National Housing Authority vs. Manila Seedling Bank Foundation, Inc.

A possessor in bad faith must reimburse the legitimate possessor for the fruits received and those the latter could have received, but is entitled to reimbursement of necessary expenses under Articles 549, 546, and 443 of the Civil Code; occupation by mere tolerance of the owner does not make the possessor one in good faith. Exemplary damages, attorney's fees, and litigation expenses are not recoverable absent the statutory grounds and evidence required by law.

Petitioner National Housing Authority (NHA) owns a 120-hectare government property in Diliman, Quezon City, reserved for the establishment of the National Government Center under Proclamation No. 481. Proclamation No. 1670, issued on 19 September 1977, reserved a seven-hectare portion of that property and granted respondent Manila Seedling Bank Foundation, Inc. usufructuary rights over it. Memorandum Order No. 127 later revoked the reserved status of the remaining 50 hectares and authorized NHA to commercialize and sell the area to the public through bidding, while Executive Order No. 58 created an inter-agency executive committee to oversee the comprehensive development of the remaining 50 hectares, known as the North Triangle Property.

Petitioner National Housing Authority (NHA) owned a 120-hectare government property in Diliman, Quezon City, reserved for the establishment of the National Government Center. By Proclamation No. 1670 issued on 19 September 1977, President Ferdinand Marcos reserved a seven-hectare area of that property and granted respondent Manila Seedling Bank Foundation, Inc. usufructuary rights over it. Respondent occupied a total of 16 hectares, exceeding the seven-hectare area allowed, and leased the excess to private tenants.

On 11 November 1987, President Corazon Aquino issued Memorandum Order No. 127 revoking the reserved status of the remaining 50 hectares of the 120-hectare property. Petitioner was expressly authorized to commercialize the area and sell it to the public through bidding. President Fidel Ramos subsequently issued Executive Order No. 58 on 15 February 1993 creating an inter-agency executive committee composed of petitioner and other government agencies to oversee the comprehensive development of the remaining 50 hectares, referred to as the North Triangle Property. Because respondent occupied a prime portion of the North Triangle Property, the Executive Committee proposed the transfer of respondent to areas more suitable to its operations.

On 12 August 1994, respondent filed before the RTC a Complaint for injunction with prayer for the issuance of a writ of preliminary injunction against petitioner. Respondent sought the protection of its occupancy and possession of the property reserved for it under Proclamation No. 1670. In its Answer with Compulsory Counterclaim, petitioner prayed that respondent be ordered to vacate the seven-hectare area and the excess, and to pay rent therefor on top of exemplary damages, attorney's fees, and litigation expenses.

The RTC later found that respondent had leased the excess to various establishments upon authority given by Minister of Natural Resources Ernesto Maceda. As he had administrative control over respondent at the time, he gave it that authority to enable it to earn income to finance its operations, considering that it no longer received any donation from the national government since 1986. The RTC also found that respondent had protected the excess by developing it and keeping squatter syndicates from taking possession, and that the expenses it incurred for the development of the excess were more than sufficient to compensate petitioner in terms of rent.

• Recovery of Rent and Damages: Petitioner argued that it is entitled to recover rent, exemplary damages, attorney's fees, and litigation expenses from respondent.
• Rental Amount: Petitioner alleged the amount of rental it could have received from the lease of the excess based on a professional appraisal.
• Vacation and Payment: Petitioner prayed that respondent be ordered to vacate the seven-hectare area and the excess, and to pay rent, exemplary damages, attorney's fees, and litigation expenses.

• Protection of Usufructuary Rights: Respondent sought protection of its occupancy and possession of the property reserved for it under Proclamation No. 1670.
• Injunction Against Relocation: Respondent filed a complaint for injunction with prayer for preliminary injunction against petitioner to prevent its relocation.

• Recovery of Rent, Exemplary Damages, Attorney's Fees, and Litigation Expenses: Whether petitioner is entitled to recover rent, exemplary damages, attorney's fees, and litigation expenses from respondent.

