Allied Banking Corporation vs. Court of Appeals

A lease stipulation granting the lessee the sole option to renew for a like term is valid and not violative of the principle of mutuality of contracts under Article 1308 of the Civil Code; its exercise results in automatic extension of the lease under the same terms and conditions. A lessee who is not a party to a deed of donation over the leased premises has no legal personality to assail its validity absent material interest.

Spouses Filemon Tanqueco and Lucia Domingo-Tanqueco owned a 512-square-meter lot in Novaliches, Quezon City, which they leased to Allied Banking Corporation for use as a branch office. The lease contained a renewal clause and required Allied to construct a building that would become the lessors' property at the end of the original term. In February 1988 the spouses donated the lot to their four children, who later became the lessors of record. The dispute implicated Article 1308 of the Civil Code, which embodies the principle of mutuality of contracts.

Spouses Filemon Tanqueco and Lucia Domingo-Tanqueco owned a 512-square-meter lot located at No. 2 Sarmiento Street corner Quirino Highway, Novaliches, Quezon City, covered by TCT No. 136779 in their name. On 30 June 1978 they leased the property to Allied Banking Corporation for a monthly rental of P1,000.00 for the first three years, adjustable by 25% every three years thereafter. Provision No. 1 of the lease stated that "the term of this lease shall be fourteen (14) years commencing from April 1, 1978 and may be renewed for a like term at the option of the lessee." Pursuant to the agreement, Allied introduced an improvement on the property consisting of a concrete building with a floor area of 340 square meters, which it used as a branch office; as stipulated, ownership of the building would be transferred to the lessors upon expiration of the original term of the lease.

Sometime in February 1988 the Tanqueco spouses executed a deed of donation over the subject property in favor of their four children, namely, Oscar D. Tanqueco, Lucia Tanqueco-Matias, Ruben D. Tanqueco, and Nestor D. Tanqueco, who accepted the donation in the same public instrument.

On 13 February 1991, a year before the expiration of the lease, the Tanquecos notified Allied that they were no longer interested in renewing the lease. Allied replied that it was exercising its option to renew under the same terms with additional proposals. Ruben D. Tanqueco, acting in behalf of all the donee-lessors, made a counter-proposal. Allied rejected the counter-proposal and insisted on Provision No. 1 of their lease contract.

When the lease contract expired in 1992, private respondents demanded that Allied vacate the premises. Allied asserted its sole option to renew the lease and enclosed in its reply letter a cashier's check in the amount of P68,400.00 representing advance rental payments for six months, taking into account the escalation clause. Private respondents returned the check to Allied, prompting the latter to consign the amount in court.

The private respondents' refusal of the consigned amount and their demand for Allied to vacate led to an action for ejectment before the Metropolitan Trial Court of Quezon City. On 20 February 1993, while the case was pending in the Court of Appeals, Allied vacated the leased premises by reason of the controversy.

• Validity of the Renewal Clause: Petitioner insisted that Provision No. 1 of the lease contract was mutually agreed upon, hence valid and binding on both parties, and that its exercise of the option to renew was part of their agreement and in pursuance thereof.
• Automatic Extension: Petitioner contended that its exercise of the option resulted in the automatic extension of the contract of lease under the same terms and conditions.

• Validity of the Renewal Clause: Whether the stipulation in the lease that it "may be renewed for a like term at the option of the lessee" is void for being potestative or violative of the principle of mutuality of contracts under Article 1308 of the Civil Code.
• Meaning of the Renewal Clause: Whether the clause "may be renewed for a like term at the option of the lessee" means that the exercise of the option automatically extends the lease under the same terms and conditions.
• Legal Personality to Assail the Donation: Whether a lessee has legal personality to assail the validity of a deed of donation executed by the lessor over the leased premises.

