A contract of lease is perfected by the meeting of the minds of the parties upon the thing to be leased and the price certain; where essential terms such as the specific area to be leased, the cost of construction to be offset against rent, and the exact duration remain undetermined or disputed, no perfected contract exists, and a party who proceeds with construction despite objections and without a signed agreement is a builder in bad faith.

The case arose from an action for recovery of possession and damages filed by respondent spouses Ben and Maria Baguilat against petitioner Emilio Bugatti. The dispute centered on an alleged oral agreement for Bugatti to lease a portion of the Baguilats' land, construct a building thereon (with costs to be offset by rent), and then pay a monthly rental, with the building eventually belonging to the Baguilats.

• In December 1987, petitioner Emilio Bugatti offered to lease land from respondents Spouses Ben and Maria Baguilat.
• Discussions included a 9-year lease, P500.00 monthly rental, construction of a building by petitioner (cost not exceeding P40,000.00 to be reimbursed by applying rentals), and ownership of the building by respondents upon lease termination.
• It was agreed that these terms would be in a written contract prepared by petitioner for respondents' approval.
• Before preparing the contract, petitioner occupied the land and began construction on January 18, 1988.
• Respondent Maria Baguilat objected, demanding the contract be signed first; petitioner assured it was being prepared.
• In March 1988, petitioner presented a lease contract that did not contain the agreed terms; respondents insisted on a redraft.
• In April 1988, petitioner presented a revised document with counter-proposals, which respondents refused.
• Despite no signed contract, petitioner continued occupying the land and completed the building in June 1988, claiming expenses of P120,000.00.
• Respondents resorted to extrajudicial measures, including Barangay Captain mediation, which failed.
• Respondents sent demand letters on November 23, 1988 (to vacate) and April 3, 1989 (to terminate construction).
• Petitioner claimed respondents agreed to lease their entire property, with no construction cost limit, and an extended lease period until full reimbursement of construction costs, with the building then transferring to respondents.
• Petitioner alleged Maria Baguilat did not initially object to the first draft and later claimed to have lost it, and that respondents gave verbal permission for construction.

• A contract of lease was perfected, embodying terms agreed upon, except for the building cost which was later decided to extend the lease period.
• Respondents had agreed to lease their entire property for nine years at P500.00 monthly rental, with petitioner constructing a building of strong materials without a cost limit.
• The lease period was to begin from the opening of petitioner's business and continue until full recovery of construction costs, after which respondents would own the building.
• Respondents did not object to the construction and gave verbal permission; Maria Baguilat even made suggestions for materials.
• The Court of Appeals erred in ordering petitioner to vacate as the lease had not expired and in its computation of rentals and reimbursement for the building.
• The agreed terms were for the P500.00 monthly rental to be deducted from the P120,000 construction cost starting March 1988, with the lease expiring in March 2008.

• No contract of lease was perfected due to the absence of consent on essential terms.
• The agreed terms were: a portion of their land, 9-year lease, P500.00 monthly rental, building cost not exceeding P40,000.00 to be reimbursed by applying rentals, and the building to belong to respondents upon lease termination.
• The drafting of a written contract embodying these terms was a condition precedent to the lease and any construction.
• Petitioner occupied the land and began construction without a signed contract and despite their immediate objections.
• The drafts presented by petitioner did not reflect the agreed terms and included counter-proposals, which they rejected.
• Petitioner was a builder in bad faith.

• Whether or not a contract of lease was perfected between the petitioner and the respondents.
• Whether or not the petitioner was a builder in good faith or in bad faith.

• The Supreme Court granted the petition, set aside the Court of Appeals' decision, and reinstated the Regional Trial Court's decision with modification.
• No contract of lease was perfected between the parties because there was no meeting of the minds on essential terms, particularly the area to be leased, the amount to be spent on construction, and consequently, the period of the lease. The parties were merely in the negotiation stage.
• The respondents' insistence on a written contract embodying their agreed terms before construction could begin, and their subsequent objections to the construction and the petitioner's draft contracts, demonstrate the lack of consent.
• Petitioner's presentation of draft contracts with terms different from those discussed, and his eventual submission of counter-proposals, constituted a counter-offer which was rejected by respondents, further proving no perfected agreement.
• Petitioner was a builder in bad faith because he commenced and continued construction despite the absence of a perfected contract of lease and in utter disregard of respondents' numerous protests and objections.
• As a builder in bad faith, petitioner loses what is built without right to indemnity, and respondents have the option under Articles 449 and 450 of the Civil Code to: (1) appropriate what petitioner has built without paying indemnity, (2) demand petitioner remove what he has built, or (3) compel petitioner to pay the value of the land.
• Respondents are also entitled to damages, equivalent to the fair rental value of the land from January 1988 until they recover possession, the determination of which is remanded to the trial court.

