Josefa vs. San Buenaventura

A lease contract stipulating that it is “renewable upon agreement of the parties” is not automatically renewed upon expiration; renewal requires the mutual agreement of both lessor and lessee, and absent such agreement the lessee must vacate. A lessee is not a builder in good faith entitled to reimbursement for useful improvements unless the lessor appropriates them, and reasonable compensation for continued occupancy must be based on evidence of fair rental value.

Lourdes San Buenaventura owned a 364-square meter parcel of land in Pasig City covered by Transfer Certificate of Title No. PT-76848. Johnny Josefa was her lessee under a Contract of Lease executed on July 15, 1990. The lease was for a determinate period and contained a clause making it “renewable upon agreement of the parties,” a stipulation whose legal effect is governed by the Civil Code provisions on lease and by the Rules of Court on ejectment and reasonable compensation.

Lourdes San Buenaventura owned a 364-square meter parcel of land in Pasig City covered by Transfer Certificate of Title No. PT-76848. On July 15, 1990, Johnny Josefa entered into a Contract of Lease with San Buenaventura over the property. The lease was for a period from August 1, 1990 to July 31, 1995, or five years, renewable upon agreement of the parties.

Upon expiration, San Buenaventura wrote Josefa informing him that the lease would no longer be extended but that he may continue with the lease at a rental rate of P30,000.00 a month. She told him to vacate the property and pay any arrearages if he opted not to lease the property after expiration. Josefa refused to vacate. He continued to occupy the property and paid a monthly rental of P15,400.00, which San Buenaventura received. San Buenaventura subsequently made demands for Josefa to vacate in a letter dated June 3, 1998. Josefa still refused to leave.

San Buenaventura filed a complaint for unlawful detainer, but it was dismissed due to her failure to secure a certification from the lupon ng barangay. She refiled the complaint on July 9, 1998 with the MeTC of Pasig City, Branch 69, docketed as Civil Case No. 6798. The complaint prayed that Josefa be ordered to vacate and deliver peaceful possession; to pay the deficit on monthly rentals from August 1, 1995 at P30,000.00 per month; to pay P100,000.00 moral damages, P100,000.00 exemplary damages, P50,000.00 attorney’s fees and P1,500.00 per appearance, and costs.

In his Answer, Josefa averred that San Buenaventura had no cause of action because, under the contract, she was obliged to renew the lease; that because of this commitment he had made renovations and improvements on the land; and he set up attorney’s fees as a counterclaim. He prayed that if the lease was not renewed, San Buenaventura be ordered to reimburse the cost of improvements in the amount of not less than P3 million. The MeTC found no basis for the claimed deficit rentals and moral and exemplary damages, and fixed P15,000.00 monthly as reasonable compensation for continued use and occupation based on the evidence.

• Renewal Clause: Petitioner argued that his predecessor had leased the property since 1939 and that the lease had always been renewed; when his 1990 contract was executed, a commitment was made to renew it upon expiration on July 31, 1995, which was why the clause “renewable upon agreement of the parties” was included. He maintained that respondent could not unilaterally cancel the lease without allowing him to negotiate renewal, and that while the clause did not make renewal automatic, it negated respondent’s right to terminate until negotiations for renewal failed. He further asserted that respondent was obliged to renew the lease without modifying its terms, and that Fernandez vs. Court of Appeals was not controlling.
• Reimbursement for Improvements: Petitioner argued that the CA erred in denying his claim for one-half of the value of improvements amounting to P3,000,000.00; citing Article 1678 of the New Civil Code, he claimed that although he was not a possessor in good faith as a lessee, he was a builder in good faith because his possession as lessee was lawful, and thus entitled to recover one-half of the value of useful improvements. He also insisted that the CA erred in applying Article 526.
• Reasonable Compensation: Petitioner argued that the CA erred in ordering him to pay P30,000.00 monthly rental for renewal of the lease, maintaining that the amount had no factual basis and was exorbitant.

• Renewal Clause: Respondent averred that a similar issue had been raised and resolved in Fernandez vs. Court of Appeals, Heirs of Amando Dalisay vs. Court of Appeals, Buce vs. Court of Appeals, and LL and Company Development and Agro-Industrial Corporation vs. Huang Chao Chun, and that their rulings should apply.

