each is a
distinct and independent entity, acting in accordance with its own mandate and
functions. It has not been sufficiently shown that the LBP was privy to the choice of
the DAR to also file an appeal of the RTC Decision dated 11 March 2003 in Special
Agrarian Case No. 61-2000. The LBP was not impleaded in CA-G.R. SP No. 76724 and
was not receiving notices in said case. The LBP and the DAR were not sharing the
same counsel given that the LBP was being represented in CA-G.R. SP No. 77520 by
its own Legal Department. The burden of proving that LBP actually knew of CA-G.R.
SP No. 76724, yet still failed to properly notify the Court of Appeals, fall on AMS, and
the same cannot be assumed just because DAR and LBP are both government
agencies/instrumentalities.

The situation of the DAR and LBP should not be treated differently from other cases
wherein multiple parties from the proceedings in the court a quo each filed their
own appeals. If brought in time to the attention of the appellate court, the multiple
appeals may be consolidated; but non-consolidation should not result in the
dismissal of the appeals on the ground of forum shopping unless it has been
substantially established that they were intentionally resorted to by the appealing
parties in order to "shop around" for a favorable decision. The rule prohibiting
forum-shopping was designed to promote and facilitate the orderly administration
of justice. It should not be interpreted with such absolute literalness as to defeat its
ultimate objective which is to achieve substantial justice as expeditiously as
possible.28

B. Substantive issues

The CARL does not absolutely prohibit lease agreements involving private
agricultural lands.
The contentious provision of the CARL is Section 6 thereof which reads in full:

SEC. 6. Retention Limits. Except as otherwise provided in this Act, no person may
own or retain, directly or indirectly, any public or private agricultural land, the size
of which shall vary according to factors governing a viable family-sized farm, such as
commodity produced, terrain, infrastructure, and soil fertility as determined by the
Presidential Agrarian Reform Council (PARC) created hereunder, but in no case shall
retention by the landowner exceed five (5) hectares. Three (3) hectares may be
awarded to each child of the landowner, subject to the following qualifications: (1)
that he is at least fifteen (15) years of age; and (2) that he is actually tilling the land
or directly managing the farm: Provided, That the landowners whose lands have
been covered by Presidential Decree No. 27 shall be allowed to keep the area
originally retained by them thereunder; Provided, further, That original homestead
grantees or their direct compulsory heirs who still own the original homestead at
the time of the approval of this Act shall retain the same areas as long as they
continue to cultivate said homestead.

The right to choose the area to be retained, which shall be compact or contiguous,
shall pertain to the landowner; Provided however, That in case the area selected for
retention by the landowner is tenanted, the tenant shall have the option to choose
whether to remain therein or be a beneficiary in the same or another agricultural
land with similar or comparable features. In case the tenant chooses to remain in the
retained area, he shall be considered a leaseholder and shall lose his right to be a
beneficiary under this Act. In case the tenant chooses to be a beneficiary in another
agricultural land, he loses his right as a leaseholder to the land retained by the
landowner. The tenant must exercise this option within a period of one (1) year from
the time the landowner manifests his choice of the area for retention.

In all cases, the security of tenure of the farmers or farmworkers on the land prior to
the approval of this Act shall be respected.

Upon the effectivity of this Act, any sale, disposition, lease, management contract or
transfer of possession of private lands executed by the original landowner in
violation of this Act shall be null and void: Provided, however, That those executed
prior to this Act shall be valid only when registered with the Register of Deeds
within a period of three (3) months after the effectivity of this Act. Thereafter, all
Register of Deeds shall inform the DAR within thirty (30) days of any transaction
involving agricultural lands in excess of five (5) hectares. (Emphasis ours.)

There is nothing in the last paragraph of the afore-quoted provision which would
relay the intention of the Legislature to absolutely prohibit lease agreements after
the effectivity of the CARL.
It is a rule in statutory construction that every part of the statute must be
interpreted with reference to the context, i.e., that every part of the statute must be
considered together with the other parts, and kept subservient to the general intent
of the whole enactment.29 Section 6 of the CARL specifically governs retention
limits, and the last paragraph thereof must be interpreted or construed in
accordance with the context of said section. Simply, what the last paragraph of
Section 6 of the CARL considers null and void are lease agreements or any other
contract involving private lands executed with the intention of circumventing and
violating the retention limits set by the CARL. Consistent therewith, Section 73(a) of
the same law expressly prohibits the ownership or possession of agricultural lands
in excess of the total retention limits or award ceilings by any person, natural or
juridical, except those under collective ownership by farmer-beneificiaries.

The Court is not persuaded that the MOA dated 8 August 1991 between TOTCO and
AMS was null and void because it was executed with the intention of violating the
provisions of the CARL, particularly, on retention limits. The MOA renewed a lease
arrangement over the piece of agricultural land that had been existence since 1970,
nearly two decades before the CARL. It is more reasonable to assume that the parties
decided to maintain the lease because it proved to be a convenient and profitable
arrangement for them, rather than that they intended to deceive the government as
to the true size of landholding of the lessee TOTCO.

The Memorandum of Agreement dated 8 August 1991, not being registered, is valid
and binding only upon the parties thereto, but not on third persons such as LBP.

To recall, the Lease Agreement between APECO (the predecessor-in-interest of

TOTCO) and AMS was executed on 21 February 1986, prior to the effectivity of the
CARL. The lease shall be for a period of 10 years, commencing on 1 November 1985
and expiring on 31 October 1995. The Lease Agreement was registered with the
Registry of Deeds and accordingly annotated on the certificate of title of APECO.

The CARL took effect on 15 June 1988. The last paragraph of Section 6 thereof states
that all contracts of sale, disposition, lease, management contract, or transfer of
possession of private lands executed prior to the CARL shall be valid only when
registered with the Register of Deeds within a period of three months from the
effectivity of the said Act. Since the 21 February 1986 Lease Agreement was already
registered prior to the CARL, there was no more need for it to be registered again
within three months from the effectivity of the said law, as required by the last
paragraph of Section 6 thereof, for such would only be redundant. Having complied
with the registration requirement, the Lease Agreement remained valid even after
the effectivity of the CARL.

On 8 August 1991, TOTCO and AMS executed the MOA increasing the area leased and
extending the lease for 25 years, beginning 1 November 1991 and ending on 31
October 2016. The MOA was not registered.
The non-registration of the 8 August 1991 MOA did not render the same null and
void. There is no provision in the CARL to such effect. While the last paragraph of
Section 6 of the said law does require as a condition for validity the registration of
any contract involving private land, it applies only to contracts "executed prior to
this Act."

The consequence of the non-registration of the 8 August 1991 MOA is clearly set
forth in Article 1648 of the Civil Code, which states that, "Every lease of real estate
may be recorded in the Registry of Property. Unless a lease is recorded, it shall not
be binding on third persons." The same principle is adopted by Section 51 of
Presidential Decree No. 1529, otherwise known as the Land Registration Decree,
which provides that no deed, mortgage, lease or other voluntary instrument except
a will purporting to convey or affect registered land shall take effect as a
conveyance or bind the land until its registration. Thus, if the lease of a piece of land
covered by a certificate of title is not registered, it is binding only between the lessor
and the lessee but it does not affect innocent third persons.30

In the present case, TOTCO submitted the VOS of its agricultural property to the DAR
on 9 September 1996. When LBP began its valuation of said property pursuant to
the CARP, the certificate of title covering the same in the name of TOTCO only bore
the annotation of the Lease Agreement dated 21 February 1986, which had already
expired on 31 October 1995.

AMS argues that DAR and LBP should have known of the extension of the lease
contract between AMS and TOTCO considering that AMS remained in possession of
the land being placed under the CARP. The DAR officials who conducted ocular visits
of the property could not have missed this fact.

The Court is not convinced. Such an argument hardly constitutes solid basis for
ruling against LBP, especially in view of its counter-charge that AMS should have
been alerted to the CARP proceedings involving the leased property given the
numerous visits and activities conducted by DAR officials thereon, as well as by the
panel of Commissioners appointed by the RTC in DAR Case No. 52-99. It is hardly
believable that AMS remained in total ignorance of the CARP proceedings involving
the leased property until it received on 3 May 2000 a copy of the RTC Decision in
DAR Case No. 52-99 dated 8 March 2000.

It would seem that the ocular visits conducted by DAR officials on the property of
TOTCO are double-edged, working to the disadvantage of all the parties and
highlighting a lack of diligence on all sides with DAR and LBP, on one hand, and
AMS, on the other failing to take notice of each others presence on the leased
property and acting promptly and accordingly therefrom.
The Court also notes that even the panel of Commissioners appointed by the RTC in
DAR Case No. 52-99, which also inspected the property of TOTCO, had likewise
overlooked the possession thereof by AMS and, resultantly, failed to discover as early
as then that the lease agreement between TOTCO and AMS was extended.

Perhaps the problem lies with paragraph 6 of the Lease Agreement of 21 February
1986, which provided that:

6. The LESSEE shall devote the leased property to production of bananas and other
crops, other than rice and corn or other crops that will place under or subject the
land under land reform, and shall have the right to build and construct thereon such
buildings, dwelling and farm houses, roadways and waterways, improvements and
facilities of whatever nature, and place thereon such equipment and machineries as
it may deem necessary or expedient in its agricultural operations, and the right but
not the obligation to remove during the leased period or any extension thereof, or
after the expiration of the lease, any such buildings, improvements, facilities,
equipment and machineries upon the termination of this lease. No liability of any
nature shall accrue to the LESSEE by reason of its construction use or removal of
these buildings, roadways, waterways, improvements, facilities, equipment and
machineries, provided such constructions or structures, use or removal shall not
cause substantial damage to the leased property. However, subject to an agreement,
the LESSOR may purchase the physical movable improvements such as buildings,
shade, staff houses, laborers quarters, and other similar permanent improvements
upon the expiration of the contract.31

Based on the foregoing paragraph, the standing crops and improvements made by
AMS on the property of TOTCO shall remain thereon, even after the expiration of the
lease, should AMS not exercise its right to remove the same. It would, therefore, not
be odd for third persons to still find the standing crops and improvements of a
banana plantation on the property of TOTCO, even when the latters lease agreement
with AMS should have already expired. There were no sufficient circumstances to
put third persons on guard or lead them to presume that the lease between TOTCO
and AMS was extended beyond the expiration of the 21 February 1986 Lease
Agreement.

The Court of Appeals belittles the effect of non-registration of the MOA dated 8
August 1991 by reasoning that it merely extended the original Lease Agreement
dated 21 February 1986. Since the principal agreement (the Lease Agreement) was
registered, there was no more need to register the accessory contract (the MOA).

The ratiocination of the appellate court on this matter, adopted by AMS, is

appallingly specious.

The 8 August 1991 MOA was not a mere accessory of the 25 February 1986 Lease
Agreement; it was a brand new contract. It substantially digressed from the terms of
the Lease Agreement, leasing an expanded area and providing for a lease period of
25 years beginning 1 November 1991 and ending 31 October 2016. That the MOA
made the Lease Agreement an integral part thereof did not make the former an
accessory of the latter. It only did away, as a matter of convenience, of having to
reiterate in the MOA the provisions in the Lease Agreement which the parties still
intended to observe.

