Mores vs. Yu-Go

A lessee who makes useful improvements in good faith under Article 1678 of the Civil Code may remove those improvements if the lessor refuses to reimburse one-half of their value; a tenant is not a builder in good faith under Articles 546 and 547, and the lessor is not entitled to moral damages absent proof of bad faith.

The Yu siblings—Shirley M. Yu-Go, Ma. Victoria M. Yu-Lim, and Ma. Estrella M. Yu—co-owned a parcel of land in Sto. Tomas, Magarao, Camarines Sur, with a building of strong materials. Spouses Antonio and Alida Mores occupied the property as their dwelling under a permissive, rent-free arrangement conditioned on the Yu siblings’ need for the property. Antonio Mores had previously been an errand boy of the Yu family and later assistant manager and cashier of the Yu siblings’ father at a Caltex Service Station until the father’s death in 1980; the station ceased operations and was leased to Herce Trucking Service, after which the Moreses were allowed to occupy the subject property. The dispute implicated the Civil Code provisions on useful improvements by a lessee and on possessors in good faith.

The Yu siblings co-owned a parcel of land in Sto. Tomas, Magarao, Camarines Sur, on which a building of strong materials stood. In March 1983, spouses Antonio and Alida Mores asked to stay in the property because they did not yet own a house. Antonio Mores had been an errand boy of the Yu family, so the Yu siblings agreed without rental, subject to the condition that the stay would last until any of them needed the property. The Moreses and their children then occupied the property under that arrangement.

In November 1997, the Yu siblings informed the Moreses that they already needed the property, explaining that Shirley Yu-Go needed it and that the Moreses already had their own house in Villa Grande Homes, Naga City. The Moreses asked for a six-month extension until May 1998. After May 1998 passed without their vacating, they asked to stay until October 1998, and the stay was extended until the end of that year. In the first week of January 1999, the Yu siblings made a final demand to vacate.

Instead of vacating, the Moreses hired laborers and began demolishing improvements on the property on January 20, 1999. The Yu siblings protested, but the demolition continued, and the Moreses took and appropriated the materials from the demolition. The appellate court’s narration states that on January 21, 1998, the Yu siblings filed a Complaint for Injunction and Damages with a prayer for a temporary restraining order and preliminary injunction before the RTC in Naga City, seeking reimbursement for the value of the demolished building, moral damages, attorney’s fees, litigation expenses, and costs.

In their Answer filed on February 5, 1999, the Moreses denied the material averments. They claimed Antonio Mores, the Yu siblings’ uncle, had been assistant manager and cashier of the Yu siblings’ father at their Caltex Service Station until the father’s death sometime in 1980. The Caltex Filling Station had stopped operation and was rented to Herce Trucking Service; upon expiration of that lease, the Moreses were allowed to occupy the subject property as their dwelling. They said they caused renovations at their own expense and with the Yu siblings’ consent—a three-bedroom annex, a covered veranda, and a concrete hollow block fence—without altering the form and substance of the property. They denied that the Yu siblings demanded they vacate, characterizing it as a reminder that they should eventually yield possession because they had bought a second-hand house undergoing repair. They argued that they removed only the improvements they had introduced, without substantial damage to the property, which remained intact. They interposed counterclaims for actual damages, attorney’s fees, and litigation expenses.

The trial court found that the Moreses were possessors in good faith and that they removed only the improvements they introduced without destroying the principal building, after the Yu siblings refused to pay them the reasonable value of the improvements. It dismissed both the complaint and the counterclaims, finding both parties acted in good faith. The trial court also quoted Alida Mores’s testimony that after the Yu siblings intimated in November 1998 that the Moreses would soon vacate, Antonio Mores asked for reimbursement for the improvements; the Yu siblings became angry and refused to pay; and the Moreses then removed the roofing, coco lumber, trusses, electrical installation, glass panel, and window panel. The appellate court, for its part, found that the relationship was one of lessor and lessee and that the Moreses had not given the Yu siblings the chance to choose between reimbursing one-half of the value of the improvements or demanding their removal.

• Moral Damages / Lack of Bad Faith: Petitioner argued that in a breach of contract between a lessor and a lessee, moral damages are not awarded to the lessor if the lessee is not shown to have acted in bad faith. She cited the appellate court’s findings that no one from the Yu siblings objected to or prevented the improvements to establish her and her husband’s good faith.
• Grave Abuse of Discretion: Petitioner maintained that the appellate court’s award of ₱100,000 moral damages was rendered with grave abuse of discretion and was not in accord with the decisions of the Supreme Court.

