Jespajo Realty Corporation vs. Court of Appeals

A lease contract stipulating an indefinite period subject to the lessee's prompt payment of rent constitutes a valid resolutory condition rather than a month-to-month lease under Art. 1687, and such stipulation does not violate the principle of mutuality of contracts under Art. 1308 when the benefit was given in exchange for valid consideration and the lessor retains the right to terminate for violation of contract terms.

Jespajo Realty Corporation, represented by its President, entered into separate contracts of lease with Tan Te Gutierrez and Co Tong over an apartment building in Binondo, Manila, effective February 1, 1985. The contracts stipulated that the lease would "continue for an indefinite period provided the lessee is up-to-date in the payment of his monthly rentals," with an automatic 20% yearly increase in monthly rentals. The lessees religiously paid their rentals with the agreed 20% annual increase until January 2, 1990, when Jespajo unilaterally notified them of an increase to P3,500.00 monthly. The lessees opposed the increase as contravening the contract. Jespajo subsequently refused the lessees' tender of payment at the contracted rate and demanded that they vacate the premises and pay the P3,500.00 monthly rental.

• The Lease Agreement: On February 1, 1985, Jespajo Realty Corporation leased rooms to Tan Te Gutierrez and Co Tong. The contracts stipulated that the lease period "shall continue for an indefinite period provided the lessee is up-to-date in the payment of his monthly rentals." The lessee had the option to terminate anytime with 60 days prior written notice, while the lessor could terminate upon violation of any contract terms. An automatic 20% yearly increase in monthly rentals was likewise stipulated.
• Religious Payment: From February 1985, the lessees consistently paid their monthly rentals, inclusive of the 20% annual increase.
• Unilateral Rent Increase: On January 2, 1990, Jespajo notified the lessees of an increase in monthly rental to P3,500.00, effective February 1, 1990. The lessees opposed the increase through counsel on March 10, 1990, citing contravention of the lease terms.
• Refusal to Accept Payment and Demand to Vacate: Due to the lessees' refusal to pay the P3,500.00 demand, Jespajo refused the lessees' tender of payment at the contracted rate. On April 10, 1990, Jespajo demanded that the lessees vacate the premises and pay P7,000.00 representing rentals for February and March 1990 at the increased rate.
• Consignation: On May 2, 1990, the lessees filed a consignation case before the MTC. Pursuant to a court order, the lessees deposited their rental obligations at the contracted rates with the City Treasurer of Manila.
• Ejectment Suit: On November 15, 1990, Jespajo filed an unlawful detainer case before the MTC, alleging non-payment of rentals.

• Applicability of Art. 1687: Petitioner argued that because the lease contract did not provide for a definite period, Article 1687 of the Civil Code applies, making the lease effective on a month-to-month basis. Consequently, the lease was not renewed when the lessees refused to pay the P3,500.00 monthly rental.
• Violation of Mutuality: Petitioner contended that a provision allowing the lease to continue indefinitely as long as the lessee pays rent is contrary to Article 1308 of the Civil Code on mutuality of contracts, as it leaves the continuation of the contract solely to the will of the tenant.
• Proper Forum for Rent Determination: Petitioner insisted that the issue of whether the P3,500.00 rental is the correct amount cannot be determined in the consignation case but must be resolved in the ejectment case. Petitioner maintained that the allegation of non-payment of the P3,500.00 rental was a valid ground for ejectment.

• Validity of the Resolutory Condition: Respondents argued that the lease contract had a fixed period—albeit indefinite—subject to a resolutory condition (prompt payment of rent), thereby taking it outside the ambit of Article 1687.
• Estoppel: Respondents contended that Jespajo is estopped from claiming the contract is terminable at its sole will or violates mutuality, having made the lessees believe the lease would continue indefinitely subject only to prompt payment.
• Bad Faith of Lessor: Respondents asserted that the lessor's unilateral imposition of the P3,500.00 rent—far exceeding the contracted 20% increase—was a scheme to create an artificial cause of action and force the lessees into default.

• Period of Lease: Whether a lease contract stipulating an indefinite period provided the lessee is up-to-date in rental payments falls under Article 1687 of the Civil Code as a month-to-month lease terminable by the lessor.
• Mutuality of Contracts: Whether a stipulation allowing the lease to continue indefinitely based on the lessee's prompt payment violates Article 1308 of the Civil Code on the mutuality of contracts.
• Consignation vs. Ejectment: Whether a disagreement on the correct rental amount should be resolved in a consignation case or an ejectment case.