Since it was the MOA dated 8 August 1991 which, in effect, adopted or absorbed the
Lease Agreement dated 21 February 1986, it was the registration of the former
rather than the latter which became essential. The registration and annotation of the
MOA on the certificate of title of TOTCO would constitute sufficient notice to third
parties of the existence of the two lease contracts, because the MOA explicitly
referred to the Lease Agreement as an integral part thereof. In contrast, it could not
be reasonably expected that third parties were alerted to the existence of the MOA
by the registration and annotation of the Lease Agreement alone on the certificate of
title of TOTCO, for the latter contract makes no mention at all of the MOA or, more
importantly, of the expanded area leased and the longer period of lease thereunder.

The Court, therefore, finds that the MOA dated 8 August 1991, not being registered,
binds only the parties thereto, namely, TOTCO and AMS. But as far as LBP, a third
party, was concerned, the registered Lease Agreement of 21 February 1986 had
expired on 31 October 1995, and the private agricultural land and all the standing
crops and improvements thereon were owned by TOTCO. Absent the registration of
the MOA, AMS cannot compel LBP to recognize the same and be bound by its terms.

The recourse of AMS is not to seek just compensation from LBP under the CARL, but
to recover from TOTCO under the Civil Code.

From the very beginning, the RTC and the Court of Appeals erred in resolving the
claim of AMS under the CARL, rather than the Civil Code. The said courts proceeded
from the mistaken presumption that AMS had a right to just compensation under the
CARL for the standing crops and improvements it introduced as a lessee on the
agricultural land of TOTCO. The RTC should have dismissed the Petition of AMS in
Special Agrarian Case No. 61-2000 for lack of cause of action; it was clearly not an
agrarian matter.

There is no question that the landowner is entitled to just compensation for its
private agricultural land taken pursuant to the CARP for distribution to qualified
beneficiaries. However, even after an exhaustive scrutiny of the CARL, the Court
could not find a provision therein on the right of a lessee of a private agricultural
land to just compensation for the crops it planted and improvements it built thereon,
which could be recognized separately and distinctly from the right of the landowner
to just compensation for his land. The standing crops and improvements are valued
simply because they are appurtenant to the land, and must necessarily be included
in the final determination of the just compensation for the land to be paid to the
landowner. Standing crops and improvements, if they do not come with the land, are
totally inconsequential for CARP purposes.

The only express provision in the CARL directly concerning the right of a lessee of a
private agricultural land placed under the CARP is Section 72(a) thereof, which
states:

Section 72. Leases, Management, Grower or Service Contracts, Mortgages and Other
Claims. Lands covered by this Act under lease, management, grower or service
contracts, and the like shall be disposed of as follows:

a) Lease, management, grower or service contracts covering private lands may

continue under their original terms and conditions until the expiration of the same
even if such land has, in the meantime, been transferred to qualified beneficiaries.

But this Court must still qualify that the lessee can only avail itself of the afore-
mentioned right to continue the lease contract under its original terms and
conditions until the expiration of the same, and even after the distribution of the
land to the qualified beneficiaries, if the said lease contract was duly registered;
because only when it is registered, will the lease contract be binding on third parties,
such as the CARP beneficiaries.

Other than Section 72(a) thereof, the CARL does not specially govern lease contracts
of private agricultural lands. So that for the determination of the rights of AMS as a
lessee in a lease contract terminated by the sale of the leased property to a third
person (regardless of the fact that the third person was the Republic and the sale
was made pursuant to the CARP), the Court resorts to the general provisions of the
Civil Code on lease contracts; and not the CARL.

Relevant articles of the Civil Code reads:

ART. 1654. The lessor is obliged:

(1) To deliver the thing which is the object of the contract in such a condition as to
render it fit for the use intended;

(2) To make on the same during the lease all the necessary repairs in order to keep it
suitable for the use to which it has been devoted, unless there is a stipulation to the
contrary;

(3) To maintain the lessee in the peaceful and adequate enjoyment of the lease for
the entire duration of the contract.

ART. 1659. If the lessor or the lessee should not comply with the obligations set forth
in articles 1654 and 1657, the aggrieved party may ask for the rescission of the
contract and indemnification for damages, or only the latter, allowing the contract to
remain in force.

ART. 1676. The purchaser of a piece of land which is under a lease that is not
recorded in the Registry of Property may terminate the lease, save when there is a
stipulation to the contrary in the contract of sale, or when the purchaser knows of
the existence of the lease.

If the buyer makes use of the right, the lessee may demand that he be allowed to
gather the fruits of the harvest which corresponds to the current agricultural year
and that the vendor indemnify him for damages suffered.

If the sale is fictitious, for the purpose of extinguishing the lease, the supposed
vendee cannot make use of the right granted in the first paragraph of this article.
The sale is presumed to be fictitious if at the time the supposed vendee demands the
termination of the lease, the sale is not recorded in the Registry of Property.
(Emphasis ours.)

It is clear that under the Civil Code, the recourse of AMS as a lessee is against its
lessor, TOTCO. Since TOTCO was unable to comply with its obligation to keep AMS in
peaceful and adequate enjoyment of the leased property for the entire duration of
the lease agreed upon in the MOA dated 8 August 1991, then AMS could rescind the
MOA (which, as the Court declared herein, is still binding between TOTCO and AMS,
but already incapable of execution considering the acquisition of the property by the
Republic under the CARP) and seek indemnification for damages. In addition, AMS,
as the lessee under an unregistered contract of lease, also had the right to demand
that it be allowed to gather the fruits of the harvest corresponding to the agricultural
year the leased property was actually acquired by the Republic under the CARP and
that it again be indemnified by TOTCO as the vendor of the property for the damages
suffered.

A lessee who made improvements on the leased property is further granted the
following rights by the Civil Code upon the termination of the lease for any reason:

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 the 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. (Emphasis ours.)

A lessee is not treated the same way as a builder in good faith who believed himself
to be the owner of the land, and as such built thereon and incurred expenses in
doing so; and who, under Articles 44832 and 54633 of the New Civil Code, is vested
the rights of retention and reimbursement for necessary and useful expenses made
on the land. A lessee, being conclusively presumed to know that he is not the owner
of the land that he is leasing, and constructs a house or building or any other
improvement or structure on the leased land, only has the right granted to him by
Article 1678 of the Civil Code to remove the same in case the lessor elects not to
appropriate the building and pay 50% of its value.34 Knowing that his occupation of
the premises continued only during the life of the lease contract and that he must
vacate the premises upon termination of the lease, or even earlier, if he violated the
terms thereof, the lessee is deemed to have introduced the improvements at his own
risk. He cannot recover their value, much less retain the premises until
reimbursement is made.35

Even more severe was paragraph 6 of the Lease Agreement dated 21 February 1986,
made an integral part of the MOA dated 8 August 1991 between TOTCO and AMS,
which granted AMS, upon the expiration of the lease, the right, but not the
obligation, to remove the improvements it introduced on the leased land. The said
paragraph did not at all require TOTCO to pay or compensate AMS for the value of
the improvements in the event that AMS would choose not to remove the same.36

In light of the foregoing, when AMS entered into a lease agreement of the
agricultural land with TOTCO, it had no right to expect that, upon the termination of
the lease, it would be compensated for the crops it planted and improvements it
built on the leased land; or that, if at all, it can recover more than half the value
thereof from TOTCO. Hence, the Court cannot allow AMS to seek full compensation
for the same crops and improvements from the LBP just because its lease was
terminated by the sale of the leased property to the Republic under the CARP. That
the leased land was placed under the CARP did not change the status of AMS as a
lessee and gave it the right to more compensation upon the termination of the lease,
as compared to the lessee of any other kind of property. It was never the intention of
the CARL to create a privileged class of lessees.

AMS has no interest in the just compensation paid by LBP to TOTCO pursuant to the
judgment in DAR Case No. 52-99.

The Decision dated 8 March 2000 of the RTC in DAR Case No. 52-99 is actually
irrelevant to AMS. Since AMS was not a landowner, but a mere lessee of the
agricultural land owned by TOTCO, it had no right under the CARL to demand from
LBP just compensation for its standing crops and improvements. Thus, it cannot lay
claim to the portion of the just compensation, pertaining to the improvements on the
leased property, awarded by the RTC to TOTCO in DAR Case No. 52-99. And
consequently, the Affidavit of Third Party Claim filed by AMS President Soriano in
DAR Case No. 52-99 over the just compensation awarded to TOTCO is without merit.

As a lessee, the rights of AMS over its standing crops and improvements on the
leased property are defined, conferred, as well as limited by the provisions of the
MOA it executed with TOTCO on 8 August 1991, in relation to those of the Civil Code.
Such rights are totally independent of and unaffected by the judgment of the RTC in
DAR Case No. 52-99. That the leased property was placed under the CARP and that
TOTCO received just compensation therefor are not relevant to the rights of AMS as
a lessee. Rather, what is significant to AMS is only the fact that it was deprived of the
peaceful and adequate enjoyment of the property for the duration of the period of
lease agreed upon in the MOA.

WHEREFORE, premises considered, the instant Petition for Review is hereby

GRANTED. The Decision dated 28 March 2006 and Resolution dated 26 September
2006 of Court of Appeals in CA-G.R. SP No. 77520 is ANNULED and SET ASIDE. The
Petition for the determination of just compensation with prayer for the issuance of a
writ of preliminary injunction and temporary restraining order filed by respondent
AMS Farming Corporation before Regional Trial Court, Tagum City, Davao del Norte,
Branch 2, and docketed as Special Agrarian Case No. 61-2000, is ordered
DISMISSED, without prejudice to the filing by respondent AMS Farming Corporation
of the appropriate case against its lessor, Totco Credit Corporation, pursuant to the
provisions of the Civil Code on lease contracts.

SO ORDERED.

G.R. No. 174286 June 5, 2009

TRADERS ROYAL BANK, Petitioner,

vs.
CUISON LUMBER CO., INC., and JOSEFA JERODIAS VDA. DE CUISON,
Respondents.

We review in this petition for review on certiorari1 the decision2 and resolution3 of
the Court of Appeals (CA) in CA-G.R. CV No. 49900. The CA affirmed with
modifications the decision4 of the Regional Trial Court (RTC), Davao City, Branch 13.
The RTC ruled in favor of respondents Cuison Lumber Co., Inc. (CLCI) and Josefa Vda.
De Cuison (Mrs. Cuison), collectively referred to as respondents, in the action they
commenced for breach of contract, specific performance, damages, and attorneys
fees, with prayer for the issuance of a writ of preliminary injunction against
petitioner Traders Royal Bank (bank).
THE BACKGROUND FACTS

On July 14, 1978 and December 9, 1979, respectively, CLCI, through its then
president, Roman Cuison Sr., obtained two loans from the bank. The loans were
secured by a real estate mortgage over a parcel of land covered by Transfer
Certificate of Title No. 10282 (subject property). CLCI failed to pay the loan,
prompting the bank to extrajudicially foreclose the mortgage on the subject
property. The bank was declared the highest bidder at the public auction that
followed, conducted on August 1, 1985. A Certificate of Sale and a Sheriffs Final
Certificate of Sale were subsequently issued in the banks favor.

