Almeda vs. Bathala Marketing Industries, Inc.

A lessor who fails to exercise the statutory option to pass on the 10% VAT to the lessee at the time of contract execution is estopped from later shifting the burden; depreciation of currency that is common, foreseeable, and not officially declared as extraordinary does not trigger the adjustment clause under Article 1250 of the Civil Code — a contractual reference to “devaluation” is read in harmony with the Civil Code provision on “extraordinary inflation or deflation” absent clear contrary intent.

Ponciano L. Almeda, husband of petitioner Eufemia Almeda and father of petitioner Romel Almeda, owned the Almeda Compound in Makati City. In May 1997, he renewed a four-year lease with respondent Bathala Marketing Industries, Inc. covering 7,348.25 square meters at a monthly rental of ₱1,107,348.69. The contract contained a clause requiring the lessee to pay increases corresponding to any new tax, charge, or burden imposed on the property after the lease’s effectivity, and another clause stipulating that in case of “extraordinary inflation or devaluation of Philippine Currency,” the value of the peso at the time the obligation was established would be the basis of payment. Ponciano Almeda died during the lease, and petitioners stepped into his shoes as lessors.

• The Lease Contract: In May 1997, Ponciano L. Almeda, as lessor, renewed a contract of lease with Bathala Marketing Industries, Inc. over a 7,348.25-square-meter portion of the Almeda Compound at 2208 Pasong Tamo Street, Makati City. The monthly rental was ₱1,107,348.69 for a term of four years from May 1, 1997. The contract included a Sixth Clause obligating the lessee to pay any increased assessment or new tax, charge, or burden imposed on the leased premises after the contract date, and a Seventh Clause providing that in case of “extraordinary inflation or devaluation of Philippine Currency,” the value of the peso at the time the obligation was established would be the basis of payment. Ponciano Almeda died during the lease term, and petitioners Eufemia and Romel Almeda succeeded as lessors.

• Demand for VAT and Rental Adjustment: On December 29, 1997, petitioners informed respondent that they would assess and collect 10% VAT on monthly rentals. Respondent objected, contending that the VAT had already been in effect when the contract was executed and that the stipulated rentals were intended to be inclusive of VAT. On January 26, 1998, petitioners further demanded a 73% increase in rental, invoking the Seventh Clause and Article 1250 of the Civil Code on extraordinary inflation. Respondent opposed, asserting that no extraordinary inflation existed under prevailing Supreme Court rulings.

• Respondent’s Compliance and Filing of Declaratory Relief: Respondent refused to pay the additional amounts but continued to remit the exact stipulated monthly rental. To forestall potential damage from conflicting interpretations, respondent filed an action for declaratory relief on February 18, 1998, seeking a judicial construction of the Sixth and Seventh Clauses.

• Petitioners’ Ejectment Suit: After filing their own complaint for ejectment, rescission, and damages on March 10, 1998, petitioners voluntarily dismissed it and refiled before the MeTC. The MeTC deferred proceedings pending resolution of the declaratory relief case.

• Lower Courts’ Findings: The RTC found that VAT was not a new tax under the Sixth Clause because Republic Act No. 7716 took effect in 1994, before the 1997 lease renewal. It also held that no extraordinary inflation or devaluation existed to justify the rental increase. The CA affirmed these interpretations but deleted the monetary awards on the ground that a declaratory relief action does not allow affirmative reliefs beyond a declaration of rights.

• Applicability of Article 1250 and Del Rosario Doctrine: Petitioners argued that the Seventh Clause’s reference to “extraordinary inflation or devaluation” should be interpreted distinctly from Article 1250’s “extraordinary inflation or deflation,” and that the peculiar doctrine in Del Rosario v. The Shell Company, Phils. Limited — which allowed recovery for the decline in the peso’s value — should govern rather than the general rule on extraordinary inflation.

• Liability for VAT under the Sixth Clause: Petitioners maintained that the 10% VAT imposed by Republic Act No. 7716 constituted a “new tax, charge or burden” within the meaning of the Sixth Clause, entitling them to collect it from respondent as additional rental.

• Impropriety of Declaratory Relief: Petitioners contended that respondent was already in breach of the lease contract when it refused to pay the demanded VAT and adjusted rentals, precluding the declaratory relief action. They further argued that the pendency of the ejectment suit rendered declaratory relief improper because the contractual interpretation issues could be ventilated in that forum.

