Balucanag vs. Francisco and Stohner

A lessee who introduces improvements on the leased premises is not a builder in good faith under Article 448 of the Civil Code, because good faith under that article presupposes a belief of ownership; the lessee’s rights over improvements are instead governed by the stipulations of the lease contract and, suppletorily, by Article 1678, under which the lessee may remove the improvements if the lessor refuses to pay one-half their value, but the lessee has no right to retain the premises pending reimbursement.

Cecilia dela Cruz Charvet owned a 177.50-square-meter lot in Pandacan, Manila. On August 31, 1952, she leased the lot to Richard Stohner for five years at a monthly rental of ₱40.00. The lease contract allowed Stohner to erect buildings and make improvements, stipulating that all such buildings and improvements would remain the lessee’s property and could be removed at any time; however, if not removed within two months after the lease expired, the lessor could remove them at the lessee’s expense. Stohner filled the land and constructed a house worth about ₱35,000.00. In 1966, Mrs. Charvet sold the lot to Rosendo Balucanag. Stohner continued in possession after the lease expired in 1957 with the acquiescence of the original lessor and later of Balucanag.

• Lease Contract and Improvements: On August 31, 1952, Cecilia dela Cruz Charvet leased her 177.50-square-meter lot in Pandacan, Manila, to Richard Stohner for five years at a monthly rental of ₱40.00. The lease contract expressly provided that Stohner could erect buildings and make improvements; all such buildings and improvements would remain the lessee’s property and could be removed at any time, but if not removed within two months after expiration of the agreement, the lessor could remove them at the lessee’s expense. During the lease, Stohner filled the land and constructed a house valued at approximately ₱35,000.00.
• Change in Ownership and Continued Possession: On March 8, 1966, Mrs. Charvet sold the lot to petitioner Rosendo Balucanag. The original lease had expired on August 31, 1957, but Stohner continued in possession with the acquiescence of Mrs. Charvet and, later, Balucanag. The rental payment arrangement continued on a monthly basis.
• Demand and Ejectment Suit: Stohner failed to pay rentals. Balucanag, through counsel, demanded that Stohner vacate. In reply, Stohner claimed to be a builder in good faith and proposed either to purchase the lot with 12% annual interest or that Balucanag reimburse him ₱35,000.00 for the improvements. No agreement was reached. Balucanag filed an ejectment suit in the City Court of Manila.
• City Court Decision: After trial, the City Court ordered Stohner to pay ₱360.00 as back rentals from December 1965 to August 1966 at ₱40.00 per month, to vacate the premises, and to pay ₱100.00 attorney’s fees.
• CFI Decision: On appeal, the Court of First Instance of Manila (Branch IX, Judge Francisco) conducted a trial de novo. It set aside the City Court judgment and dismissed the complaint. The CFI ruled that Stohner was a builder in good faith because he constructed the house with the original lessor’s consent and because Mrs. Charvet had not sought his ejectment after the lease expired in 1957. Invoking Articles 448 and 546 of the Civil Code, the CFI concluded that Stohner could not be ejected until reimbursed for the value of the improvements.

• Binding Effect of Lease Stipulation: Petitioner maintained that the lease contract’s Paragraph IV, which governed the improvements and provided that the lessor could remove them at the lessee’s expense if not removed within two months after expiration, was valid and binding on Stohner, who never assailed it.
• Inapplicability of Builder in Good Faith Doctrine: Petitioner argued that Stohner, as a lessee, could not be considered a builder in good faith under Article 448 of the Civil Code because that article applies only to persons who build on land believing themselves to be the owners.
• Right to Eject for Non-Payment: Petitioner further contended that after the lease expired, an implied new lease arose from month to month under Article 1687, and Stohner’s failure to pay rentals justified ejectment without reimbursement.

• Builder in Good Faith: Respondent Stohner claimed he was a builder in good faith of the residential house, having erected it with the original lessor’s consent. He invoked Articles 448 and 546 of the Civil Code, asserting that he could not be ejected until reimbursed for the value of the improvements, which he placed at ₱35,000.00.
• Proposals for Compromise: Stohner alternatively proposed purchasing the lot with interest or having the lessor reimburse him for the improvements, framing his possession as rightful until indemnified.

• Builder in Good Faith: Whether a lessee who introduces improvements on the leased land with the lessor’s consent is a builder in good faith under Article 448 of the Civil Code, entitled to retain the premises until reimbursed for the value of the improvements.
• Governing Law on Improvements: Whether Article 448 or Article 1678 of the Civil Code, or the lease contract’s stipulations, govern the respective rights of the lessor and lessee over improvements introduced by the lessee.
• Right to Eject after Expiration and Non-Payment: Whether the lessor may eject the lessee without paying indemnity for improvements when the lease has expired and the lessee has defaulted in rental payments.

