Bermon Marketing Communication Corporation vs. Spouses Yaco

A lessee may validly waive its right to reimbursement under Article 1678 of the Civil Code through an express stipulation in the lease contract that improvements shall become the lessor's property without reimbursement, such stipulation not being contrary to law, morals, good customs, public order, or public policy under Article 1306 of the Civil Code.

Spouses Lilia M. Yaco and Nemesio Yaco are the registered owners of a parcel of land at No. 72 Apo St., Mandaluyong City, containing 393 square meters with a one-storey building, an old residential house, and an open space between the two buildings. On December 19, 2000, the spouses entered into a Contract of Lease with Bermon Marketing Communication Corporation, leasing the property for a period of six years at ₱50,000.00 per month for the first two years, subject to a 10% increase every two years. The lease contract expressly provided that petitioner shall construct, at its own expense, a second floor on the existing office, which upon termination of the lease would automatically become the property of the spouses Yaco.

Respondent Spouses Lilia M. Yaco and Nemesio Yaco are the registered owners of a parcel of land at No. 72 Apo St., Mandaluyong City, containing an area of 393 square meters with a one-storey building, an old residential house, and an open space between the two buildings. On December 19, 2000, the spouses entered into a Contract of Lease with petitioner Bermon Marketing Communication Corporation, leasing the subject property for a period of six years at ₱50,000.00 per month for the first two years, subject to a 10% increase every two years. The lease contract expressly provided that petitioner shall construct, at its own expense, a second floor on the existing office, which upon termination of the lease would automatically become the property of the spouses Yaco. Petitioner claimed it incurred expenses of ₱800,000.00 for the construction of the second floor.

Sometime in March 2001, petitioner constructed a new building on the open space of the property for use in its advertisement business, claiming the construction was made with the knowledge and consent of the spouses Yaco and with the understanding that the lease contract would be extended for another four years. Petitioner incurred ₱1,135,282.41 for materials and ₱1,049,219.00 for labor. The spouses Yaco denied having consented to or known of the construction of the new building on the open space. On January 12, 2007, the lease expired without renewal and was converted into a month-to-month basis. On December 14, 2007, the spouses Yaco sent petitioner a Demand Letter to vacate the premises and pay rent arrears. Petitioner claimed the spouses Yaco left a handwritten proposal increasing rent to ₱90,000.00 per month, which petitioner countered at ₱70,000.00, but the spouses never returned. On June 12, 2008, petitioner received another demand letter for unpaid rentals and to vacate.

Thereafter, the spouses Yaco filed a Complaint for ejectment praying that petitioner be ordered to vacate the premises and pay ₱242,000.00, ₱540,000.00 for the use of improvements from January 12, 2007 to June 12, 2008, and ₱100,000.00 per month for the use of the entire premises from June 13, 2008 until fully vacated. In its Answer with Counterclaim, petitioner claimed the parties had agreed to extend the lease to ten years and that it was entitled to reimbursement of approximately ₱2,000,000.00 for the new building and ₱500,000.00 for the second floor, having increased the value of the land. The spouses Yaco replied that they were not liable to reimburse petitioner because the lease contract stipulated that the second floor construction would be at petitioner's own expense without right of reimbursement, with ownership vesting in the lessor upon expiration, and that the construction of the new building on the open space was without their consent or knowledge.

• Applicability of Article 1678: Petitioner argued that Article 1678 of the Civil Code is applicable, claiming that spouses Yaco had already exercised their option under the law when they stated in their demand letters that the improvements were now owned by them, thereby exercising their option to appropriate the improvements and triggering the obligation to pay one-half of the value thereof.
• Consent to Construction: Petitioner maintained that the construction of the improvements was made with the consent and knowledge of the spouses Yaco, and that if the spouses truly did not consent to the construction of the building on the open space, they could have exercised their option to have petitioner remove the improvements.

• Contractual Waiver of Reimbursement: Respondents countered that they are not liable to pay one-half of the improvements because the Contract of Lease expressly provides that the improvements will be owned by them at the end of the lease, thus precluding any obligation to reimburse petitioner for the amounts spent on construction.
• Lack of Good Faith: Respondents argued that assuming Article 1678 is applicable, they are still not liable to pay one-half of the value of the improvements because petitioner was not in good faith when it constructed the building on the open space, as the spouses never consented to such construction.

• Applicability of Article 1678: Whether Article 1678 of the Civil Code is applicable in the present case.
• Liability for Reimbursement: Whether spouses Yaco are liable to pay one-half of the amount of the improvements to petitioner.

• Applicability of Article 1678: No. Article 1678 does not apply because petitioner validly waived its right to reimbursement under the express stipulation in the Contract of Lease that improvements constructed at the lessee's expense shall automatically become the lessor's property without reimbursement.
• Liability for Reimbursement: No. Spouses Yaco are not liable to reimburse petitioner for one-half of the value of the improvements, the waiver being valid and binding in the absence of any allegation that petitioner did not freely or knowingly waive its right.