• VAT Not a New Tax; Lessor’s Option Waived: Respondent countered that the VAT law (R.A. 7716) was already in effect in 1994, three years before the lease was renewed, and therefore could not be considered a “new tax” under the Sixth Clause. Moreover, the original lessor never charged or collected VAT at the contract’s inception, manifesting an intention not to shift the tax burden to the lessee.

• No Extraordinary Inflation: Respondent asserted that the general depreciation of the Philippine peso over decades did not constitute the “extraordinary” phenomenon required by law and jurisprudence, which demands an unusual, unforeseeable, and officially declared crisis beyond common currency fluctuation.

• Declaratory Relief Proper: Respondent argued that no breach had occurred because it continued to pay the exact stipulated rental; the dispute was purely a question of contractual construction, making declaratory relief the appropriate remedy to settle the parties’ rights before any breach materialized.

• Propriety of Declaratory Relief: Whether the action for declaratory relief was proper given that (a) respondent had allegedly breached the contract by refusing the demanded VAT and rental adjustment, and (b) a separate ejectment suit was pending before another court.

• Liability for VAT: Whether respondent was obligated to pay the 10% VAT under the Sixth Clause of the lease contract as a “new tax.”

• Rental Adjustment for Inflation: Whether petitioners were entitled to a 73% rental increase under the Seventh Clause of the contract and Article 1250 of the Civil Code on the ground of extraordinary inflation or devaluation.

• Propriety of Declaratory Relief: The declaratory relief action was proper. All six requisites were present: the controversy arose from a written contract, its terms were doubtful and required judicial construction, no breach had occurred before filing, there was an actual justiciable controversy, the issue was ripe for determination, and no other adequate remedy was available. Respondent’s consistent payment of the exact stipulated rentals negated any breach. The pendency of the ejectment case did not bar declaratory relief; unlike in Panganiban v. Pilipinas Shell Petroleum Corporation, where the unlawful detainer case had already been resolved, or in Teodoro, Jr. v. Mirasol, where a breach had already occurred, the ejectment suit here remained unresolved and the MeTC itself suspended proceedings. The resolution of the declaratory relief action was deemed the most efficient means to terminate all disputes between the parties.

• Liability for VAT: Petitioners could not shift the 10% VAT burden to respondent. Under Section 99 of the National Internal Revenue Code, as amended by R.A. 7716, the lessor is the person primarily liable for VAT and “may” choose to pass it on to the lessee — a permissive, not mandatory, option. The original lessor, Ponciano Almeda, did not charge or collect VAT when the lease was renewed in May 1997 despite the VAT law having taken effect in 1994. This omission manifested an intent not to avail of the statutory option, and petitioners, as successors, were estopped from doing so later. Furthermore, the Sixth Clause covers only “new” taxes imposed after the contract’s effectivity in May 1997. Since R.A. 7716 became effective in 1994, VAT was not a new tax within the clause’s contemplation.

• Rental Adjustment for Inflation: No rental adjustment was warranted. While the Seventh Clause used the term “devaluation” instead of Article 1250’s “deflation,” the parties’ intention was to adhere to the Civil Code provision, as shown by petitioners’ own January 26, 1998 letter quoting Article 1250 verbatim. The clause must therefore be read in harmony with Article 1250. Jurisprudence defines extraordinary inflation as a decrease or increase in purchasing power that is unusual, beyond common fluctuation, and not reasonably foreseeable at the time the obligation was established. The general erosion of the Philippine peso since the mid-1960s is common to most currencies and does not constitute that extraordinary phenomenon. Moreover, no competent authority had officially declared the existence of extraordinary inflation during the relevant period, and absent such declaration, the effects of extraordinary inflation cannot be applied.

• Extraordinary Inflation (Article 1250, Civil Code) — Extraordinary inflation exists when there is a decrease or increase in the purchasing power of the Philippine currency that is unusual, beyond common fluctuation, and could not have been reasonably foreseen or was manifestly beyond the contemplation of the parties at the time the obligation was established. A general decline in the peso’s value over decades, characteristic of most currencies, does not qualify. Furthermore, absent an official pronouncement or declaration by competent authorities of the existence of extraordinary inflation during a given period, its effects are not to be applied.

• Requisites of Declaratory Relief — An action for declaratory relief requires: (1) the subject matter must be a deed, will, contract, or other written instrument, statute, executive order or regulation, or ordinance; (2) the terms or validity thereof are doubtful and require judicial construction; (3) there has been no breach of the document; (4) there is an actual justiciable controversy or the “ripening seeds” of one between persons with adverse interests; (5) the issue is ripe for judicial determination; and (6) adequate relief is not available through other means or forms of action. The Court applied these requisites and found them satisfied, emphasizing that the absence of breach distinguishes the case from precedents where declaratory relief was disallowed.

