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Property rules

Can’t set you free

The Sia brothers, owners of a prime property in the middle of the city, entered into a Contract of Lease with Fast Food Inc. Salient provisions of the contract were: a) the term of the lease shall be 15 years; on the third year of the lease, Fast Food shall have the right to pre-terminate the lease; (c) after the first year and every after, the monthly rent shall escalate by 10 percent annually.

The Contract of Lease also provides that the failure of the parties to insist upon a strict performance of any of the terms of the lease shall not be deemed a relinquishment or waiver of any rights or remedy that said party may have, nor shall it be construed as a waiver of any subsequent breach or default of the terms, conditions and covenants hereof which shall continue to be in full force and effect. No waiver by the parties of any of their rights under this Contract of Lease shall be deemed to have been made unless expressed in writing and signed by the party concerned.

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Soon, Fast Food assigned all its rights and obligations under the Contract of Lease to one Funny Foods, which in turn assigned all the said rights and obligations under such contract Happy Renter Inc.

The first up to the fifth year of the lease, the lessees paid rent at the monthly rate prescribed for under the Contract of Lease. The rental escalation clause in the said contract, which requires the annual escalation of monthly rent by 10 percent, was consistently observed on the second to the fifth year. The rental escalation clause, however, was not observed during the sixth up to the 10th year of the lease.

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At the start of the 11th year of the lease, however, the lessors called the attention of the lessee regarding its intent to enforce the rental escalation clause of the Contract of Lease for the said year. Accordingly, the lessors informed the lessees that the rent for the eleventh year of the lease shall be double the monthly rate. A proposal to reduce the increased monthly rate was rejected by the lessors.

During the lease’s 12th year, Happy Renter sent to the lessors conveying its intent to pre- terminate the lease. In the letter, Happy Renter stated that “due to severe and irreversible business losses it will cease its operations on the next month.”

The pre-termination of the lease contract did not sit well with the brothers. They soon filed a complaint for sum of money against the lessee —which sum respondents refer to as the “escalation for the years 2007 and 2008.”

Q: Was the rental escalation clause of the Contract of Lease suspended indefinitely beginning from the sixth year of the lease when the brother lessors did not collect the increased rent pursuant to the escalation clause?

A: No. There is nothing that barred the lessors from enforcing and applying the rental escalation clause for the 11th and 12th years of the lease.

Q: Did the assignment by Fast Food of its rights and obligations under the Contract of Lease to Funny Foods, and the assignment by Funny Foods of the same rights and obligations to Happy Renter result in Fast Food’s release from its obligations under the Contract of Lease and its substitution therein by Happy Renter?

A: No, the assignment did not result to novation, particularly, novation of an obligation by the substitution of the person of the debtor.

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Q: What is novation?

A: Novation is the extinguishment of an obligation by its modification and replacement by a subsequent one.

It takes place when an obligation is modified in any of the following ways: (a) by changing its object or principal conditions, (b) by substituting the person of the debtor, or (c) by subrogating a third person in the rights of the creditor.

In such instances, the obligation ceases to exist as a new one—bearing the modifications agreed upon—takes its place. Novation is, thus, a juridical act of dual function—for as it extinguishes an obligation, it also creates a new one in lieu of the old.

Q: What is novation of an obligation by substituting the person of the debtor?

A: The term suggests, entails the replacement of the debtor by a third person. When validly made, it releases the debtor from the obligation which is then assumed by the third person as the new debtor. To validly effect such kind of novation, however, it is not enough for the debtor to merely assign his debt to a third person, or for the latter to assume the debt of the former; the consent of the creditor to the substitution of the debtor is essential and must be had.

As Article 1293 of the Civil Code provides that “Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor. Xxx xxx.”

Q: What is the reason for the requirement that the creditor must give his consent to the substitution?

A: The substitution of another in place of the debtor may prevent or delay the fulfillment or performance of the obligation by reason of the inability or insolvency of the new debtor; hence, the consent of the creditor is necessary.

Q: Did the acceptance of the lessors of the rental payments paid by Happy Renter result to a novation of debtors?

A: The facts not show that the lessors had expressly consented in writing to the substitution of Fast Food by Happy Renter. The consent of the lessors to such substitution has to be in writing, in light of the non-waiver clause of the Contract of Lease. As can be recalled, the non-waiver clause of the Contract of Lease required the parties thereto to express any waiver of their rights under said contract in writing lest their waiver be considered null.

Moreover, the consent of lessors to the substitution of Fast Food and Happy Renter, cannot be presumed from the sole fact that they accepted payments from Happy Renter.

It is well settled that mere acceptance by a creditor of payments from a third person for the benefit of the debtor, sans any agreement that the original debtor will also be released from his obligation, does not result in novation but merely the addition of debtors. This is because well-settled rule is that novation is never presumed.

(Source: Siapno vs. Food Fest Land Inc. G.R. No. 226088, Feb. 27, 2019)

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