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Property rules

Oral lease turned sour

Finn verbally agreed to lease his Mandaluyong property to Vito, who intended to put up a restaurant thereon.

Finn executed an Interim Grant of Authority in favor of Vito which allowed the latter to make the prospective leased premises operational as a restaurant pursuant to a lease agreement that is still being being finalized.

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However, before Vito’s 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. Finn wrote Vito demanding payment of the deposit and rentals, and signifying that he had no intention to continue with the agreement should the latter fail to pay. Vito, however, ignored Finn’s demand, continued to occupy the premises until the day when his caretaker voluntarily surrendered the property to Finn.

Vito went to court to compel Finn to execute a written lease contract for five years, deducting from the deposit and rent the cost of, or in the alternative order Finn to return his investment and compensate for his unearned net income with interest, plus attorney’s fees. Vito further claimed that it would be inequitable to allow Finn, as owner of the property to enjoy perpetually the improvements introduced by him without reimbursing him for the value of the said improvements. He asserts that no one shall be unjustly enriched or benefitted at the expense of another.

The trial court ruled in favor of Finn and dismissed Vito’s complaint. On appeal, however, the Court of Appeals reversed the trial court’s decision and ordered Finn to pay Vito the expenses the latter incurred for the repairs and improvements of the premises.

On appeal to the Supreme Court, Vito was required to file his comment to Finn’s petition. Vito’s counsel manifested that he could not file one since his client’s whereabouts were unknown to him. The High Court reiterated its order requiring Vito’s counsel to file his comment since copies of the resolutions requiring Vito to file his comment were sent to his last known address and thus were deemed served.

Q: Can the principles of equity and unjust enrichment justify the entitlement of Vito to reimbursement?

A: The principle of equity does 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. Positive rules prevail over all abstract arguments based on equity contra legem. Neither is the principle of unjust enrichment applicable since Finn had a valid claim.

Q: Given the absence of a written contract of lease, what is the relationship between Finn and Vito?

A: The absence of a written contract of lease notwithstanding, Finn and Vito are still lessor and lessee, respectively.

Q: Is Vito, as a lessee, entitled to be reimbursed for the useful improvements and ornamental expenses he introduced upon the termination of their lease agreement?

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A: Under Article 1678 of the Civil Code, Finn, as lessor, has the primary right (or the first move) to reimburse the lessee for 50 percent of the value of the improvements at the end of the lease. If he refuses to make the reimbursement, the subsidiary right of Vito, as lessee, to remove the improvements, even though the principal thing suffers damage, arises. Consequently, it is Finn who has the primary option to pay for one-half of the value of the useful improvements. It is only when he refuses to make the reimbursement that Vito may remove the improvements. Should Finn 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 Vito to insist on his 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, Vito is not entitled to reimbursement. Article 1678 gives the lessee the right to remove the ornaments without damage to the principal thing. But if lessor appropriates and retains said ornaments, he shall pay for their value upon the termination of the lease.

The fact that Finn will benefit from the improvements introduced by Vito is beside the point. In the first place, Vito introduced these improvements at his own risk as lessee. Vito was not forced or obliged to splurge on the leased premises as it was a matter of necessity as well as a business strategy.

Q: Can Vito validly assert that he is entitled to reimbursement for the useful improvements introduced on the property because he is a builder in good faith?

A: 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 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.

The above provisions, notwithstanding, Vito, as lessee, cannot be considered possessor or builder in good faith. 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.  If the rule were otherwise, it would always be in the power of the tenant to improve his landlord out of his property.

Q: Given that Vito’s exact whereabouts are unknown, how will the provisions of Article 1678 be implemented?

A: This is where considerations of equity should come into play. It is obviously no longer feasible for Vito to remove the improvements from the property, if they still exist. The only equitable alternative then, given the circumstances, is to order Finn to pay Vito one-half of the value of the useful improvements introduced on the property. To be off-set against this amount are Vito’s unpaid monthly rentals. This is in accord with the law’s 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.

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

Source: Cheng vs. Spouses Donini, G.R. No. 167017, June 22, 2009

Ma. Soledad Deriquito-Mawis Dean, College of Law, Lyceum of the Philippine University Chairperson, Philippine Association of Law Schools Mawis Law Office

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