Dakak Beach Resort Corporation vs. Mendezona

The stipulations in a lease contract regarding the ownership of improvements upon its termination are the law between the parties and prevail over the default provisions of Article 1678 of the Civil Code. A lessee who continues possession after the lease expires without the lessor's acquiescence and against the lessor's demand to vacate is liable for reasonable rent and cannot claim rights under provisions for builders in good faith or legal redemption.

The subject property was originally owned by Violeta Saguin de Luzuriaga, who obtained it via a free patent. In 1987, she leased it to Dakak Beach Resort Corporation for 10 years. The lease contract contained a clause that all permanent improvements introduced by the lessee would become the lessor's property upon termination. Dakak built cottages on the lot. After the lease expired in 1997, Dakak refused to vacate despite demands. Violeta sold the property to her daughter, Pilar Mendezona, who, with her husband, filed a case for recovery of possession.

• Filed in RTC (Branch 8, Dipolog City) as Civil Case No. 5812.
• RTC ruled in favor of the Spouses Mendezona, ordering Dakak to vacate, pay unpaid rentals, and declaring the improvements belonged to the owners.
• Dakak appealed to the CA (CA-G.R. CV No. 04450-MIN).
• The CA affirmed with modification, adjusting the computation of rental payments.
• Dakak elevated the case to the SC via a Petition for Review on Certiorari.

• Violeta Saguin de Luzuriaga owned Lot No. 8771-A by virtue of a free patent.
• On December 1, 1987, she signed a 10-year lease contract with Dakak, represented by Jalosjos, with a stipulation that all permanent improvements would become the lessor's property upon termination.
• Dakak built cottages on the property.
• Violeta was never given a copy of the contract despite demands. She mistakenly believed the lease ended earlier and returned a rental check in 1992.
• In 1994, she demanded Dakak vacate, which was ignored.
• In 1998, Violeta sold the property to her daughter, Pilar Mendezona.
• Pilar demanded Dakak vacate in 1999; this was also ignored.
• The Spouses Mendezona filed a complaint for recovery of possession in 2003.
• The lease contract expired on December 31, 1997.

• Dakak and Jalosjos claimed they were builders in good faith under Articles 448 and 546 of the Civil Code, entitled to retain the property until reimbursed for the value of the cottages.
• Alternatively, they argued that if Article 1678 applied, they were entitled to reimbursement for one-half the value of the improvements.
• They claimed a right of legal redemption over the lot under Articles 1621 and 1623 as owners of adjoining rural lands.
• They contested the rental amounts awarded as unconscionable.

• The Spouses Mendezona argued the lease contract's stipulation on improvements was clear and binding.
• The right of redemption under Articles 1621/1623 did not apply because the adjoining lands were used for commercial (not agricultural) purposes.
• The rental computations were fair and reasonable given the prolonged unauthorized use of their property.

• Procedural Issues: N/A
• Substantive Issues:
  1. Whether the total rent awarded is unconscionable and contrary to law.
  2. Whether the contract of lease was validly terminated.
  3. Whether Dakak is a builder in good faith entitled to retain the property until reimbursement.
  4. Whether the Spouses Mendezona must pay Dakak one-half of the value of the improvements under Article 1678.
  5. Whether Dakak has a right of legal redemption over the lot under Articles 1621 and 1623.