In a series of written communications between CLCI and the bank, CLCI manifested
its intention to restructure its loan obligations and to repurchase the subject
property. On July 31, 1986, Mrs. Cuison, the widow and administratrix of the estate
of Roman Cuison Sr., wrote the banks Officer-in-Charge, Remedios Calaguas, a letter
indicating her offered terms of repurchase. She stated:

1. That I will pay the interest of P115,538.66, plus the additional expenses of
P17,293.69, the total amount of which is P132,832.35 on August 8, 1986;

2. That I will pay 20% of the bid price of P949,632.84, plus whatever interest
accruing within sixty (60) days from August 8, 1986;

3. That whatever remaining balance after the above two (2) payments shall be
amortized for five (5) years on equal monthly installments including whatever
interest accruing lease on diminishing balance.5

CLCI paid the bank P50,000.00 (on August 8, 1986) and P85,000.00 (on September
3, 1986). The bank received and regarded these amounts as "earnest money" for the
repurchase of the subject property. On October 20, 1986, the bank sent Atty. Roman
Cuison, Jr. (Atty. Cuison), as the president and general manager of CLCI, a letter
informing CLCI of the banks board of directors resolution of October 10, 1986 (TRB
Repurchase Agreement), laying down the conditions for the repurchase of the
subject property:

This is to formally inform you that our Board of Directors, in its regular meeting held
on October 10, 1986, passed a resolution for the repurchase of your property
acquired by the bank, subject to the following terms and conditions, viz:

1. That the repurchase price shall be at total banks claim as of the date of
implementation;

2. That client shall initially pay P132,000.00 within fifteen (15) days from the
expiration of the redemption period (August 8, 1986) and further payment of
P200,632.84, representing 20% of the bid price, to be remitted on or before October
31, 1986;

3. That the balance of P749,000.00 to be paid in three (3) years in twelve (12)
quarterly amortizations, with interest rate at 26% computed on diminishing
balance;

4. That all the interest and other charges starting from August 8, 1986 to date of
approval shall be paid first before implementation of the request; interest as of
October 31, 1986 is P65,669.53;

5. Possession of the property shall be deemed transferred after signing of the

Contract to Sell. However, title to the property shall be delivered only upon full
payment of the repurchase price via Deed of Absolute Sale;

6. Registration fees, documentary stamps, transfer taxes at the date of sale and other
similar government impost shall be for the exclusive account of the buyer;

7. The improvement of the property shall at all times be covered by insurance

against loss with a policy to be obtained from a reputable company which designates
the bank as beneficiary but premiums shall be paid by the client;

8. That the sale is good for thirty (30) days from the buyers receipt of notice of
approval of the offer; otherwise, sale is automatically cancelled;

9. Effective upon signing of the Contract to Sell, all realty taxes which will become
due on the property shall be for the account of the buyer;

10. That the first quarterly installment shall be due within ninety (90) days of
approval hereof, and the succeeding installment shall be due every three (3) months
thereafter;

11. Upon default of the buyer to pay two (2) successive quarterly installments,
contract is automatically cancelled at the Banks option and all payments already
made shall be treated as rentals or as liquidated damages; and

12. Other terms and conditions that the bank may further impose to protect its
interest.

Should you agree with the above terms and conditions please sign under "Conforme"
on the space provided below.

We attach herewith your Statement of Account6 as of October 31, 1986, for your
reference.
Thank you.

Very truly yours,

(Signed)

Conforme: (Not signed)7

CLCI failed to comply with the above terms notwithstanding the extensions of time
given by the bank. Nevertheless, CLCI tendered, on February 3, 1987, a check for
P135,091.57 to cover fifty percent (50%) of the twenty percent (20%) bid price. The
check, however, was returned for "insufficiency of funds." On May 13, 1987, CLCI
tendered an additional P50,000.00.8 On May 29, 1987, the bank sent Atty. Cuison a
letter informing him that the P185,000.00 CLCI paid was not a deposit, but formed
part of the earnest money under the TRB Repurchase Agreement. On August 28,
1987, Atty. Cuison, by letter, requested that CLCIs outstanding obligation of
P1,221,075.61 (as of July 31, 1987) be reduced to P1 million, and the amount of
P221,075.61 be condoned by the bank. To show its commitment to the request, CLCI
paid the bank P100,000.00 and P200,000.00 on August 28, 1987. The bank credited
both payments as earnest money.

A year later, CLCI inquired about the status of its request. The bank responded that
the request was still under consideration by the banks Manila office. On September
30, 1988, the bank informed CLCI that it would resell the subject property at an
offered price of P3 million, and gave CLCI 15 days to make a formal offer; otherwise,
the bank would sell the subject property to third parties. On October 26, 1988, CLCI
offered to repurchase the subject property for P1.5 million, given that it had already
tendered the amount of P400,000.00 as earnest money.

CLCI subsequently claimed that the bank breached the terms of repurchase, as it had
wrongly considered its payments (in the amounts of P140,485.18, P200,000.00 and
P100,000.00) as earnest money, instead of applying them to the purchase price.
Through its counsel, CLCI demanded that the bank rectify the repurchase agreement
to reflect the true consideration agreed upon for which the earnest money had been
given. The bank did not act on the demand. Instead, it informed CLCI that the
amounts it received were not earnest money, and that the bank was willing to return
these sums, less the amounts forfeited to answer for the unremitted rentals on the
subject property.

In view of these developments, CLCI and Mrs. Cuison, on February 10, 1989, filed
with the RTC a complaint for breach of contract, specific performance, damages, and
attorneys fees against the bank. On April 20, 1989, the bank filed its Answer alleging
that the TRB repurchase agreement was already cancelled given CLCIs failure to
comply with its provisions; by way of counterclaim, the bank also demanded the
payment of the accrued rentals in the subject property as of January 31, 1989, and
the award of moral damages and exemplary damages as well as attorneys fees and
litigation expenses for the unfounded suit instituted against the bank by CLCI.9 After
trial on the merits, the RTC ruled in respondents favor. The dispositive portion of its
November 4, 1994 Decision states:

WHEREFORE, premises considered, judgment is hereby rendered in favor of

plaintiffs and against the defendant bank, ordering said defendant bank to:

1. Execute and consummate a Contract to Sell which is reflective of the true

consideration indicated in the Resolution of the Board of Directors of Traders Royal
Bank held on October 10, 1986 (Exhibit "F" and Exhibit "13"), duly accrediting the
amount of P435,000 as earnest money to be part of the price, the mode of payment
being on quarterly installment, but the period within which the first quarterly
payment being on quarterly payment shall be made to commence upon the
execution of said Contract to Sell;

2. Pay to plaintiffs the amounts of P50,000.00 in concept of moral damages,

P20,000.00 as exemplary damages;

3. Pay attorneys fees of P20,000.00; and

4. Pay litigation expenses in the amount of P2,000.00.

The counterclaim of defendant bank is hereby dismissed.

SO ORDERED.

On appeal to the CA, the bank pointed out the misappreciation of facts the RTC
committed and argued that: first, the repurchase agreement did not ripen into a
perfected contract; and second, even assuming that there was a perfected
repurchase agreement, the bank had the right to revoke it and apply the payments
already made to the rentals due for the use of the subject property, or as liquidated
damages under paragraph 11 of the TRB Repurchase Agreement, since CLCI violated
its terms and conditions. Further, the bank contended that CLCI had abandoned the
TRB Repurchase Agreement in its letters dated August 28, 1987 and October 26,
1988 when it proposed to repurchase the subject property for P1 million and P1.5
million, respectively. Lastly, the bank objected to the award of damages in the
plaintiffs favor.

THE CA DECISION

On March 31, 2006, the CA issued the challenged Decision and affirmed the RTCs
factual findings and legal conclusions. Although it deleted the awards of attorneys
fees, moral and exemplary damages, the CA ruled that there was a perfected contract
to repurchase the subject property given the banks acceptance (as stated in the
letter dated October 20, 1986) of CLCIs proposal contained in Mrs. Cuisons letter of
July 31, 1986. The CA distinguished between a condition imposed on the perfection
of the contract and a condition imposed on the performance of an obligation, and
declared that the conditions laid down in the letter dated October 20, 1986 merely
relate to the manner the obligation is to be performed and implemented; failure to
comply with the latter obligation does not result in the failure of the contract and
only gives the other party the options and/or remedies to protect its interest. The
CA held that the same conclusion obtains even if the letter of October 20, 1986 is
considered a counter-offer by the bank; CLCIs payment of P135,000.00 operated as
an implied acceptance of the banks counter-offer, notwithstanding CLCIs failure to
expressly manifest its conforme. In light of these findings, the CA went on to
acknowledge the validity of the terms of paragraph 11 of the TRB Repurchase
Agreement, but nonetheless held that CLCI has not yet violated its terms given the
banks previous acts (i.e., the grant of extensions to pay), which showed that it had
waived the agreements original terms of payment.

The CA rejected the theory that CLCI had abandoned the terms of the TRB
Repurchase Agreement and found no incompatibility between the agreement and
the contents of the August 28, 1987 and October 26, 1988 letters which did not
show an implied abandonment by CLCI, nor the latters expressed intent to cancel or
abandon the perfected repurchase agreement. In the same manner, the CA struck
down the banks position that CLCIs payments were "deposits" rather than earnest
money. The appellate court reasoned that while the amounts tendered cannot be
strictly considered as earnest money under Article 1482 of the New Civil Code,10
they were nevertheless within the concept of earnest money under this Courts
ruling in Spouses Doromal, Sr. v. CA,11 since they were paid as a guarantee so that
the buyer would not back out of the contract.

The CA however ruled that the award of moral and exemplary damages, attorneys
fees and litigation expenses lacked factual and legal support. The CA found that the
bank acted in good faith and based its actions on the erroneous belief that CLCI had
already abandoned the repurchase agreement. Likewise, the award of moral
damages was not in order as there was no showing that CLCIs reputation was
debased or besmirched by the banks action of applying the previous payments
made to the interest and rentals due on the subject property; neither is Mrs. Cuison
entitled to moral damages without any evidence to justify this award. The CA also
ruled that there was nothing in the records to warrant the awards of exemplary
damages and attorneys fees.

The bank subsequently moved but failed to secure a reconsideration of the CA

decision. The bank thus came to us with the following

ISSUES

I.
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN APPREHENDING THE
SIGNIFICATION (SIC) OF THE TERM "OFFER" ON THE ONE HAND AND
"ACCEPTANCE" ON THE OTHER HAND IN SALES CONTRACT WHICH ERROR LED IT
TO ARRIVE AT A WRONG CONCLUSION OF LAW.

II.

THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN ITS INTERPRETATION

OF THE STIPULATIONS AND TERMS AND CONDITIONS EMBODIED IN THE
PROPOSED REPURCHASE AGREEMENT xxx WHICH LED IT TO ERRONEOUSLY
CONCLUDE THAT THERE WAS A "PERFECTED" REPURCHASE AGREEMENT
BETWEEN RESPONDENTS AND PETITIONER AND WHICH INTERPRETATION IS
NOT IN ACCORDANCE WITH THE APPLICABLE LAW AND ESTABLISHED
JURISPRUDENCE.