• Validity of the Renewal Clause: No. The clause is not void; an express agreement giving the lessee the sole option to renew is valid and binding, and it does not violate Article 1308 because the option is part of the consideration and mutuality obtains once the option is exercised and accepted.
• Meaning of the Renewal Clause: Yes. The clause means that exercise of the option resulted in automatic extension of the lease under the same terms and conditions; a general covenant to renew without specifying terms implies renewal on the same terms as the original lease.
• Legal Personality to Assail the Donation: No. A person not principally or subsidiarily bound has no legal capacity to challenge a contract's validity; the lessee must first have a material interest, and none was shown.

• Validity of the Renewal Clause: Article 1308 provides that a contract must bind both parties and that its validity or compliance cannot be left to the will of one of them. This embodies the principle of mutuality, whose ultimate purpose is to void a contract containing a condition that makes fulfillment dependent solely on the uncontrolled will of one party. An express agreement giving the lessee the sole option to renew is frequent and valid; it is part of the consideration and no different from other lease provisions. The option is purely executory and confers a right to renewal upon compliance with its conditions. That it binds only the lessor and may be exercised only by the lessee does not render it void for lack of mutuality, because the lessor is free to give or withhold the option. Once the lessee exercises the option and the lessor accepts, both are bound by the new lease; their rights and obligations become mutually fixed, and the lessee cannot escape liability by later abandoning the premises. Lao Lim vs. Court of Appeals was distinguished because the stipulation there allowed the lessee to stay "as long as he needs it and can pay the rents," unlike the fixed "like term" option here. Garcia vs. Rita Legarda, Inc. was also distinguished because it involved a contract to sell residential lots and the vendor's right to cancel, not a lease renewal clause.
• Meaning of the Renewal Clause: The only term clearly agreed upon for the new contract was the period of fourteen years, as shown by the phrase "for a like term." The clause was silent on the specific terms and conditions of the renewed lease. Under Ledesma vs. Javellana, which cited Hicks vs. Manila Hotel Company, a stipulation to renew relates to the contract in which it is found and does not permit insistence on different terms unless variations are expressly provided. American law likewise provides that a general covenant to renew or extend a lease without specifying terms implies renewal upon the same terms as the original lease. No provision indicated that renewal would be subject to new terms still to be agreed upon. In case of uncertainty, the tenant is favored over the landlord, because the landlord had the power to stipulate in his own favor and failed to do so. A contrary interpretation would render the option worthless, since the lessor could defeat renewal by imposing unreasonable and onerous conditions. Contract words should not be rendered surplusage if a reasonable construction can avoid it. Thus, Allied's exercise of the option resulted in automatic extension under the same terms and conditions.
• Legal Personality to Assail the Donation: Allied could not assail the validity of the deed of donation because it was not a party thereto. A person who is not principally or subsidiarily bound has no legal capacity to challenge the validity of a contract. He must first have an interest, meaning a material interest affected by the deed, as distinguished from a mere incidental interest. A person who is not a party to a contract and for whose benefit it was not expressly made cannot maintain an action on it, even if performance would incidentally affect him, except when he is prejudiced in his rights with respect to one of the contracting parties and can show the detriment that could positively result to him from the contract in which he had no intervention. No such interest or detriment was shown.

• Mutuality of Contracts (Article 1308, Civil Code) — Article 1308 provides that a contract must bind both contracting parties and that its validity or compliance cannot be left to the will of one of them. The Court explained that this principle voids a contract containing a condition that makes fulfillment dependent solely on the uncontrolled will of one party. However, an express agreement giving the lessee the sole option to renew is valid because the option is part of the consideration; the lessor is free to concede it, and once the lessee exercises it and the lessor accepts, both parties are bound by the new lease. The fact that the option binds only the lessor and may be exercised only by the lessee does not destroy mutuality.
• Option to Renew a Lease — A lease clause granting the lessee the sole option to renew is a purely executory contract that confers a right to obtain renewal upon compliance with its conditions. Its exercise results in automatic extension of the lease under the same terms and conditions, especially where the clause specifies only the period ("for a like term") and is silent on other terms. A general covenant to renew without specifying terms implies renewal on the same terms as the original lease. The right of renewal constitutes part of the lessee's interest in the land and forms a substantial and integral part of the agreement.
• Construction of Renewal Clauses — In case of uncertainty in a provision granting extension of a lease, the tenant is favored over the landlord, because the landlord had the power to stipulate in his own favor and failed to do so. A contrary interpretation subjecting renewal to future mutual agreement would render the option worthless and allow the lessor to defeat it by imposing unreasonable conditions. No word, clause, sentence, provision, or part of a contract shall be considered surplusage, meaningless, void, insignificant, or nugatory if that can be reasonably avoided.
• Legal Personality to Challenge a Contract — A person who is not principally or subsidiarily bound has no legal capacity to challenge the validity of a contract. He must first have a material interest, as distinguished from a mere incidental interest. A non-party for whose benefit the contract was not expressly made cannot maintain an action on it, even if performance would incidentally affect him, except when he is prejudiced in his rights with respect to one of the contracting parties and can show positive detriment.

