Murga vs. Chan

A municipal court lacks jurisdiction over an unlawful detainer action where the complaint and its annexes show that the real controversy is the interpretation of a lease clause providing for automatic renewal, and where the demand to vacate is merely alternative to the payment of increased rent and is not a definite, unconditional demand.

Jesusa Vda. de Murga owned two parcels of land in Zamboanga City, designated as lots 36 and 38 of the cadastral plan and covered by Transfer Certificates of Title Nos. 3237 and 3238, which she leased to Juanito Chan under a ten-year contract beginning January 31, 1949. The lease allowed Chan to introduce improvements with the lessor’s consent and gave Murga an option to purchase those improvements upon expiration; if she did not exercise that option, the contract provided for automatic renewal, with the period and rental to be adjusted by the parties. The dispute implicated the jurisdictional boundary between municipal courts and courts of first instance under Rule 70 of the Rules of Court and Section 88 of the Judiciary Act of 1948.

Jesusa Vda. de Murga owned two parcels of land in Zamboanga City, designated as lots 36 and 38 of the cadastral plan and covered by Transfer Certificates of Title Nos. 3237 and 3238. On January 31, 1949, she entered into a contract of lease over both lots with Juanito Chan. The lease was for ten years from January 31, 1949, with a monthly rent of P500.00 payable within the first ten days of every month. With the lessor’s consent, Chan introduced improvements on the land consisting of buildings with a total cost of P70,000.00. Clause 7 of the contract provided that upon termination of the ten-year term, the lessor had the option to purchase the buildings belonging to and constructed by Chan, with the price to be determined by three commissioners, two appointed by each party and the remainder by both. If the lessor did not exercise that option for any reason or cause, the contract of lease would be automatically renewed, but the period of renewal would be fixed and adjusted again by the parties; in case of renewal, the rental would also be adjusted by the parties depending on the business condition then prevailing. Chan paid the monthly rent in full during the ten-year period.

As early as July 23, 1958, before the expiration of the lease, the parties exchanged communications for its renewal but failed to reach an agreement. On July 23, 1958, the lessor informed the lessee of her willingness to renew the lease for five years at a monthly rent of P700.00 (Exhibit B). The lessee replied that he was willing to consider the suggested increase but that, due to very poor business, he might not be able to consider it (Exhibit C). On August 1, 1958, the lessor advised the lessee that beginning February 1, 1959, the rental of her lots would be P700.00 (Exhibit D).

On January 18, 1959, the lessee advised the lessor that she should purchase the buildings constructed on the land in accordance with the lease and, if she did not agree, expressed willingness to continue occupying the land and execute a new contract of lease, while appealing for a reduction of the monthly rental to P400.00 due to prevailing business conditions (Exhibit L). On January 19, 1959, the lessor replied that she rejected the option to purchase the buildings and made her last offer: (a) P600.00 rentals payable within the first fifteen days of every month, without contract; or (b) P700.00 rentals payable within the first fifteen days of every month, one year advanced rental, with a five-year contract (Exhibit F). On January 20, 1959, the lessor informed the lessee that the conditions stated in his January 18, 1959 letter were not acceptable to her (Exhibit G). On January 21, 1959, the lessee advised the lessor that he could not accept the conditions stated in her January 19 and 20, 1959 letters, insisted that she purchase the houses on the leased lots, and stated that if she refused, he would continue occupying the lot under a monthly rental of P500.00 due to the prevailing business, as stipulated in the lease signed on January 31, 1949 (Exhibit H).

On February 4, 1959, the lessor demanded that the lessee vacate the premises, stating that the lease contract had expired on January 31, 1959 and that she had waived the right to exercise the option granted her under paragraph 7 of the contract (Exhibit I). On February 16, 1959, the lessee sent his check for P500.00 to the lessor in payment of the monthly rental for February 1959 (see Exhibit J). On February 19, 1959, the lessor returned the check and reiterated in the demand letter, Annex J of the Complaint, that she was demanding that the leased premises be vacated unless the lessee paid P600.00 or P700.00 as new rental beginning February 1, 1959 before the expiration of the 15-day period granted for vacating. The lessee disregarded the written demand, remained in possession, insisted that the contract stipulated an automatic renewal, and sent the P500.00 check as a token of his decision. The lessor, unsatisfied because she had demanded P600.00 or P700.00 as new monthly rent as a condition for renewal, filed on March 10, 1959 a complaint for unlawful detainer in the Municipal Court of Zamboanga City to eject Chan. The complaint reproduced the correspondence exchanged between the parties and claimed that Chan’s possession had become illegal by his failure and refusal to pay the increased new rental; it prayed that he be ordered to vacate and to pay the new rents of P600.00 or P700.00 from February 1, 1959 monthly as the case may be, with Exhibits B to J attached.

In his amended answer, Chan admitted the genuineness and authenticity of the letters annexed to the complaint but traversed some allegations and raised lack of jurisdiction of the court and lack of cause of action for unlawful detainer. It was not disputed that Chan had paid the monthly rent in full during the ten-year period and that the lessor had refused to purchase the buildings. The pleadings and annexes placed in issue whether clause 7 provided for automatic renewal, with the lessor maintaining that the lease had terminated and was renewable only upon a new agreement, and the lessee maintaining that clause 7 granted him an automatic renewal and that the action was not unlawful detainer but one incapable of pecuniary estimation.