Reduced to the most basic, the main issue posed is whether or not a perfected
contract of repurchase existed and can be enforced between the parties.

THE COURTS RULING

We GRANT the petition.

The case presents to us as threshold issue the presence or absence of consent as a

requisite for a perfected contract to repurchase the subject property. The RTC ruled
that a perfected contract existed based mainly on the following facts: first, the
existence of the TRB Repurchase Agreement which "clearly depicts the repurchase
agreement of the subject property under the terms therein embodied"; and second,
the payment of earnest money in the total amount of P435,000.00 which forms part
of the price and, as initial payment, is proof of the perfection of the contract.12 In
concurring with the foregoing findings on appeal, the CA, in turn, declared that there
was a meeting of the minds between the parties on the offer and acceptance for the
repurchase of the subject property under the following quoted facts:

It may be recalled that it was Mrs. Cuison, through her letter of July 31, 1986, who
proposed to repurchase the foreclosed property. She in fact had tendered right away
an amount of P50,000.00 as partial payment of the P132,000.00 she had promised to
pay as initial payment. In response, TRB sent a letter dated October 20, 1986 to Atty.
Cuison informing him of the resolution passed by the Board of Directors of TRB
acknowledging the proposal of Ms. Cuison to repurchase the property. Under the
circumstance, the proposal made by Ms. Cuison constituted the "offer" contemplated
by law, and the reply of TRB was the corresponding "acceptance" of the proposal-
offer.

xxx
Conceding arguendo that TRBs letter-response October 20, 1986 constituted a
counter-offer or politacion, CLCIs ensuing remittance of P135,000.00 as initial
payment of the price, operates effectively as an implied acceptance of TRBs counter-
offer. The absence of a signature to signify plaintiffs conforme to the repurchase
agreement is of no moment. While the conforme portion of the subject repurchase
agreement indeed bears no signature at all, this fact, however, does not detract from
the accomplished fact that plaintiffs had acquiesced or assented to the standing
"conditional counter-offer" of TRB. Plaintiffs "conforme" would at best be a mere
formality considering that the repurchase agreement had already been perfected, if
impliedly.13

Based on these findings, the crucial points that the lower courts apparently
considered were Mrs. Cuisons letter of July 31, 1986 to the bank; the banks letter of
October 20, 1986 to CLCI; and the parties subsequent conduct showing their
acknowledgement of the existence of their agreement, specifically, the respondents
payments (designated as earnest money) and the banks acceptance of these
payments. However, unlike the RTCs conclusion that relied on CLCIs payment and
the banks acceptance of the payment as "earnest money," the CA concluded that
there was a perfected contract, either because of the banks acceptance of CLCIs
offer (made through Mrs. Cuisons letter of July 31, 1986), or by CLCIs implied
acceptance indicated by its initial payments in compliance with the terms of the TRB
Repurchase Agreement.

The petitioner bank, of course, argues differently and concludes that the undisputed
facts of the case show that there was no meeting of the minds between the parties
given CLCIs failure to give its consent and conformity to the banks letter of October
20, 1986, confirmed by the testimony of Atty. Cuison, no less, when he denied that
CLCI consented to the agreements terms of implementation.

Our task in this petition for review on certiorari is not to review the factual findings
of the CA and the RTC, but to determine whether or not, on the basis of the said
findings, the conclusions of law reached by the said courts are correct.

Under the law, a contract is perfected by mere consent, that is, from the moment that
there is a meeting of the offer and the acceptance upon the thing and the cause that
constitute the contract.14 The law requires that the offer must be certain and the
acceptance absolute and unqualified.15 An acceptance of an offer may be express
and implied; a qualified offer constitutes a counter-offer.16 Case law holds that an
offer, to be considered certain, must be definite,17 while an acceptance is considered
absolute and unqualified when it is identical in all respects with that of the offer so
as to produce consent or a meeting of the minds.18 We have also previously held
that the ascertainment of whether there is a meeting of minds on the offer and
acceptance depends on the circumstances surrounding the case.19
In Villonco Realty Co. v. Bormacheco,20 the Court found a perfected contract of sale
between the parties after considering the parties written communications showing
the offer (counter-offer) and acceptance by the seller who formally manifested his
conformity with the offer in the buyers letter. We took note of the acts of the parties
the payment of the buyer of an amount representing the partial payment under the
contract; the acceptance of the partial payment by the seller; the allowance of the
buyer for the seller to encash the check containing the partial payment; the
subsequent return of the amount representing the partial payment by the buyer
with the corresponding interest stated in the buyers letter (offer) and considered
them evidence of the perfection of the sale. Under these circumstances, we also
declared that a change in a phrase in the offer to purchase, that does not essentially
change the terms of the offer, does not amount to a rejection of the offer and the
tender of a counter-offer.

In Schuback & Sons Philippine Trading Corp. v. CA,21 we declared a meeting of

minds between the vendor and the vendee even though the quantity of goods
purchased had not been fully determined. We noted that the vendee, after
expressing his intention to purchase the merchandise, simultaneously enclosed a
purchase order whose receipt prompted the vendor to immediately order the
merchandise. We also took into account the act of the vendee in requesting for a
discount as proof of his acceptance of the quoted price.

Yuviengco v. Dacuycuy22 yielded a different result, as we considered that the letter

and telegrams sent by the parties to each other showed that there was no meeting of
minds in the absence of an unconditional acceptance to the terms of the contract of
sale; otherwise, the buyers would not have included the phrase "to negotiate details"
when they agreed to the property that was subject of the proposed contract.

Similarly, in Philippine National Bank v. CA,23 we ruled that there was no perfected
contract of sale because the specified terms and conditions imposed under the facts
of the case constituted counter-offers against each other that were not accepted by
either of the parties. This case involved a first contract, involving the same property,
which the parties mutually cancelled; we said that the terms of this earlier contract
cannot be considered in determining the acceptance and compliance with the terms
of a proposed second contract a distinct and separate contract from the one earlier
aborted.

The incomplete details of the agreement led us to conclude in Insular Life Assurance
Co. Ltd. v. Assets Builders Corp.24 that no perfected contract existed; there were
"other matters or details in addition to the subject matter and the consideration
[that] would be stipulated and agreed." We likewise considered the subsequent acts
between the parties and the existence of a second proposal which belied the
perfection of any initial contract.
The recent Navarra v. Planters Development Bank25 is another case where we saw
no perfected contract, as the offer was incomplete for lack of agreed details on the
manner of paying the purchase price; there was also no acceptance as the letter of
Planters Development Bank indicated the need to discuss other details of the
transaction.1awphil

All these cases illustrate the rule that the concurrence of the offer and acceptance is
vital to the birth and the perfection of a contract. The clear and neat principle is that
the offer must be certain and definite with respect to the cause or consideration and
object of the proposed contract, while the acceptance of this offer express or
implied must be unmistakable, unqualified, and identical in all respects to the offer.
The required concurrence, however, may not always be immediately clear and may
have to be read from the attendant circumstances; in fact, a binding contract may
exist between the parties whose minds have met, although they did not affix their
signatures to any written document.26

The facts of the present case, although ambivalent in some respects, point on the
whole to the conclusion that both parties agreed to the repurchase of the subject
property.

A reading of the petitioners letter of October 20, 1986 informing CLCI that the
banks board of directors "passed a resolution for the repurchase of [your] property"
shows that the tenor of acceptance, except for the repurchase price, was subject to
conditions not identical in all respects with the CLCIs letter-offer of July 31, 1986. In
this sense, the banks October 20, 1986 letter was effectively a counter-offer that
CLCI must be shown to have accepted absolutely and unqualifiedly in order to give
birth to a perfected contract. Evidence exists showing that CLCI did not sign any
document to show its conformity with the banks counter-offer. Testimony also
exists explaining why CLCI did not sign; Atty. Cuison testified that CLCI did not agree
with the implementation of the repurchase transaction since the bank made a wrong
computation.27

These indicators notwithstanding, we find that CLCI accepted the terms of the TRC
Repurchase Agreement and thus unqualifiedly accepted the banks counter-offer
under the TRB Repurchase Agreement and, in fact, partially executed the agreement,
as shown from the following undisputed evidence:

(a) The letter-reply dated November 29, 1986 of Atty. Cuison, as president and
general manager of CLCI, to the bank (in response to the banks demand letter dated
November 27, 1986 to pay 20% of the bid price); CLCI requested an extension of
time, until the end of December 1986, to pay its due obligation;28

(b) Mrs. Cuisons letter-reply of February 3, 1987 (to the banks letter of January 13,
1987) showed that she acknowledged CLCIs failure to comply with its requested
extension and proposed a new payment scheme that would be reasonable given
CLCIs critical economic difficulties; Mrs. Cuizon tendered a check for P135,091.57,
which represented 50% of the 20% bid price;29

(c) The CLCIs continuous payments of the repurchase price after their receipt of the
banks letter of October 20, 1986;

(d) CLCIs possession of the subject property pursuant to paragraph 5 of the TRB
Repurchase Agreement, notwithstanding the absence of a signed contract to sell
between the parties;

xxx

We counted the following facts, too, as indicators leading to the conclusion that a
perfected contract existed: CLCI did not raise any objection to the terms and
conditions of the TRB Repurchase Agreement, and instead, unconditionally paid
without protests or objections30 ; CLCIs acknowledgment of their obligations under
the TRB Repurchase Agreement (as shown by Atty. Cuisons letter of November 29,
1986); and Atty. Cuisons admission that the TRB Repurchase Agreement was
already a negotiated agreement between CLCI and the bank, as shown by the
following testimony:

Q When you received this document, this Exh. "F" from the defendant bank, did you
already consider this as an agreement?

A We consider that as a negotiated agreement pending the documentation of the

formal contract to sell which is stated under the repurchase agreement.

Q In other words, at the time you received this document Exh. "F," which was on
October 23, 1986 date of receipt, was there already a meeting of the minds between
the parties?

A That is precisely we put [sic] the earnest money because we were of the opinion
that the bank is already agreeable to the implementation of the repurchase
agreement.

xxx

COURT

Q Insofar as Exh. "F" is concerned?

A There was initially, that is precisely we [sic] deposited in consideration of the

repurchase agreement.31
The bank, for its part, showed its recognition of the existence of a repurchase
agreement between itself and CLCI by the following acts:

(a) The letter dated November 27, 1986 of the bank, reminding CLCI that it was
remiss in its commitments to pay 20% of the bid price under the terms of the TRB
Repurchase Agreement;

(b) In the same letter, the bank gave CLCI an extension of time (until November 30,
1986) to comply with its past due obligations under the agreement;

(c) The banks acceptance of CLCIs payments as earnest money for the repurchase
of the property;

(d) CLCIs continued possession of the subject property with the banks consent;

(e) The banks grant of extensions to CLCI for the payment of its obligations under
the contract;

(f) The Statement of Account dated July 31, 1987 showing that the bank applied
CLCIs payments according to the terms of the TRB Repurchase Agreement;

(g) The letter of January 26, 1989 of the banks counsel, Atty. Abarquez, addressed to
CLCIs counsel, showing the banks recognition that there was an agreement
between the bank and CLCI, which the latter failed to honor; and

(h) The testimonies of the banks witnesses Mr. Eulogio Giramis32 and Ms. Arlene
Aportadera,33 the banks employees who handled the CLCI transactions who
admitted the existence of the repurchase agreement with CLCI and the latters
failure to comply with the agreements terms.