• Applicability of Article 1678: Article 1678 of the Civil Code governs useful improvements introduced by a lessee in good faith on leased premises, granting the lessor the sole option either to appropriate the improvements and pay one-half of their cost or to require the lessee to remove them. The payment of one-half of the value was intended to prevent unjust enrichment on the part of the lessor. Nevertheless, Article 1306 of the Civil Code allows contracting parties to establish stipulations not contrary to law, morals, good customs, public order, or public policy, including the waiver of statutory rights. The Contract of Lease between the parties expressly stipulated that improvements shall be constructed at the lessee's expense and shall automatically become the exclusive property of the lessor at the end of the lease without any reimbursement. This stipulation is not contrary to law, morals, public order, or public policy, as held in Lhuillier vs. Court of Appeals. Petitioner thus effectively waived its right to reimbursement. The contrary pronouncement in CJH Development Corporation vs. Aniceto — that a provision granting the lessor the right to appropriate improvements without reimbursement directly contradicts Article 1678 — was held to be merely obiter dictum, since the right of reimbursement was not put in issue in that case and the lessor did not appropriate the improvements. Being obiter dictum, it lacks the force of an adjudication and cannot serve as guiding principle.

• Liability for Reimbursement: Since petitioner validly waived its right to reimbursement under the lease contract, and there being no allegation that the waiver was not made freely or knowingly, petitioner is bound by the stipulation. Spouses Yaco are therefore not obligated to reimburse petitioner for one-half of the value of the improvements. The Court noted that the question of ejectment was no longer at issue since spouses Yaco had already obtained possession of the subject property.

• Waiver of statutory right to reimbursement under Article 1678 — A lessee may validly waive its right to reimbursement for one-half of the value of useful improvements under Article 1678 of the Civil Code through an express stipulation in the lease contract providing that improvements shall become the lessor's property without reimbursement. Such stipulation is permissible under Article 1306 of the Civil Code, it not being contrary to law, morals, good customs, public order, or public policy. The waiver is binding absent any allegation that it was not made freely or knowingly.
• Obiter dictum — An obiter dictum is a remark or opinion expressed by a judge incidentally or collaterally, not directly upon the question before the court, or upon a point not necessarily involved in the determination of the cause. It does not embody the resolution or determination of the court and lacks the force of an adjudication, having no binding force for purposes of res judicata. A contrary pronouncement in another case that was not necessary to the resolution of the issue before it cannot be used as a guiding principle.

• "In the present case, Spouses Yaco and petitioner stipulated that any improvements shall be constructed at the expense of the lessee which shall automatically become the exclusive property of the lessor at the end of the lease without any reimbursement." — This passage identifies the controlling stipulation that constitutes the lessee's valid waiver of its Article 1678 right, forming the ratio decidendi of the case.

• "Petitioner waived his right to reimbursement of one-half of the amount of the improvements he introduced. Thus, in the absence of any allegation that it did not freely or knowingly waived its right to reimbursement as stipulated in the contract of lease, Bermon is bound by the same." — This states the Court's conclusion that the contractual waiver is binding and enforceable, directly resolving the issue of reimbursement liability.

• "an obiter dictum is a remark made, or opinion expressed, by a judge, in his decision upon a cause by the way, that is, incidentally or collaterally, and not directly upon the question before him, or upon a point not necessarily involved in the determination of the cause" — This defines the doctrine of obiter dictum in canonical formulation, used to set aside the contrary pronouncement in CJH Development Corporation vs. Aniceto.

• Lhuillier vs. Court of Appeals, 401 Phil. 829 (2000) — Controlling precedent followed. The Court relied on this case to establish that a lease contract stipulation providing that improvements introduced by the lessee shall become the property of the lessor without reimbursement is not contrary to law, morals, public order, or public policy, and that the lessee is not prohibited from waiving the right to reimbursement.
• CJH Development Corporation vs. Aniceto, G.R. No. 224006, July 6, 2020 — Distinguished and set aside as obiter dictum. The Court held that the pronouncement in this case — that a provision granting the lessor the right to appropriate improvements without reimbursement directly contradicts Article 1678 — was merely obiter dictum because the right of reimbursement was not put in issue and the lessor did not appropriate the improvements.
• Cheng vs. Sps. Donini, 608 Phil. 206 (2009) — Cited for the proposition that Article 1678 gives the lessor the sole option to appropriate improvements and pay one-half of the cost or to have the lessee remove them.
• Parilla vs. Dr. Pilar, 538 Phil. 909 (2006) — Cited for the principle that payment of one-half of the value of improvements under Article 1678 was intended to prevent unjust enrichment on the part of the lessor.

• Article 1678, Civil Code — Governs useful improvements introduced by a lessee in good faith on leased premises, granting the lessor the option to pay one-half of the value of the improvements or to refuse reimbursement, in which case the lessee may remove the improvements. The Court held this provision does not apply where the lessee has validly waived its right to reimbursement by contract.
• Article 1306, Civil Code — Provides that contracting parties may establish such stipulations, clauses, terms, and conditions as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. The Court applied this provision to uphold the validity of the lease contract stipulation waiving the lessee's right to reimbursement.

Peralta, C.J., Caguioa, Zalameda, and Gaerlan, JJ., concurred.