• Applicability of Article 1678: Whether Article 1678 of the Civil Code governs the rights of the Moreses as lessees over the useful improvements they introduced, rather than Articles 546 and 547 on possessors in good faith.
• Builder in Good Faith: Whether the Moreses may be considered builders in good faith under Articles 546 and 547 of the Civil Code.
• Right to Remove Improvements: Whether the Moreses had the right to remove the improvements they introduced after the Yu siblings refused to reimburse them.
• Moral Damages: Whether the Court of Appeals erred in awarding ₱100,000 moral damages to the Yu siblings absent bad faith on the part of the Moreses.

• Applicability of Article 1678: Yes. The relationship was one of lessor and lessee, and Article 1678 of the Civil Code governs the lessee’s useful improvements; Articles 546 and 547 on possessors in good faith do not apply.
• Builder in Good Faith: No. Tenants cannot be builders in good faith because they have no pretension to ownership; full reimbursement and retention apply only to a possessor in good faith who builds believing he owns the land.
• Right to Remove Improvements: Yes. Since the Yu siblings refused to reimburse one-half of the value after the Moreses demanded it, the Moreses had the right under Article 1678 to remove the improvements they introduced.
• Moral Damages: No. Moral damages are not awarded to a lessor in a breach of lease absent bad faith by the lessee; no bad faith was shown, so the ₱100,000 award was deleted.

• Applicability of Article 1678: The appellate court correctly held that Article 1678 applies. The relationship between the Yu siblings and the Moreses was one of lessor and lessee. Article 1678 provides that if the lessee makes, in good faith, useful improvements suitable to the intended use of the lease, without altering the form or substance of the leased property, the lessor upon termination shall pay one-half of the value of the improvements at that time. If the lessor refuses to reimburse that amount, the lessee may remove the improvements even though the principal thing may suffer damage, provided the lessee does not cause more impairment than necessary. The Moreses were lessees, not owners. The trial court found that they removed only the improvements they introduced without destroying the principal building, after the Yu siblings refused to pay their reasonable value. The appellate court erred in saying the Moreses did not give the Yu siblings the option to retain the improvements; the trial court quoted Alida Mores’s testimony that after the Yu siblings said the Moreses would soon vacate, Antonio Mores asked for reimbursement, the Yu siblings refused, and the Moreses removed the improvements. When the Moreses demanded reimbursement, the Yu siblings should have offered to pay one-half of the value. Since they failed to do so, the Moreses had the right to remove the improvements.
• Builder in Good Faith: The good faith referred to by Alida Mores concerned the building of the improvements. Tenants like the Moreses cannot be considered builders in good faith because they have no pretension to be owners of the property. Full reimbursement of useful improvements and retention of the premises until reimbursement applies only to a possessor in good faith—one who builds on land with the belief that he is the owner. It does not apply where the only interest is that of a lessee under a rental contract; otherwise, it would always be in the power of the tenant to "improve" his landlord out of his property. Thus, Articles 546 and 547 do not apply.
• Right to Remove Improvements: Under Article 1678, if the lessor refuses to reimburse one-half of the value of the useful improvements, the lessee may remove them even though the principal thing may suffer damage, provided no more impairment is caused than necessary. The Moreses demanded reimbursement, and the Yu siblings refused. The trial court found that the Moreses removed only the improvements they introduced without destroying the principal building. The appellate court’s premise that the Moreses did not give the Yu siblings the option to retain the improvements is belied by Alida Mores’s testimony. Therefore, the Moreses had the right to remove the improvements.
• Moral Damages: In a breach of contract between a lessor and a lessee, moral damages are not awarded to the lessor if the lessee is not shown to have acted in bad faith. The Moreses acted after the Yu siblings refused to reimburse the reasonable value of the improvements. The trial court found no bad faith on their part. There was thus no reason for the appellate court’s award of ₱100,000 moral damages, and the award was deleted.