Admittedly, some evidence on record may be argued to point to the absence of a

meeting of the minds (more particularly, the previous offers made by CLCI to change
the payment scheme of the repurchase of the subject property which was not
accepted; the banks expressed intent to offer the subject property for sale to third
persons at a higher price; and the unaccepted counter-offer by the respondents after
the bank increased the purchase price).34 These incidents, however, were the
results of CLCIs failure to comply with its obligations to pay the amounts due on the
stipulated time and were made after the parties minds had met on the terms of the
contract. The seemingly contrary indications, therefore, do not go into and affect the
perfection of the contract; they came after the contract had been perfected and, as
discussed below, were indicative of the banks cancellation of the repurchase
agreement.

In light of this conclusion, we now determine the consequential rights, obligations

and liabilities of the parties. It is at this point that we diverge from the conclusions of
the CA and the RTC, as we conclude that while there was a perfected contract
between the parties, the bank effectively cancelled the contract when it
communicated with CLCI that it would sell the subject property at a higher price to
third parties, giving CLCI 15 days to make a formal offer, and disregarding CLCIs
counter-offer to buy the subject property for P1.5 million. We arrive at this
conclusion after considering the following reasons:

First, the bank communicated its intent not to proceed with the repurchase as above
outlined and formally cancelled the TRB Repurchase Agreement in its letters dated
January 11 and 30, 1989 to CLCI.35 Thus, CLCIs rights acquired under the TRB
Repurchase Agreement to repurchase the subject property have been defeated by its
own failure to comply with its obligations under the agreement. The right to cancel
for breach is provided under paragraph 11 of the TRB Repurchase Agreement, as
follows:

11. Upon default of the buyer to pay two (2) successive quarterly installments,
contract is automatically cancelled at the Banks option and all payments already
made shall be treated as rentals or as liquidated damages;

We note, additionally, that the TRB Repurchase Agreement is in the nature of a

contract to sell where the title to the subject property remains in the banks name, as
the vendor, and shall only pass to the respondents, as vendees, upon the full
payment of the repurchase price.36 The settled rule for contracts to sell is that the
full payment of the purchase price is a positive suspensive condition; the failure to
pay in full is not to be considered a breach, casual or serious, but simply an event
that prevents the obligation of the vendor to convey title from acquiring any
obligatory force.37 Viewed in this light, the bank cannot be compelled to perform its
obligations under the TRB Repurchase Agreement that has been rendered
ineffective by the respondents non-performance of their own obligations.

Second, the respondents violated the terms and conditions of the TRB Repurchase
Agreement when they failed to pay their obligations under the agreement as these
obligations fell due. Paragraphs 2 and 10 of the TRB Repurchase Agreement are
clear on the respondents obligation to pay the bid price and the quarterly
installments. Paragraphs 2 and 10 state:

2. That client shall initially pay P132,000.00 within fifteen (15) days from the
expiration of the redemption period (August 8, 1986) and further payment of
P200,632.84 representing 20% of the bid price to be remitted on or before October
31, 1986;

xxx xxx xxx

10. That the first quarterly installment shall be due within ninety (90) days of
approval hereof, and the succeeding installment shall be due every three (3) months
thereafter;

The approval referred to under paragraph 10 is the approval by the bank of the
repurchase of the subject property, as indicated in the banks letter of October 20,
1986 which states, "This is to formally inform you that our Board of Directors in its
regular meeting held on October 10, 1986, passed a resolution for the repurchase of
your property acquired by the bank." It was on the basis of this approval and the
quoted terms of the agreement that the bank issued its Statement of Account dated
July 31, 1987 indicating that the respondents were already in default, not only with
respect to the 20% of the bid price, but also with the three quarterly
installments.lavvphi1

Third, the respondents themselves claim that the bank violated the agreement when
it applied the respondents payments to the interest and penalties due without the
respondents consent, instead of applying these to the repurchase price for the
subject property.38 An examination of the provisions of the TRB Repurchase
Agreement reveals that the bank is allowed to apply the respondents payments first
to the amounts due as interests and other charges, before applying any payment to
the repurchase price. Paragraph 4 of the agreement provides:

4. That all the interest and other charges starting from August 8, 1986 to date of
approval shall be paid first before implementation of the request; interest as of
October 31, 1986 is P65,669.53;

Under these terms, the bank cannot be faulted for the application of payments it
made. Likewise, the bank cannot be faulted for the application of other amounts paid
as rentals as this is allowed under paragraph 11, quoted above, of the agreement.

Fourth, the petitioner bank cannot be said, as the CA ruled, to have already waived
the terms of the TRB Repurchase Agreement by extending the time to pay and
subsequently accepting late payments. The CAs conclusion lacks factual and legal
basis taking into account that the Statement of Account of July 31, 1987, heretofore
cited, which shows that the bank considered the respondents already in default. At
this point, Atty. Cuison, by letter, requested that part of its outstanding obligation be
condoned by the bank, paying P300,000.00 as of August 31, 1987, which amount the
bank accepted as earnest money. For one whole year thereafter, neither party
moved. Significantly, the respondents, who had continuing payments to make and
who had the burden of complying with the terms of the agreement, failed to act
except to ask the bank for the status of its requested condonation. Under these facts,
a continuing breach of the agreement took place, even granting that a waiver had
intervened as of August 31, 1987. Thus, the bank was well within its right to
consider the agreement cancelled when, in September 1988, it changed the
repurchase terms to P3.0 million. We find it significant that the respondents, instead
of asserting its rights under the TRB Repurchase Agreement, counter-offered P1.5
million with the P400,000.00 already paid as part of the purchase price. At that
point, it was clear that even the respondents themselves considered the TRB
Repurchase Agreement cancelled.

Lastly, the perfected repurchase agreement itself provides for the respondents
possession of the subject property; in fact, the respondents have been in continuous
possession of the subject property since October 1986, despite the absence of a
contract to sell apparently with the banks consent. The agreement also provides
under its paragraph 11 that upon the respondents default and the cancellation of
the agreement, all payments already made shall be treated as rentals or as liquidated
damages.

The undisputed facts show that the bank has been deprived of the use and benefit of
its property that has been in the possession of the respondents for the latters use
and benefit without paying any rentals thereon. The records reveal that until now,
the respondents are still in possession of the subject property.39

We note that subsequent to the banks counterclaim for the payment of rentals due
as of January 31, 1989, the bank also seeks to recover the rentals that accrued after
January 31, 1989, which as of August 8, 1993 amounted to P1,123,500.00 as shown
by the evidence presented by the bank before the RTC and in the pleadings it had
filed before the RTC, CA, and the Court.40 Although this claim was not alleged in the
banks Answer being an after-acquired claim which was only raised during the trial
proper through the testimony dated August 17, 1993 of Ms. Arlene Aportadera,41
the bank is not barred from recovering these rentals. As we explained in Banco de
Oro Universal Bank v. CA,42 a party is not barred from setting up a claim even after
the filing of the answer if the claim did not exist or had not matured at the time said
party filed its answer. Moreover, we note that the respondents did not object to the
presentation of this evidence, hence, the issue of rentals from August 8, 1993 and
onwards was tried with the implied consent of the parties; applying Section 5, Rule
10 of the 1997 Rules of Civil Procedure,43 the issue should be treated in all respects
as if it had been raised in the pleadings.44 Given the implied consent, judgment may
be validly rendered on this issue even if no motion had been filed and no
amendment had been ordered.45

In National Power Corporation v. CA,46 we held that where there is a variance in the
defendants pleadings and the evidence adduced by it at the trial, the Court may
treat the pleading as amended to conform to the evidence.

Additionally, the respondents are also liable to pay interest by way of damages for
their failure to pay the rentals due for the use of the subject property. In Eastern
Shipping Lines v. CA,47 we laid down the following guidelines with respect to the
award and the computation of legal interest, as follows:
II. With regard particularly to an award of interest in the concept of actual and
compensatory damages, the rate of interest, as well as the accrual thereof, is
imposed, as follows:

1. When the obligation is breached, and it consists in the payment of a sum of money,
i.e., a loan or forbearance of money, the interest due should be that which may have
been stipulated in writing. Furthermore, the interest due shall itself earn legal
interest from the time it is judicially demanded. In the absence of stipulation, the
rate of interest shall be 12% per annum to be computed from default, i.e., from
judicial or extrajudicial demand under and subject to the provisions of Article 1169
of the Civil Code.

2. When an obligation, not constituting a loan or forbearance of money, is breached,

an interest on the amount of damages awarded may be imposed at the discretion of
the court at the rate of 6% per annum. No interest, however, shall be adjudged on
unliquidated claims or damages except when or until the demand can be established
with reasonable certainty. Accordingly, where the demand is established with
reasonable certainty, the interest shall begin to run from the time the claim is made
judicially or extrajudicially (Art. 1169 Civil Code) but when such certainty cannot be
so reasonably established at the time the demand is made, the interest shall begin to
run only from the date the judgment of the court is made (at which time
quantification of damages may be deemed to have been reasonably ascertained).
The actual base for the computation of legal interest shall, in any case, be on the
amount finally adjudged.

3. When the judgment of the court awarding a sum of money becomes final and
executory, the rate of legal interest, whether the case falls under paragraph 1 or
paragraph 2, above, shall be 12% per annum from such finality until its satisfaction,
this interim period being deemed to be by then an equivalent to a forbearance of
credit. [Emphasis supplied]

The records are unclear on when the bank made a demand outside of the judicial
proceedings for the rentals on the subject property.48 However, the records show
that the bank made a counterclaim for the payments of the rentals due as of January
31, 1989 in its Answer and subsequently, a claim for the after-acquired rentals was
made by the bank through the testimony of Ms. Arlene Aportadera. Applying Eastern
Shipping Lines, the payment of interest for the rentals shall be reckoned from the
date the judicial demand was made by the bank or on April 20, 1989 when the bank
set up its counterclaim for rentals in the subject property.

Under the circumstances, we can impose a 6% interest on the rentals from April 20,
1989 up to the finality of this decision. Thereafter, the interest shall be computed at
12% per annum from such finality up to full satisfaction.
We find no basis for the award of exemplary damages. Article 2232 of the Civil Code
declares:

Article 2232. In contracts and quasi-contracts, the court may award exemplary
damages if the defendant acted in a wanton, fraudulent, reckless, oppressive, or
malevolent manner.

Considering the factual circumstances we have discussed above, we can hardly

characterize respondents act of insisting on the enforcement of the repurchase
agreement as wanton, fraudulent, reckless, oppressive, or malevolent.

As there is no basis for an award of exemplary damages, the awards of attorneys

fees and litigation expenses to the bank are not justified under Article 2208 of the
Civil Code.

