Bercero vs. Capitol Development Corporation

A lease contract entered into by a lessor with a third party during the pendency of a still-subsisting lease over the same property is void for having an inexistent cause under Article 1409(3) of the Civil Code; the contract produces no civil effects, and the parties, being in pari delicto, are not entitled to damages, specific performance, or restoration of possession based on the void agreement.

Capitol Development Corporation (respondent) leased its commercial building and lot at 1194 EDSA, Quezon City to R.C. Nicolas Merchandising, Inc. for 10 years, from 1983 to 1993, with the right to sublease. R.C. Nicolas converted the premises into a bowling and billiards center and subleased portions to several parties, including Pedro T. Bercero (petitioner), whose sublease was to expire on August 16, 1988. Respondent filed an ejectment suit against R.C. Nicolas for non-payment of rent and impleaded the sub-lessees, including petitioner. Before the ejectment case concluded, petitioner and other sub-lessees executed compromise agreements with respondent, recognized the termination of R.C. Nicolas’s lease, and signed direct lease contracts with respondent. Petitioner’s direct lease ran for three years, from August 16, 1988 to August 31, 1991. R.C. Nicolas thereafter filed its own ejectment suit against petitioner, obtained a favorable judgment, and caused petitioner’s eviction in November 1990. Respondent did not intervene or restore petitioner, prompting petitioner’s action for damages and restoration of possession.

• Primary Lease and Sublease: On January 31, 1983, respondent leased its property to R.C. Nicolas for a 10-year period ending January 31, 1993, with the right to sublease. R.C. Nicolas subleased a portion to petitioner for a term ending August 16, 1988.
• Ejectment of Principal Lessee: Respondent filed an ejectment case against R.C. Nicolas for non-payment of rent (Civil Case No. 52933, MeTC-Branch 41, Quezon City) and impleaded the sub-lessees, including petitioner.
• Compromise and Direct Lease: During the pendency of the ejectment case, petitioner and other sub-lessees entered into a compromise settlement with respondent. They recognized respondent as lawful owner, acknowledged the termination of R.C. Nicolas’s lease for non-payment, surrendered possession, and executed direct lease contracts with respondent. Petitioner’s direct lease contract with respondent covered the period from August 16, 1988 to August 31, 1991.
• Ejectment of Petitioner by R.C. Nicolas: R.C. Nicolas filed an ejectment and collection suit against petitioner (Civil Case No. 0668, MeTC-Branch 39). The MeTC ruled in favor of R.C. Nicolas and ordered petitioner’s eviction. Petitioner’s appeal to the RTC-Branch 78 resulted in the issuance of a writ of execution pending appeal because petitioner failed to post a supersedeas bond or deposit rentals. Petitioner was physically evicted from the premises sometime in November 1990.
• Respondent’s Inaction and Petitioner’s Demands: Despite repeated demands, respondent failed to restore petitioner’s possession or to intervene in the ejectment proceedings instituted by R.C. Nicolas. The MeTC-Branch 41 eventually rendered a decision on November 13, 1991 in the ejectment case, ordering R.C. Nicolas to pay unpaid rentals to respondent.
• Petitioner’s Suit for Damages: On March 24, 1992, petitioner filed Civil Case No. Q-92-11732 against respondent for sum of money with attachment and mandatory injunction, seeking restoration of possession and actual, moral, and exemplary damages due to respondent’s alleged breach of its obligation under Article 1654(3) of the Civil Code to maintain peaceful possession.
• RTC Ruling: The trial court held that respondent breached its obligation as lessor by failing to assist petitioner against R.C. Nicolas’s ejectment suit. It ordered respondent to restore petitioner’s possession for three years and awarded ₱480,000.00 actual damages, ₱50,000.00 moral damages, ₱50,000.00 exemplary damages, and ₱50,000.00 attorney’s fees.
• CA Reversal: The Court of Appeals set aside the RTC Decision on the ground of estoppel, holding that although respondent failed to ensure petitioner’s peaceful possession, petitioner could not claim damages because he was aware of the pending ejectment litigation between respondent and R.C. Nicolas when he signed the direct lease.

• Inapplicability of Estoppel: Petitioner argued that estoppel could not be applied against him because he contracted with respondent in good faith, relying on respondent’s representations that R.C. Nicolas’s lease had already been terminated and that respondent had a valid right to enter into a new lease.
• Lessor’s Breach and Bad Faith: Petitioner maintained that respondent breached its obligation under Article 1654(3) by failing to lift a finger to protect him from the ejectment suit filed by R.C. Nicolas and by subsequently refusing to restore his possession after the November 1990 eviction, despite the direct lease being valid until August 31, 1991. Respondent’s inaction constituted utter bad faith, entitling him to damages.

• Estoppel: Respondent countered that the Court of Appeals correctly applied estoppel because petitioner voluntarily entered into the direct lease agreement with full knowledge that the lease between respondent and R.C. Nicolas had not yet been judicially terminated and that petitioner still had existing obligations to R.C. Nicolas under the sublease.

• Validity of the Direct Lease: Whether the lease contract between petitioner and respondent was valid, given that respondent’s prior lease with R.C. Nicolas was still subsisting and subject to pending litigation at the time of execution.
• Entitlement to Damages and Possession: Whether petitioner was entitled to restoration of possession and damages for respondent’s alleged failure to maintain peaceful possession under Article 1654(3) of the Civil Code.

