Buce vs. Spouses Galeon, et al.

A lessee who constructs improvements on leased property is not a builder in good faith and has no right of retention under Article 448 in relation to Article 546 of the Civil Code; the applicable provision is Article 1678, which grants the lessee the right to remove the improvements if the lessor refuses to reimburse one-half of their value. Additionally, an implied new lease under Article 1670 requires the concurrence of three elements: (a) expiration of the original lease term; (b) the lessor has not given the lessee a notice to vacate; and (c) the lessee continued enjoying the thing leased for 15 days with the acquiescence of the lessor.

The respondents are the heirs of Bernardo Tiongco and Dionisio Tiongco, who were the registered owners of a parcel of land located at Quirino Avenue, Pandacan, Manila, covered by Transfer Certificate of Title (TCT) No. 92195. The subject land was subsequently covered by TCT No. 167461 issued in the names of the respondents. Bernardo and Dionisio entered into a contract of lease with the spouses Rogelio and Anita Buce over the subject land, effective for 15 years from June 1, 1979, subject to renewal for another 10 years under the same terms and conditions, with the lessees allowed to construct improvements thereon at their own expense.

The respondents are the heirs of Bernardo Tiongco and Dionisio Tiongco, who left the subject land upon their demise. The subject land was covered by TCT No. 92195 registered in the names of Bernardo and Dionisio, which was subsequently cancelled by TCT No. 167461 issued in the names of the respondents. Bernardo and Dionisio entered into a contract of lease with the spouses Rogelio and Anita Buce over the subject land, effective for 15 years from June 1, 1979, subject to renewal for another 10 years under the same terms and conditions. The lessees agreed to pay a monthly rental of P200.00 starting June 1979 and were allowed to construct improvements thereon at their own expense.

The monthly lease rental increased to P400.00 in 1985 and to P1,000.00 in July and August 1991. Before the end of 1991, respondents informed petitioner of an impending increase to P1,576.58 effective January 1992. Despite such information, petitioner tendered checks in the amount of P400.00 for rental payments for October to December 1991, January and May 1992, and January 1993. Because these checks were insufficient, respondents refused to accept them. Petitioner filed a complaint for specific performance with prayer for consignation against the respondents. During the pendency of that case, respondents sent a letter reminding petitioner that the lease contract expired on June 1, 1994.

On August 29, 1995, the trial court declared that the lease contract was automatically renewed for another 10 years and fixed the rental at P400.00 from June 1, 1990 to June 1, 1994 and P1,000.00 from June 1, 2000 to June 1, 2004. On appeal, the CA reversed and ordered petitioner to vacate. The matter reached the Supreme Court in G.R. No. 136913, which ruled that the lease contract was not automatically renewed in the absence of mutual agreement, reversing the CA only insofar as it ordered immediate vacatur, without prejudice to an action for recovery of possession.

Acting contrary to the ruling, petitioner failed to restore possession. On July 13, 2002, respondents sent a notice reiterating the turn-over of possession and payment of rental arrearages of P46,000.00 and P10,000.00 as reasonable rental until petitioner vacates. Petitioner failed to heed the letter. Respondents brought the complaint to the barangay, but no settlement was reached as petitioner failed to appear; a Certificate to File Action was issued. Respondents subsequently lowered the rental demand from P10,000.00 to P5,000.00, but petitioner refused to pay and instead made partial payments of P1,000.00 a month.

Respondents instituted a complaint for recovery of possession before the RTC of Manila, Branch 10. In her Answer, petitioner averred that the filing was premature due to respondents' acquiescence in allowing her continued occupation despite the expiration of the lease contract, insisting on an implied renewal. The RTC ordered petitioner to vacate, remove improvements should respondents refuse to pay, and pay rental arrearages and monthly rentals, finding that partial payment of P1,000.00 did not amount to implied renewal. On appeal, petitioner insisted she could not be evicted without proper reimbursement for the two-storey building she introduced, reiterated implied renewal, and denied liability for rental arrears, claiming the increase to P5,000.00 was exorbitant. The CA denied the appeal and affirmed with modification, holding that petitioner had no right of retention as she was not a builder in good faith, that no implied new lease existed because respondents' formal demand to vacate terminated any implied lease, and that petitioner was liable for arrears for her use and occupation.

