Aquino vs. Aguilar

Article 1678 of the Civil Code, which allows reimbursement for useful improvements, applies only to lessees and not to occupants by mere tolerance; occupants by tolerance who construct improvements despite express prohibition from the landowner are builders in bad faith entitled only to reimbursement of necessary expenses for preservation of the land under Article 452, without the right of retention.

Spouses Crispin and Teresa Aquino, residing in the United States, owned a residential property in Makati City that was occupied since 1981 by Teresa's sister Josefina Aguilar and her husband Eusebio with the Aquinos' consent and approval. In July 1983, the Aquinos sent a letter to the Aguilars expressly advising them not to construct any improvements on the property because the Aquinos intended to sell it after three or four years for investment purposes. Despite this express prohibition, the Aguilars demolished the existing dilapidated house and constructed a three-storey building in its place, occupying half of the third floor for two decades without paying rent.

• Spouses Crispin and Teresa Aquino are the registered owners of a house and lot located at No. 6948, Rosal Street, Guadalupe Viejo, Makati City under Transfer Certificate Title No. 148338.
• Since 1981, respondents Spouses Eusebio and Josefina Aguilar (Josefina being Teresa's sister) occupied the property with the consent and approval of petitioners, who were then residing in the United States.
• Respondents demolished the existing house previously constructed on the property and built a three-storey building in its place, occupying half of the third floor for the next 20 years without payment of rental.
• On July 15, 1983, petitioners sent a letter to respondents marked as Exhibit "2" advising them not to construct any improvements on the premises as petitioners planned to sell the property when its value increased, and suggesting respondents apply for a housing project to have a place to transfer to when the property was sold.
• On September 22, 2003, petitioners sent a formal demand letter to respondents informing them that an immediate family member needed to use the premises and demanding surrender of the property within 10 days from notice.
• Respondents failed to heed the demand, prompting petitioners to file a Complaint for ejectment before the office of the barangay captain; amicable settlement efforts under Section 412 of the Local Government Code proved unsuccessful.
• In their Answer with Counterclaim, respondents claimed they contributed approximately P1 million to the construction costs (while petitioners spent P2 million) and provided uncompensated management and supervision services, asserting an implied co-ownership or partnership agreement granting them exclusive use of a portion of the building.
• Respondents claimed they were builders in good faith entitled to compensation for the current value of their contribution, praying for dismissal of the complaint and award of P5 million as compensation for their contributions, plus moral damages and attorney's fees.

• The Court of Appeals seriously erred in remanding the case to the court of origin for the purpose of ascertaining respondents' right to be reimbursed for useful improvements under Articles 1678 and 546 of the Civil Code.
• Respondents were builders in bad faith because they knew the property belonged to petitioners and were expressly prohibited from constructing improvements as early as 1983, as evidenced by the July 15, 1983 letter.
• As builders in bad faith, respondents are not entitled to any indemnity or reimbursement for useful expenses under Articles 449, 450, and 451 of the Civil Code, and forfeit what was built without right of indemnity.
• Article 1678 applies only to lessees, not to occupants by mere tolerance, and the Court of Appeals erred in applying this provision to respondents who never alleged they were lessees but rather claimed co-ownership.
• The award of reimbursement for useful expenses and the remand for determination of such expenses should be deleted.

• The Court of Appeals correctly ruled that their status is analogous to that of a lessee or tenant whose term of lease has expired but whose occupancy continued by tolerance of the owner, citing Calubayan v. Pascual.
• They are entitled to reimbursement for necessary and useful expenses pursuant to Articles 1678 and 546 of the Civil Code because they built the improvements in good faith with the knowledge and without objection from petitioners.
• They contributed approximately P1 million to the construction and provided uncompensated management and supervision services while petitioners were abroad, establishing an implied co-ownership or partnership.
• The July 15, 1983 letter was written when an old dilapidated house was still standing, and the new building was constructed subsequently with petitioners' knowledge and consent, making them builders in good faith under Article 448.

• Procedural Issues:
  • Whether the Court of Appeals erred in remanding the case to the court of origin for determination of the cost of necessary and useful expenses incurred by respondents.
• Substantive Issues:
  • Whether Article 1678 of the Civil Code applies to occupants by mere tolerance or only to lessees.
  • Whether respondents were builders in good faith or bad faith under Article 448 of the Civil Code.
  • Whether respondents are entitled to reimbursement for useful expenses, necessary expenses, or both, and whether they have a right of retention over the premises.

