Geminiano vs. Court of Appeals

A lessee who introduces improvements on leased premises is not a builder in good faith under Article 448 of the Civil Code but is governed by Article 1678, which grants reimbursement of one-half the value of useful improvements only if the lessor opts to appropriate them; if the lessor refuses, the lessee's sole right is to remove the improvements without causing more impairment than necessary, and the lessee cannot retain the premises pending reimbursement.

Lot No. 3765-B-1, containing 314 square meters, was originally owned by the petitioners' mother, Paulina Amado vda. de Geminiano. The lot was allegedly acquired by one Maria Lee in 1972 through extrajudicial foreclosure of mortgage, though Lee never sought a writ of possession, leaving the petitioners' mother in possession. Lee sold the lot to Lily Salcedo in 1982, who in turn sold it to spouses Agustin and Ester Dionisio in 1984. On 14 February 1992, the Dionisio spouses executed a Deed of Quitclaim over the property in favor of the petitioners, who then registered the lot in their name. In November 1978, the petitioners had sold their unfinished bungalow on a 12-square-meter portion of the lot to the private respondents for P6,000, with an alleged promise to sell the underlying lot portion, and their mother simultaneously executed a seven-year lease over 126 square meters of the lot, including the area where the house stood, at P40 per month.

Lot No. 3765-B-1, containing 314 square meters, was originally owned by Paulina Amado vda. de Geminiano, the petitioners' mother. On a 12-square-meter portion of that lot stood the petitioners' unfinished bungalow. In November 1978, the petitioners sold the bungalow to the private respondents, Dominador Nicolas and Mary A. Nicolas, for P6,000, with an alleged promise to sell to the latter the portion of the lot occupied by the house. Subsequently, the petitioners' mother executed a contract of lease over a 126-square-meter portion of the lot, including the area on which the house stood, in favor of the private respondents for P40 per month for a period of seven years commencing on 15 November 1978. The private respondents then introduced additional improvements and registered the house in their names.

It turned out that the lot had been the subject of a suit resulting in its acquisition by one Maria Lee in 1972, apparently through extrajudicial foreclosure of mortgage. Lee, however, never sought a writ of possession to gain actual possession of the property, and the petitioners' mother therefore remained in possession. In 1982, Lee sold the lot to Lily Salcedo, who in turn sold it in 1984 to the spouses Agustin and Ester Dionisio. On 14 February 1992, the Dionisio spouses executed a Deed of Quitclaim over the property in favor of the petitioners, who then caused the lot to be registered in their name.

After the expiration of the lease contract in November 1985, the petitioners' mother refused to accept the monthly rentals. On 9 February 1993, the petitioners sent a letter via registered mail addressed to private respondent Mary Nicolas, demanding that she vacate the premises and pay the rentals in arrears within twenty days from notice. Upon the private respondents' failure to heed the demand, the petitioners filed a complaint for unlawful detainer and damages with the MTCC of Dagupan City on 14 April 1993.

During the pre-trial conference, the parties agreed to confine the issues to: (1) whether there was an implied renewal of the lease which expired in November 1985; (2) whether the lessees were builders in good faith entitled to reimbursement of the value of the house and improvements; and (3) the value of the house. The parties submitted their respective position papers and the case was heard under the Rule on Summary Procedure. The MTCC found the value of the house and improvements to be P180,000, as alleged by the private respondents and uncontested by the petitioners. The MTCC ruled that no valid lease existed because the lessor was no longer the owner at the time of execution, and that Articles 448 and 546 did not apply to lessees; respondents' rights were governed by Article 1678. The RTC reversed, treating respondents as builders in good faith entitled to full reimbursement and retention. The Court of Appeals affirmed the RTC.

• Governing Provision: Petitioners argued that the rights of the private respondents as lessees are governed by Article 1678 of the Civil Code, which allows reimbursement of only one-half the value of useful improvements, and only if the lessor opts to appropriate them—not Article 448, which applies to possessors in good faith.
• No Forced Co-ownership: Petitioners pointed out that no "state of forced co-ownership" would be created between them and the private respondents, obviating any need to apply Article 448 by analogy as was done in Pecson vs. Court of Appeals.

• Builder in Good Faith: Respondents claimed they were builders in good faith, hence Article 448 of the Civil Code should apply, entitling them to full reimbursement of improvements and the right of retention until reimbursement. They relied on the lack of title of the petitioners' mother at the time the lease contract was executed, as well as the alleged assurance made by the petitioners that the lot on which the house stood would eventually be sold to them.