• Procedural: N/A
• Substantive:
  1. No. The SC modified the computation of unpaid rent for the lease period (1992-1997) to PHP 93,463.28 but found the monthly rent of PHP 4,000.00 for 1998 and the annual PHP 2,000.00 increase thereafter to be fair and reasonable compensation for commercial use of the property.
  2. Yes. The lease was validly terminated upon its expiration on December 31, 1997. No implied new lease arose because the lessor (Violeta, and later the Spouses Mendezona) consistently demanded vacation, showing no acquiescence to Dakak's continued possession.
  3. No. Articles 448 and 546 do not apply to lessees. A "builder in good faith" is one who builds believing themselves to be the owner, not a lessee with a known contractual interest. The exceptional application in Spouses Macasaet v. Spouses Macasaet (involving family relations) was inapplicable.
  4. No. Article 1678, which provides for reimbursement of one-half the value of useful improvements, does not apply because the lease contract expressly stipulated that all permanent improvements would become the lessor's property upon termination. This contractual stipulation is valid and binding as the law between the parties. Furthermore, any claim under Article 1678 had prescribed, as it was raised for the first time on appeal more than 10 years after the lease expired.
  5. No. The right of legal redemption under Article 1621 applies only to "rural lands" used for agricultural purposes. While the lot itself was classified as agricultural (due to its free patent origin), the adjoining lands owned by Dakak were used for commercial purposes (as part of a beach resort). Therefore, the property did not qualify as "rural land" for the purpose of legal redemption.

• Freedom of Contract (Article 1306, Civil Code) — Parties may establish stipulations they deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy. The SC applied this to uphold the lease contract's stipulation that improvements belong to the lessor upon termination.
• Contract as the Law Between the Parties — A valid and binding contract has the force of law between the parties and must be complied with in good faith. The SC held this principle barred Dakak from claiming reimbursement contrary to the contract's clear terms.
• Legal Redemption (Article 1621, Civil Code) — The owners of adjoining rural lands not exceeding one hectare have a right to redeem the property when it is sold. The SC clarified that for this right to apply, both the land sought to be redeemed and the adjoining land must be rural lands used for agricultural purposes. Commercial use disqualifies the property.
• Builder in Good Faith (Article 448, Civil Code) — A person who builds on land believing themselves to be its owner. The SC reiterated that this concept does not apply to a lessee, who builds with knowledge of the owner's title and the contractual relationship.
• Article 1678, Civil Code (Useful Improvements by Lessee) — Provides that if a lessee makes useful improvements in good faith, the lessor may, upon termination, appropriate them by paying one-half their value or allow the lessee to remove them. The SC ruled this is a default provision that parties can contractually stipulate around.

• "The contract is the law between the parties and should be complied with in good faith."
• "Stipulations giving the lessor the improvements have long been considered valid... they serve as a guaranty to the lessors; they tend to compel the timely payment of rentals by the lessees who had chosen to enter into a long term lease contract."
• "For land to be considered rural in nature under Article 1621, it is essential to look into the actual use of the property. When the property sought to be redeemed and the adjacent lands thereto are used for residential, industrial, or commercial purposes, they cannot be classified as rural lands under Article 1621."

• Spouses Macasaet v. Spouses Macasaet — Cited by petitioners to argue for application of Article 448. The SC distinguished it, noting it involved an exceptional familial situation and expressly stated Article 448 does not apply to lessees.
• Spouses Fabia v. Intermediate Appellate Court — Followed for its definition of "rural lands" under Article 1621, emphasizing that the actual use for agriculture is determinative.
• Philippine National Bank v. Court of First Instance, Hian v. CA, Mislang v. Torres — Cited to support the principle that Article 1678 does not apply when the lease contract contains its own stipulations regarding improvements.
• Cabangis v. Hon. Court of Appeals — Applied to show that a claim for indemnity for improvements under Article 1678 can be waived if not asserted timely and that the right to remove improvements must be exercised at lease termination.

• Article 1306, Civil Code — Freedom to contract.
• Article 1621, Civil Code — Right of legal redemption for adjoining rural landowners.
• Article 1670, Civil Code — Implied new lease (tacita reconduccion). SC found its elements (acquiescence of lessor, no demand to vacate) were not met.
• Article 1678, Civil Code — Reimbursement for useful improvements made by a lessee. Held inapplicable due to contractual stipulation.
• Article 2220, Civil Code — Basis for awarding moral damages for breach of contract done in bad faith.
• Article 2229 & 2232, Civil Code — Basis for awarding exemplary damages in cases of wanton, fraudulent, or oppressive conduct in contractual breaches.