• Lack of Jurisdiction: Defendant-appellant Juanito Chan maintained that the municipal court had no jurisdiction because the interpretation, application, and enforcement of the terms of the lease agreement fell within the competence of a higher court, and the action was not one for unlawful detainer but one incapable of pecuniary estimation.
• Lack of Cause of Action for Unlawful Detainer: He argued that the demand letter was not the kind of demand contemplated by the Rules of Court, since a demand to vacate is indispensable to determine whether the tenant’s possession had become illegal, and no definite demand to vacate had been made.
• Automatic Renewal: He contended that clause 7 of the lease expressly granted him the option to renew, so the lease was automatically renewed and he had the right to continue occupying the premises.

• Expiration and New Agreement: Plaintiff-appellee Jesusa Vda. de Murga maintained that the lease had terminated on January 31, 1959 and was renewable only upon a new agreement of the parties.
• Conditional Demand and Nonpayment: She claimed that the lessee’s possession had become illegal by his failure and refusal to pay the increased new rental, and she had demanded P600.00 or P700.00 as new monthly rent as a condition for renewal.
• Waiver of Option: She asserted that she had waived the right to exercise the option granted her under paragraph 7 of the contract, and on February 4, 1959 demanded that the lessee vacate because the lease had expired.

• Jurisdiction over Unlawful Detainer: Whether the allegations in the complaint constitute a cause of action for unlawful detainer and confer jurisdiction over the case to the municipal court (now city court) of Zamboanga City under Rule 70 of the Rules of Court, particularly considering the demand letter Annex J of the Complaint.
• Automatic Renewal: Whether the lessor and the lessee had agreed upon an automatic renewal of the lease of the premises under clause 7 of the contract of lease.

• Jurisdiction over Unlawful Detainer: No. The municipal court had no jurisdiction; the demand to vacate was merely alternative to the payment of increased rent, and the real controversy hinged on the interpretation of clause 7, a matter outside the municipal court’s jurisdiction.
• Automatic Renewal: Yes. Clause 7 envisioned automatic renewal if the lessor did not exercise her option to purchase the lessee’s buildings; the provision for adjustment of the period and rental did not negate the automatic renewal.

• Jurisdiction over Unlawful Detainer: The demand letter of February 19, 1959 made the obligation to vacate dependent on the lessee’s failure to agree to the new rent. Because the lessee was in physical possession under a prior lease and the demand was in the alternative imposing a new rental, even without considering the automatic-renewal stipulation, no default arose without a subsequent definite demand to vacate subject to no condition. Under Manotok vs. Guinto and Belmonte vs. Martin, a notice giving the lessee the alternative either to pay increased rental or to vacate is not the demand contemplated by the Rules of Court; a lessee who stays merely assumes the new rental and cannot be ejected until he defaults and a necessary demand is first made. Moreover, the pleadings and annexes showed that the jugular vein of the controversy was the correct interpretation of clause 7, which was outside the jurisdiction of the municipal court. The lessor claimed the lease had terminated and was renewable only by new agreement; the lessee claimed automatic renewal and that the action was incapable of pecuniary estimation. The lessee’s contention was sustained.
• Automatic Renewal: Clause 7 envisioned two eventualities at the expiration of the lease on January 31, 1959: either the lessor would purchase the improvements constructed by the lessee, or, if the lessor failed for any cause or reason to exercise the option to buy, the lease would be deemed automatically renewed. The evidence established that the lessor refused to buy the buildings. The statement that in case of renewal the duration and the new rental would be adjusted by the parties was of no moment in determining whether the complaint alleged a cause of action for unlawful detainer. The pleadings showed that the controversy hinged on the interpretation of clause 7. Following Cruz vs. Alberto, a clause allowing extension “agreed upon by both parties” did not require a new mutual agreement but gave the lessee the right of election to take a second term or quit; the phrase “agreed upon by both parties” was superfluous. Following Legarda Koh vs. Ongsiaco, an unqualified “extendible” term is a promise to extend in favor of the lessee, obliging the lessor to fulfill the promise; the lessor may withdraw only after fulfilling the promise unless the lessee violated the contract. The lessee’s contention that clause 7 granted an automatic renewal was therefore sustained.