• Renewal Clause: Whether the lease contract between petitioner and respondent contained a “renewal clause,” and as such, whether they had agreed to extend the period of the lease after July 31, 1995.
• Reimbursement for Improvements: Whether petitioner is entitled to reimbursement for his improvements on the leased premises.
• Reasonable Compensation: Whether petitioner is obliged to pay P30,000.00 a month by way of reasonable compensation for his continued occupancy of the property.

• Renewal Clause: No. The clause “renewable upon agreement of the parties” required mutual agreement; absent agreement, no renewal occurred and petitioner must vacate. The lease expired by lapse of the determinate period, and the notice to vacate showed the lessor no longer consented to continued occupation.
• Reimbursement for Improvements: No. A lessee is not a builder in good faith; under Article 1678, the right to one-half the value of improvements arises only if the lessor appropriates them, and respondent refused to do so. Petitioner’s sole right was to remove the improvements without causing unnecessary damage.
• Reasonable Compensation: No, as to P30,000.00. The CA’s P30,000.00 monthly award had no factual basis; reasonable compensation under Rule 70, Section 17 must be based on evidence, and the MeTC’s P15,000.00 monthly award was reinstated.

• Renewal Clause: The lease was for a determinate period, and under Article 1669 of the New Civil Code it ceased on the day fixed without need of further demand. After expiration, petitioner was unlawfully withholding possession, and the notice to vacate constituted an express act that the lessor no longer consented to continued occupation, giving respondent a cause of action for ejectment. The clause “renewable upon agreement of the parties” was clear: renewal could occur only upon agreement. Petitioner’s refusal to pay the P30,000.00 monthly rental proposed by respondent caused the failure of agreement; absent agreement, petitioner had no option but to vacate. Petitioner himself admitted that renewal was not automatic. Respondent, as owner, was not obliged to agree to renew or to negotiate if she opted not to renew. Because renewal contemplates the death of the old contract, a new contract must be executed by the parties. A contract can only be renewed upon mutual agreement or at the will of both. Under Buce vs. Court of Appeals, following Fernandez vs. Court of Appeals and Article 1196, the period was deemed set for the benefit of both parties; renewal could be had only upon their mutual agreement. The owner-lessor has the prerogative to terminate the lease at expiration, and the continuance of the lease cannot depend exclusively on the lessee’s choice. Petitioner’s claim of a verbal agreement to extend the lease indefinitely was inadmissible under the parol evidence rule and unenforceable under the statute of frauds.
• Reimbursement for Improvements: A lessee is not a builder in good faith. In Geminiano vs. Court of Appeals, lessees knew their occupation would continue only for the life of the lease and could not be considered possessors or builders in good faith. Article 448, in relation to Article 546, allowing full reimbursement of useful improvements and retention until reimbursement, applies only to a possessor in good faith—one who builds on land believing he is the owner. It does not apply where one’s only interest is that of a lessee under a rental contract; otherwise, a tenant could improve the landlord out of the property. Although petitioner was initially a lawful possessor by virtue of the lease, as a mere lessee whose possession after expiration was at the owner’s sufferance, he could not claim to be a builder in good faith. Under Article 1678, he was entitled to one-half of the value of improvements only if respondent, as owner, decided to appropriate them. Since respondent refused to appropriate the improvements, petitioner could not compel reimbursement. His sole right was to remove the improvements without causing more damage to the property than necessary.
• Reasonable Compensation: The CA awarded P30,000.00 monthly not for renewal but as compensation for continued occupancy after expiration. The increase had no factual basis because the CA failed to state its basis for doubling the amount adjudged by the trial court; it simply increased the award in the dispositive portion. Under Rule 70, Section 17 of the 1997 Rules of Civil Procedure, the judgment may award the sum justly due as arrears of rent or reasonable compensation for use and occupation. In Asian Transmission Corporation vs. Canlubang Sugar Estates, reasonable compensation partakes of the nature of actual damages; while the trial court may fix the reasonable amount, it must base its action on evidence. Fair rental value is the amount a willing lessee would pay and a willing lessor would receive, neither under compulsion and both having reasonable knowledge of all facts, such as extent, character, utility, sales and holding prices of similar land, and highest and best use. In D.O. Plaza Management Corporation vs. Co-Owners Heirs of Andres Atega, factors include prevailing rates in the vicinity, location, use, inflation rate, and testimony of one of the private respondents. No evidence justified P30,000.00; respondent’s bare proposal to increase the monthly rental could not be the factual basis. The CA ignored the trial court’s P15,000.00 award, which was based on the evidence on record. The trial court’s award of P15,000.00 as reasonable compensation was maintained.

