Dakak Beach Resort Corp. v. Mendezona
REITERATIONFacts
The Antecedents: Violeta Saguin de Luzuriaga (Violeta) owned Lot No. 8771-A, a 1,602-square-meter property in Taguilon, Dapitan City, obtained via a free patent. On December 1, 1987, Violeta entered into a 10-year lease contract with Dakak Beach Resort Corporation (Dakak), represented by Romeo G. Jalosjos (Jalosjos), commencing January 1, 1988, and renewable for another five years. The contract stipulated escalating monthly rentals and provided that all permanent and fixed improvements introduced by the lessee would become the lessor's property upon termination. Violeta repeatedly demanded a copy of the contract from Jalosjos but was not provided one. Believing the lease expired, Violeta returned rental checks in 1992 and demanded Dakak vacate the lot in 1994. The demands were ignored. On April 13, 1998, Violeta sold the subject property and all her rights to her daughter, Pilar L. Mendezona (Pilar). On August 16, 1999, Pilar demanded Dakak vacate the property, which was also ignored. Procedural History: On April 2, 2003, Spouses Jose Ma. M. Mendezona (Jose) and Pilar L. Mendezona (Pilar) (collectively, the Spouses Mendezona) filed a Complaint for recovery of possession, specific performance, rentals, and damages against Dakak and Jalosjos. Dakak and Jalosjos admitted the lease expired on December 31, 1997, but claimed a preferential right to acquire the property due to their investments and asserted a right of redemption under Articles 1621 and 1623 of the New Civil Code. The Regional Trial Court (RTC) of Dipolog City, Branch 8, ruled in favor of the Spouses Mendezona, ordering Dakak and Jalosjos to vacate, declaring improvements as belonging to the Spouses Mendezona, and ordering payment of unpaid and reasonable rentals. Dakak and Jalosjos appealed to the Court of Appeals (CA), raising for the first time claims for reimbursement and retention as builders in good faith under Article 448 or, alternatively, reimbursement under Article 1678. The CA affirmed with modifications, agreeing that Articles 448 and 1678 did not apply due to the contractual stipulation and the nature of the parties' relationship. The CA also corrected the RTC's rental computation and struck down the PHP 50,000.00 monthly rental after finality, instead applying the yearly increase. Dakak and Jalosjos' motion for reconsideration was denied by the CA. The Petition: Dakak Beach Resort Corporation and Romeo G. Jalosjos filed a Petition for Review on Certiorari before the Supreme Court, assailing the CA's Decision and Resolution. They raised the following issues: (1) whether the total rent awarded by the CA is unconscionable and contrary to law; (2) whether the contract of lease was validly terminated; (3) whether Dakak is a builder in good faith and entitled to retain the property until reimbursement; (4) whether the Spouses Mendezona shall pay Dakak and Jalosjos, as lessees, one-half of the value of the improvements they introduced within Lot No. 8771-A upon the termination of the lease; and (5) whether being the owners of the adjoining rural lands, Dakak and Jalosjos have the right of redemption over Lot No. 8771-A when it was sold by Violeta on April 13, 1998, in favor of the Spouses Mendezona.
Issue(s)
Whether the total rent awarded by the CA is unconscionable and contrary to law. Whether the contract of lease was validly terminated. Whether Dakak is a builder in good faith and entitled to retain the property until reimbursement. Whether the Spouses Mendezona shall pay Dakak and Jalosjos, as lessees, one-half of the value of the improvements they introduced within Lot No. 8771-A upon the termination of the lease. Whether being the owners of the adjoining rural lands, Dakak and Jalosjos have the right of redemption over Lot No. 8771-A when it was sold by Violeta on April 13, 1998, in favor of the Spouses Mendezona.
Ruling
The Supreme Court DENIED the Petition for lack of merit. It AFFIRMED with MODIFICATION the Decision dated June 28, 2018, and Resolution dated January 25, 2019, of the Court of Appeals. Petitioners Dakak Beach Resort Corporation and Romeo G. Jalosjos were ordered to vacate the subject land and return possession to the Spouses Mendezona within thirty (30) days. All permanent and fixed improvements were declared owned by the Spouses Mendezona. Petitioners were ordered to pay PHP 93,463.28 for unpaid rentals from August to December 1992 until December 31, 1997, with 6% interest per annum from April 2, 2003, until fully paid. Petitioners were also ordered to pay reasonable rent of PHP 4,000.00 per month for 1998 and an annual escalation of PHP 2,000.00 in the monthly rental rate for succeeding years until they vacate, with 6% interest per annum from April 2, 2003, until fully paid. Additionally, petitioners were ordered to pay moral damages of PHP 500,000.00 and exemplary damages of PHP 1 million to the Spouses Mendezona. The total sum awarded shall further be subject to 6% legal interest from the date of finality until full satisfaction. The Decision was declared immediately executory.
