Golez vs. Nemeño

Petitioners, as lessees, remain liable to pay back rentals for the period they were in possession of the leased premises notwithstanding the destruction by fire of the building they constructed thereon, because the agreed mode of payment (construction of a building to be transferred to the lessor) does not exempt them from compensating the lessor for use of his land; however, the rental award is limited to the period of actual possession, and damages must be specifically pleaded and proven to be recoverable.

Respondent Meliton Nemeño is the registered owner of a commercial lot in Molave, Zamboanga del Sur, covered by Original Certificate of Title No. 0-2,233. On May 31, 1989, he entered into a lease contract with petitioners Spouses Ricardo and Elena C. Golez over a portion of that lot, under which petitioners would construct a commercial building valued at ₱143,823.00 and, instead of paying monthly rent, the accumulated rental of ₱2,000.00 per month would be applied to the cost of the building until fully paid, at which point ownership of the building would transfer to respondent. The contract term was four years, extendable until the building cost was fully covered. Petitioners operated a restaurant on the premises.

Respondent Meliton Nemeño owned a commercial lot in Molave, Zamboanga del Sur, covered by Original Certificate of Title No. 0-2,233. On May 31, 1989, he entered into a lease contract with petitioners Spouses Ricardo and Elena C. Golez over a 12-by-7-meter portion of the lot. Under the contract, petitioners were to construct a commercial building thereon costing ₱143,823.00, inclusive of building permit fees, furniture, fixtures, and a deepwell handpump. Instead of paying the ₱2,000.00 monthly rental to respondent, petitioners would withhold payment and apply the accumulated rent toward the cost of the building. The lease term was four years, extendable until the building cost was fully covered, at which point ownership of the building would transfer to respondent, with petitioners obligated to repair it before turnover. The contract took effect on June 1, 1989. Petitioners operated a restaurant on the premises.

On May 23, 1992, the building was destroyed by fire. Six days later, on May 29, 1992, respondent sent a demand letter to petitioners for accumulated rentals from March 17, 1989 to June 17, 1992, totaling ₱78,000.00. The demand went unheeded, prompting respondent to file a complaint for collection of rentals plus damages before the RTC of Molave. Respondent alleged that Ricardo was the proximate cause of the fire, that petitioners had insured the building beyond its cost without his knowledge, and that Ricardo had been charged with arson before the MTC of Molave. He prayed for ₱96,000.00 in unpaid rentals and ₱100,000.00 in damages for violation of the lease contract.

Petitioners admitted executing the lease but denied rental liability, contending that the rental was amortized over the building's cost, making respondent a co-owner who must bear the loss. They characterized the fire as a fortuitous event, though they admitted insuring the building beyond their insurable interest. By way of counterclaim, petitioners alleged that they had extended cash loans to respondent totaling ₱11,000.00 beginning April 1989 at 5% monthly interest, which remained unpaid and had ballooned to ₱39,104.00. They also demanded ₱1,000,000.00 in damages for respondent's public imputation that they burned the building.

During trial, the trial court prohibited both parties from presenting evidence on the arson issue, ruling that the cause of action was collection of rentals, not the burning of the building. Respondent testified on the contract, the building's destruction, and his unheeded demand for rentals. Petitioners presented a promissory note dated January 1, 1990 signed by respondent for the ₱11,000.00 loan, as well as two handwritten letters from respondent dated May 8, 1991 and January 12, 1992, to prove the debt remained outstanding. On rebuttal, respondent presented the original of the January 1, 1990 promissory note, which he possessed since July 26, 1990, claiming he had already paid the debt. He testified that the letters were demands for the return of the three previous promissory notes that had been consolidated into the January 1, 1990 note.

Meanwhile, the criminal complaint for arson against Ricardo followed a tortuous path: the MTC investigating judge found probable cause on July 9, 1992, approved by the Provincial Prosecutor on September 4, 1992, but dismissed on November 3, 1992 upon Ricardo's motion for reconsideration. The DOJ denied respondent's motion for reconsideration on February 10, 1994, upholding the dismissal with finality. The trial court and the CA nonetheless found Ricardo liable for the burning, relying on circumstantial evidence including the over-insurance, the investigating judge's finding of probable cause, and respondent's testimony that he saw Ricardo entering the building before the fire. Both courts ordered petitioners to pay the contract amount of ₱143,823.00 with 12% interest, plus moral, temperate, and exemplary damages, and dismissed petitioners' counterclaim.