• Validity of the Direct Lease: The lease contract between petitioner and respondent was void ab initio for having an inexistent cause pursuant to Article 1409(3) of the New Civil Code. Respondent could not grant petitioner a right to lease in 1988 because it had already granted that same right exclusively to R.C. Nicolas for a 10-year period ending in 1993; the original lease remained valid and subsisting, notwithstanding the pending ejectment litigation. Respondent’s unilateral rescission of its contract with R.C. Nicolas without awaiting the final outcome of the ejectment case was unlawful. A lease is a reciprocal contract; its continuance, effectivity, or fulfillment cannot be made to depend exclusively upon the free and uncontrolled choice of just one party. Consequently, the direct lease produced no legal effect from its inception.
• Entitlement to Damages and Possession: Petitioner was not entitled to any affirmative relief. As the lease contract was void, it was absolutely wanting in civil effects and could not serve as the basis for an action to enforce compliance, recover damages, or seek restoration of possession. Petitioner could not successfully invoke good faith because he was a party-defendant in the ejectment case involving R.C. Nicolas’s leasehold rights and was fully aware of the pending litigation that cast doubt upon respondent’s authority to lease the property. The parties were deemed in pari delicto; the courts leave parties to a void agreement as they are, and no suit for specific performance, recovery of property or money, or damages may be maintained. Each party must bear the consequences of its own acts.

• Void Contract for Inexistent Cause — Under Article 1409(3) of the New Civil Code, contracts whose cause or object did not exist at the time of the transaction are inexistent and void from the beginning. The cause is the essential reason for entering the contract; where a lessor simultaneously grants the same lease right to two different parties, the second lease lacks an existing cause. The doctrines of ratification and waiver of illegality do not apply to inexistent contracts.
• Unilateral Rescission of Reciprocal Contracts — A lease is a reciprocal contract; its continuance, effectivity, and fulfillment cannot be made to depend exclusively upon the free and uncontrolled choice of just one party. A lessor may not unilaterally declare its lease with a prior lessee terminated without a final judicial determination, and any direct lease forged with a third party during the pendency of a suit over the original lease is premised on an inexistent right.
• In Pari Delicto — Parties to a void or inexistent agreement are in equal fault (in pari delicto) and cannot expect affirmative aid from the courts. No suit can be maintained for specific performance, to recover the property or money transferred under the void contract, or for damages for its violation; the courts leave the parties where they have placed themselves. This rule applies with equal force to both lessor and lessee under a void lease.
• Lessor’s Obligation to Maintain Peaceful Possession (Article 1654(3)) — The lessor must maintain the lessee in peaceful and adequate enjoyment of the lease for the entire contractual term, which includes protecting the lessee from legal trespass (perturbacion de derecho) that casts doubt upon the lessor’s own right. This obligation, however, presupposes a valid and subsisting lease; it does not arise from a void contract.

• "Void are all contracts in which the cause or object does not exist at the time of the transaction. In the present case, the lease contract between petitioner and respondent is void for having an inexistent cause — respondent did not have the right to lease the property to petitioner considering that its lease contract with R.C. Nicolas was still valid and subsisting, albeit pending litigation."
• "A lease is a reciprocal contract and its continuance, effectivity or fulfillment cannot be made to depend exclusively upon the free and uncontrolled choice of just one party to a lease contract. Thus, the lease contract entered into between petitioner and respondent, during the pendency of the lease contract with R.C. Nicolas, is void."
• "It is well-settled that parties to a void agreement cannot expect the aid of the law; the courts leave them as they are, because they are deemed in pari delicto or 'in equal fault.'"
• "A void or inexistent contract is equivalent to nothing; it is absolutely wanting in civil effects; it cannot be the basis of actions to enforce compliance."

• Limitless Potentials, Inc. v. Quilala, G.R. No. 157391, July 15, 2005 — Followed for the principles that the lessor must maintain peaceful possession and that a reciprocal contract’s continuance cannot depend on the will of only one party.
• Rellosa v. Gaw Chee Hun, 93 Phil. 827 (1953) — Cited for the doctrine that no affirmative relief of any kind will be given to one party against the other under a void agreement, grounded on the maxim in pari delicto.
• Menchavez v. Teves, Jr., G.R. No. 153201, January 26, 2005 — Cited as authority for the rule that parties to a void agreement are in pari delicto and cannot seek the aid of the courts.
• Republic v. La’o, G.R. No. 141941, May 4, 2006 — Cited for the principle that a void or inexistent contract has no legal existence and produces no civil effects, and therefore cannot support a cause of action.

• Article 1409(3), New Civil Code — Provides that contracts whose cause or object did not exist at the time of the transaction are inexistent and void from the beginning. Applied to nullify the direct lease because respondent’s right to lease the property— the cause of the second lease—did not exist while the original lease with R.C. Nicolas remained subsisting.
• Article 1654(3), New Civil Code — Obligates the lessor to maintain the lessee in peaceful and adequate enjoyment of the lease for the entire duration of the contract. Invoked by petitioner but held inapplicable because the underlying lease contract was void and produced no juridical tie between the parties.

Consuelo Ynares-Santiago (Chairperson), Romeo J. Callejo, Sr., Minita V. Chico-Nazario, Antonio Eduardo B. Nachura.