WHEREFORE, premises considered, we hereby GRANT the petition. The Decision

dated March 31, 2006 and Resolution dated August 11, 2006 of the Court of Appeals
in CA-G.R. CV No. 49900 are hereby REVERSED and SET ASIDE.

The complaint in Civil Case No. 19416-89 for breach of contract, specific
performance, damages, and attorneys fees, with preliminary injunction filed by
Cuison Lumber Co., Inc. and Mrs. Cuison against Traders Royal Bank is hereby
DISMISSED. The respondents are ordered to vacate the subject property and to
restore its possession to the petitioner bank.

The respondents are further ordered to pay reasonable compensation, for the use
and occupation of the subject property in the amount of P1,123,500.00, representing
the accrued rentals as of August 8, 1993, less the amount of P485,000.00
representing deposits paid by the respondents. In additiodn, respondents are also
ordered to pay the amount of P13,700.00 a month by way of rentals starting from
August 8, 1993 until they vacate the subject property. The rentals shall earn a
corresponding legal interest of six percent (6%) per annum to be computed from
April 20, 1989 until the finality of this decision. After this decision becomes final and
executory, the rate of legal interest shall be computed at twelve percent (12%) per
annum from such finality until its satisfaction.

Costs against the respondents.

SO ORDERED.

G.R. No. 167017 June 22, 2009

SERAFIN CHENG, Petitioner,

vs.
SPOUSES VITTORIO and MA. HELEN DONINI, Respondents.

The subject of this petition is an oral lease agreement that went sour. Petitioner
Serafin Cheng agreed to lease his property located at 479 Shaw Blvd., Mandaluyong
City to respondents, Spouses Vittorio and Ma. Helen Donini, who intended to put up
a restaurant thereon. They agreed to a monthly rental of P17,000, to commence in
December 1990.

Bearing an Interim Grant of Authority executed by petitioner, respondents

proceeded to introduce improvements in the premises. The authority read:

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

Manila, 31 October 1990.1

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

Respondents then filed an action for specific performance and damages with a
prayer for the issuance of a writ of preliminary injunction in the Regional Trial Court
(RTC) of Pasig City, Branch 67, docketed as Civil Case No. 60769. Respondents
prayed that petitioner be ordered to execute a written lease contract for five years,
deducting from the deposit and rent the cost of repairs in the amount of P445,000,
or to order petitioner to return their investment in the amount of P964,000 and
compensate for their unearned net income of P200,000 with interest, plus attorneys
fees.2

Petitioner, in his answer, denied respondents claims and sought the award of moral
and exemplary damages, and attorneys fees.3
After trial, the RTC rendered its decision in favor of petitioner, the dispositive
portion of which provided:

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

1. The Complaint is dismissed.

2. On the counterclaim, [respondents] are ordered, jointly and severally, to pay the
[petitioner] P500,000.00 as moral damages; P100,000.00 as exemplary damages;
and P50,000.00 as attorneys fees.

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

SO ORDERED.4

Respondents appealed to the Court of Appeals (CA) which, in its decision5 dated
March 31, 2004, recalled and set aside the RTC decision, and entered a new one
ordering petitioner to pay respondents the amount of P964,000 representing the
latters expenses incurred for the repairs and improvements of the premises.6

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

Hence, this petition for certiorari under Rule 45 of the Rules of Court, with
petitioner arguing that:

THE COURT OF APPEALS DECIDED THIS CASE NOT IN ACCORD WITH LAW AND
WITH APPLICABLE DECISIONS OF THIS HONORABLE COURT. PUT OTHERWISE:

A. BY ORDERING PETITIONER TO REIMBURSE RESPONDENTS THE FULL VALUE OF

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

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

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

ORNAMENTAL EXPENSES, THE COURT OF APPEALS CONTRAVENED THE SECOND
PARAGRAPH OF ARTICLE 1678.
D. THE COURT OF APPEALS ERRED IN APPLYING THE PRINCIPLE OF EQUITY IN
FAVOR OF THE RESPONDENTS.

E. THE COURT OF APPEALS ERRED IN NOT AFFIRMING THE DECISION OF THE

TRIAL COURT AWARDING DAMAGES TO PETITIONER.

F. THE COURT OF APPEALS SERIOUSLY ERRED AND/OR GRAVELY ABUSED ITS

DISCRETION IN FIXING THE AMOUNT OF P961,000.009 CONTRARY TO
RESPONDENTS OWN REPRESENTATION AND EVIDENCE.10

Respondents were required to file their comment on the petition but their counsel
manifested that he could not file one since his clients whereabouts were unknown
to him.11 Counsel also urged the Court to render a decision on the basis of the
available records and documents.12 Per resolution dated August 30, 2006, copies of
the resolutions requiring respondents to file their comment were sent to their last
known address and were deemed served. The order requiring respondents counsel
to file a comment in their behalf was reiterated.13

In their comment, respondents argued that they were possessors in good faith,
hence, Articles 448 and 546 of the Civil Code applied and they should be indemnified
for the improvements introduced on the leased premises. Respondents bewailed the
fact that petitioner was going to benefit from these improvements, the cost of which
amounted to P1.409 million, in contrast to respondents rental/deposit obligation
amounting to only P34,000. Respondents also contended that petitioners rescission
of the agreement was in bad faith and they were thus entitled to a refund.14

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

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

2. respondents committed a breach in the terms and conditions of the agreement

when they failed to pay the rentals;

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

4. respondents were entitled to reimbursement for the cost of improvements under

the principle of equity and unjust enrichment; and

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

As the correctness of the CAs ruling regarding (1) the lack of agreement on the
deposit and rentals; (2) respondents breach of the terms of the verbal agreement
and (3) the lack of valid rescission by petitioner was never put in issue, this decision
will be confined only to the issues raised by petitioner, that is, the award of
reimbursement and the deletion of the award of damages. It need not be stressed
that an appellate court will not review errors that are not assigned before it, save in
certain exceptional circumstances and those affecting jurisdiction over the subject
matter as well as plain and clerical errors, none of which is present in this case.16

Remarkably, in ruling that respondents were entitled to reimbursement, the CA did

not provide any statutory basis therefor and instead applied the principles of equity
and unjust enrichment, stating:

It would be inequitable to allow the defendant-appellee, as owner of the property to

enjoy perpetually the improvements introduced by the plaintiffs-appellants without
reimbursing them for the value of the said improvements. Well-settled is the rule
that no one shall be unjustly enriched or benefitted at the expense of another.17

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

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

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

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

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

But respondents cannot be considered possessors or builders in good faith. As early

as 1956, in Lopez v. Philippine & Eastern Trading Co., Inc.,23 the Court clarified that
a lessee is neither a builder nor a possessor in good faith

x x x This principle of possessor in good faith naturally cannot apply to a lessee

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

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

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

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

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

The fact that petitioner will benefit from the improvements introduced by
respondents is beside the point. In the first place, respondents introduced these
improvements at their own risk as lessees. Respondents were not forced or obliged
to splurge on the leased premises as it was a matter of necessity as well as a
business strategy.27 In fact, had respondents only complied with their obligation to
pay the deposit/rent, there would have been no dispute to begin with. If they were
able to shell out more than a million pesos to improve the property, the measly
P34,000 deposit demanded by petitioner was a mere "drop in the bucket," so to
speak. More importantly, the unequivocal terms of Article 1678 of the Civil Code
should be the foremost consideration.

The Court notes that the CA pegged the total value of the improvements made on the
leased premises at P964,000, which was apparently based on the allegation in
respondents complaint that it was their total investment cost.28 The CA lumped
together all of respondents expenses, which was a blatant error. A qualification
should have been made as to how much was spent for useful improvements (or
those which were suitable to the use for which the lease was intended) and how
much was for ornamental expenses. Respondent Vittorio Donini testified that he
spent P450,000 for necessary repairs, while P500,000 was spent for adornments.29
The evidence on record, however, showed respondents expenses for useful
improvements to be as follows:

Expense Amount
Electrical P31,893.65
Exh. "F", et seq. 30

Roofing P14,856.00
Exhibit "O"31

Labor P19,909.75
Exh. "P", et seq.32

CeilingP65,712.00
Exh. "Q", et seq.33

Labor P38,689.20
Exh. "R", et seq.34

Electrical (phase 2) P76,539.10

Exh. "S", et seq.35
Door P41,371.75
Exh. "T", et seq.36

Labor P25,126.00
Exh. "U", et seq.37

Water P 8,031.00
Exhs. "W" & "W-1"38

Gutters P 35,550.05
Exhs. "X" & "X-1"39

Outside Wall P 24,744.00

Exh. "X-2"40

Inside Wall P 22,186.10

Exh. "X-3"41

Electrical (phase 3) P 88,698.30

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

Labor P 19,995.00
Exhibit "Y"43

Total P513,301.90
Accordingly, the 50% value of the useful improvements to be reimbursed by
petitioner, if he chose to do so, should be based on P513,301.90. Since petitioner did
not exercise his option to retain these useful improvements, then respondents could
have removed the same. This was the legal consequence of the application of Article
1678 under ordinary circumstances.

The reality on the ground ought to be recognized. For one, as disclosed by

respondents counsel, he no longer knows the exact whereabouts of his clients, only
that they are now in Europe and he has no communication with them at all.44 For
another, it appears that as soon as respondents vacated the premises, petitioner
immediately reclaimed the property and barred respondents from entering it.
Respondents also alleged, and petitioner did not deny, that the property subject of
this case had already been leased to another entity since 1991.45 This is where
considerations of equity should come into play. It is obviously no longer feasible for
respondents to remove the improvements from the property, if they still exist. The
only equitable alternative then, given the circumstances, is to order petitioner to pay
respondents one-half of the value of the useful improvements (50% of P513,301.90)
introduced on the property, or P256,650.95. To be off-set against this amount are
respondents unpaid P17,000 monthly rentals for the period of December 1990 to
April 1991,46 or P85,000. Petitioner should, therefore, indemnify respondents the
amount of P171,650.95. This is in accord with the laws intent of preventing unjust
enrichment of a lessor who now has to pay one-half of the value of the useful
improvements at the end of the lease because the lessee has already enjoyed the
same, whereas the lessor can enjoy them indefinitely thereafter.47

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

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

Petitioner is entitled to moral damages but not in the amount of P500,000 awarded
by the RTC, which the Court finds to be excessive. While trial courts are given
discretion to determine` the amount of moral damages, it "should not be palpably
and scandalously excessive."48 Moral damages are not meant to enrich a person at
the expense of the other but are awarded only to allow the former to obtain means,
diversion or amusements that will serve to alleviate the moral suffering he has
undergone due to the other persons culpable action.49 It must always reasonably
approximate the extent of injury and be proportional to the wrong committed.50
The award of P100,000 as moral damages is sufficient and reasonable under the
circumstances.