Ratio Decidendi
On Issue 1: The Court found that the contract of lease was validly terminated on December 31, 1997, as stipulated. There was no implied new lease under Article 1670 of the New Civil Code because Violeta and later Pilar, the lessors, did not acquiesce to Dakak's continued possession and had repeatedly demanded that Dakak vacate the property. The Court corrected the RTC's computational error for unpaid rentals from August 1992 to December 1997, increasing the amount to PHP 93,463.28 based on the lease contract's specific rates. The Court affirmed the CA's finding that the monthly rate of PHP 4,000.00 for 1998 and the annual escalation of PHP 2,000.00 for succeeding years were fair and reasonable, considering the property's commercial use and the income derived by Dakak, as established in D.O. Plaza Management Corp. v. Heirs of Atega. On Issue 2: The contract of lease was validly terminated on December 31, 1997, as per its terms. The Court found no implied new lease under Article 1670 of the New Civil Code. For an implied new lease to exist, the lessee must continue enjoying the leased premises for 15 days with the acquiescence of the lessor, and no demand to vacate by the lessor must have been made. In this case, Violeta and Pilar consistently expressed their desire to terminate the contract and demanded that Dakak vacate the property, negating any acquiescence, as reiterated in Buce v. Spouses Galeon. On Issue 3: Dakak is not a builder in good faith and is not entitled to retain the property until reimbursement. The Court reiterated that a "builder in good faith" under Article 448 of the New Civil Code pertains to one who builds on land believing himself or herself to be its owner, unaware of a defect in title, as held in Spouses Aquino v. Spouses Aguilar and Spouses Espinoza v. Spouses Mayandoc. Articles 448 and 546 are generally not applicable where a contractual relationship, such as a lease, exists between the parties, as affirmed in Communities Cagayan, Inc. v. Spouses Arsenio. The Court distinguished Spouses Macasaet v. Spouses Macasaet, noting that it involved familial relations and was an exception, whereas no such relations exist here, and a lessee's interest is merely that of a possessor by virtue of a contract. On Issue 4: The Spouses Mendezona are not obligated to pay Dakak and Jalosjos one-half of the value of the improvements. Article 1678 of the New Civil Code, which grants a lessee a right to reimbursement for useful improvements, does not apply when the lease contract expressly stipulates otherwise. The contract between Violeta and Dakak clearly stated that "all permanent and fixed improvements introduced by the LESSEE at LESSOR'S property shall become the property of the latter upon actual termination of the leasehold relationship." This stipulation is valid and binding, as parties are free to establish terms not contrary to law, morals, good customs, public order, or public policy under Article 1306 of the New Civil Code, a principle upheld in cases like Philippine National Bank v. Court of First Instance and Hian v. CA. Furthermore, even if Article 1678 were applicable, Dakak's claim for reimbursement, raised 13 years after the commencement of the action and 20 years after the lease expiration, has prescribed under Article 1144, paragraph 2 of the New Civil Code, as established in Cabangis v. Hon. Court of Appeals. On Issue 5: Dakak and Jalosjos do not have a right of redemption under Article 1621 of the New Civil Code. While Lot No. 8771-A is agricultural land by virtue of its free patent, the right of redemption under Article 1621 requires that both the land sought to be redeemed and the adjacent lands must be actually used for agricultural purposes. The purpose of this law is to foster agricultural development by consolidating small agricultural lands, as explained in Del Pilar v. Catindig and Cortes v. Flores. In this case, Lot No. 8771-A and the surrounding properties owned by Dakak and Jalosjos are used for commercial purposes (i.e., operation of Dakak beach resort). Therefore, they cannot be classified as rural lands for the purpose of legal redemption under Article 1621, consistent with the ruling in Spouses Fabia v. Intermediate Appellate Court.
Main Doctrine
This case primarily establishes and reiterates that the legal provisions concerning a 'builder in good faith' (Articles 448 and 546 of the New Civil Code) are generally inapplicable to a lessee, as their relationship is contractual. Instead, the treatment of improvements made by a lessee is governed by the stipulations in the lease contract. If the contract explicitly provides that improvements accrue to the lessor upon termination, then Article 1678, which grants a right of reimbursement to the lessee, does not apply. Furthermore, the right of legal redemption for rural lands under Article 1621 is strictly construed, requiring that both the land in question and the adjacent properties be actually utilized for agricultural purposes, not merely classified as such, to promote agricultural development.