Melencio vs. Dy Tiao Lay

A lease of co-owned property for a term exceeding six years, executed by only a majority of the co-owners without the consent of all, is null and void because it constitutes an act of ownership or partial alienation beyond mere management and enjoyment under articles 398 and 1548 of the Civil Code.

The land in Cabanatuan, Nueva Ecija was originally owned by Julian Melencio, whose heirs included Ramon Melencio, father of the plaintiffs; defendant Dy Tiao Lay is the eventual holder of a lease originally granted to Yap Kui Chin. The dispute concerns the authority of co-owners to bind common property to a long-term lease under the Civil Code, particularly articles 397, 398, and 1548, and the effect of the lessee’s possession and improvements on the rights of non-signing co-owners.

The land in Cabanatuan, Nueva Ecija, containing 4,628.25 square meters, was originally owned by Julian Melencio. He died before 1905, leaving his widow Ruperta Garcia and five children: Juliana, Ramon, Ruperta, Pedro R., and Emilio Melencio. Emilio also died before 1905, and his son Jose P. Melencio, then a minor, succeeded to his interest by representation. Although a question was raised whether the land was community property of Julian and Ruperta, the evidence was practically undisputed that Ruperta Garcia held only a widow’s usufruct in the land.

On July 24, 1905, Ruperta Garcia, Pedro R. Melencio, Juliana Melencio, and Ruperta Melencio executed a contract of lease over the land in favor of Yap Kui Chin. Neither Jose P. Melencio nor Ramon Melencio was mentioned in the lease. The term was twenty years, extendible for a like period at the lessee’s option. The lessee intended to establish a rice mill, with necessary buildings for warehouses and employees’ quarters. At the termination of the original period or its extension, the lessors could purchase all buildings and improvements at a price fixed by experts appointed by the parties; if the lessors failed to exercise that privilege, the lease would continue for another and further period of twenty years. The document was duly acknowledged but never recorded with the register of deeds. The original rent was P25 per month, later reduced to P20.20 because a street was constructed through the land.

Shortly after the lease was executed, the lessee took possession and erected the mill and necessary buildings. In matters pertaining to the lease, he dealt with Pedro R. Melencio, who from 1905 until his death in 1920 acted as manager of the property held in common by the heirs of Julian Melencio and Ruperta Garcia. The original lessee, Yap Kui Chin, died in 1912, and the lease and other property were transferred to Uy Eng Jui, who again transferred it to Uy Eng Jui & Co., an unregistered partnership; finally the lease came into the hands of Dy Tiao Lay. Ramon Melencio died in 1914, and his widow, Liberata Macapagal, was appointed administratrix of his estate. In 1913 the land, including the parcel in question, was registered under the Torrens system. The lease was not mentioned in the certificate of title, but it was stated that one house and three warehouses on the land were the property of Yap Kui Chin.

In 1920 the heirs of Julian Melencio made an extrajudicial partition of parts of the inheritance, and the land in question fell to the share of the children of Ramon Melencio, the original plaintiffs. Their mother, Liberata Macapagal, as administratrix of Ramon’s estate, collected the rent at P20.20 per month until May 1926, when she demanded that the rent be increased to P300 per month. The defendant then informed her that a written lease existed and that under its terms he was entitled to an extension at the original rental. The plaintiffs insisted they had never known of the lease and maintained that it was executed without their consent and was void. Upon careful search, a copy of the lease was found among the papers of the deceased Pedro R. Melencio.

The plaintiffs thereafter brought the present action to set aside the lease and recover possession of the land, seeking P300 monthly rental from May 1926 until surrender and a declaration that any lease was void for lack of consent, concurrence, and ratification by the owners. Liberata Macapagal Viuda de Melencio, as administratrix of Ramon’s estate, was allowed to intervene; her amended complaint alleged that the defendant had occupied the land since November 1920 under a verbal month-to-month lease. The defendant claimed the 1905 lease was still in force, that Liberata had recognized and ratified it, and that prescription barred the plaintiffs.