• Due Process: Petitioners argued that the trial court explicitly excluded the issue of arson during trial, yet the lower courts relied on findings of Ricardo's responsibility for the fire in adjudging liability and awarding damages, violating their right to due process.
• Applicability of Article 1262: Petitioners maintained that Article 1262 of the Civil Code extinguished their obligation to deliver the building since it was destroyed without their fault and before they incurred delay, with no stipulation assuming liability for fortuitous events.
• No Basis for Damages: Petitioners contended that there were no legal or factual bases for the award of moral, temperate, and exemplary damages, as these were neither specifically pleaded in the complaint nor proven during trial, and that respondent took possession of the lot after the fire, limiting any rental claim to 1989–1992.
• Counterclaim Entitlement: Petitioners argued that the presumption of payment under Section 3(h) of Rule 131 was inapplicable, citing respondent's two handwritten letters allegedly acknowledging the loan obligation and offering payment, which should override the disputable presumption.
• Inapplicability of Arson Presumption: Petitioners contended that the presumption of arson under Section 6 of Presidential Decree No. 1613 did not apply because the arson issue had been excluded from trial and there was no admission of over-insurance on their part.

• Liability for Back Rentals: Whether petitioners are liable to pay respondent back rentals notwithstanding the destruction of the building by fire.
• Liability for Damages: Whether petitioners are liable for moral, temperate, and exemplary damages.
• Counterclaim: Whether petitioners are entitled to their counterclaim for respondent's alleged unpaid loan.

• Liability for Back Rentals: Yes, but limited to the period of actual possession. Petitioners must pay ₱2,000.00 monthly from June 1, 1989 to May 23, 1992, with 6% interest per annum from May 29, 1992 until full satisfaction, as the destruction of the building does not exempt them from compensating respondent for use of his property.
• Liability for Damages: No, as to moral, temperate, and exemplary damages. These were neither specifically pleaded nor proven, and the lower courts' finding of arson was made without allowing either party to present evidence on the issue. Litigation expenses of ₱15,000.00 were sustained; attorney's fees were deleted for lack of a prayer.
• Counterclaim: No. The presumption of payment under Section 3(h) of Rule 131 was not rebutted, as the letters presented by petitioners did not conclusively show that respondent's obligation remained outstanding.

• Liability for Back Rentals: The contract was one of lease, albeit with a modified payment scheme whereby accumulated rent would be applied to the building's cost and ownership would transfer to respondent upon full payment. The building's destruction by fire did not extinguish petitioners' obligation to compensate respondent for use of his land. To hold otherwise would constitute unjust enrichment, as petitioners operated a restaurant on the premises for several years. The doctrine of unjust enrichment — enrichment of the defendant, impoverishment of the plaintiff, and lack of cause — barred petitioners from retaining the benefit of free use of respondent's property. However, the rental award was limited to the period of actual possession. Respondent himself testified that Ricardo stayed in the building just before it burned down on May 23, 1992, and no evidence showed petitioners remained in possession thereafter. Ordering payment equivalent to the building's full cost would itself constitute unjust enrichment on respondent's part, since the accumulated rent for the actual period of occupation was far below ₱143,823.00. Article 1262 of the Civil Code, which extinguishes the obligation to deliver a determinate thing lost without the debtor's fault before delay, was inapplicable to the rental obligation itself; it pertained only to the building delivery, not to the compensation due for use of the land.

• Liability for Damages: Moral, temperate, and exemplary damages were not specifically pleaded in the complaint, which merely prayed for "₱100,000.00 as damages for the violation." It is settled that moral damages require both pleading and proof of moral suffering, mental anguish, or similar injury. Respondent did not testify on any such suffering. The lower courts' finding that Ricardo authored the fire could not serve as a basis for moral damages under Article 2220 or exemplary damages under Article 2232, because both parties were prohibited from presenting evidence on the arson issue. The criminal complaint for arson was dismissed with finality by the DOJ, precluding criminal liability. Litigation expenses of ₱15,000.00 were justified under Article 2208, as respondent was compelled to litigate to protect his interest. Attorney's fees were deleted because they were not prayed for in either the original or amended complaint. The order to pay triple the cost of the action was deleted for lack of any factual or legal justification.

• Counterclaim: The presumption under Section 3(h) of Rule 131 — that an obligation delivered up to the debtor has been paid — applied because respondent possessed the original promissory note dated January 1, 1990. Petitioners bore the burden of rebutting this disputable presumption. The two handwritten letters from respondent, dated May 8, 1991 and January 12, 1992, did not conclusively show that the obligation remained outstanding. The first letter demanded the return of three prior promissory notes that had been consolidated into the January 1, 1990 note; the second letter inquired about the receipts and suggested that if they could not be located, it would not be a problem between them. These letters were demands for surrender of prior notes, not acknowledgments of an outstanding debt. The presumption of payment therefore stood unrebutted.

