Lim vs. Court of Appeals

A lease contract provision that makes the renewal thereof dependent exclusively upon the lessee's will is a purely potestative condition that is void for violating the principle of mutuality of contracts; furthermore, res judicata does not apply where the second action involves a different lease contract (created by compromise agreement) and a different cause of action from the first.

The case arose from a lease agreement initially executed in 1976 between petitioner Francisco Lao Lim (lessor) and private respondent Benito Villavicencio Dy (lessee). After the original lease expired in 1979, the lessee refused to vacate, leading to a first ejectment suit that was settled through a judicially approved compromise agreement. This agreement provided for successive three-year renewal periods with automatic rent increases, contingent upon the lessee's need for the premises and ability to pay. When the lessor refused to renew the lease after the 1982-1985 period, the lessee insisted on his right to continuous renewal, prompting a second ejectment suit.

• Petitioner Lim and private respondent Dy entered into a lease contract for three years from 1976 to 1979.
• Upon expiration of the original term, Dy refused to vacate, prompting Lim to file an ejectment suit in the City Court of Manila (Civil Case No. 051063-CV).
• The parties entered into a judicially approved compromise agreement providing that the lease term "shall be renewed every three years retroacting from October 1979 to October 1982," with automatic 20% rental increases every three years "for as long as defendant needed the premises and can meet and pay the said increases," and requiring the defendant to give sixty days' notice of intent to renew before expiration.
• The lease continued under this arrangement from 1979 to 1982, and was renewed for another term from 1982 to 1985.
• On April 17, 1985, Lim advised Dy that he would no longer renew the contract effective October 1985.
• On August 5, 1985, Dy notified Lim of his intention to renew for another three-year term from November 1985 to October 1988.
• Lim replied refusing to agree to the renewal.
• On January 15, 1986, Lim filed a second ejectment suit with the Metropolitan Trial Court of Manila (Civil Case No. 114659-CV) due to Dy's refusal to vacate.
• The MeTC dismissed the complaint on September 24, 1987, holding that the lease was continuous and that the compromise agreement constituted res judicata.
• The Regional Trial Court affirmed the dismissal on January 28, 1988 (Civil Case No. 87-42719).
• The Court of Appeals affirmed the RTC decision in toto on June 30, 1988 (CA-G.R. SP No. 13925), holding that the stipulation was a valid resolutory condition and that res judicata applied.
• The Supreme Court granted the petition for review on certiorari.

• The stipulation "for as long as the defendant needed the premises and can meet and pay said increases" is a purely potestative condition because it leaves the effectivity of the lease to the sole will of the lessee, violating Article 1308 of the Civil Code.
• The condition is suspensive (governing renewal), not resolutory, and since the lease is for definite three-year periods, it automatically terminates upon expiration unless renewed by mutual agreement.
• The second ejectment case is not barred by res judicata because there is no identity of subject matter and cause of action between the first case (based on the 1978 lease expiration) and the second case (based on the 1985 lease expiration under the compromise agreement).

• The disputed stipulation is a valid resolutory condition and therefore beyond the ambit of Article 1308 of the Civil Code.
• The compromise agreement has the effect of res judicata, barring the second ejectment suit.
• The lease contract is continuous, with its period dependent upon the lessee's need for the premises and ability to pay the rents.

• Procedural Issues:
  • Whether the second ejectment suit is barred by the principle of res judicata by virtue of the judicially approved compromise agreement in the first ejectment case.
• Substantive Issues:
  • Whether the stipulation allowing renewal "for as long as the defendant needed the premises" constitutes a valid resolutory condition or an invalid potestative condition.
  • Whether the lease contract is for a definite period or a continuous one.