• Period of Lease: Article 1687 finds no application in cases where the period of the lease is fixed, even if indefinite or expressly left to the will of the lessee. The subject lease contract is with a period subject to a resolutory condition—prompt payment of rent. Because the lessees religiously paid their rentals at the agreed 20% annual increase, the condition was fulfilled and the agreement remained subsisting under its original terms when the lessor unilaterally imposed the P3,500.00 increase.
• Mutuality of Contracts: The stipulation does not violate Article 1308. The grant of an indefinite period in favor of the lessee was given in exchange for an automatic 20% yearly increase in monthly rentals, constituting valid consideration. Furthermore, the contract expressly allowed the lessor to terminate the lease upon violation of any of its terms and conditions, ensuring mutuality of obligations. The lessor is likewise estopped from claiming the contract is contrary to mutuality after making representations that induced reliance from the lessees.
• Consignation vs. Ejectment: The finding of fact that the lessees were not in arrears—having validly consigned the rentals—precludes a finding of non-payment as a ground for ejectment. Consignation under Article 1258 of the Civil Code properly serves to prevent the performance of an obligation from becoming more onerous to the debtor due to causes not imputable to them, such as the lessor's unjustified refusal to accept payment at the contracted rate.

• Mutuality of Contracts — The principle that the validity or compliance of a contract cannot be left to the will of one of the contracting parties does not invalidate an option given solely to one party, such as a lessee's option to continue the lease, when such option is part of the consideration agreed upon by both parties. Once the option is exercised, both parties are mutually bound to the new terms.
• Resolutory Condition in Lease Contracts — A stipulation that a lease shall continue for an indefinite period provided the lessee is up-to-date in the payment of monthly rentals constitutes a resolutory condition. The lease continues to be valid and binding until the condition is breached (i.e., failure to pay rent), taking the contract outside the purview of Article 1687 of the Civil Code.
• Estoppel in Contractual Stipulations — A party who has made representations in a contract upon which another has relied is estopped from reneging on those acts and representations to the prejudice of the relying party. Neither the law nor the courts will extricate a party from an unwise or undesirable contract entered into with full awareness of its consequences.

• "The fact that such option is binding only on the lessor and can be exercised only by the lessee does not render it void for lack of mutuality. After all, the lessor is free to give or not to give the option to the lessee. And while the lessee has a right to elect whether to continue with the lease or not, once he exercises his option to continue and the lessor accepts, both parties are thereafter bound by the new lease agreement. Their rights and obligations become mutually fixed, and the lessee is entitled to retain possession of the property for the duration of the new lease, and the lessor may hold him liable for the rent therefor."
• "The grant of benefit of the period in favor of the lessee was given in exchange for no less than an automatic 20% yearly increase in monthly rentals. This additional condition was not present in the Puahay and Singson cases."

• Yek Seng Co. vs. Court of Appeals, 205 SCRA 305 (1992) — Distinguished. Petitioner cited this case to argue that a lease without a definite period is terminable from month to month under Article 1687. The Court found it inapplicable because Article 1687 does not apply when the lease has a fixed period, even if indefinite.
• Puahay Lao vs. Suarez, 22 SCRA 215 (1968) and Singson v. Baldomar, 77 Phil 470 (1946) — Distinguished. Petitioner cited these to argue that an indefinite period dependent on the lessee's payment violates mutuality. The Court distinguished them on their facts, noting that in those cases, the lessees were actually in arrears or the lease was expressly on a month-to-month basis, unlike the present case where prompt payment was made and a 20% annual increase was exchanged for the indefinite period.
• Philippine Banking Corporation vs. Lui She, 21 SCRA 52 (1967) — Followed. Cited to explain that Article 1308 creates no impediment to a resolutory condition permitting cancellation by one party, as the exercise of such an option is in fulfillment of the contract agreed upon by both parties.
• Allied Banking Corp. vs. CA, 284 SCRA 357 (1998) — Followed. Relied upon extensively to rule that an option given solely to the lessee does not violate mutuality when it is part of the consideration, and the lessor is free to give or not give such option.
• Opulencia vs. Court of Appeals, 293 SCRA 385 (1998) — Followed. Applied the principle of estoppel to hold that a lessor may not renege on representations in the contract upon which the lessee relied.

• Article 1687, Civil Code — Governs the period of a lease when no fixed period has been agreed upon. Held inapplicable because the lease contract contained a fixed period subject to a resolutory condition, not an absence of a period.
• Article 1308, Civil Code — Provides that the validity or compliance of a contract cannot be left to the will of one of the contracting parties (mutuality of contracts). Held not violated because the lessee's option was exchanged for valid consideration (20% annual increase) and the lessor retained the right to terminate for contract violations.
• Article 1258, Civil Code — Governs consignation. Applied to uphold the lessees' deposit of rentals, as consignation prevents the obligation from becoming more onerous to the debtor due to the creditor's unjustified refusal to accept payment.

Bellosillo, Quisumbing, and Callejo, Sr. (Mendoza, J., on official leave).