• Option to Shift VAT (R.A. 7716) — Under the National Internal Revenue Code, as amended by R.A. 7716, the lessor is primarily liable for VAT on lease of real property in the ordinary course of business and “may” pass the burden to the lessee. The word “may” is permissive and directory, conferring discretion on the lessor. Failure to exercise that option at the inception of the contract or to collect VAT thereafter constitutes a waiver, and the lessor is estopped from later shifting the tax to the lessee.

• Contract Interpretation — Intention of the Parties — In construing contracts, the intention of the parties is paramount and is determined from their contemporaneous and subsequent acts. A party’s own letter invoking a specific statutory provision alongside a contractual clause is evidence that the parties intended the clause to be read in harmony with that statute.

• “Extraordinary inflation exists when there is a decrease or increase in the purchasing power of the Philippine currency which is unusual or beyond the common fluctuation in the value of said currency, and such increase or decrease could not have been reasonably foreseen or was manifestly beyond the contemplation of the parties at the time of the establishment of the obligation.” — This definition, drawn from previous cases, is the ratio decidenti for denying the rental adjustment claim.

• “The word ‘may’ in the statute, generally speaking, denotes that it is directory in nature. It is generally permissive only and operates to confer discretion.” — Applied to the lessor’s option to shift VAT, this passage anchors the holding that the original lessor’s inaction constituted a waiver.

• “[A]bsent an official pronouncement or declaration by competent authorities of the existence of extraordinary inflation during a given period, the effects of extraordinary inflation are not to be applied.” — This provides a bright-line requirement for parties invoking Article 1250.

• Panganiban v. Pilipinas Shell Petroleum Corporation, 443 Phil. 753 (2003) — Distinguished. The declaratory relief case there was dismissed because the unlawful detainer suit had already been resolved and the petitioner insisted on the declaratory relief over the detainer case, unlike here where the ejectment case was still pending and the trial court itself suspended proceedings.

• Teodoro, Jr. v. Mirasol, 99 Phil. 150 (1956) — Distinguished. The declaratory relief action there was dismissed because a breach of contract had already occurred at the time of filing, a fact not present in this case.

• Del Rosario v. The Shell Company, Phils. Limited, 164 SCRA 556 (1988) — Invoked by petitioners but held inapplicable. The parties’ intent, as shown by petitioners’ reference to Article 1250 in their demand letter, demonstrated that they intended the Seventh Clause to align with the Civil Code provision rather than the distinct doctrine in Del Rosario.

• Filipino Pipe and Foundry Corp. v. NAWASA, 161 SCRA 32 (1988) — Cited with approval as one of the cases defining extraordinary inflation and affirming the necessity of an official declaration of its existence.

• Citibank, N.A. v. Sabeniano, 514 SCRA 441 (2007) — Relied upon for the definitions of inflation and extraordinary inflation; the case reinforces the requirement that the currency fluctuation be unusual and unforeseeable.

• Telengtan Brothers & Sons, Inc. v. United States Lines, Inc., 483 SCRA 458 (2006) — Cited for the consolidated doctrine that the general decline of the Philippine peso over decades does not satisfy the standard of extraordinary inflation and that official declaration is required.

• Article 1250, Civil Code — Provides that in case of extraordinary inflation or deflation, the value of the currency at the time of the establishment of the obligation shall be the basis of payment, unless there is an agreement to the contrary. The Court interpreted the contract’s Seventh Clause in harmony with this provision, applying its established requisites.

• Section 99, National Internal Revenue Code, as amended by Republic Act No. 7716 — Imposes 10% VAT on the lease of real property when gross annual receipts exceed ₱500,000.00, and grants the lessor the option, using the permissive “may,” to shift the tax to the lessee. The Court held that the original lessor’s failure to exercise this option amounted to a waiver.

• Rule 45, Rules of Court — Basis of the petition for review on certiorari; no substantive discussion.

• Rule 63, Rules of Court (Declaratory Relief) — The governing rule for the action, though cited indirectly through the requisites developed in decisional law.

Associate Justice Consuelo Ynares-Santiago (Chairperson), Associate Justice Ma. Alicia Austria-Martinez, Associate Justice Renato C. Corona, and Associate Justice Ruben T. Reyes concurred. Associate Justice Minita V. Chico-Nazario was on leave; Associate Justice Corona participated per Special Order No. 484.

N/A (No dissenting opinion was recorded; the decision was unanimous.)