• Unlawful Detainer — Demand to Vacate — A demand to vacate is indispensable in unlawful detainer to determine whether the tenant’s possession has become illegal. A notice giving the lessee the alternative either to pay increased rental or to vacate is not the demand contemplated by the Rules of Court; if the lessee elects to stay, he merely assumes the new rental and cannot be ejected until he defaults and a necessary demand is first made. Applied: the February 19, 1959 demand was conditional, and no subsequent definite unconditional demand to vacate was made, so no unlawful detainer default arose.
• Jurisdiction — Real Controversy Test — The jurisdiction of the municipal court in ejectment is determined by the allegations of the complaint and its annexes; if the real controversy is the interpretation of a lease clause, the matter is outside the municipal court’s jurisdiction. Applied: the pleadings showed the jugular vein of the controversy was the interpretation of clause 7, so the municipal court had no jurisdiction.
• Automatic Renewal / Extendible Lease — When a lease provides that its term is extendible or automatically renewable, the agreement is construed in favor of the lessee; the lessee may renew and continue occupying the property after notifying the lessor, and the lessor may withdraw only after fulfilling the promise to extend unless the lessee violated the contract. Applied: clause 7 automatically renewed the lease if the lessor did not exercise her option to purchase the buildings; the adjustment of duration and rental did not defeat the renewal.
• Contract Stipulations Have the Force of Law — Under Article 1091 of the Civil Code, obligations arising from contracts have legal force between the parties and must be fulfilled according to their stipulations. Applied: the promise to extend or automatically renew the lease was enforceable against the lessor.
• Construction Against Grantor / In Favor of Tenant — Where a lease provision is uncertain, the tenant is favored and the grant is construed most strongly against the grantor. Applied: the Court resolved the automatic-renewal clause in favor of the lessee.

• "The notice giving lessee the alternative either to pay the increased rental or otherwise to vacate the land is not the demand contemplated by the Rules of Court in unlawful detainer cases. When after such notice, the lessee elects to stay, he thereby merely assumes the new rental and cannot be ejected until he defaults in said obligation and necessary demand is first made. (Manotok vs. Guinto, L-9540, April 30, 1957.)" — This passage states the jurisdictional demand requirement in unlawful detainer and explains why the lessor’s alternative demand did not place the lessee in default.
• "As we read clause "7", We find that it envisioned the happening of two eventualities at the expiration of the lease on January 31, 1959 — either the lessor may purchase the improvements constructed by the lessee on the land, or in case the lessor fails, for any cause or reason, to exercise the option to buy, the lease shall be deemed automatically renewed." — This is the Court’s core interpretation of clause 7, establishing the automatic-renewal character of the lease.
• "The pleadings of the parties, and the annexes thereto, clearly show that the jugular vein of the controversy hinges on the correct interpretation of clause "7" of the contract of lease, a matter outside the jurisdiction of the municipal court." — This passage states the jurisdictional ratio: the real controversy was lease interpretation, not simple unlawful detainer.
• "When a contract of lease provides that the term thereof is extendible, the agreement is understood as being in favor of the lessee, and the latter is authorized to renew the contract and to continue to occupy the leased property, after notifying the lessor to that effect. The lessor can withdraw from the said contract only after having fulfilled his promise to grant the extension of time stipulated therein, unless the lessee has failed to comply with or has violated the conditions of the contract." — This passage states the doctrine on extendible leases, applied to sustain the lessee’s right to renewal.

• Manotok vs. Guinto, L-9540, April 30, 1957 — Cited for the rule that a notice giving the lessee the alternative either to pay increased rental or to vacate is not the demand contemplated by the Rules of Court in unlawful detainer; the lessee who stays merely assumes the new rental and cannot be ejected until default and necessary demand.
• Belmonte vs. Martin, 42 Off. Gaz. No. 10, 2146 — Cited for the rule that although a lessor may judicially dispossess a lessee for default in payment of the agreed price under Article 1569 of the Civil Code, an action for ejectment cannot lie where the default is based on rent not agreed upon.
• Cruz vs. Alberto, 39 Phil. 991 — Cited and followed in interpreting a lease-extension clause; the words “agreed upon by both parties” did not require a new mutual agreement but gave the lessee the right of election to take a second term or quit, and the clause was not superfluous.
• Legarda Koh vs. Ongsiaco, 36 Phil. 185 — Cited for the rule that an unqualified “extendible” term in a lease is equivalent to a promise by the lessor to extend, obliging the lessor to fulfill it; the lessor may withdraw only after fulfilling the promise unless the lessee violated the contract, and the tenant is favored in construction.

• Rule 70, Rules of Court — Governs unlawful detainer. The demand to vacate required by the rule was not satisfied by the lessor’s alternative demand that the lessee either pay increased rent or vacate, and no definite unconditional demand to vacate had been made.
• Section 88, Judiciary Act of 1948 — Cited by the Court of First Instance as the basis for the municipal court’s jurisdiction. The Supreme Court rejected its application because the case involved the interpretation of clause 7 of the lease, a matter outside the municipal court’s jurisdiction.
• Article 1569, Civil Code — Cited in Belmonte vs. Martin: the lessor may judicially dispossess the lessee for default in payment of the agreed price, but where the default is based on rent not agreed upon, an action for ejectment cannot lie.
• Article 1091, Civil Code — Cited in Legarda Koh vs. Ongsiaco: obligations arising from contracts have legal force between the contracting parties and must be fulfilled according to their stipulations; applied to enforce the promise to extend or renew the lease.

Concepcion, C.J.; Reyes, J.B.L.; Makalintal; Sanchez; Castro; Fernando; and Capistrano, JJ., concurred. Dizon, J., took no part. Zaldivar, J., was on leave.