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Corporate Securities Info

Thoughts on PAL-Pagcor lease

/ 07:11 AM September 18, 2017

Whoever negotiated the lease of the 10-hectare property of Philippine Gambling and Gaming Corp. (Pagcor) near the Ninoy Aquino International Airport to Philippine Airlines (PAL) should take a refresher course on contracts.

PAL leased the property in 2014 for aircraft operation-related purposes. Shortly after signing the lease, it paid Pagcor P24 million representing one-month advance rental and security deposit for the use of the premises up to 2033.


Three years later, Pagcor is claiming that the contract is invalid because it is not the true owner of the property, and that the terms of the lease are grossly disadvantageous to the government.

Any lawyer worth his salt knows that only the owner, or whoever may be acting under his authority, can legally lease, encumber or sell his property to a third party.


In the preparation of lease contrasts, it is good practice to ask the property owner to state in writing (or warrant) that he has lawful title over the property even if he has presented sufficient proof of ownership.

And this is exactly what Pagcor did. It declared that it is the true owner of the leased premises, is duly authorized to lease them out, and is willing to defend this right against the claims and demands of other persons.

After PAL and Pagcor have performed their respective lease obligations for the past three years, Pagcor suddenly learns that “it is not yet the absolute and registered owner of the property” and wants to nullify the contract for that reason.

Pagcor is citing an error of its own making, or a self-inflicted contractual infirmity, to justify its refusal to abide by the terms and conditions of an agreement it freely and voluntarily entered into.

The only conclusion that can be derived from Pagcor’s action is either its lawyer did not know the meaning of the warranties he made on his principal’s behalf, or he wanted to gain brownie points from PAL’s initial payment at the expense of Pagcor’s reputation as a reliable business partner.

At this late stage, Pagcor cannot (and should not) be allowed to disown its warranty about the leased premises. If indeed it is not its legal owner, then it has to exert all efforts to make good its warranty, otherwise it may find itself in serious legal trouble for that booboo.

Equally disconcerting about Pagcor’s refusal to honor the lease contract is its claim that the terms of the lease are grossly disadvantageous to the government.


In effect, it is saying that the P40 per square meter monthly rental it agreed to in 2014 is disproportionate to or not reflective of the true worth of the premises and should therefore be increased to conform to present land rates.

When Pagcor negotiated and entered into the lease contract, it is reasonable to assume that it conducted a thorough financial study of the strategic or long range value of the said rental.

Since Pagcor has been in operation for decades, it should be familiar with government rules and regulations and the guidelines of the Commission on Audit on transactions of this nature.

At the time Pagcor agreed to the P40 monthly rental, that rate was considered advantageous to the government considering the location and physical condition then of the leased premises.

If it was not, Pagcor’s resident auditor would have objected to the signing of the contract; the fact that he did not means that he considered the terms of the lease fair and square.

So when did the agreed rental become disadvantageous to the government as to justify the nullification of the lease? What criteria did Pagcor use to arrive at the conclusion that the amount is lopsided against the government?

In the hands of a competent negotiator in a contract of this nature, an annual escalation clause or provision for review of the lease after, say, three years, could have been provided to make the rental rate responsive to developments that may arise during the term of the lease. It is unfortunate that, for unexplained reasons, this otherwise standard clause in long term lease agreements was overlooked.

Absent the presence of fraud or intimidation, contracts that are freely entered into should be scrupulously complied with. That is the way business is conducted in civilized societies.

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TAGS: PAL-Pagcor, Philippine Airlines (PAL), Philippine Gambling and Gaming Corp. (Pagcor)
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