Muller vs. Philippine National Bank

When a lessee continues to occupy the leased premises after the lease expires, an implied new lease arises under Article 1670, so the lease subsists and the prescriptive periods for written and oral contracts do not begin to run; the lessee is liable for rent or reasonable compensation from the time of occupation without payment, not merely from the latest demand to vacate.

PNB owned two parcels of land with improvements in Abeto Subdivision, Brgy. Sta. Rosa, Manduriao, Iloilo City, with an aggregate area of 1,250 square meters. The spouses Fritz and Thelma Muller occupied these properties under a lease. Article 1670 of the Civil Code supplies the statutory backdrop on implied new leases, which governs the lessor’s claim for rentals in arrears in ejectment and the effect of the lessee’s continued occupation on prescription.

Fritz and Thelma Muller occupied two parcels of land with improvements in Abeto Subdivision, Brgy. Sta. Rosa, Manduriao, Iloilo City, owned by PNB and with an aggregate area of 1,250 square meters. On May 26, 1987, PNB informed the Mullers that their lease would expire on June 1, 1987 and that they had rental arrears for two and a half years amounting to PhP18,000. Seeking to renew the lease for another year, Fritz wrote PNB proposing to buy the subject properties. PNB denied the request for renewal on June 13, 1987, and on October 2, 1987, PNB Iloilo informed Fritz that his offer to purchase was not given due course by the Head Office.

On March 17, 1988, PNB demanded that the Mullers vacate the properties within fifteen days from that date because the lease had expired. The demand was ignored. Due to the continued occupation, PNB sent a final demand letter dated July 17, 2006, demanding payment of rental arrears from June 1984 up to June 1, 2006. The Mullers failed to pay attention to the written demands, which prompted PNB to institute a complaint for ejectment.

The Mullers did not file an Answer to the complaint, and no evidence was presented on their behalf. Records showed that they had occupied the properties since 1984 and had not paid rentals from May 1987 to June 2006. They vacated the premises on August 1, 2007. PNB had been consistent in its demands for payment of rentals, but the Mullers continuously failed to pay; they also insisted that PNB sell the properties to them without meeting PNB’s price.

• Reckoning of Rentals: Petitioners contended that the award of rentals should be reckoned from receipt of the latest demand on July 17, 2006, not from prior demands; before that latest demand, PNB had no right to collect rent because only after receipt of the latest demand could they be considered illegal occupants obligated to pay rent.
• Tolerance: Petitioners argued that before the latest demand their possession may be said to have been tolerated by PNB, and as such they were “not required to pay the rent within the period prior to their receipt of the latest demand to vacate.”
• Prescription: Petitioners maintained that PNB’s claim for collection of rentals in arrears had prescribed because more than 10 years had elapsed since 1987, the date of the written lease agreement, before PNB filed the ejectment case in 2007; even the claim for rentals after the expiration of the written lease in 1987 had prescribed, since actions arising from written contracts prescribe in 10 years and those from oral contracts in six years.

• Procedural Defect: PNB argued that the Petition was dismissible on account of its defective verification and certification against forum shopping.
• Reasonable Compensation: PNB argued that as owner it is entitled to reasonable compensation for petitioners’ continued use and occupation of its properties, which prevented it from enjoying the same and the fruits thereof.
• Nature of Possession: PNB argued that petitioners’ occupation was not by mere tolerance because there was an oral lease agreement between them, and for this reason they must pay rent.
• Prescription and Continuing Lease: PNB argued that petitioners’ claim of prescription was unavailing because there was a continuing lease agreement between the parties throughout the period in issue, and because the amount demandable and recoverable from a defendant in ejectment proceedings, regardless of its denomination as rental or reasonable compensation or damages, flows from the detainer or illegal occupation of the property and is merely incidental thereto.

• Reckoning of Rentals: Whether PNB is entitled to rentals in arrears prior to July 17, 2006, or whether the award of rentals in the ejectment case should be reckoned only from the latest demand to vacate.
• Prescription: Whether PNB’s claims for rentals in arrears have prescribed.

• Reckoning of Rentals: Yes. PNB is entitled to rentals or reasonable compensation from the time the Mullers occupied the properties without paying rent, not only from the latest demand; the lease continued under Article 1670 and a forced lease also arose from their occupation.
• Prescription: No. Prescription did not bar the claim because the lease subsisted under Article 1670 and prescription did not begin to run; the action was filed within the period from the last demand.

• Reckoning of Rentals: The SC rejected petitioners’ position as logically flawed: if a lessee could withhold rent until a demand to vacate and then vacate without paying rent, the lessor would be uncompensated and the lessee’s outstanding rental obligations would be condoned. Under Article 1670, when the written lease expired on June 1, 1987 and the Mullers did not vacate, the terms of the written lease except its period were revived; the lease continued. Even without a consensual lease, a forced lease arose from their use and occupation of PNB’s property, making them liable for rent as reasonable compensation. In ejectment, Section 17, Rule 70 limits recoverable damages to rent, fair rental value, or reasonable compensation for use and occupation; the amount flows from the detainer and is incidental. The SC also cited Articles 19 and 20 of the Civil Code and condemned petitioners’ refusal to pay rent and vacate while insisting that PNB sell at their price as holding the properties hostage. The CA was correct that liability ran from the time they occupied without paying rent, not only from the last demand.
• Prescription: The SC held that Articles 1144 and 1145 of the Civil Code were inapplicable because the lease between the parties subsisted under Article 1670; as far as the parties were concerned, prescription did not even begin to set in. So long as petitioners continued to occupy the properties, with or without PNB’s consent, there was a lease agreement between them and they could not escape payment of rent. The CA’s conclusion that the action was filed within the period from the last demand was correct; PNB’s claim for rentals in arrears had not prescribed.