• Builder in Good Faith: A lessee can never be a builder in good faith under Article 448. That article presupposes that the builder occupies or possesses the land in the belief that he is the owner, a belief that ceases only upon discovering a flaw in his title. A lessee, by definition, knows he is not the owner and cannot deny his lessor’s title. The doctrine of possessor in good faith, as enunciated in Lopez, Inc. v. Phil. and Eastern Trading Co., Inc., is inapplicable to a lease relationship.
• Governing Law on Improvements: Paragraph IV of the lease contract, which allowed the lessee to remove improvements and authorized the lessor to remove them at the lessee’s expense if not removed within two months after expiration, was valid and binding. Even absent that stipulation, Article 1678 of the Civil Code — not Article 448 — applies to improvements made by a lessee. Article 1678 grants the lessor the option to appropriate useful improvements by paying one-half of their value; if the lessor refuses, the lessee may remove the improvements, even if the leased property suffers damage thereby, but without causing more impairment than necessary. The lessee cannot compel the lessor to appropriate the improvements and make reimbursement, nor may the lessee retain the premises until reimbursed.
• Right to Eject after Expiration and Non-Payment: After the original lease expired in 1957, Stohner’s continued possession with the lessor’s acquiescence gave rise to an implied new lease (tacita reconduccion). Under Article 1687, since rent was paid monthly, the lease was from month to month. The lessor could terminate it at the end of any month with due notice. Stohner’s non-payment of rent independently entitled the petitioner to recover possession.

• Lessee Not a Builder in Good Faith — Article 448 of the Civil Code applies only where a person builds on land in the belief that he is the owner; it does not apply to a lessee, who knows the land belongs to another. A lessee who introduces improvements does so at his own risk and cannot recover their value from the lessor or retain the premises pending reimbursement. This doctrine, drawn from Lopez, Inc. v. Phil. and Eastern Trading Co., Inc. (98 Phil. 348), was strictly applied to deny Stohner’s claim.
• Rights of Lessee Under Article 1678 — Where the lease contract does not contain a stipulation on improvements, Article 1678 governs: (a) the lessor has the option to appropriate useful improvements made in good faith by paying the lessee one-half of their value at termination; (b) if the lessor refuses reimbursement, the lessee may remove the improvements even if the leased premises suffer damage, provided no greater impairment than necessary is caused; and (c) the lessee has no right to compel the lessor to reimburse or to retain possession until reimbursement.
• Tacita Reconduccion Under Article 1687 — When a lease expires but the lessee continues in possession with the lessor’s acquiescence, an implied new lease arises. If rent was paid monthly, the period is month to month, allowing the lessor to terminate the lease at the end of any month upon notice.

• “… the principle of possessor in good faith refers only to a party who occupies or possess property in the belief that he is the owner thereof and said good faith ends only when he discovers a flaw in his title so as to reasonably advise or inform him that after all he may not be the legal owner of said property. It cannot apply to a lessee because as such lessee he knows that he is not the owner of he leased premises. Neither can he deny the ownership or title of his lessor. … A lessee who introduces improvements in the leased premises, does so at his own risk in the sense that he cannot recover their value from the lessor, much less retain the premises until such reimbursement.” This passage from Lopez, Inc. v. Phil. and Eastern Trading Co., Inc. was approvingly quoted to reject the CFI’s application of Article 448.
• “Article 1678 … gives the lessor the option to appropriate the useful improvements by paying one-half of their value. And the lessee cannot compel the lessor to appropriate the improvements and make reimbursement, for the lessee’s right under the law is to remove the improvements even if the leased premises may suffer damage thereby.” This encapsulates the Court’s application of Article 1678 to the controversy.

• Lopez, Inc. v. Phil. and Eastern Trading Co., Inc., 98 Phil. 348 — Controlling; relied upon for the definitive rule that a lessee is not a possessor in good faith under Article 448 and has no right to reimbursement or retention for improvements.
• Lapeña v. Judge Morfe, et al., 101 Phil. 997 — Cited to support the interpretation that under Article 1678, the lessor alone has the option to pay one-half the value of useful improvements; the lessee cannot compel reimbursement.

• Article 448, Civil Code — Invoked by the CFI but held inapplicable; the article deals with a person who builds, sows, or plants on land belonging to another in good faith (belief of ownership) and was ruled not to cover a lessee.
• Article 546, Civil Code — Similarly inapplicable; provides for retention by a possessor in good faith until necessary expenses are reimbursed, but the lessee is not a possessor in good faith within its meaning.
• Article 1678, Civil Code — Applied as the governing provision on useful improvements made by a lessee in good faith. The lessor may pay half the value of improvements or allow their removal; the lessee has no right of retention.
• Article 1687, Civil Code — Applied to determine the duration of the implied new lease after expiration: from month to month because rent was paid monthly, allowing termination at each month’s end with notice.
• Article 1159, Civil Code — Noted in the separate concurring and dissenting opinion as rendering the lease stipulation on improvements binding as law between the parties, supplanting Article 1678.

Justices Makasiar (Chairman), Aquino, Concepcion, Jr., and Guerrero concurred. Justice De Castro took no part.

• Justice Abad Santos — Concurred in setting aside the CFI decision, ordering Stohner to vacate, pay costs, and pay overdue rentals. Dissented, however, as to the treatment of the house. The dissent maintained that Article 1678 applies only in the absence of a contrary stipulation; because Paragraph IV of the lease contract expressly governed improvements and their removal upon expiration, that stipulation had the force of law between the parties under Article 1159 and should have dictated the judgment regarding the house, rather than Article 1678.