The award of P100,000 as exemplary damages is likewise excessive. Exemplary

damages are imposed not to enrich one party or impoverish another but to serve as
a deterrent against or as a negative incentive to curb socially deleterious actions.51
We think P50,000 is reasonable in this case.1avvphi1

Finally, Article 2208 of the Civil Code allows recovery of attorney's fees when
exemplary damages are awarded or when the defendant's act or omission has
compelled the plaintiff to litigate with third persons or to incur expenses to protect
his interest.52 Petitioner is entitled to it since exemplary damages were awarded in
this case and respondents act in filing Civil Case No. 60769 compelled him to
litigate. The amount of P25,000 is in accord with prevailing jurisprudence.53

WHEREFORE, the petition is PARTIALLY GRANTED. The decision dated March 31,
2004 rendered by the Court of Appeals in CA-G.R. CV No. 54430 is hereby MODIFIED
in that

(1) petitioner Serafin Cheng is ORDERED to pay respondents, spouses Vittorio and
Ma. Helen Donini, the amount of P171,650.95 as indemnity for the useful
improvements; and
(2) respondents, spouses Vittorio and Ma. Helen Donini, are ORDERED to pay
petitioner Serafin Cheng the following sums:

a) P100,000.00 moral damages;

b) P50,000.00 exemplary damages and

c) P25,000.00 attorneys fees.

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

SO ORDERED.

G.R. No. 178527 November 27, 2009

JOVEN YUKI, JR., Petitioner,

vs.
WELLINGTON CO, Respondent.

The lessee-petitioners attempt to hold on to the property subject of the instant

unlawful detainer case, by resorting to fraudulent machinations such as refusing to
receive the notices to vacate, must not be countenanced. His stubborn refusal to
receive the notices to vacate should not prejudice the right of the lessor-respondent,
to use and enjoy the fruits of his property.

This Petition for Review on Certiorari1 assails the November 23, 2008 Decision2 of
the Court of Appeals (CA) in CA-G.R. SP No. 89228 granting respondents Petition for
Review3 and setting aside the March 7, 2005 Decision4 of the Regional Trial Court
(RTC), Branch 14, Manila. The RTC reversed and set aside the Decision5 dated
September 21, 2004 of the Metropolitan Trial Court (MeTC), Branch 15, Manila,
granting respondents Complaint for unlawful detainer6 and ordering petitioner to
vacate the premises subject matter of this case.

Factual Antecedents

Mr. Joseph Chua was the registered owner of a parcel of land, together with a
commercial building erected thereon, situated at the corner of Espan a and
Instruccion Sts., Sampaloc, Manila. In 1981, he leased a portion of the building to
petitioner Joven Yuki, Jr., who put up a business therein under the name and style
"Supersale Auto Supply." The contract of lease between Mr. Chua and petitioner had
a term of five years but was not reduced into writing. Thereafter, the lease was
renewed through a series of verbal and written agreements,7 the last of which was a
written Contract of Lease8 covering the period of January 1, 2003 to December 31,
2003 at a monthly rental of P7,000.00.

In November 2003, Mr. Chua informed petitioner that he sold the property to
respondent Wellington Co and instructed petitioner to thenceforth pay the rent to
the new owner.

Proceedings before the Metropolitan Trial Court

After the expiration of the lease contract, petitioner refused to vacate and surrender
the leased premises. Thus, respondent filed a Complaint for unlawful detainer9
before the MeTC of Manila. The material allegations of the complaint read as follows:

xxxx

3. Plaintiff [herein respondent] is the registered owner of that parcel of land

together with the building existing thereon situated at 2051 Espan a St. cor.
Instruccion St., Sampaloc, Manila. Plaintiffs title to said property is evidenced by the
Transfer Certificate of Title No. 261682 of the Registry of Deeds of Manila,
photocopy of which is attached hereto as Annex "A" and the tax declarations for the
lot and improvement are attached hereto as Annexes "B" and "B-1", respectively;

xxxx

5. Prior to the sale of the lot and building by the previous owner to herein plaintiff,
Joseph Chua sent a notice to defendant [herein petitioner] informing him that the
property is for sale giving the defendant the opportunity to exercise his pre-emptive
right. Copy of said Notice is attached hereto as Annex "D";

6. Defendant waived his right to exercise his pre-emptive right and the real property
was eventually sold to herein plaintiff;

7. Plaintiff, being the new owner of the lot and building, informed defendant that his
Contract of Lease with the former lessor-owner Joseph Chua will no longer be
renewed as per letter dated November 3, 2003, copy of which was left at defendants
store, for his refusal to acknowledge the receipt of the same. A copy of said Notice is
attached hereto and made an integral part hereof as Annex "E";

8. For failure and refusal of the defendant to vacate and surrender the leased unit to
plaintiff, plaintiffs counsel in turn sent a formal demand upon defendant to vacate
the leased premises within ten (10) days from receipt of the formal demand in view
of the expiration of the contract of lease. Copy of said letter dated January 13, 2004
is attached hereto as Annex "F". A copy was sent by registered mail but defendant
failed to claim the same as evidenced by the Certification from the Central Post
Office, copy of which is attached hereto as Annex "G". Another copy of the same
demand letter was personally served at defendants address as attested by the
sworn statement of Wilberto Co who served the said formal demand as well as the
notice earlier sent by plaintiff. Copy of the Affidavit of Wilberto Co is attached hereto
as Annex "H";

xxxx

Respondent prayed that petitioners possession of subject premises be declared

unlawful and that petitioner be ordered to vacate it. He also sought reasonable
compensation for the use of the property until such time that it is surrendered to
him and for the petitioner to pay him moral damages and attorneys fees.

In his Answer with Counterclaim,10 petitioner denied having been served with
copies of the alleged notice of sale and notice to vacate. By way of affirmative
defenses, he claimed that the complaint should be dismissed for being premature as
there was no allegation therein of prior referral to the barangay. Petitioner also
asserted that since he was not notified by the former owner of the sale, he was
deprived of his preemptive rights. Moreover, respondent has no cause of action
against him because respondent is not the true owner of the property but merely
acts as a representative of persons whom respondent refused to disclose. Further,
petitioner argued that there was an implied renewal of lease considering that a) he
did not receive a notice to vacate, b) the two months deposit and one month advance
payment he gave to Mr. Chua were never returned to him, and c) respondent
accepted his payments for the months of January and February 2004.

Petitioner also asserted that his property rights would be violated if he is evicted
because he has been operating his business in the premises for more than 20 years
and has established goodwill in the area. He thus proposed that he be compensated
the amount of not less than P1 million or be allowed to dispose of his stocks within a
reasonable period of time, before he vacates the premises.

On September 21, 2004, the MeTC-Branch 15 rendered a Decision11 in favor of the

respondent, the dispositive portion of which reads:

WHEREFORE, judgment is hereby rendered in favor of the plaintiff and against the
defendant ordering the defendant and all persons claiming right under him:

1. to VACATE and surrender the subject property peacefully to plaintiff;

2. to PAY the plaintiff reasonable compensation for the use and occupancy of the
subject premises in the amount of eight thousand (P8,000.00) pesos per month from
January 1, 2004 until such time that he and all persons claiming rights under him
have fully vacated the premises;
3. to PAY the plaintiff thirty thousand (P30,000.00) pesos as attorneys fees and
litigation expenses.

SO ORDERED.12

Proceedings before the Regional Trial Court

In time, petitioner went on appeal to the RTC contending that

A. THE LOWER COURT ERRED WHEN IT RULED THAT THE PLAINTIFF-APPELLEE

[herein respondent] HAD A CAUSE OF ACTION TO EVICT HEREIN DEFENDANT-
APPELLANT [herein petitioner] FROM THE PREMISES.

B. THE LOWER COURT ERRED WHEN IT RULED THAT THERE WAS NO IMPLIED
NEW LEASE CREATED BY PLAINTIFF-APPELLEES ACCEPTANCE OF THE RENTALS
MADE BY DEFENDANT-APPELLANT.

C. THE LOWER COURT ERRED WHEN IT RULED THAT VALID NOTICE [TO] VACATE
WAS SERVED UPON DEFENDANT-APPELLANT BY THE PLAINTIFF-APPELLEE.

D. THE LOWER COURT GRAVELY ERRED WHEN IT RULED THAT DEFENDANT-

APPELLANT WAS NOT DENIED HIS PREEMPTIVE RIGHT TO PURCHASE THE
PROPERTY HE HAS BEEN OCCUPYING.

E. THE LOWER COURT GRAVELY ERRED WHEN IT DENIED THE MOTION FOR
CLARIFICATORY HEARING FILED BY DEFENDANT-APPELLANT AS WELL AS
HAVING DENIED THE MOTION FOR VOLUNTARY INHIBITION.

F. THE LOWER COURT ERRED WHEN IT AWARDED ATTORNEYS FEES AMOUNTING

TO THIRTY THOUSAND (P30,000.00) IN FAVOR OF PLAINTIFF-APPELLEE.

On March 7, 2005, the RTC-Branch 14 rendered a Decision13 with the following

disposition:

WHEREFORE, all premises considered, the Court finds and so holds preponderance
of evidence on the part of the defendant-appellant. Accordingly, the Decision
appealed from is hereby REVERSED, and the complaint for Unlawful Detainer is
dismissed.

Finally, there is on record a defendant-appellants Motion for Reconsideration as

regards the amount of the supersedeas bond. By the dismissal of the case, the
resolution thereof is thereby rendered moot and academic.

SO ORDERED.14
In reversing the ruling of the MeTC, the RTC found no proof on record that petitioner
actually received the notice to vacate, thereby making the Complaint fatally
defective. The RTC likewise opined that the resolution of the case hinges on the
existence of implied new lease, a question which is incapable of pecuniary
estimation and, therefore, beyond the MeTCs jurisdiction.

Proceedings before the Court of Appeals

Respondent filed with the CA a Petition for Review15 under Rule 42 of the Rules of
Court assailing the RTC Decision. On November 23, 2006, the CA promulgated the
now assailed Decision16 granting the petition. Its fallo reads:

WHEREFORE, the instant petition is hereby GRANTED. The Decision dated 7 March
2005 rendered by the Regional Trial Court (RTC) of Manila, Branch 14 is SET ASIDE
and the Decision dated 21 September 2004 of the Metropolitan Trial Court (MeTC)
of Manila, Branch 15 is REINSTATED.

SO ORDERED.17

Issues

Petitioner interposed the present recourse imputing upon the CA the following
errors:

A. x x x THE COURT OF APPEALS COMMITTED GRAVE ERROR WHEN IT RULED NOT

TO DISMISS THE PETITION INTERPOSED BY RESPONDENT AND INSTEAD
PROCEEDED TO REVERSE THE DECISION DATED MARCH 7, 2005 OF THE
REGIONAL TRIAL COURT, BRANCH 14 DESPITE RESPONDENT (THEN PETITIONER)
HAVING FAILED TO COMPLY WITH THE PROCEDURAL REQUIREMENTS UNDER
RULE 42 OF THE 1997 RULES OF CIVIL PROCEDURE.18

B. THE COURT OF APPEALS ERRED WHEN IT FOUND ERRORS COMMITTED BY THE

RTC IN REVERSING THE DECISION OF THE MTC.19

Our Ruling

The petition lacks merit.

The allegations in respondents petition are supported by material portions of the

record.