• Unjust Enrichment — The doctrine prohibits one from profiting or enriching oneself inequitably at another's expense. Its elements are: (a) enrichment on the part of the defendant; (b) impoverishment on the part of the plaintiff; and (c) lack of cause. The Court applied this doctrine in two directions: first, to uphold petitioners' liability for back rentals, since they used respondent's property for years without compensation; and second, to limit the rental award to the period of actual possession, since ordering payment equivalent to the building's full cost would unjustly enrich respondent, the accumulated rent for the actual occupation period being far below ₱143,823.00.

• Presumption of Payment (Section 3(h), Rule 131) — That an obligation delivered up to the debtor has been paid. This is a disputable presumption, satisfactory if uncontradicted but may be overcome by other evidence. The Court held that respondent's possession of the original promissory note triggered the presumption, and petitioners' evidence — two handwritten letters — was insufficient to rebut it, as the letters merely demanded return of prior consolidated notes and did not conclusively acknowledge an outstanding obligation.

• Requirement of Pleading and Proof for Damages — Moral damages cannot be awarded absent both a specific pleading in the complaint and proof of moral suffering, mental anguish, fright, or similar injury. Exemplary damages under Article 2232 require a showing that the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. The Court emphasized that a generic prayer for "damages" does not suffice, and that findings of bad faith cannot rest on evidence the court itself excluded.

• "The destruction of the building should not in any way be made a basis to exempt petitioners from paying rent for the period they made use of the leased property. Otherwise, this will be a clear case of unjust enrichment." — This passage articulates the ratio decidendi for the rental liability ruling, applying the unjust enrichment doctrine to hold that the modified payment scheme did not extinguish the rental obligation upon the building's destruction.

• "To order petitioners to pay for back rentals equivalent to the cost of the building is in the same way, unjust enrichment this time on the part of respondent considering that the rent due for the period petitioners occupied the leased premises is way below the cost of the building." — This passage explains the Court's modification of the rental award, applying unjust enrichment symmetrically to prevent the lessor from recovering more than the rent actually accrued during the period of possession.

• "As correctly argued by petitioners, these damages were not pleaded in respondent's complaint nor proven during trial." — This passage states the controlling rule on the necessity of both pleading and proof for damages, which formed the basis for deleting the moral, temperate, and exemplary damages awards.

• P. C. Javier & Sons, Inc. vs. Court of Appeals, 500 Phil. 419 (2005) — Cited as controlling authority for the doctrine of unjust enrichment. The Court relied on this case's formulation of the elements of unjust enrichment (enrichment, impoverishment, lack of cause) to sustain the rental liability and to justify limiting the award to the period of actual possession.

• Mahinay vs. Velasquez, Jr., 464 Phil. 146 (2004) — Cited for the rule that moral damages require both pleading and proof of moral suffering. The Court used this authority to support deletion of the moral damages award.

• San Miguel Brewery, Inc. vs. Magno, 128 Phil. 328 (1967) — Cited within the Mahinay citation chain for the same proposition regarding the pleading-and-proof requirement for moral damages.

• Abrogar vs. Intermediate Appellate Court, 241 Phil. 69 (1988) — Cited for the rule that attorney's fees cannot be recovered absent a specific prayer in the complaint, supporting deletion of the attorney's fees award.

• Article 1262, Civil Code — Provides that an obligation consisting in the delivery of a determinate thing is extinguished if lost or destroyed without the debtor's fault and before delay. Petitioners invoked this provision to argue that the building's destruction extinguished their obligation to deliver it. The Court did not apply it to excuse the rental obligation, using unjust enrichment doctrine instead to uphold rental liability for the period of actual possession.

• Article 2208, Civil Code — Authorizes recovery of litigation expenses when the defendant's act or omission has compelled the plaintiff to litigate to protect his interest. The Court sustained the ₱15,000.00 award for litigation expenses under this provision.

• Article 2220, Civil Code — Provides that willful injury to property may be a ground for moral damages. The Court held this provision could not be applied because the lower courts excluded evidence on the arson issue and the criminal complaint was dismissed with finality.

• Article 2232, Civil Code — Authorizes exemplary damages in contracts when the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. The Court held this could not be applied for the same reasons precluding moral damages.

• Section 3(h), Rule 131, Rules of Court — Establishes the disputable presumption that an obligation delivered up to the debtor has been paid. The Court applied this presumption to affirm dismissal of petitioners' counterclaim, finding that respondent's possession of the original promissory note triggered the presumption and petitioners' letters did not rebut it.

• Section 6, Presidential Decree No. 1613 (Law on Arson) — Establishes prima facie evidence of arson, including when a building is insured for substantially more than its actual value. Petitioners argued this was inapplicable; the Court did not rely on it, instead focusing on the exclusion of arson evidence and the DOJ's final dismissal of the criminal complaint.

Velasco, Jr. (Chairperson), Peralta, Perez, and Jardeleza, JJ., concurred. No separate concurring opinions were noted.