DKC Holdings Corporation vs. Court of Appeals

The Court held that a contract involving property rights, such as a lease with an option to buy, is transmissible to the deceased party's heir under Article 1311 of the Civil Code, unless the rights and obligations are intransmissible by their nature, stipulation, or provision of law. Because the obligation to deliver possession of the leased property does not require special personal qualifications, it binds the heir, who steps into the shoes of the decedent.

Encarnacion Bartolome owned a 14,021-square-meter parcel of land in Valenzuela, Metro Manila. On March 16, 1988, she entered into a Contract of Lease with Option to Buy with petitioner DKC Holdings Corporation, granting the latter two years to exercise the option while paying a monthly reservation fee. Upon exercising the option to lease, petitioner would pay a specified monthly rental, and Encarnacion would deliver possession of the property. Encarnacion died in January 1990 before the option period lapsed. Her sole heir, private respondent Victor Bartolome, executed an Affidavit of Self-Adjudication, secured a new title in his name, and refused to accept rental payments or surrender possession of the property when petitioner exercised its option in March 1990.

• The Contract: On March 16, 1988, petitioner and Encarnacion Bartolome executed a Contract of Lease with Option to Buy over her 14,021-square-meter property. Petitioner paid a P3,000.00 monthly reservation fee for two years to secure its option to lease or purchase.
• Death of the Lessor and Succession: Encarnacion died in January 1990. Private respondent Victor Bartolome, her sole heir, executed an Affidavit of Self-Adjudication and obtained a new title (TCT No. V-14249) in his name. He subsequently refused petitioner's payments for the reservation fees and rentals.
• Exercise of the Option: On March 14, 1990, within the two-year option period, petitioner mailed Victor a notice exercising the option to lease, tendering P15,000.00 as rental for March. Victor refused the tender and refused to surrender possession. Petitioner deposited the rental and unpaid reservation fees in a bank account opened in Victor's name. Petitioner also attempted to annotate the contract on Victor's new title, but the Register of Deeds refused despite accepting the required fees.
• The Tenant Claim: During the trial, Andres Lanozo moved to intervene and dismiss, claiming to be a tenant-tiller for forty-five years. The trial court denied the motion, a ruling not elevated for review.

• Petitioner maintained that the provision on the notice to exercise the option was transmissible to the heir.
• Petitioner argued that notice of the option need not be served personally upon the deceased lessor.
• Petitioner contended that the contract was neither one-sided nor onerous.
• Petitioner asserted that the existence of a registered tenancy was not fatal to the validity of the contract.
• Petitioner argued that it should not be held liable for attorney's fees.

• Respondent Victor Bartolome countered that he was not a party to the contract and thus not bound by its provisions, asserting that the contract terminated upon the death of Encarnacion Bartolome. The lower courts agreed, additionally holding that notice must be personal to the decedent, the contract was one-sided, and the tenancy was fatal to the contract.

• Procedural Issues: N/A
• Substantive Issues:
  • Whether the Contract of Lease with Option to Buy was terminated upon the death of the lessor or binds her sole heir.
  • Whether the notice to exercise the option must be served personally on the deceased lessor.
  • Whether the existence of a registered tenancy invalidates the contract.

• Procedural: N/A
• Substantive:
  • The Court ruled that the contract was not terminated by the lessor's death and binds her sole heir. Under Article 1311 of the Civil Code, contracts take effect between the parties, their assigns, and heirs, unless the rights and obligations are intransmissible by their nature, stipulation, or provision of law. The obligation to deliver possession of the leased property does not require the exercise of special knowledge, skill, or personal qualifications; thus, it is transmissible by nature. The heir steps into the shoes of the decedent and is bound by the obligations affecting the inherited property.
  • The Court found that petitioner validly exercised its option by sending written notice to the heir within the two-year period and depositing the rental payments in the heir's bank account after the heir refused the tender. Because the original lessor was deceased, it was legitimate for petitioner to address the notice to the heir.
  • The Court declined to rule on the issue of tenancy, noting that the trial court's denial of the tenant's motion to intervene was never appealed. The tenant's rights may be ventilated in a separate proceeding.

• Principle of Relativity of Contracts (Article 1311, Civil Code) — Contracts take effect only between the parties, their assigns, and heirs, except when the rights and obligations arising therefrom are not transmissible by their nature, by stipulation, or by provision of law. The Court applied this principle to bind the heir, Victor Bartolome, to the contract entered into by his predecessor-in-interest because the obligation to deliver possession of the property was transmissible by nature.
• Intransmissible Obligations — Obligations are intransmissible if they are purely personal, either by provision of law (e.g., partnerships, agency) or by the nature of the obligation requiring special personal qualifications of the obligor (e.g., genius, skill, taste, integrity). The Court applied this doctrine to distinguish personal contracts from property-related contracts, holding that a lease contract involving the delivery of property does not require special personal qualifications and is therefore transmissible to the heirs.

• "He who contracts does so for himself and his heirs."
• "The death of a party does not excuse nonperformance of a contract which involves a property right, and the rights and obligations thereunder pass to the personal representatives of the deceased. Similarly, nonperformance is not excused by the death of the party when the other party has a property interest in the subject matter of the contract."

• Eleizegui v. Lawn Tennis Club, G.R. No. 967, 2 Phil. 309 (1903) — Cited as controlling authority for the principle that "he who contracts does so for himself and his heirs," tracing the doctrine to the old Civil Code.
• Carillo v. Salak de Paz, G.R. No. L-4133, 91 Phil. 265 (1952) — Followed for the rule that heirs can be compelled to execute a deed of reconveyance if the predecessor was duty-bound to do so, as heirs inherit property subject to liabilities affecting the decedent.
• Parañaque Kings Enterprises vs. Court of Appeals, G.R. No. 111538, 268 SCRA 727 (1997) — Followed to reject the defense of lack of privity, establishing that a successor-in-interest who steps into the shoes of the lessor assumes all obligations under the existing lease contract.

• Article 1311, Civil Code of the Philippines — Provides that contracts take effect only between the parties, their assigns, and heirs, except when the rights and obligations arising from the contract are not transmissible by their nature, or by stipulation or by provision of law. The Court applied this provision to rule that the lease contract was transmissible to the heir because the rights and obligations were not intransmissible by nature, stipulation, or law.

Davide, Jr., C.J., Puno, Kapunan, and Pardo, JJ.