• Alterations to Common Property: Appellants contended that Exhibit C called for an alteration of the property in question and therefore ought to have been signed by all the co-owners as required by law.
• Will of the Lessee: Appellants contended that the validity and fulfillment of the lease were made to depend upon the will of the lessee exclusively.
• Term Exceeding Six Years: Appellants contended that the lease, being for a term of over six years, was null and void under article 1548 of the Civil Code.
• Unreasonable Duration and Public Policy: Appellants contended that the duration of the lease was unreasonably long and therefore against public policy.
• Repeated Violations: Appellants contended that the defendant and his predecessors in interest repeatedly violated the provisions of the lease agreement.
• Lack of Consent and Ratification: In their reply, plaintiffs alleged that the lease was null and void for lack of the intervention and consent of two co-owners, Ramon Melencio and Jose P. Melencio, and without the marital consent of the husbands of Juliana and Ruperta Melencio; they also alleged that Liberata Macapagal, as administratrix, could not lawfully execute a similar lease or ratify the one in question.

• Validity and Continuity of the 1905 Lease: Defendant alleged that he occupied the land by virtue of a contract of lease executed on July 24, 1905, in favor of his predecessor in interest by Ruperta Garcia, Pedro Melencio, Juliana Melencio, and Ruperta Melencio, and that the contract was still in force.
• Ratification by the Administratrix: Defendant alleged that Liberata Macapagal, mother of the plaintiffs, in her capacity as judicial administratrix of the estate of Ramon Melencio, recognized and ratified the existence and validity of the lease through a public document executed on or about November 27, 1920, and by collecting monthly rent from the assignees of the original lessee until April 30, 1926.
• Consignation and Counterclaim: Defendant alleged that he deposited P20.20 every month with the clerk of court as rent and counterclaimed P272 for goods and money delivered to the plaintiffs.
• Prescription and Estoppel: In his answer to the complaint of intervention, defendant set up prescription as a special defense; the majority opinion also notes the suggestion that by prescription and acceptance of benefits under the lease, the plaintiffs were estopped to question the authority for making the lease.

• Alterations to Common Property: Whether the lease is null and void because it called for alterations to the co-owned property and was not signed by all the co-owners as required by law.
• Will of the Lessee: Whether the lease is null and void because its validity and fulfillment were made to depend exclusively on the will of the lessee.
• Term Exceeding Six Years and Consent of All Co-Owners: Whether the lease is null and void under article 1548 of the Civil Code because it was for a term exceeding six years and was executed without the consent of all the co-owners.
• Unreasonable Duration and Public Policy: Whether the lease is null and void because its duration was unreasonably long and against public policy.
• Prescription and Estoppel: Whether the plaintiffs are barred by prescription or estoppel by acceptance of benefits from questioning the lease.

• Alterations to Common Property: No. The alterations were not of sufficient importance to nullify the lease, especially since no co-owner objected to them until over twenty years after the lease was executed.
• Will of the Lessee: No. The provision allowing the lessee, at any time before erecting any building, to rescind the lease did not violate article 1256 of the Civil Code.
• Term Exceeding Six Years and Consent of All Co-Owners: Yes, the lease is null and void. A lease for more than six years executed by only a majority of co-owners, without the consent of all, is an act of ownership or partial alienation beyond mere management under articles 398, 1548, and 1713 of the Civil Code and the Spanish Supreme Court decision of June 1, 1909.
• Unreasonable Duration and Public Policy: Yes, the duration was unreasonably long; the lease could last sixty years, which, without all co-owners’ consent, made it an act of ownership or partial alienation rather than mere management.
• Prescription and Estoppel: No. The burden of proving prescription was on the defendant, and there was no proof that Ramon Melencio and his successors knew of the lease before 1926; receipt of a share of the products was insufficient to establish estoppel.

