Yap v. Court of Appeals
REITERATIONFacts
The Antecedents: Martinez Leyba, Inc. (MLI) owned a commercial building. In 1960, MLI leased it to Alejandro Dy Juanco, owner of Universal Mill Supply. The lease was oral and monthly. Universal Mill Supply was incorporated in 1969, with Dy Juanco as majority stockholder, and continued paying monthly rentals via corporate checks. In 1978, Bee Queen Restaurant, Inc. (BEE QUEEN), also with Dy Juanco as majority stockholder, was incorporated and occupied the premises, paying rentals. On November 3, 1986, BEE QUEEN subleased the first floor and mezzanine to Danilo S. Yap for five years (January 1, 1986 - December 31, 1990), with a clause stating the sublease duration would be co-terminus with BEE QUEEN's lease. Yap opened Kouros Restaurant. On October 23, 1990, MLI sent Dy Juanco a letter terminating their lease effective November 5, 1990, citing non-occupation and subleasing. Dy Juanco and Universal Mill Supply insisted they still occupied the second floor and that subleasing was not prohibited. Yap informed Dy Juanco he deposited November and December 1990 rentals in court. On December 13, 1990, BEE QUEEN notified Yap that their sublease expired December 31, 1990, demanding he vacate and pay P29,000.00 in unpaid rentals. On December 22, 1990, Yap entered into a direct lease contract with MLI and paid rentals to MLI. Procedural History: On May 16, 1991, BEE QUEEN filed a complaint against Yap and MLI, seeking to fix a period of lease, declare the Yap-MLI lease void, and for damages, alleging conspiracy to dispossess BEE QUEEN. BEE QUEEN argued that the 1960 contract, being without a period, allowed the court to fix a longer term under Article 1687 of the Civil Code. MLI countered that it prohibited subleasing, that Dy Juanco's sublease constituted abandonment justifying termination of their oral contract, and that it never consented to BEE QUEEN taking over the lease. The Regional Trial Court (RTC) dismissed the case on November 28, 1995, holding that the lease had a definite term (month-to-month) and Article 1687 did not apply, especially since MLI had exercised its option to terminate. On appeal, the Court of Appeals (CA) reversed the RTC, extending the Dy Juanco-MLI lease for three years from finality of its decision. MLI and Yap filed separate petitions for review, which were consolidated. The Petition: MLI argued that no lease contract existed between it and BEE QUEEN/Universal Mill Supply, and it never assented to BEE QUEEN taking over the lease. It claimed Dy Juanco abandoned the lease by subleasing. Yap argued that an extension under Article 1687 must be sought before lease termination and on equitable grounds, which were absent. MLI later manifested that the property was expropriated by the government for the LRT Line 2, rendering the case moot.
Issue(s)
Whether the Court of Appeals erred in extending the lease contract between Alejandro Dy Juanco and Martinez Leyba, Inc. despite MLI's assertion of no contractual relationship with Bee Queen Restaurant, Inc. and Universal Mill Supply Co. Inc., and whether equitable considerations warrant such an extension. Whether Alejandro Dy Juanco, Universal Mill Supply Co. Inc., and Bee Queen Restaurant, Inc. are entitled to an extension of the lease contract under Article 1687 of the Civil Code, considering the sublease arrangement and profit motive. Whether the lease contract between Alejandro Dy Juanco and Martinez Leyba, Inc. was validly terminated by MLI, particularly in light of the unauthorized sublease. Whether Danilo S. Yap and Martinez Leyba, Inc. conspired to execute a lease contract to dispossess Bee Queen Restaurant, Inc.
Ruling
The petitions are GRANTED. The assailed Decision of the Court of Appeals is REVERSED and SET ASIDE, and the Decision of the Regional Trial Court dismissing the complaint is AFFIRMED and REINSTATED.
Ratio Decidendi
On the applicability of Article 1687, the extension of the lease contract, and equitable considerations: The Court reiterated that if the period for a lease contract has not been fixed, it is understood to be from month to month if the rent is paid monthly. Consequently, the contract expires at the end of each month unless, prior thereto, an extension has been sought through appropriate legal action. The ruling in Prieto v. Santos was applied, stating that any extension must be sought before the contract's expiration, not after. In this case, MLI opted not to renew the lease or accept payment at the end of October 1990, thus terminating the lease ipso facto. The lessee could not belatedly file a suit to extend its term after the contract had expired. The Court distinguished the present case from Ramirez v. Chit and F. S. Divinagracia Agro-Commercial, Inc. v. Court of Appeals, where the lessees were in actual possession when the lease was terminated and invoked Article 1687 as a defense against ejectment. Here, the lessee initiated the action to extend the lease after its termination. The Court held that the power to fix a longer term under Article 1687 is discretionary and should be exercised only where equities warrant it. The Court found no equitable considerations favoring the private respondents. The fact that the lessee paid rentals religiously for years or made improvements, as held in Yek Seng Co., is not sufficient to justify an extension, especially when the lessor's right to regain possession is disregarded. The Court emphasized that basic common law principles of fairness and equity shun property entailment bordering on perpetuity to the exclusion of the owner. On the entitlement to an extension under Article 1687, considering the sublease and profit motive: A glaring fact against extension was that BEE QUEEN, Dy Juanco, and Universal Mill Supply did not physically occupy or use the property but subleased it to Yap. BEE QUEEN subleased the premises to Yap for P14,500.00 monthly while paying only P4,626.50 to its lessor. This constituted making a profit with minimal effort. The Court stated, "He who seeks equity must do equity," and found it uncomfortable that private respondents, who did not even inform their lessor about the sublease, invoked equity. Their continued occupancy was deemed repugnant to equity and fair play. On the termination of the lease by MLI: MLI asserted that it had always prohibited subleasing and that Dy Juanco's act of subleasing constituted abandonment, justifying the termination of their oral contract. MLI claimed it did not consent to the sublease and had no dealings with BEE QUEEN until the case was filed. The Court noted that Nestor Quesada, MLI's Building Administrator, denied knowledge of any agreement with BEE QUEEN and stated that the building was leased to Universal Mill Supply, represented by Dy Juanco, who never informed management about the sublease to Yap. This supports MLI's position that the sublease was unauthorized and a ground for termination. On the conspiracy and dispossession: The Court found no conspiracy between Yap and MLI to dispossess BEE QUEEN. Yap entered into a direct lease with MLI only after MLI had terminated its lease with Dy Juanco and after BEE QUEEN had notified Yap of the sublease's expiration. Yap's actions were consistent with securing his occupancy after the original lease arrangements became untenable. The RTC's dismissal of the case for lack of merit was affirmed, finding no basis for BEE QUEEN's claims.
Main Doctrine
A lease contract with a monthly rental, even if not reduced to writing, is considered a lease from month to month. The lessor has the right to terminate the lease at the end of any month, and the lessee cannot belatedly seek an extension of the term after its expiration, especially when the lessee has subleased the premises for a profit without informing the lessor.