Food Fest Land, Inc. and Joyfoods Corporation vs. Siapno

Novation by substitution of the person of the debtor requires the creditor's express consent, which must be given in writing when the original contract contains a non-waiver clause requiring written form for any waiver of rights; mere acceptance of payments from a third person without an express agreement releasing the original debtor results only in the addition of debtors, not the extinguishment of the original obligation.

Food Fest Land, Inc. entered into a 15-year Contract of Lease with respondents Romualdo, Teodoro, Jr., and Felipe Siapno for a 521-square-meter parcel of land in Dagupan City intended for use as a fastfood restaurant site. The contract stipulated a rental escalation clause mandating a 10% annual increase in monthly rent and a non-waiver clause requiring any waiver of contractual rights to be expressed in writing and signed by the party concerned. Food Fest later assigned its rights and obligations to Tucky Foods, Inc., which subsequently assigned the same to Joyfoods Corporation. While the escalation clause was observed for the first five years, petitioners paid only the fifth-year rate during years six through ten. Upon respondents' demand for compliance with the escalation clause in the eleventh year, Joyfoods pre-terminated the lease, leading respondents to file an action for recovery of the unpaid rental differentials.

• The Contract of Lease: On April 14, 1997, respondents (registered owners of a 521-square-meter parcel of land in Dagupan City covered by Transfer Certificate of Title No. 63128) entered into a Contract of Lease with Food Fest Land, Inc. for the operation of a fastfood restaurant. The contract stipulated a 15-year term with a pre-termination right exercisable by the lessee on the third year. The monthly rent for the first year was set at ₱43,901.00, escalating by 10% annually for succeeding years, payable within the first ten days of the following month. The contract included a non-waiver clause (Clause 16) stating that no waiver of rights shall be deemed made unless expressed in writing and signed by the party concerned.
• Assignments of Rights: In October 1998, Food Fest assigned all its rights and obligations under the contract to Tucky Foods, Inc. In September 2001, Tucky Foods assigned the same rights and obligations to Joyfoods Corporation.
• Payment History: For the first five years of the lease, Food Fest and its assignees complied with the rental escalation clause. By the fifth year, the monthly rent had reached ₱64,275.45. However, from the sixth through the ninth years, petitioners continued paying only ₱64,275.45 per month without the 10% escalation. In the tenth year, the payment increased slightly to ₱68,774.71 per month, still without full compliance with the escalation clause.
• Demand and Negotiations: At the start of the eleventh year (2007), respondents demanded enforcement of the escalation clause, computing the monthly rent at ₱113,867.89 unless renegotiated. Joyfoods proposed ₱80,000.00 per month (June 27, 2007), which was rejected. Joyfoods subsequently proposed ₱85,000.00 per month (July 4, 2007), which was likewise rejected.
• Pre-termination: On October 27, 2008, during the twelfth year of the lease, Joyfoods sent a letter notifying respondents of its intent to pre-terminate the lease due to "severe and irreversible business losses," scheduling cessation of operations on November 29, 2008, and turnover of the premises on December 13, 2008.
• Complaint: On April 20, 2009, respondents filed a complaint for sum of money seeking ₱988,907.74, representing the difference between the rent due under the escalation clause and the amount actually paid for the eleventh and twelfth years of the lease.

• Amount of Unpaid Balance: Petitioners admitted the existence of an unpaid balance but contested the amount awarded. They alleged that an unwritten agreement had suspended the rental escalation clause indefinitely beginning from the sixth year, rendering the contractually stipulated rates inapplicable thereafter. They further claimed that respondents had counter-proposed a monthly rent of ₱90,000.00 for the eleventh and twelfth years via a handwritten notation on Joyfoods' July 4, 2007 letter, which Joyfoods allegedly accepted, thereby reducing the unpaid balance to ₱382,055.22.
• Joint Liability and Novation: Petitioners argued that Food Fest could not be held liable for the unpaid balance because the successive assignments of the lease rights—from Food Fest to Tucky Foods, and from Tucky Foods to Joyfoods—constituted a novation by substitution of the person of the debtor, releasing Food Fest from its obligations. They maintained that liability rested solely with Joyfoods as the last assignee.

• Existence of Modifying Agreements: Respondents maintained that no agreements existed to suspend the escalation clause indefinitely or to fix the rent at ₱90,000.00 for the eleventh and twelfth years. They contended that the alleged handwritten counter-proposal lacked credible evidence regarding its authorship or authority, rendering it unreliable.
• Continued Liability of Original Lessee: Respondents argued that no novation occurred because they never consented to the substitution of Food Fest as debtor, and certainly not in the written form required by the non-waiver clause of the Contract of Lease. They maintained that mere acceptance of payments from Joyfoods did not imply a release of Food Fest from liability.

• Factual Basis for Modified Rental Rates: Whether the rental escalation clause was suspended indefinitely by agreement and whether a subsequent agreement fixed the rent at ₱90,000.00 per month for the eleventh and twelfth years, thereby reducing the unpaid balance.
• Novation by Substitution of Debtor: Whether the assignment of lease rights from Food Fest to Tucky Foods and subsequently to Joyfoods constituted a novation by substitution of debtor that released Food Fest from liability under the Contract of Lease.