• Governing Provision: Whether Article 448 or Article 1678 of the Civil Code governs the rights of the private respondents—i.e., whether they are builders in good faith or mere lessees.
• Implied Renewal of Lease: Whether there was an implied renewal of the lease that expired in November 1985.
• Right of Retention: Whether the private respondents may retain the premises until reimbursed for the value of the house and improvements.
• Promise to Sell: Whether the alleged promise to sell the lot to the private respondents gives them a claim or color of title sufficient to constitute them as possessors in good faith.

• Governing Provision: Article 1678 governs. The private respondents are mere lessees, not builders in good faith, because they entered possession under a lease contract and knew their occupation would continue only for the life of the lease.
• Implied Renewal of Lease: No implied renewal for the original seven-year period. Even if the lease were valid, any implied renewal would be on a month-to-month basis under Article 1687 of the Civil Code, and the lessor's refusal to accept rentals from January 1986 manifested her intent to terminate.
• Right of Retention: No. Since the petitioners refused to appropriate the improvements, the private respondents cannot compel reimbursement of even one-half the value under Article 1678, nor can they retain the premises; their sole right is to remove the improvements without causing unnecessary impairment.
• Promise to Sell: No. The alleged promise was not substantiated by convincing evidence, was not reduced to writing as required by Article 1403 of the Civil Code, and even if proven, would not convert lessees into possessors or builders in good faith under Article 448.

• Governing Provision: The right to let property is an incident of title and possession, but a person may be a lessor even without being the owner, since a lease transfers only temporary use and enjoyment, not ownership. The private respondents came into possession of the 126-square-meter portion by virtue of a lease contract executed by the petitioners' mother as lessor. This carried with it a recognition of the lessor's title. As lessees who had undisturbed possession for the entire term, the respondents were estopped from denying their landlord's title or asserting a better title in themselves or in a third person while they remained in possession. This estoppel applies even though the lessor had no title at the time the lessor-lessee relationship was created, and may be asserted by the lessor's successors in title. Being mere lessees, the respondents knew their occupation would continue only for the life of the lease and cannot be considered possessors or builders in good faith. Article 448, in relation to Article 546, 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 a tenant to "improve" his landlord out of his property. There was no need to apply Article 448 by analogy as in Pecson vs. Court of Appeals, because the situation sought to be avoided in that case—a state of forced co-ownership—is not present here.

• Implied Renewal of Lease: The MTCC held that since the petitioners' mother was no longer the owner at the time the lease was executed in 1978 (the lot having been acquired by Maria Lee in 1972), there was no lease to speak of, much less a renewal. Even assuming the lease was valid, its implied renewal would not be for the original seven-year period but only on a month-to-month basis pursuant to Article 1687 of the Civil Code. The refusal of the petitioners' mother to accept rentals starting January 1986 was a clear indication of her desire to terminate the monthly lease.

• Right of Retention: Under Article 1678, the right to indemnity arises only if the lessor opts to appropriate the improvements. Since the petitioners refused to exercise that option, the private respondents cannot compel them to reimburse one-half the value of the house and improvements. Neither can the respondents retain the premises until reimbursement is made. Their sole right is to remove the improvements without causing any more impairment upon the property leased than is necessary.

• Promise to Sell: The alleged promise to sell was not substantiated by convincing evidence. Neither the deed of sale over the house nor the contract of lease contained an option in favor of the respondents to purchase the lot. Even if such a promise existed, it would not make the respondents possessors or builders in good faith under Article 448. The respondents could not rely on a mere expectancy of ownership because the alleged promise was neither fulfilled nor proven. Under Article 1403 of the Civil Code, an agreement for the sale of real property or an interest therein is unenforceable unless some note or memorandum thereof is produced. Having taken no steps to reduce the alleged promise to writing or enforce it, the respondents cannot bank on the promise and profess any claim or color of title over the lot.

• Estoppel of Lessee to Deny Lessor's Title — A lessee who has undisturbed possession for the entire term under a lease is estopped to deny the landlord's title or to assert a better title not only in themselves but also in some third person while they remain in possession and until they surrender possession to the landlord. This estoppel applies even though the lessor had no title at the time the lessor-lessee relationship was created, and may be asserted not only by the original lessor but also by those who succeed to the title. The Court applied this doctrine to hold that the private respondents, having entered under a lease, could not deny the petitioners' title as successors to the lessor.

• Builder in Good Faith vs. Lessee — Article 448 of the Civil Code, 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, because a lessee knows that occupation will continue only for the life of the lease. The Court held that the private respondents were mere lessees and could not invoke Article 448.