• Stages of a Contract — A contract undergoes three distinct stages: preparation or negotiation, perfection, and consummation. Negotiation begins when prospective parties manifest interest and ends at agreement. Perfection occurs when parties agree on essential elements. Consummation is the fulfillment of terms. The Court found the parties were only in the negotiation stage as they had not agreed on all essential elements of the lease.
• Perfection of Consensual Contracts (Lease) — A lease, being a consensual contract, is perfected at the moment there is a meeting of the minds upon the thing (subject matter) and the cause or consideration (price). The area of agreement must extend to all points that the parties deem material. The Court held that there was no meeting of minds on essential terms like the specific area, construction costs, and lease duration, thus no perfected lease.
• Qualified Acceptance as Counter-Offer (Article 1319, New Civil Code) — An acceptance of an offer is not absolute and unqualified if it varies the terms of the offer; such qualified acceptance constitutes a counter-offer. Petitioner's submission of draft contracts with terms different from what respondents alleged were discussed, and his subsequent counter-proposals, were seen as varying the respondents' offer (or initial understanding), thus constituting a counter-offer that was rejected, preventing perfection.
• Builder in Bad Faith (Articles 449 and 450, New Civil Code) — One who builds on the land of another without the owner's consent, or despite the owner's objections, and knowing he has no right to do so, is a builder in bad faith. Petitioner was deemed a builder in bad faith for constructing despite respondents' protests and the absence of a perfected lease, thus losing what was built without right to indemnity and giving the landowner specific remedies.
• Primacy of Trial Court's Factual Findings — The evaluation of witness testimonies by the trial court is entitled to the highest respect because it has the direct opportunity to observe witnesses' demeanor and manner of testifying. The Supreme Court deferred to the RTC's assessment of witness credibility, finding the CA's contrary findings not borne out by evidence.

• "The Court after a careful evaluation of the foregoing portion of plaintiffs' testimony cannot give its imprimatur to the conclusion reached by defendant to the effect that plaintiffs allowed the defendant to enter into a portion of the land in question and construct a building thereon, for such a conclusion is gratuitous as it does not portray the true intention of the plaintiffs as alluded to by the defendant." (Quoting the RTC decision)
• "With the foregoing as a background, the Court ... is of the considered view, that no contract of lease was perfected and/or consumated [sic] between the parties, ... all that was actually done was a negotiation of an intended lease contract which did not actually materialize due to gross violation committed by the defendant of the terms and conditions set or laid down by the plaintiffs in the course of the negotiation for which reason plaintiffs refused to sign the draft prepared by the defendant." (Quoting the RTC decision)
• "Even assuming arguendo, that the proposal or offer made by the defendant to construct a building on the land in question where he will later on conduct his business was allowed or permitted by the plaintiffs during the negotiation stage... yet the bare fact as borne out by the evidence remains, that the supposed permission extended to defendant is subject to the condition that the defendant should first prepare and present to the plaintiffs the contract of lease embodying the terms and conditions as proposed for the approval of the plaintiffs, which is clearly a condition precedent to be complied with by the defendant." (Quoting the RTC decision)
• "In a contract of lease, one of the parties binds himself to give to another the enjoyment or use of a thing for a price certain, and for a period which may be definite or indefinite. Being a consensual contract, a lease is perfected at the moment there is a meeting of the minds upon the thing and the cause or consideration which are to constitute the contract. The area of agreement must extend to all points that the parties deem material."

• Ang Yu Asuncion v. CA, 238 SCRA 602 (1994) — Cited for the three distinct stages of a contract: negotiation, perfection, and consummation.
• Fule v. Court of Appeals, 286 SCRA 698 (1998) — Cited for the conditions under which factual findings of the Court of Appeals are not binding on the Supreme Court, and for the principle that the area of agreement in a contract must extend to all points parties deem material.
• People v. Baccay, 284 SCRA 296 (1998) — Cited for the principle that the trial court's evaluation of witness testimonies is entitled to the highest respect due to its direct opportunity to observe witnesses.
• A. Magsaysay, Inc. v. Cebu Portland Cement, Co., 100 Phil 351 (1957) — Cited (via Tolentino) for the principle that the area of agreement in a contract must extend to all points parties deem material.
• De Vera v. Court of Appeals, 305 SCRA 624 (1999) — Cited in relation to the options available to a landowner when a builder acts in bad faith under Articles 449 and 450 of the Civil Code.

• Article 1319, New Civil Code — "Consent is manifested by the meeting of the offer and the acceptance upon the thing and the cause which are to constitute the contract. The offer must be certain and the acceptance absolute. A qualified acceptance constitutes a counter-offer." Applied to show that petitioner's varied terms in the draft contracts constituted a counter-offer, preventing a meeting of minds.
• Article 1643, New Civil Code — "In the lease of things, one of the parties binds himself to give to another the enjoyment or use of a thing for a price certain, and for a period which may be definite or indefinite. However, no lease for more than ninety-nine years shall be valid." Defines a contract of lease, which the Court found was not perfected.
• Article 449, New Civil Code — "He who builds, plants or sows in bad faith on the land of another, loses what is built, planted or sown without right to indemnity." Applied to petitioner as a builder in bad faith.
• Article 450, New Civil Code — "The owner of the land on which anything has been built, planted or sown in bad faith may demand the demolition of the work, or that the planting or sowing be removed, in order to replace things in their former condition at the expense of the person who built, planted or sowed; or he may compel the builder or planter to pay the price of the land, and the sower the proper rent." Applied to enumerate the options available to respondents as owners of the land.
• Article 451, New Civil Code — "In the cases of the two preceding articles, the landowner is entitled to damages from the builder, planter or sower." Referenced to affirm respondents' entitlement to damages.
• Article 1678, New Civil Code — Referenced by the Court of Appeals (and implicitly rejected by the Supreme Court's finding of bad faith) regarding the rights of a lessee in good faith to reimbursement for useful improvements. The Supreme Court's ruling that petitioner was a builder in bad faith makes this article inapplicable to him.