• Recovery of Rent, Exemplary Damages, Attorney's Fees, and Litigation Expenses: Yes, in part. Petitioner is entitled to recover the fruits or rent from respondent as a possessor in bad faith under Articles 549, 546, and 443 of the Civil Code, but not exemplary damages, attorney's fees, or litigation expenses; respondent is entitled to reimbursement of necessary expenses, and the case is remanded to determine the amounts.

• Recovery of Rent, Exemplary Damages, Attorney's Fees, and Litigation Expenses: The Court began from its prior ruling in National Housing Authority vs. CA, which upheld respondent's usufructuary right over the seven-hectare area but held that the right was circumscribed within that area and that respondent abused the privilege by encroaching on petitioner's property. Because respondent had no right beyond the seven-hectare area and was fully aware of that fact, its occupation of nine additional hectares rendered it a possessor in bad faith as to the excess. The authority from Minister Maceda did not come from petitioner, the owner, and mere tolerance by petitioner did not convert respondent into a possessor in good faith; a person whose occupation is by sheer tolerance of the owner is not a possessor in good faith. Under Article 549 in relation to Articles 546 and 443 of the Civil Code, a possessor in bad faith must reimburse the legitimate possessor for the fruits received and those the latter could have received had possession not been interrupted, and has a right only to the expenses in Article 546(1) and Article 443. Since respondent admitted leasing the excess to various establishments and earning profits, it was bound to pay the corresponding amounts to petitioner. Respondent, however, was entitled to a refund of necessary expenses, defined as those made for the preservation of the land occupied, or those without which the land would deteriorate or be lost, and which may include expenditures that augment the land's income or are incurred for cultivation, production, and upkeep. Both the CA and RTC found that respondent developed the excess and protected it from squatter syndicates; these expenses fell under necessary expenses for which even a possessor in bad faith is entitled to reimbursement. Because respondent did not itemize these necessary expenses, and the Court declined to adopt petitioner's appraisal-based rental allegation, a remand to the RTC was necessary to determine the amounts the parties are entitled to. Exemplary damages were denied because, although respondent was a possessor in bad faith, there was no evidence that it acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner under Article 2232. Attorney's fees and litigation expenses were also denied because petitioner was not forced to litigate due to unfounded claims of respondent; respondent initiated the proceedings by filing the injunction complaint after feeling its rights over the seven-hectare area were threatened by the proposed transfer.

• Possessor in Bad Faith — Under Article 526, a possessor in bad faith is one who possesses contrary to the conditions for good faith; mistake upon a doubtful or difficult question of law may be a basis for good faith. The Court applied this to respondent, which knew its rights were limited to seven hectares yet occupied and leased nine additional hectares. Occupation by mere tolerance of the owner does not make the possessor one in good faith.
• Obligation of a Possessor in Bad Faith to Return Fruits — Article 549, in relation to Articles 546 and 443, requires a possessor in bad faith to reimburse the legitimate possessor for fruits received and those the latter could have received had possession not been interrupted; the bad-faith possessor has a right only to necessary expenses under Article 546(1) and expenses under Article 443. The Court applied this because respondent leased the excess and earned profits, making it liable to account for those fruits.
• Necessary Expenses — Necessary expenses are those made for the preservation of the land occupied, or those without which the land would deteriorate or be lost; they may also include expenditures that augment the land's income or are incurred for cultivation, production, and upkeep. Even a possessor in bad faith is entitled to reimbursement. The Court applied this to respondent's development of the excess and protection from squatter syndicates, but remanded for itemization and determination.
• Exemplary Damages — Under Article 2232, exemplary damages may be awarded in contracts and quasi-contracts if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. The Court denied the award because no such evidence existed despite respondent's bad-faith possession.
• Attorney's Fees and Litigation Expenses — These are not recoverable where the claimant was not forced to litigate because of the opposing party's unfounded claims. The Court denied them because respondent initiated the injunction case, not petitioner.
• Usufruct Limits — A usufruct gives a right to enjoy another's property with the obligation to preserve its form and substance, unless the title or law provides otherwise. The Court applied this to hold that respondent's rights began and ended within the seven-hectare area and that its acts beyond it were negated.