• Renewal Clause Requires Mutual Agreement — A lease stipulation that the contract is “renewable upon agreement of the parties” does not operate as an automatic renewal or as a unilateral option in favor of the lessee. Renewal requires the mutual agreement of both lessor and lessee; the lessor is not obliged to agree to renew or to negotiate for renewal if she opts not to renew. Absent such agreement, the lessee must vacate. The Court applied this to hold that petitioner’s refusal to pay the proposed P30,000.00 monthly rental caused the failure of agreement, and no renewal occurred.
• Determinate Lease Expires by Lapse of Period — Under Article 1669 of the New Civil Code, a lease for a determinate time ceases on the day fixed without need of further demand. A notice to vacate is an express act on the part of the lessor that he no longer consents to the lessee’s continued occupation. The Court applied this to hold that after expiration, petitioner was unlawfully withholding possession and respondent had a cause of action for ejectment.
• Lessee Not a Builder in Good Faith — A lessee, even if initially a lawful possessor, is not a possessor or builder in good faith under Articles 448 and 546 of the New Civil Code because he knows that his occupation continues only for the life of the lease. Article 1678 gives the lessee a right to one-half of the value of useful improvements only if the lessor decides to appropriate them; if the lessor refuses, the lessee cannot compel reimbursement and may only remove the improvements without causing unnecessary damage. The Court applied this to deny petitioner’s P3,000,000.00 claim.
• Reasonable Compensation Requires Evidentiary Basis — Under Rule 70, Section 17 of the 1997 Rules of Civil Procedure, reasonable compensation for the use and occupation of premises after lease expiration partakes of the nature of actual damages and must be based on evidence of fair rental value. Fair rental value is the amount a willing lessee would pay and a willing lessor would receive, neither under compulsion and both reasonably informed of the property’s extent, character, utility, sales and holding prices of similar land, and highest and best use. Factors include prevailing rates in the vicinity, location, use, inflation rate, and testimony of a private respondent. The Court applied this to delete the P30,000.00 award and reinstate P15,000.00.
• Parol Evidence and Statute of Frauds — A claim of a verbal agreement to extend a lease indefinitely is inadmissible to qualify the terms of a written contract under the parol evidence rule and is unenforceable under the statute of frauds. The Court applied this to reject petitioner’s assertion of an indefinite verbal extension.

• “The clause ‘renewable upon agreement of the parties’ in the lease contract is clear and admits of no other interpretation: the contract is renewable only upon agreement of the parties. If no such agreement is forged, petitioner has no other option except to vacate the property.” — This passage states the ratio decidendi on the renewal clause: renewal is not automatic and requires mutual agreement.
• “A contract can only be renewed upon the mutual agreement of the parties or at the will of both of them.” — This formulation encapsulates the Court’s rule that a lease renewal cannot depend on the lessee’s unilateral choice.
• “In this case, there is no question that petitioner was initially a lawful possessor because his entry into the property is by virtue of a lease contract with respondent. However, as a mere lessee whose possession after the expiration of the contract is at the sufferance of the owner of the property, he cannot claim to be a builder in good faith.” — This passage defines the Court’s ratio on why a lessee is not a builder in good faith entitled to reimbursement.
• “In the first place, the CA awarded the P30,000.00 monthly rentals not for the renewal of the lease contract, but as compensation for petitioner’s continued occupancy of the property after the lease expired. However, we agree with petitioner’s contention that the increase of the award to P30,000.00 has no factual basis, considering that the appellate court failed to state its basis for doubling the amount adjudged by the trial court.” — This passage states the ratio for deleting the increased reasonable compensation award and reinstating the MeTC’s award.