• Factual Basis for Modified Rental Rates: The claim that the escalation clause was suspended indefinitely and that a ₱90,000.00 rate was agreed upon for years eleven and twelve was rejected. The RTC and CA correctly found that no credible evidence supported the existence of such agreements; the alleged handwritten counter-proposal on the July 4, 2007 letter was deemed unreliable and suspect, as the authorship and authority of the signatory were not established. Factual findings of lower courts are binding upon the Supreme Court in petitions for review under Rule 45 absent any showing that such findings are manifestly mistaken, absurd, or impossible, or grounded entirely on speculation.
• Novation by Substitution of Debtor: No novation by substitution of debtor occurred. Under Article 1293 of the Civil Code, substituting a new debtor requires the creditor's consent, which may be express or implied. However, the Contract of Lease's non-waiver clause mandated that any waiver of rights—including the waiver of the right to hold the original debtor liable—must be expressed in writing and signed by the party concerned. Absent respondents' written consent to Food Fest's release, no substitution was effected. Moreover, even absent the non-waiver clause, novation would still not result because mere acceptance of payments from a third person (Joyfoods) without an express agreement releasing the original debtor (Food Fest) constitutes only the addition of debtors, not novation. Under the principle that novation is never presumed, the burden to prove an express agreement releasing the original debtor was not met. Consequently, both Food Fest and Joyfoods remained liable as co-debtors for the unpaid balance.

• Novation by Substitution of Debtor — Novation is the extinguishment of an obligation by its modification and replacement by a subsequent one, which may occur by substituting the person of the debtor. Under Article 1293 of the Civil Code, such substitution requires the creditor's consent, which may be given expressly or impliedly. However, when the original contract contains a non-waiver clause requiring written form for any waiver of rights, the creditor's consent to substitution must be expressed in writing, as the release of the original debtor implies a waiver of the creditor's right to enforce the obligation against said debtor.
• Novation Never Presumed — Novation will not be allowed unless clearly shown by express agreement or by acts of equal import. To effect a subjective novation by change in the person of the debtor, it is necessary that the old debtor be released expressly from the obligation, and the third person assumes his place in the relation. Without such express release, the third person who assumes the obligation becomes merely a co-debtor or surety.
• Mere Acceptance of Payment from Third Party — The mere acceptance by a creditor of payments from a third person for the benefit of the debtor, without any agreement that the original debtor will be released from his obligation, does not result in novation but merely the addition of debtors.
• Binding Nature of Factual Findings in Rule 45 — In a petition for review under Rule 45, the Supreme Court is not a trier of facts and generally defers to the factual findings of lower courts. Such findings may only be disturbed when they are manifestly mistaken, absurd, or impossible; grounded entirely on speculation, surmises, or conjectures; or when there has been grave abuse of discretion.

• "Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor." — Citing Article 1293 of the Civil Code, the Court emphasized that creditor consent is essential to substitution of debtor to prevent or delay the fulfillment of the obligation due to the inability or insolvency of the new debtor.
• "The reason for the requirement that the creditor give his consent to the substitution is obvious. The substitution of another in place of the debtor may prevent or delay the fulfillment or performance of the obligation by reason of the inability or insolvency of the new debtor; hence, the consent of the creditor is necessary."
• "The well-settled rule is that novation is never presumed. Novation will not be allowed unless it is clearly shown by express agreement, or by acts of equal import. Thus, to effect an objective novation, it is imperative that the new obligation expressly declare that the old obligation is thereby extinguished, or that the new obligation be on every point incompatible with the new one. In the same vein, to effect a subjective novation by a change in the person of the debtor it is necessary that the old debtor be released expressly from the obligation, and the third person or new debtor assumes his place in the relation. There is no novation without such release as the third person who has assumed the debtor's obligation becomes merely a co-debtor or surety."
• "It should be noted that in order to give novation its legal effect, the law requires that the creditor should consent to the substitution of a new debtor. This consent must be given expressly for the reason that, since novation extinguishes the personality of the first debtor who is to be substituted by a new one, it implies on the part of the creditor a waiver of the right that he had before the novation which waiver must be express under the principle that renuntiatio non praesumitor..."

• De Cortes v. Venturanza, 170 Phil. 55 (1977) — Controlling precedent explaining the rationale for requiring creditor consent in novation by substitution of debtor and distinguishing between expromision and delegacion.
• Testate Estate of Lazaro Mota v. Serra, 47 Phil. 464 (1925) — Controlling precedent holding that consent to substitution must be express because novation implies a waiver of the creditor's right against the original debtor, and renuntiatio non praesumitor (waiver is not presumed).
• Ajax Marketing Development Corporation v. Court of Appeals, 318 Phil. 268 (1995) — Controlling precedent establishing that novation is never presumed and that subjective novation requires express release of the old debtor.
• Servicewide Specialists, Inc. v. Intermediate Appellate Court, 255 Phil. 787 (1989) — Applied for the principle that without novation, the assumption of debt by a third party results in the addition of debtors.
• Quintos v. Nicolas, 736 Phil. 438 (2014); Angeles v. Pascual, 673 Phil. 499 (2011); FNCB Finance v. Estavillo, 270 Phil. 630 (1990) — Cited regarding the binding nature of factual findings in Rule 45 petitions.
• Microsoft Corporation v. Farajallah, 742 Phil. 775 (2014) — Cited for exceptions to the rule on binding factual findings.

• Article 1293, Civil Code of the Philippines — Governs novation by substituting a new debtor, requiring the creditor's consent for valid substitution.
• Article 1291, Civil Code of the Philippines — Defines novation as the extinguishment of an obligation by its modification, including substitution of the debtor.
• Article 1306, Civil Code of the Philippines — Recognizes the freedom of contracting parties to establish stipulations, clauses, and terms as they may deem convenient, provided they are not contrary to law, morals, good customs, public order, or public policy.
• Article 1308, Civil Code of the Philippines — Provides that the contract must bind both contracting parties; its validity or compliance cannot be left to the will of one of them.
• Section 1, Rule 45, Rules of Court — Limits review in petitions for review on certiorari to questions of law, with exceptions.

Leonen, Reyes, Hernando and Carandang, JJ., concurred.