• Right of Retention: Petitioner argued that she cannot be evicted from the subject land without proper reimbursement for the two-storey building she introduced therein, claiming she is entitled to retention until reimbursed for the costs of the building she constructed.
• Implied New Lease: Petitioner insisted that there was an implied renewal of the lease contract, arguing that respondents' acquiescence in allowing her continued occupation despite the expiration of the lease contract constituted an implied new lease.
• Rental Arrearages: Petitioner denied liability to pay rental arrears, contending that the increase of monthly rental payment from P1,000.00 to P5,000.00 is exorbitant.
• Attorney's Fees: Petitioner questioned the propriety of the award of attorney's fees.

• No Right to Reimbursement: Respondents reiterated that petitioner has no right to any reimbursement for the two-storey building and no right to remain in possession of the subject land.
• Liability for Rentals: Respondents averred that petitioner is liable to pay rental arrearages and reasonable compensation for the use of the subject land.

• Right of Retention: Whether petitioner has a right to retention over the subject land until she is reimbursed for the costs of the building she constructed therein.
• Implied New Lease: Whether there was an implied new lease contract between petitioner and the respondents.
• Rental Arrearages: Whether petitioner is liable to pay rental arrearages.
• Attorney's Fees: Whether the payment of attorney's fees is proper.

• Right of Retention: No. A lessee is not a builder in good faith; Article 448 in relation to Article 546 of the Civil Code does not apply. The applicable provision is Article 1678, which grants the lessee the right to remove improvements if the lessor refuses to reimburse one-half of their value.
• Implied New Lease: No. The elements of implied new lease under Article 1670 were not present because respondents sent a notice to vacate way back in 1993, and their intention to discontinue the lease was further manifested by the filing of the case for recovery of possession.
• Rental Arrearages: No. Petitioner is not liable to pay rental arrearages because there was no sufficient evidence that she received the notices of rental increase or that the parties mutually agreed thereto, and respondents admitted receiving P1,000.00 per month.
• Attorney's Fees: Yes. The award of attorney's fees is sustained because petitioner's unjustified failure to surrender possession amounted to bad faith.

• Right of Retention: The Court relied on Geminiano vs. Court of Appeals, which held that being mere lessees, the private respondents knew that their occupation of the premises would continue only for the life of the lease, and thus they cannot be considered possessors nor builders in good faith. Article 448 in relation to Article 546, which allows full reimbursement of useful improvements and retention of the premises until reimbursement, applies only to a possessor in good faith — one who builds on land with the belief that he is the owner thereof. It does not apply where one's only interest is that of a lessee under a rental contract; otherwise, it would always be in the power of the tenant to "improve" his landlord out of his property. The applicable provision is Article 1678, which provides that if the lessee makes useful improvements in good faith suitable to the use for which the lease is intended, the lessor upon termination shall pay the lessee one-half of the value of the improvements; should the lessor refuse to reimburse, the lessee may remove the improvements even though the principal thing may suffer damage, without causing more impairment than necessary. The right to reimbursement arises only if the lessor opts to appropriate the improvements. In this case, there was no indication that respondents chose to appropriate the improvements, so they cannot be compelled to pay one-half of its value. However, respondents cannot retain possession of the improvement without reimbursing petitioner; in case they refuse to pay, petitioner has the right to remove the building without causing more impairment than necessary.