• Article 1678, Civil Code — Useful Improvements by a Lessee — When a lessee makes, in good faith, useful improvements suitable to the intended use of the lease, without altering the form or substance of the leased property, the lessor upon termination must pay one-half of the value of the improvements at that time. If the lessor refuses to reimburse that amount, the lessee may remove the improvements even though the principal thing may suffer damage, provided the lessee does not cause more impairment than necessary. Ornamental expenses are not reimbursable, but the lessee may remove ornamental objects if no damage is caused to the principal thing and the lessor does not choose to retain them by paying their value at the time the lease is extinguished. The Court applied this provision because the Moreses were lessees who made useful improvements and removed them after the Yu siblings refused reimbursement.
• Tenant/Lessee Is Not a Builder in Good Faith Under Articles 546 and 547 — Full reimbursement of useful improvements and retention of the premises until reimbursement applies only to a possessor in good faith, meaning one who builds on land with the belief that he is the owner. It does not apply where the person’s only interest is that of a lessee under a rental contract; otherwise, it would always be in the power of the tenant to "improve" his landlord out of his property. The Court applied this to hold that the Moreses, as tenants, could not claim the rights of a builder in good faith under Articles 546 and 547.
• Moral Damages in Lease Contracts Require Bad Faith — In a breach of contract between a lessor and a lessee, moral damages are not awarded to the lessor if the lessee is not shown to have acted in bad faith. The Court applied this because the Moreses removed the improvements only after the Yu siblings refused to pay their reasonable value, and no bad faith was established; the ₱100,000 moral damages award was therefore deleted.

• "If the lessee makes, in good faith, useful improvements which are suitable to the use for which the lease is intended, without altering the form or substance of the property leased, the lessor upon the termination of the lease shall pay the lessee one-half of the value of the improvements at that time. Should the lessor refuse to reimburse said amount, the lessee may remove the improvements, even though the principal thing may suffer damage thereby. He shall not, however, cause any more impairment upon the property leased than is necessary." — This is the Court’s quotation of Article 1678 of the Civil Code, the controlling provision on a lessee’s right to useful improvements and removal upon the lessor’s refusal to reimburse.
• "Indeed, full reimbursement of useful improvements and retention of the premises until reimbursement is made applies only to a possessor in good faith, i.e., one who builds on land with the belief that he is the owner thereof. It does not apply where one’s only interest is that of a lessee under a rental contract; otherwise, it would always be in the power of the tenant to "improve" his landlord out of his property." — This passage states the ratio for rejecting the Moreses’ claim as builders in good faith under Articles 546 and 547 and for applying Article 1678 instead.
• "When the spouses Mores demanded reimbursement, the Yu siblings should have offered to pay the spouses Mores one-half of the value of the improvements. Since the Yu siblings failed to make such offer, the spouses Mores had the right to remove the improvements." — This is the Court’s core application of Article 1678, establishing that the lessee’s right to remove improvements arose from the lessor’s refusal to reimburse one-half of their value.
• "There is thus no reason for the appellate court’s award of moral damages to the Yu siblings." — This sentence captures the Court’s conclusion that the moral damages award lacked basis once the Moreses’ right to remove the improvements was recognized and bad faith was not established.

• Quemuel and Solis vs. Olaes and Prudente, 111 Phil. 797 (1961) — Cited in support of the rule that tenants cannot be considered builders in good faith because they have no pretension to ownership of the property.
• Geminiano vs. Court of Appeals, 328 Phil. 682 (1996) — Cited in support of the rule that full reimbursement of useful improvements and retention of the premises until reimbursement applies only to a possessor in good faith, and not to one whose only interest is that of a lessee under a rental contract.

• Article 1678, Civil Code — Quoted and applied by the Court. It governs the rights of a lessee who makes useful improvements in good faith: the lessor upon termination must pay one-half of the value of the improvements; if the lessor refuses, the lessee may remove the improvements even if the principal thing suffers damage, provided no more impairment is caused than necessary. The Court applied this provision because the Moreses were lessees who made useful improvements and removed them after the Yu siblings refused reimbursement.
• Articles 546 and 547, Civil Code — Cited in relation to the trial court’s ruling on builders in good faith and the right of accession. The Court held these provisions inapplicable to the Moreses because they were lessees, not possessors in good faith who built on the land with the belief that they were owners.
• Rule 45, 1997 Rules of Civil Procedure — The procedural basis for Alida Mores’s petition for review before the Supreme Court.

Antonio Eduardo B. Nachura, Diosdado M. Peralta, Roberto A. Abad, and Jose C. Mendoza.