Petitioner contends that the Petition for Review20 filed by the respondent with the
CA is procedurally infirmed and that the appellate court should have outrightly
dismissed the same. Specifically, petitioner points out that while respondent
attached to the petition the parties respective position papers, he failed to attach to
said position papers the annexes thereto. This, petitioner insists, warrants the
dismissal of respondents petition per Section 2, Rule 42 of the Rules of Court,21 in
relation to Section 322 of the same Rule.

We do not agree. Section 2 of Rule 42 does not require that all the pleadings and
documents filed before the lower courts must be attached as annexes to the petition.
Aside from clearly legible duplicate originals or true copies of the judgments or final
orders of both lower courts, it merely requires that the petition be accompanied by
copies of pleadings and other material portions of the record as would support the
allegations of the petition. As to what these pleadings and material portions of the
record are, the Rules grants the petitioner sufficient discretion to determine the
same. This discretion is of course subject to CAs evaluation whether the supporting
documents are sufficient to make out a prima facie case.23 Thus, Section 3
empowers the CA to dismiss the petition where the allegations contained therein are
utterly bereft of evidentiary foundation. Since in this case the CA gave due course to
respondents Petition for Review and proceeded to decide it on the merits, it can be
fairly assumed that the appellate court is satisfied that respondent has sufficiently
complied with Section 2 of Rule 42.

Besides, our own examination of the CA rollo reveals that the annexes to the position
papers can be found somewhere else in the petition. The annexes to the parties
respective position papers are the same annexes attached to the Complaint and the
Answer. In fact, Annexes "A" to "H" of the Complaint respectively pertain to the same
documents marked as Annexes "A" to "H" of respondents Position Paper. And while
respondents Position Paper as attached to the petition does not contain any
annexes, said annexes are nonetheless appended to the Complaint which is also
attached to the petition.

The same is true with Annexes "1" to "6" of petitioners Position Paper. Annexes "1",
"2", and "3" are attached to the Petition for Review as Annexes "3", "4", and "5",
respectively, of the Answer. Annex "4" of petitioners Position Paper is the Contract
of Lease marked as Annex "C" of the Complaint, while Annexes "5" and "6" are
marked and attached as Annexes "1" and "2", respectively, of the Answer. To our
mind, these are more than substantial compliance with the requirements of the
rules. Indeed, if we are to apply the rules of procedure in a very rigid and technical
sense as what the petitioner suggests in this case, the ends of justice would be
defeated. In Lanaria v. Planta,24 we emphasized that courts should not be so strict
about procedural lapses that do not really impair the proper administration of
justice, for rules of procedure are intended to promote, and not to defeat, substantial
justice.25

Allegations of implied new lease or tacita reconduccion cannot oust the MeTC of
jurisdiction over unlawful detainer cases.
Petitioner also contends that the CA grievously erred in reversing the Decision of the
RTC. He maintains that the RTC correctly held that the key issue to be resolved in
this case is the existence of an implied new lease, a matter which is incapable of
pecuniary estimation and, therefore, beyond the MeTCs jurisdiction.

The argument is bereft of merit. The allegation of existence of implied new lease or
tacita reconduccion will not divest the MeTC of jurisdiction over the ejectment case.
It is an elementary rule that the jurisdiction of the court in ejectment cases is
determined by the allegations pleaded in the complaint26 and cannot be made to
depend upon the defenses set up in the answer or pleadings filed by the
defendant.27 This principle holds even if the facts proved during trial do not
support the cause of action alleged in the complaint.28 In connection with this, it is
well to note that in unlawful detainer cases the elements to be proved and resolved
are the facts of lease and expiration or violation of its terms.29

Here, no interpretative exercise is needed to conclude that respondent has complied

with such requirement. In respondents Complaint, he specifically alleged that (1)
the former owner, Mr. Chua, and petitioner entered into a contract of lease; (2)
subsequently, respondent purchased the leased premises from Mr. Chua and became
the owner thereof; (3) thereafter, the lease contract between Mr. Chua and petitioner
expired; and (4) petitioner refused to vacate the premises despite the expiration and
non-renewal of the lease.

Besides, we do not agree with the RTC that the MeTC does not have jurisdiction to
resolve the issue of existence of implied new lease in the unlawful detainer case.
Tacita reconduccion refers to the right of the lessee to continue enjoying the
material or de facto possession of the thing leased within a period of time fixed by
law. During its existence, the lessee can prevent the lessor from evicting him from
the disputed premises. On the other hand, it is too well-settled to require a citation
that the question to be resolved in unlawful detainer cases is, who is entitled to de
facto possession. Therefore, since tacita reconduccion is determinative of who
between the parties is entitled to de facto possession, the MeTC has jurisdiction to
resolve and pass upon the issue of implied new lease in unlawful detainer case. In
Mid-Pasig Land Development Corporation v. Court of Appeals,30 we ruled that the
MeTC is clothed with exclusive original jurisdiction over an unlawful detainer case
even if the same would entail compelling the plaintiff therein to recognize an
implied lease agreement.

Respondent did not acquiesce to petitioners continued possession of subject

premises.

Petitioner likewise claims that the RTC correctly held that there was no sufficient
evidence on record that he received the alleged notice to vacate. While he admits
that a notice to vacate is no longer necessary when the ground for unlawful detainer
is the expiration of the lease, proof that he actually received said notice is still
important in this case in view of his allegation of implied new lease. Citing Article
1670 of the Civil Code,31 petitioner contends that if at the expiration of the contract
of lease the lessee continued to enjoy the leased property for 15 days with the
acquiescence of the lessor, there is an implied new lease. In this case, the
determination of whether or not his continued stay in the leased premises is with
the acquiescence of the lessor hinges on whether or not he received the notice to
vacate. And, as correctly found by the RTC, he did not receive any notice to vacate.

We are not swayed. Under Article 1670, an implied new lease will set in if it is shown
that: (a) the term of the original contract of lease has expired; (b) the lessor has not
given the lessee a notice to vacate; and (c) the lessee continued enjoying the thing
leased for 15 days with the acquiescence of the lessor. This acquiescence may be
inferred from the failure of the lessor to serve notice to vacate upon the lessee.32

In the instant case, however, the MeTC and the CA correctly found that there was a
valid demand to vacate. Thus:

Prior to the sale of the property by previous owner Joseph Chua to herein plaintiff,
defendant was formally notified by the previous owner in a letter dated September
1, 2003 (Annex "D" of Complaint, Records, p. 12) of his intention to sell the property
but herein defendant failed to exercise his pre-emptive right to purchase the
property.

Thus, the subject premises was sold to plaintiff who became the registered owner
thereof as evidenced by TCT No. 261682 (Annex "A," Complaint, Records, p. 7).
Plaintiff, as new owner/vendee, informed defendant through a letter dated
November 3, 2003 (Annex "E," Complaint, Records, p. 13), even prior to the
expiration of the contract that he will be needing the premises thus the contract will
not be renewed or no contract will be executed, and directed defendant to vacate the
premises by January 1, 2004. The said notice was sent by registered mail and by
personal service. The notice sent by registered mail was returned to sender for
failure of the defendant to claim the same at the post office. The unclaimed letter is
attached to the plaintiffs position paper as Annex "F" (Records, p. 93). Despite
notice given to him, defendant failed to vacate and a formal demand letter dated
January 13, 2004 was served to him personally on January 21, 2004 which he
refused to acknowledge that he received the same. A copy of that same letter was
sent by registered mail but defendant refused to claim the same for which it was
returned to sender. The unclaimed letter which was returned to sender is attached
to the plaintiffs position paper as Annex "G-1" (Records, p. 96) and the certification
from the post office attesting to the fact that defendant failed to claim the same is
attached to the plaintiffs position paper as Annex "G" (Records, p. 95). The demand
letter dated January 13, 2004 pertains to the premises presently occupied by
defendant. The Contract of Lease (Annex "C," of Complaint, Records, pp. 10-11)
which expired on December 31, 2003 speaks of only one (1) unit which is the
subject matter of this case. Defendant failed to show that the portion being occupied
by him which is the subject matter of this case is covered by another lease contract.

The Court therefore finds that there was a valid demand to vacate.33

This finding of the MeTC, which was affirmed by the CA, is a factual matter that is
not ordinarily reviewable in a petition for review on certiorari filed under Rule 45 of
the Rules of Court. It is settled that in a petition for review on certiorari, only
questions of law may be raised by the parties and passed upon by this
court.1awphi1

Besides, even if we do review the case, there is no cogent reason to disturb the
finding of said courts. Under the rules, if the addressee refuses to accept delivery,
service by registered mail is deemed complete if the addressee fails to claim the mail
from the postal office after five days from the date of first notice of the postmaster.34
Further, the absence of personal service of notice to vacate in this case could only be
attributed to petitioners unexplainable refusal to receive the same. In Co Keng Kian
v. Intermediate Appellate Court,35 we held that "[t]he Court cannot countenance an
unfair situation where the plaintiff in an eviction case suffers further injustice by the
unwarranted delay resulting from the obstinate refusal of the defendant to
acknowledge the existence of a valid demand."

The formal demands to vacate sent to petitioner, coupled with the filing of an
ejectment suit, are categorical acts on the part of respondent showing that he is not
amenable to another renewal of the lease contract. Therefore, petitioners
contention that his stay in the subject premises is with the acquiescence of the
respondent, has no leg to stand on.

Petitioners alleged preferential right to buy subject premises has no basis.

In view of the above disquisition, petitioners claim that he was deprived of his
preemptive rights because he was not notified of the intended sale, likewise
crumbles. Besides, the right of first refusal, also referred to as the preferential right
to buy, is available to lessees only if there is a stipulation thereto in the contract of
lease or where there is a law granting such right to them (i.e., Presidential Decree
No. 1517 (1978),36 which vests upon urban poor dwellers37 who merely lease the
house where they have been residing for at least ten years, preferential right to buy
the property located within an area proclaimed as an urban land reform zone).
Unlike co-owners and adjacent lot owners,38 there is no provision in the Civil Code
which grants to lessees preemptive rights. Nonetheless, the parties to a contract of
lease may provide in their contract that the lessee has the right of first refusal.

In this case, there is nothing in the Contract of Lease which grants petitioner
preferential right to buy the subject premises. We are likewise unaware of any
applicable law which vests upon him priority right to buy the commercial building
subject matter of this case. In fact, aside from the sweeping statement that his
preferential right to buy was violated, petitioner failed to cite in his Petition,39
Reply,40 or Memorandum41 any specific provision of a law granting him such right.
In other words, petitioner failed to lay the basis for his claim that he enjoys a
preferential right to buy.

And even assuming that he has, the same will not prevent the ejectment case filed by
the respondent from taking its due course. A contract of sale entered into in
violation of preemptive right is merely rescissible and the remedy of the aggrieved
party whose right was violated is to file an appropriate action to rescind the sale and
compel the owner to execute the necessary deed of sale in his favor. In Wilmon Auto
Supply Corp. v. Court of Appeals,42 we categorically held that an action for unlawful
detainer cannot be abated or suspended by an action filed by the defendant-lesseee
to judicially enforce his right of preemption.

WHEREFORE, the petition is DENIED.

SO ORDERED.