• Rights of Lessee as to Improvements (Article 1678) — Under Article 1678, if a lessee makes useful improvements in good faith suitable to the use for which the lease is intended, without altering the form or substance of the property, the lessor upon termination of the lease shall pay the lessee one-half the value of the improvements. Should the lessor refuse reimbursement, the lessee may remove the improvements even though the principal thing may suffer damage thereby, provided no more impairment is caused than necessary. The right to indemnity arises only if the lessor opts to appropriate; if the lessor refuses, the lessee cannot compel reimbursement nor retain the premises. The Court applied this provision, holding that since the petitioners refused to appropriate the improvements, the respondents' sole right was removal.

• "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 ratio decidendi distinguishing a builder in good faith from a lessee, explaining why Article 448 cannot apply to the latter.

• "The private respondents, as lessees who had undisturbed possession for the entire term under the lease, are then estopped to deny their landlord's title, or to assert a better title not only in themselves, but also in some third person while they remain in possession of the leased premises and until they surrender possession to the landlord." — This states the doctrine of estoppel applicable to lessees, foundational to the Court's conclusion that respondents could not claim a better title or assert builder-in-good-faith status.

• "Since the petitioners refused to exercise that option, the private respondents cannot compel them to reimburse the one-half value of the house and improvements. Neither can they retain the premises until reimbursement is made. The private respondents' sole right then is to remove the improvements without causing any more impairment upon the property leased than is necessary." — This passage defines the operative consequences of Article 1678 when the lessor declines to appropriate improvements, directly resolving the issue of retention.

• Pecson vs. Court of Appeals, 244 SCRA 407 [1995] — Distinguished. In Pecson, Article 448 was applied by analogy to avoid a "state of forced co-ownership." The Court held that the situation justifying such analogical application was not present in this case, because no forced co-ownership would arise between the petitioners and the private respondents.
• Jovellanos vs. Court of Appeals, 210 SCRA 126 [1992] — Cited for the proposition that a lease transfers only temporary use and enjoyment, not ownership of the property.
• Joven vs. Court of Appeals, 212 SCRA 700 [1992] — Cited for the principle that a purchaser at foreclosure who never sought a writ of possession does not gain actual possession, leaving the prior possessor in possession.
• Borre vs. Court of Appeals, 158 SCRA 560 [1988]; Manuel vs. Court of Appeals, 199 SCRA 603 [1991]; Munar vs. Court of Appeals, 238 SCRA 372 [1994] — Cited in support of the doctrine that a lessee is estopped from denying the lessor's title while in possession of the leased premises.
• Racaza vs. Susana Realty, Inc., 18 SCRA 1172 [1966]; Santos vs. Court of Appeals, 221 SCRA 42 [1993]; Heirs of the late Jaime Binuya vs. Court of Appeals, 211 SCRA 761 [1992] — Cited for the proposition that Article 448 does not apply to lessees, who know their occupation is limited to the life of the lease and thus cannot be considered possessors or builders in good faith.

• Article 448, Civil Code — Governs the rights of an owner of land on which something has been built, sown, or planted in good faith, granting the owner the option to appropriate the works after indemnity or to oblige the builder to pay the price of the land. The Court held this provision inapplicable because the private respondents were mere lessees, not possessors in good faith.
• Article 546, Civil Code — Provides for reimbursement of useful improvements to a possessor in good faith. The Court held this provision inapplicable for the same reason as Article 448—it applies only to possessors in good faith, not to lessees.
• Article 1678, Civil Code — Governs useful improvements made by a lessee in good faith, requiring the lessor upon termination of the lease to pay one-half the value of the improvements; if the lessor refuses, the lessee may remove the improvements. The Court held this provision governing, and because the petitioners refused to appropriate the improvements, the respondents' sole right was removal.
• Article 1687, Civil Code — Provides that the implied renewal of a lease is on a month-to-month basis, not for the period stipulated in the original contract. The Court noted that even if the lease were valid, any implied renewal would be month-to-month.
• Article 1403, Civil Code — Provides that an agreement for the sale of real property or an interest therein is unenforceable unless some note or memorandum thereof is produced. The Court invoked this to hold that the respondents' failure to reduce the alleged promise to sell to writing rendered it unenforceable and gave them no claim or color of title.
• Section 2(b), Rules of Court — Cited in support of the estoppel doctrine barring a lessee from denying the lessor's title.

Narvasa, C.J., Melo, Francisco, and Panganiban, JJ., concurred.