• Implied New Lease under Article 1670 — If the lessee continues enjoying the leased thing for fifteen days after the contract’s end with the lessor’s acquiescence, and no contrary notice has been given, an implied new lease arises for the period in Articles 1682 and 1687, with the other terms of the original contract revived. The SC applied this because the Mullers did not vacate after their written lease expired on June 1, 1987; the lease continued, and prescription did not begin to run.
• Forced Lease and Reasonable Compensation — Even without a consensual lease, or where occupant and owner are strangers, the occupant is liable to pay rent to the owner as reasonable compensation for the use and occupation of the property. The SC applied this to hold the Mullers liable for rentals even as their continued possession created a forced lease.
• Ejectment Damages Limited to Rent or Fair Rental Value — In ejectment, the plaintiff may recover damages for loss of use and possession, but Section 17, Rule 70 limits the award to rent, fair rental value, or reasonable compensation for use and occupation; the amount flows from the detainer and is incidental. The SC applied this to affirm the award of rentals or reasonable compensation.
• Prescription in a Continuing Lease — While a lease subsists, the prescriptive periods for actions upon written and oral contracts under Articles 1144 and 1145 do not run. The SC applied this because the lease continued under Article 1670, so PNB’s claim for rentals had not prescribed.
• Legal Interest after Finality — The legal rate of interest after finality of judgment is 6% per annum until full payment under Nacar vs. Gallery Frames. The SC modified the CA’s 12% post-finality interest to 6%.

• “Under Article 1670 of the Civil Code, ‘[i]f at the end of the contract the lessee should continue enjoying the thing leased for fifteen days with the acquiescence of the lessor, and unless a notice to the contrary by either party has previously been given, it is understood that there is an implied new lease, not for the period of the original contract, but for the time established in Articles 1682 and 1687. The other terms of the original contract shall be revived.’” — The SC cites the statutory basis for the implied new lease that kept the lease alive after June 1, 1987.
• “Thus, when petitioners’ written lease agreement with respondent expired on June 1, 1987 and they did not vacate the subject properties, the terms of the written lease, other than that covering the period thereof, were revived. The lease thus continued. In this sense, the prescriptive periods cited by petitioners - as provided for in Articles 1144 and 1145 of the Civil Code - are inapplicable. As far as the parties are concerned, the lease between them subsisted and prescription did not even begin to set in.” — This is the core holding on why prescription did not bar PNB’s claim for rentals in arrears.
• “The plaintiff in an ejectment case is entitled to damages caused by his loss of the use and possession of the premises. Damages in the context of Section 17, Rule 70 of the 1997 Rules of Civil Procedure is limited to ‘rent’ or fair rental value or the reasonable compensation for the use and occupation of the property.” — The SC defines the limited damages recoverable in ejectment, which supports the award of rentals or reasonable compensation.
• “However, the 12% interest rate it imposed after the finality of judgment and until full payment shall be modified to 6% per annum pursuant to Nacar v. Gallery Frames.” — The SC modifies the CA’s post-finality interest rate to the legal rate of 6% per annum.

• Spouses Catungal vs. Hao, 407 Phil. 309 (2001) — Cited by the SC for the rule that a forced lease may exist even without a consensual lessor-lessee relationship, making the occupant liable for reasonable compensation.
• Mapua vs. Suburban Theaters, Inc., 87 Phil. 358 (1950) — Cited for the rule that the amount recoverable in ejectment, whether denominated rental, reasonable compensation, or damages, flows from the detainer or illegal occupation and is incidental thereto.
• Nacar vs. Gallery Frames, 716 Phil. 267 (2013) — Applied to modify the post-finality interest rate from 12% to 6% per annum.

• Article 1670, Civil Code — Provides for an implied new lease when the lessee continues to enjoy the leased thing after the contract’s end with the lessor’s acquiescence. Applied because the Mullers did not vacate after June 1, 1987; the lease continued and prescription did not begin.
• Articles 1144 and 1145, Civil Code — Set the prescriptive periods for actions upon written contracts and oral contracts. Held inapplicable because the lease subsisted and prescription did not run.
• Article 19, Civil Code — Requires every person to act with justice, give everyone his due, and observe honesty and good faith. Cited to support the ruling that petitioners could not enjoy PNB’s property without paying compensation.
• Article 20, Civil Code — Requires indemnification for damage caused contrary to law. Cited together with Article 19.
• Section 17, Rule 70, 1997 Rules of Civil Procedure — Limits damages in ejectment to rent, fair rental value, or reasonable compensation for the use and occupation of the property. Applied to affirm the award of rentals or reasonable compensation.