• "An express agreement which gives the lessee the sole option to renew the lease is frequent and subject to statutory restrictions, valid and binding on the parties." — This states the core ruling rejecting the lower courts' holding that the renewal clause was void under Article 1308.
• "The fact that such option is binding only on the lessor and can be exercised only by the lessee does not render it void for lack of mutuality." — This explains why a lessee-only option does not violate the mutuality principle.
• "The settled rule is that in case of uncertainty as to the meaning of a provision granting extension to a contract of lease, the tenant is the one favored and not the landlord." — This canon of construction supports the holding that the renewal clause is construed in favor of the lessee.
• "A person who is not principally or subsidiarily bound has no legal capacity to challenge the validity of the contract." — This states the rule barring Allied from assailing the deed of donation.

• Lao Lim vs. Court of Appeals, G.R. No. 87047, 31 October 1990, 191 SCRA 156 — Relied upon by the trial court but distinguished; the stipulation there allowed the lessee to stay "as long as he needs it and can pay the rents," unlike the fixed "like term" option in this case.
• Garcia vs. Rita Legarda, Inc., No. L-20175, 30 October 1976, 21 SCRA 555 — Relied upon by the trial court but distinguished; it involved a contract to sell residential lots and the vendor's right to cancel, not a lease renewal clause.
• Ledesma vs. Javellana, G.R. No. 55187, 28 April 1983, 121 SCRA 794 — Followed; where the lessee had the sole option to renew and the contract failed to specify the terms of the new lease, renewal is under the same terms and conditions as the original contract.
• Hicks vs. Manila Hotel Company — Cited in Ledesma; a stipulation to renew relates to the contract in which it is found and does not permit insistence on different terms unless variations are expressly provided.
• Astudillo vs. The Board of Directors of PHHC, No. L-28066, 22 September 1976, 73 SCRA 15 — Cited for the rule that a person not principally or subsidiarily bound has no legal capacity to challenge a contract's validity.
• House International Building Tenants Association, Inc. vs. Intermediate Appellate Court, G.R. No. 75287, 30 June 1987, 151 SCRA 703 — Cited for the rule that a non-party for whose benefit a contract was not expressly made cannot maintain an action on it.
• Teves vs. The People's Homesite and Housing Corporation, et al., No. L-21498, 27 June 1968, 23 SCRA 1141 — Cited for the exception allowing a non-party to sue when prejudiced in his rights with respect to one of the contracting parties and can show positive detriment.
• Shimonek vs. Tillanan, 1 P. 2d., 154 — Cited for the principle that no word, clause, sentence, provision, or part of a contract shall be considered surplusage, meaningless, void, insignificant, or nugatory if that can be reasonably avoided.

• Article 1308, Civil Code — Provides that the contract must bind both contracting parties and that its validity or compliance cannot be left to the will of one of them. The Court applied this as the principle of mutuality but held that a lessee-only option to renew does not violate it because the option is part of the consideration and both parties become bound once it is exercised and accepted.
• Article 1397, Civil Code — Cited in a footnote in connection with the ruling that a person not principally or subsidiarily bound has no legal capacity to challenge a contract's validity. The text does not quote its language.

Davide, Jr., Vitug, and Kapunan, JJ., concurred.