• Implied New Lease: Article 1670 provides that if at the end of the contract the lessee continues enjoying the thing leased for fifteen days with the acquiescence of the lessor, and unless a notice to the contrary by either party has previously been given, there is an implied new lease. The elements are: (a) the term of the original contract of lease has expired; (b) the lessor has not given the lessee a notice to vacate; and (c) the lessee continued enjoying the thing leased for 15 days with the acquiescence of the lessor. Article 1687 provides that if the period for the lease has not been fixed, it is understood to be from year to year if the rent is annual, from month to month if monthly, from week to week if weekly, and from day to day if daily. The elements were not extant in this case because respondents sent a notice to petitioner informing her of their intention not to renew the lease way back in 1993 after the filing of the specific performance case. Such notice constitutes a notice to vacate, as respondents were categorical in reminding petitioner that the contract had expired, and by sending the same, they intended to discontinue the juridical tie. This intention was further manifested by the filing of the case for recovery of possession following the ruling in G.R. No. 136913. Respondents did not consent to petitioner's continued stay; her occupation was by mere tolerance, deficient of all the elements to constitute an implied new lease. Petitioner's contention that she failed to receive such notice was belied by the factual findings of the RTC and the CA. Respondents' act of accepting rental payments cannot be construed as consent to renewal because petitioner remained in possession and, regardless of the outcome, had to pay rentals for the use of the same. As petitioner continued to occupy the subject property without a contract of lease, she is liable to pay for the reasonable use and possession thereof, pegged at P5,000.00 per month.

• Rental Arrearages: The Court agreed with petitioner that she is not liable to pay rental arrearages. The increment from P1,000.00 to P1,576.58 demanded to take effect in January 1992, nor the increase from P1,000.00 to P5,000.00 demanded in July 2002, cannot be considered in holding petitioner liable for deficient rental payment because there was no sufficient evidence proving that petitioner received the notices signifying the intended rental increase and that the parties mutually agreed thereto. The RTC and CA rulings failed to uphold the increments demanded by respondents. As respondents admitted that they received P1,000.00 per month from petitioner as rental payment, the rental arrearages computed on the basis of the increase have no basis.

• Attorney's Fees: The award of attorney's fees is the exception rather than the general rule; counsel's fees are not awarded every time a party prevails because of the policy that no premium should be placed on the right to litigate. Article 2208 of the Civil Code specifically provides for the instances when attorney's fees may be recovered, and the power to award them demands factual, legal, and equitable justification. The award was sustained because: (1) even after the ruling in G.R. No. 136913, petitioner still refused to surrender possession despite the categorical declaration that the lease contract was not renewed; (2) petitioner disregarded respondents' notice to vacate; and (3) the case was elevated to the Court for the second time because of petitioner's insistence that she has a better right to possess the subject land. The RTC and CA correctly found that petitioner's unjustified failure to surrender possession amounted to bad faith, entitling respondents to attorney's fees.

• Tacita Reconduccion (Implied New Lease) — Under Article 1670 of the Civil Code, an implied new lease arises when the following elements concur: (a) the term of the original contract of lease has expired; (b) the lessor has not given the lessee a notice to vacate; and (c) the lessee continued enjoying the thing leased for 15 days with the acquiescence of the lessor. The Court applied this doctrine by finding that the elements were not present because respondents had sent a notice to vacate in 1993 and had filed a case for recovery of possession, demonstrating their lack of consent to petitioner's continued occupation.

• Lessee as Builder in Good Faith — A lessee is not a builder in good faith because, being a mere lessee, the lessee knows that occupation of the premises continues only for the life of the lease. Article 448 in relation to Article 546 of the Civil Code, which allows full reimbursement of useful improvements and retention of the premises until reimbursement, applies only to a possessor in good faith — one who builds on land with the belief that he is the owner thereof. The Court applied this doctrine to hold that petitioner, as a lessee, had no right of retention over the subject land.

• Article 1678 Right of Lessee to Remove Improvements — Under Article 1678 of the Civil Code, if the lessee makes useful improvements in good faith suitable to the use for which the lease is intended, the lessor upon termination shall pay the lessee one-half of the value of the improvements; should the lessor refuse to reimburse, the lessee may remove the improvements even though the principal thing may suffer damage, without causing more impairment than necessary. The right to reimbursement arises only if the lessor opts to appropriate the improvements. The Court applied this provision to hold that since respondents did not choose to appropriate the improvements, they cannot be compelled to pay one-half of its value, but they cannot retain possession of the improvement without reimbursing petitioner.