• Alterations to Common Property: Article 397 of the Civil Code provides that none of the owners shall, without the consent of the others, make any alterations in the common property even though advantageous to all. The alleged alterations were not of sufficient importance to nullify the lease, especially because none of the co-owners objected until over twenty years after the lease was executed. Enriquez vs. A.S. Watson and Co. was cited as containing a full discussion of the effect of alterations of leased community property.
• Will of the Lessee: Under the circumstances, the provision that the lessee, at any time before he erected any building on the land, might rescind the lease could hardly be regarded as a violation of article 1256 of the Civil Code.
• Term Exceeding Six Years and Consent of All Co-Owners: The trial court relied principally on Enriquez vs. A.S. Watson and Co. and on the Direccion General de los Registros resolution of April 26, 1907. Enriquez was materially different: all co-owners executed the lease for eighteen years; a minor owner was represented by his legally appointed guardian, and the guardian’s action was formally approved by the Court of First Instance. Here, only a small majority of the co-owners executed the lease, and under its terms the lease could last sixty years. The Direccion General resolution, which upheld a majority-executed lease exceeding six years, was overruled by the Spanish Supreme Court decision of June 1, 1909. That Spanish decision held that although a lease is generally an act of management, a lease exceeding six years may give rise to a real right in favor of the lessee and constitutes a sundering of ownership transcending mere management; in such cases, the co-owners representing the greater portion of the common property have no power to lease for more than six years without the consent of all co-owners. It also held that joint ownership is not a sort of agency and cannot be governed by agency provisions, so article 1727 was inapplicable. Following that decision and taking into consideration articles 398, 1548, and 1713 of the Civil Code, the lease in question was declared null and void.
• Unreasonable Duration and Public Policy: The lease was for twenty years, extendible for a like period at the lessee’s option, and could continue for another twenty years if the lessors failed to purchase the buildings and improvements. It could therefore last sixty years. This duration, combined with the lack of consent of all co-owners, removed the lease from the category of mere management and enjoyment and made it an act of ownership or partial alienation. The third and fourth propositions were determinative of the controversy.
• Prescription and Estoppel: The burden of proof of prescription devolved upon the defendant. There was no proof that Ramon Melencio and his successors ever had knowledge of the existence of the lease prior to 1926. It could not be concluded from mere suspicion that they were informed of the document and its terms. Under a strict interpretation of the lease, the lessees could remain indefinitely in their tenancy unless the lessors could purchase the mill and buildings on the land; in such circumstances, better evidence of the plaintiffs’ knowledge was required. The fact that Ramon during his lifetime received his share of the products of land owned in common with his coheirs was not sufficient proof of knowledge of the lease, because the land in question was only a small portion of a large tract administered by Pedro R. Melencio in connection with other community property.

• Lease of Co-Owned Property for More Than Six Years Requires Unanimous Consent — Under articles 398 and 1548 of the Civil Code, the majority of co-owners may decide acts of mere management and enjoyment of common property, but a lease exceeding six years is an act of ownership or partial alienation that gives rise to a real right and cannot be granted without the consent of all co-owners. The Court applied this rule to declare the 1905 lease null and void because it was executed by only some co-owners and could last up to sixty years.
• Alterations to Common Property — Article 397 of the Civil Code prohibits any co-owner from making alterations in the common property without the consent of the others, even if advantageous to all. The Court found the alleged alterations insufficient to nullify the lease, particularly because no co-owner objected for over twenty years after execution.
• Contract Validity Not Dependent Exclusively on the Will of the Lessee — Article 1256 of the Civil Code was invoked against a lease provision allowing the lessee to rescind before erecting any building. The Court found no violation because, under the circumstances, the provision did not make the validity and fulfillment of the lease depend exclusively on the lessee’s will.
• Prescription and Estoppel by Acceptance of Benefits — A party asserting prescription or estoppel by acceptance of benefits must prove that the party sought to be barred had knowledge of the contract. Mere receipt of benefits or a share of products is insufficient where knowledge of the lease is not established. The Court applied this by rejecting the defendant’s prescription and estoppel defense because there was no proof Ramon Melencio and his successors knew of the lease before 1926.
• Co-Ownership Is Not Agency — The Spanish Supreme Court decision followed by the Court held that joint ownership is not a sort of agency and cannot be governed by the provisions relating to agency; thus article 1727 of the Civil Code, providing that a principal is not bound where his agent acts beyond his authority, was inapplicable. This supported the conclusion that majority co-owners could not validate a long-term lease as mere agents.
• Lease Exceeding Six Years as Partial Alienation — A lease for more than six years may constitute a real right subject to registry and a partial alienation of the property, transcending mere management. Because of this character, it requires the consent of all co-owners. The Court used this doctrine to distinguish Enriquez vs. A.S. Watson and Co. and to nullify the lease.