• Fernandez vs. Court of Appeals, G.R. No. L-80231, October 18, 1988, 166 SCRA 577 — Controlling precedent on renewal clauses; a stipulation “to be renewable” at the option of both parties means the faculty to renew is given to both lessor and lessee simultaneously, so both must agree to renew. Followed.
• Buce vs. Court of Appeals, 387 Phil. 897 (2000) — Quoted for the rule that renewal may be had only upon mutual agreement or at the will of both parties; the owner-lessor has the prerogative to terminate the lease at expiration, and the lease’s continuance cannot depend exclusively on the lessee’s choice. Followed.
• Geminiano vs. Court of Appeals, G.R. No. 120303, July 24, 1996, 259 SCRA 344 — Held that lessees, knowing their occupation continues only for the life of the lease, cannot be considered possessors or builders in good faith. Followed.
• Asian Transmission Corporation vs. Canlubang Sugar Estates, G.R. No. 142383, August 29, 2003, 410 SCRA 202 — Held that reasonable compensation under the ejectment rule partakes of actual damages and must have factual basis; a court cannot fix an amount without ratiocination and evidence. Followed.
• D.O. Plaza Management Corporation vs. Co-Owners Heirs of Andres Atega, G.R. No. 158526, December 16, 2004, 447 SCRA 171 — Enumerated factors for determining reasonable rental: prevailing rates in the vicinity, location, use, inflation rate, and testimony of a private respondent. Followed.
• Carlos Super Drug Corporation vs. Court of Appeals, 447 Phil. 150, 157 (2003) — Cited for the rule that after lease expiration, the lessee’s withholding of possession is unlawful and entitles the lessor to ejectment. Cited.
• Tagbilaran Integrated Settlers Association (TISA), Incorporated vs. Court of Appeals, G.R. No. 148562, November 25, 2004, 444 SCRA 193 — Cited for the rule that a notice to vacate is an express act by the lessor that he no longer consents to the lessee’s continued occupation. Cited.
• Santos vs. Court of Appeals, G.R. No. 100963, April 6, 1993, 221 SCRA 42, 46 — Cited in support of the ruling that a lessee cannot compel reimbursement of one-half the value of improvements when the lessor refuses to appropriate them. Cited.
• Heirs of the Late Jaime Binuya vs. Court of Appeals, G.R. No. 100493, July 23, 1992, 211 SCRA 761, 768 — Cited for the lessee’s sole right to remove improvements without causing more damage than necessary. Cited.

• Article 1669, New Civil Code — A lease for a determinate time ceases on the day fixed without need of further demand. Applied to hold the lease expired and petitioner’s continued possession unlawful.
• Article 1678, New Civil Code — If the lessee makes useful improvements in good faith, the lessor upon termination shall pay one-half of their value; if the lessor refuses, the lessee may remove the improvements without causing more impairment than necessary. Applied to deny reimbursement because respondent refused to appropriate the improvements and to recognize only the right of removal.
• Article 448, New Civil Code, in relation to Article 546 — Full reimbursement of useful improvements and retention until reimbursement applies only to a possessor in good faith, one who builds on land believing he is the owner; it does not apply to a lessee. Applied to reject petitioner’s claim.
• Article 1196, New Civil Code — Where a period is set for the benefit of both parties, renewal of the lease may be had only upon mutual agreement or at the will of both. Cited in Buce vs. Court of Appeals and applied to the renewal clause.
• Rule 70, Section 17, 1997 Rules of Civil Procedure — In ejectment, judgment may award restitution of the premises, the sum justly due as arrears of rent or reasonable compensation for use and occupation, attorney’s fees, and costs. Applied to require evidentiary basis for the P30,000.00 award and to reinstate the P15,000.00 award.

Romeo J. Callejo, Sr. (ponente); Artemio V. Panganiban (Chief Justice, Chairperson); Consuelo Ynares-Santiago; Ma. Alicia Austria-Martinez; and Minita V. Chico-Nazario.