• "Since respondent had no right to act beyond the confines of the seven-hectare area granted to it, and since it was fully aware of this fact, its encroachment of nine additional hectares of petitioner's property rendered it a possessor in bad faith as to the excess." — This is the ratio for classifying respondent as a possessor in bad faith as to the excess area.
• "Under Article 549 in relation to Articles 546 and 443 of the Civil Code, a possessor in bad faith has a specific obligation to reimburse the legitimate possessor for everything that the former received, and that the latter could have received had its possession not been interrupted." — This states the controlling rule requiring respondent to account for the fruits of the excess.
• "These necessary expenses have not been itemized by respondent. On the other hand, We are not inclined to adopt the allegation of petitioner as to the amount of rental it could have received from the lease of the excess based on a professional appraisal." — This explains why the Court remanded the case to the RTC for determination of amounts.
• "Finally, We are constrained to deny petitioner's prayer for the award of exemplary damages. While respondent was a possessor in bad faith, there is no evidence that it acted in a wanton, fraudulent, reckless, oppressive or malevolent manner." — This is the basis for denying exemplary damages under Article 2232.

• National Housing Authority vs. CA, 495 Phil. 693 (2005) — Controlling precedent; upheld respondent's usufructuary right over the seven-hectare area but emphasized that the right was circumscribed within that area and that respondent abused the privilege by encroaching on petitioner's property.
• Resuena vs. CA, 494 Phil. 40 (2005) — Cited for the rule that a person whose occupation of realty is by sheer tolerance of the owner is not a possessor in good faith.
• Spouses Kilario vs. CA, 379 Phil. 515 (2000) — Cited for the same rule on tolerance and good faith.
• Quevada vs. Glorioso, 356 Phil. 105 (1998) — Cited in relation to the obligations of a possessor in bad faith under Articles 549, 546, and 443.
• Alburo vs. Villanueva, 7 Phil. 277 (1907) — Cited for the definition of necessary expenses as those made for the preservation of the land occupied.
• Mendoza vs. De Guzman, 52 Phil. 164 (1928) — Cited for the definition of necessary expenses as those without which the land would deteriorate or be lost, and for expenses that augment income or are incurred for cultivation, production, and upkeep.

• Article 549, Civil Code — A possessor in bad faith shall reimburse the fruits received and those the legitimate possessor could have received, and has a right only to the expenses mentioned in Article 546(1) and Article 443. Applied to require respondent to account for profits from leasing the excess.
• Article 546, Civil Code — Necessary expenses shall be refunded to every possessor, but only the possessor in good faith may retain the thing until reimbursement; useful expenses are refunded only to a possessor in good faith. Applied to allow respondent, despite bad faith, to recover necessary expenses.
• Article 443, Civil Code — He who receives fruits has the obligation to pay the expenses made by a third person in their production, gathering, and preservation. Applied in relation to respondent's entitlement to necessary expenses.
• Article 526, Civil Code — Defines a possessor in good faith and a possessor in bad faith; mistake upon a doubtful or difficult question of law may be the basis of good faith. Applied to hold respondent a possessor in bad faith as to the excess.
• Article 2232, Civil Code — In contracts and quasi-contracts, the court may award exemplary damages if the defendant acted in a wanton, fraudulent, reckless, oppressive, or malevolent manner. Applied to deny exemplary damages for lack of evidence.
• Proclamation No. 1670 — Reserved a seven-hectare area of the property and granted respondent usufructuary rights over it. Applied to limit respondent's rights to seven hectares.
• Memorandum Order No. 127 — Revoked the reserved status of the remaining 50 hectares and authorized petitioner to commercialize and sell the area to the public through bidding. Cited as context for the North Triangle Property.
• Executive Order No. 58 — Created an inter-agency executive committee to oversee the comprehensive development of the North Triangle Property. Cited as context for the proposed transfer of respondent.
• Rule 45, Rules of Court — The petition was filed under Rule 45 as a Petition for Review on Certiorari. Cited as the procedural vehicle.

Leonardo-De Castro, Bersamin, Perlas-Bernabe, and Caguioa, JJ., concur.