• Procedural:
  • The Supreme Court partly granted the petition and modified the Court of Appeals' Decision dated April 25, 2008.
  • The Court reversed the remand for determination of useful expenses but affirmed the remand limited to the determination of necessary expenses for preservation of the land only.
• Substantive:
  • Article 1678 applies only to lessees who build useful improvements on leased property and does not apply to those who possess property by mere tolerance of the owners without a contractual right.
  • The analogy in Calubayan v. Pascual between occupants by tolerance and lessees extends only to the implied obligation to vacate upon demand, not to the right to reimbursement under Article 1678.
  • Respondents were builders in bad faith because they admitted knowing the property belonged to petitioners and were expressly prohibited from building improvements in the July 15, 1983 letter; the prohibition remained extant and continuing as it was never withdrawn or modified.
  • The lack of constant reminders from petitioners about the prohibition was immaterial, and respondents could not claim good faith despite petitioners' failure to object constantly, as they were aware of the flaw in their title from the outset.
  • Builders in bad faith are not entitled to reimbursement for useful expenses under Articles 449 and 450; they forfeit improvements built without right of indemnity, and the landowner may demand demolition or appropriate the improvements without payment.
  • Builders in bad faith are entitled only to reimbursement of necessary expenses for preservation of the land under Article 452, but without the right of retention under Article 546.
  • The award of actual damages of P7,000 monthly rental from October 22, 2003 until finality of the decision was affirmed as reasonable compensation for use and occupation.
  • The prayer for attorney's fees was denied for lack of cogent basis.

• Builder in Good Faith — Defined as one who, not being the owner of the land, builds on that land believing himself to be its owner and unaware of the defect in his title or mode of acquisition; the essence lies in an honest belief in the validity of one's right, ignorance of a superior claim, and absence of intention to overreach another. Applied to determine that respondents were builders in bad faith because they knew the property belonged to another and were expressly prohibited from constructing improvements.
• Accession — The legal principle by which the owner of land becomes the owner of improvements built thereon; applied to hold that petitioners as landowners have the right to appropriate improvements built by respondents without obligation to pay indemnity therefor, pursuant to Articles 449 and 450.
• Occupants by Tolerance — Persons who occupy the land of another at the latter's tolerance or permission without any contract between them; they are bound by an implied promise to vacate upon demand. Applied to distinguish from lessees and to deny application of Article 1678 to such occupants.

• "The term 'builder in good faith' as used in reference to Article 448 of the Civil Code, refers to one who, not being the owner of the land, builds on that land believing himself to be its owner and unaware of the defect in his title or mode of acquisition." — Definition of builder in good faith and the standard for determining good faith in accession cases.
• "The essence of good faith lies in an honest belief in the validity of one's right, ignorance of a superior claim, and absence of intention to overreach another." — Explanation of the fundamental elements constituting good faith in the context of builders and possessors.
• "By its express provision, Article 1678 of the Civil Code applies only to lessees who build useful improvements on the leased property. It does not apply to those who possess property by mere tolerance of the owners, without a contractual right." — Clarification of the limited scope of Article 1678 and its inapplicability to occupants by tolerance.
• "Those who occupy the land of another at the latter's tolerance or permission, even without any contract between them, are necessarily bound by an implied promise that the occupants would vacate the property upon demand." — Statement of the principle governing occupants by tolerance and their obligation to vacate.

• Calubayan v. Pascual — Cited to distinguish the rights of occupants by tolerance; the Court clarified that the analogy to lessees in this case applies only to the obligation to vacate upon demand, not to the right to reimbursement under Article 1678.
• Spouses Ismael and Teresita Macasaet v. Spouses Vicente and Rosario Macasaet — Cited as an instance where Article 448 was applied to a builder who constructed improvements with the consent of the owner; distinguished because in the instant case there was express prohibition from building.
• Heirs of Durano, Sr. v. Spouses Uy — Cited for the rule that owners of land have the right to appropriate what has been built on the property without obligation to pay indemnity when the builder is in bad faith.
• Tan Queto v. Court of Appeals — Cited for the principle that builders in bad faith have no right to a refund of any improvement built on the land of another.
• Taganito Mining Corporation v. Commissioner of Internal Revenue — Cited for the rule that a party who does not appeal from a judgment can no longer seek modification or reversal thereof.

• Article 448 of the Civil Code — Defines the rights of a builder in good faith; referenced to distinguish the status of respondents who were found to be builders in bad faith.
• Article 449 of the Civil Code — Provides that a builder in bad faith loses what is built without right of indemnity; applied to deny respondents reimbursement for useful expenses.
• Article 450 of the Civil Code — Grants the landowner the option to demand demolition of work built in bad faith or compel the builder to pay the price of the land; applied to affirm petitioners' rights.
• Article 452 of the Civil Code — Entitles a builder in bad faith to reimbursement for necessary expenses of preservation of the land; applied to allow respondents recovery only for necessary expenses.
• Article 546 of the Civil Code — Governs refund of necessary and useful expenses to possessors; applied to clarify that only possessors in good faith have the right of retention, which respondents as builders in bad faith do not possess.
• Article 1678 of the Civil Code — Provides for reimbursement of useful improvements made by lessees; held inapplicable to occupants by mere tolerance.
• Rule 45 of the Rules of Court — Governs petitions for review on certiorari; cited as the procedural basis for the petition.