• "Taking into consideration articles 398,1548, and 1713 of the Civil Code and following the aforesaid decision of June 1,1909, we hold that the contract of lease here in question is null and void." — This is the Court’s ratio decidendi, stating the provisions and foreign decision on which the nullity of the lease rests.
• "the part owners representing the greater portion of the property held in common have no power to lease said property for a longer period than six years without the consent of all the coowners, whose propriety rights, expressly recognized by the law, would by contracts of long duration be restricted or annulled" — This passage, adopted from the Spanish Supreme Court decision of June 1, 1909, states the controlling rule that a majority of co-owners cannot bind common property to a long-term lease without unanimous consent.
• "The fact that Ramon during his lifetime received his share of the products of land owned in common with his coheirs is not sufficient proof of knowledge of the existence of the contract of lease when it is considered that the land in question was only a small portion of a large tract which Pedro R. Melencio was administering in connection with other community property." — This passage explains why the defendant’s estoppel and prescription defense failed: receipt of benefits did not prove knowledge of the lease.
• "An examination of the Enriquez case will show that it differs materially from the present." — This sentence introduces the Court’s distinction of the principal precedent relied upon by the trial court, because Enriquez involved all co-owners and an eighteen-year lease, while the present lease was executed by only a majority and could last sixty years.

• Enriquez vs. A.S. Watson and Co., 22 Phil., 623 — Cited by the trial court and distinguished by the Supreme Court. In Enriquez, all co-owners executed an eighteen-year lease, a minor owner was represented by his legally appointed guardian, and the guardian’s action was approved by the Court of First Instance; in the present case, only a small majority of co-owners executed the lease, and it could last sixty years.
• Supreme Court of Spain decision, June 1, 1909 — Followed by the Court. It held that a lease exceeding six years by a majority of co-owners, without the consent of all, is void because it constitutes an act of ownership or partial alienation; it also held that co-ownership is not agency. The Court relied on it in declaring the lease null and void.
• Direccion General de los Registros resolution, April 26, 1907 — Relied upon by the trial court but overruled by the Spanish Supreme Court decision of June 1, 1909. It had held that a lease exceeding six years executed by a majority of co-owners was valid; the Court did not follow it.

• Article 397, Civil Code — Provides that none of the owners shall, without the consent of the others, make any alterations in the common property even though such alterations might be advantageous to all. The Court found the alleged alterations insufficient to nullify the lease, especially because no co-owner objected for over twenty years.
• Article 398, Civil Code — Concerns decisions by the majority of co-owners on the management and enjoyment of common property. The Court held it did not authorize a lease exceeding six years, which is an act of ownership or partial alienation requiring the consent of all co-owners.
• Article 1548, Civil Code — Prohibits a manager without special power from entering into a lease for more than six years. The Court applied it by analogy to hold that a majority of co-owners cannot lease common property for more than six years without the consent of all co-owners.
• Article 1713, Civil Code — Cited in the concluding holding as one of the provisions taken into consideration in declaring the lease null and void. The text does not quote its terms.
• Article 1256, Civil Code — Invoked against the claim that the lease’s validity and fulfillment depended exclusively on the lessee’s will. The Court found no violation because the provision allowing the lessee to rescind before erecting any building did not make the contract depend exclusively on the lessee’s will.
• Article 1727, Civil Code — Cited in the Spanish Supreme Court decision as providing that a principal is not bound where his agent acts beyond his authority. The Court, following that decision, held it inapplicable because co-ownership is not a sort of agency.

Avanceña, C.J., Malcolm, Johns, Romualdez, and Villa-Real, JJ., concurred. Johnson, J., reserved his vote.

• Street and Villamor, JJ. — The dissenters concurred that the 1905 lease was not per se binding on Ramon Melencio because he was not a party and was not even mentioned as a co-owner, and because a lease for twenty years, extendible under certain circumstances for a second and third period of equal duration, was an act of rigorous alienation and not a mere act of management and enjoyment under article 398 of the Civil Code. They would nevertheless affirm the trial court because Ramon and his children were estopped from questioning the lease: Ramon enjoyed the benefits of the lease from 1905 until his death in 1914, and his widow and children continued to enjoy them until May 1926, when the widow repudiated the lease as a preliminary to the action. Acceptance of benefits over so long a period estopped them and cured the want of the special power contemplated in article 1548. An additional estoppel arose from Ramon standing by while the lessees placed improvements valued at more than P100,000 on the property. The dissenters found the plaintiffs’ claim of ignorance of the lease terms of little weight and no legal merit; Ramon should be presumed to have known the terms because he enjoyed benefits from month to month and had the means of knowledge through his trusted brother Pedro, who kept the contract, and because the 1920 partition document noted that the property was subject to a lease in favor of the defendant. Non-registration of the lease made no difference in a lawsuit between the parties or their successors in interest. They concluded that the judgment should be affirmed.