• "Being mere lessees, the private respondents knew that their occupation of the premises would continue only for the life of the lease. Plainly, they cannot be considered as possessors nor builders in good faith." — This passage from Geminiano vs. Court of Appeals, quoted by the Court, establishes the settled rule that a lessee cannot claim the rights of a builder in good faith, which is the foundation of the Court's ruling on the right of retention.

• "It does not apply where one's only interest is that of a lessee under a rental contract; otherwise, it would always be in the power of the tenant to 'improve' his landlord out of his property." — This passage articulates the policy rationale for denying lessees the rights of builders in good faith under Article 448 in relation to Article 546, explaining why Article 1678 is the applicable provision.

• "From the foregoing, it is clear that there is an implied renewal of the contract when the following elements concur: (a) the term of the original contract of lease has expired; (b) the lessor has not given the lessee a notice to vacate; and c) the lessee continued enjoying the thing leased for 15 days with the acquiescence of the lessor." — This passage from Samelo vs. Manotok Services, Inc., quoted by the Court, provides the canonical formulation of the elements of implied new lease under Article 1670, which the Court applied to find that no implied new lease existed.

• Buce vs. Court of Appeals, 387 Phil. 897 (2000) — Prior related litigation between the same parties; the Court ruled that the lease contract was not automatically renewed in the absence of mutual agreement. This case is controlling on the issue of the lease contract's expiration and was relied upon to show respondents' intention to discontinue the lease.

• Geminiano vs. Court of Appeals, 328 Phil. 682 (1996) — Controlling precedent establishing that a lessee is not a builder in good faith and cannot claim the rights under Article 448 in relation to Article 546 of the Civil Code. The Court relied on this case to deny petitioner's right of retention.

• Samelo vs. Manotok Services, Inc., 689 Phil. 411 (2012) — Cited for the elements of implied new lease under Article 1670 of the Civil Code. The Court applied these elements to determine that no implied new lease existed.

• Torres vs. Court of Appeals, 290-A Phil. 163 (1992) — Cited for the proposition that a party who continues to occupy property without a contract of lease is liable to pay for the reasonable use and possession thereof.

• Philippine National Construction Corporation vs. APAC Marketing Corporation, 710 Phil. 389 (2013) — Cited for the rule that attorney's fees are the exception rather than the general rule and are not awarded every time a party prevails.

• Spouses Timado vs. Rural Bank of San Jose, Inc., 789 Phil. 453 (2016) — Cited for the rule that the power of the court to award attorney's fees under Article 2208 demands factual, legal, and equitable justification.

• Article 448, Civil Code — Provides for the rights of a builder in good faith on another's land, allowing full reimbursement of useful improvements and retention of the premises until reimbursement. The Court held this provision does not apply to lessees.

• Article 546, Civil Code — Provides for the rights of a possessor in good faith to reimbursement for necessary and useful improvements. The Court held this provision applies only to possessors in good faith, not lessees.

• Article 1670, Civil Code — Provides for implied new lease (tacita reconduccion) when the lessee continues enjoying the thing leased for fifteen days with the acquiescence of the lessor and no notice to the contrary has been given. The Court applied this provision to determine whether an implied new lease existed.

• Article 1678, Civil Code — Provides that if the lessee makes useful improvements in good faith, the lessor upon termination shall pay one-half of the value of the improvements; should the lessor refuse to reimburse, the lessee may remove the improvements. The Court applied this provision as the governing rule for lessees' improvements.

• Article 1687, Civil Code — Provides for the determination of the period of an implied lease when the period has not been fixed, depending on the period of rental payments. The Court cited this provision in discussing the terms of an implied new lease.

• Article 2208, Civil Code — Enumerates the instances when attorney's fees may be recovered in the absence of stipulation. The Court applied this provision to sustain the award of attorney's fees based on petitioner's bad faith.

Peralta, C.J. (Chairperson), Caguioa (Working Chairperson), Carandang, and Lazaro-Javier, JJ., concurred.