• Procedural:
  • The second ejectment suit is NOT barred by res judicata. While a compromise agreement has the effect of res judicata, the doctrine requires identity of parties, subject matter, and cause of action. Although there is identity of parties, there is no identity of subject matter (the first case involved the 1978 lease contract, while the second involves the lease created under the 1982 compromise agreement) and no identity of cause of action (the wrong in the first case was refusal to vacate after the 1978 lease expiration, while the second involves refusal to vacate after the 1985 expiration under the compromise agreement). The compromise agreement settled only the first case and could not cover future causes of action arising from subsequent violations of its terms.
• Substantive:
  • The stipulation "for as long as the defendant needed the premises" is a purely potestative condition because it leaves the effectivity and enjoyment of leasehold rights to the sole and exclusive will of the lessee. It is a suspensive condition (governing renewal, not termination) and violates Article 1308 of the Civil Code.
  • The lease is for a definite period of three years, renewable only upon mutual agreement. The phrase "for as long as needed" must be read in conjunction with the three-year term and the requirement for notice of intent to renew, indicating that renewal requires mutual consent.
  • Perpetual leases are not favored in law; covenants for continued renewals will not be construed to create a perpetuity unless by plain and unambiguous terms.
  • Even if construed as an option to renew, the covenant only provides for one renewal (which was already satisfied in 1982), not perpetual renewals.
  • The Court overruled its previous decisions in Koh v. Ongsiaco and Cruz v. Alberto to the extent they presumed that lease terms are designed for the benefit of the lessee alone.

• Potestative Condition — A condition the fulfillment of which depends upon the sole will of one party. Under Article 1308 of the Civil Code, a contract with a suspensive potestative condition is void for violating the principle of mutuality. The Court held that the stipulation allowing renewal solely at the lessee's option is a purely potestative condition that is invalid.
• Res Judicata — The doctrine that a final judgment on the merits rendered by a court of competent jurisdiction is conclusive as to the rights of the parties and constitutes an absolute bar to subsequent actions involving the same claim, demand, or cause of action. The Court held that res judicata requires identity of parties, subject matter, and cause of action, which were lacking between the first and second ejectment cases.
• Mutuality of Contracts — The principle that contracts must bind both parties and cannot leave the fulfillment of obligations to the will of one party. The Court emphasized that the continuance of a lease cannot depend exclusively on the uncontrolled choice of the lessee.
• Rule on Perpetual Leases — The principle that perpetual leases are not favored, and covenants for renewal will not be construed to create perpetuities unless the language clearly and unambiguously expresses such intention.

• "The continuance, effectivity and fulfillment of a contract of lease cannot be made to depend exclusively upon the free and uncontrolled choice of the lessee between continuing the payment of the rentals or not, completely depriving the owner of any say in the matter."
• "Mutuality does not obtain in such a contract of lease and no equality exists between the lessor and the lessee since the life of the contract is dictated solely by the lessee."
• "Where the instrument is susceptible of two interpretations, one which will make it invalid and illegal and another which will make it valid and legal, the latter interpretation should be adopted."
• "It is also important to bear in mind that in a reciprocal contract like a lease, the period of the lease must be deemed to have been agreed upon for the benefit of both parties, absent language showing that the term was deliberately set for the benefit of the lessee or lessor alone."

• Encarnacion vs. Baldomar (77 Phil. 470) — Controlling precedent directly on point holding that a lease condition allowing the lessee to stay as long as he pays rent is untenable because it leaves to the lessee the sole power to determine whether the lease should continue.
• Buccat vs. Dispo (160 SCRA 240) — Distinguished by the Court; involved a lease for an indefinite period serving as a school site, unlike the definite three-year term in the instant case.
• Koh v. Ongsiaco and Cruz v. Alberto — Overruled by the Court to the extent they rested on the presumption that lease terms are designed for the benefit of the lessee alone.
• Fernandez vs. Court of Appeals (166 SCRA 577) — Cited in support of overruling Koh and Cruz.
• Aroc vs. People's Homesite and Housing Corporation (81 SCRA 350) — Cited for the requisites of res judicata.
• Pagsisihan vs. Court of Appeals (95 SCRA 540) — Cited for the test to determine identity of causes of action (identity of facts essential to their maintenance).

• Article 1308, Civil Code — Prohibits contracts where the fulfillment depends upon the sole will of one party; cited as the basis for invalidating the potestative condition in the lease.
• Article 1373, Civil Code — Provides that when the instrument is susceptible of two interpretations, the interpretation making it valid and legal should be adopted; cited to support the construction that the lease is for a definite period rather than a perpetual one.