Parilla vs. Pilar

A lessee or agent in possession under a lease contract is not a “builder in good faith” under Articles 448 and 546 of the Civil Code but is governed by the specific provisions on lease, particularly Article 1678, which entitles the lessee to reimbursement of only one-half of the value of useful improvements at the termination of the lease, and only if the lessor exercises the option to appropriate them; otherwise, the lessee’s remedy is removal, with no right of retention until reimbursement.

In 1960, a lease contract over a parcel of land in Bantay, Ilocos Sur was executed between Shell Company of the Philippines Limited and respondent’s predecessors-in-interest. In 1990, the lease was renewed by Pilipinas Shell and respondent Dr. Prospero Pilar. Petitioners Samuel and Chinita Parilla and their son Deodato Parilla, as dealers of Pilipinas Shell’s petroleum products, were allowed to occupy the property. Upon expiration of the lease in 2000, petitioners remained in possession and built a billiard hall, a restaurant, a sari-sari store, and a parking lot, and allowed other persons to operate businesses on the premises. Respondent, who resided in the United States, repeatedly demanded that petitioners and the other occupants vacate. Petitioners refused.

• The Lease and Possession: Petitioners Samuel and Chinita Parilla and their son Deodato were dealers of Pilipinas Shell Petroleum Corporation. They occupied a parcel of land in Bantay, Ilocos Sur under a 10-year lease agreement executed in 1990 between Pilipinas Shell and respondent Dr. Prospero Pilar. The lease contract originated from a 1960 lease between Shell and respondent’s predecessors-in-interest.

• Expiration and Continued Possession: The lease expired in 2000. Petitioners nonetheless remained on the property and constructed improvements: a billiard hall, a restaurant, a sari-sari store managed by non-parties Leonardo Dagdag, Josefina Dagdag, and Edwin Pugal, and a parking lot used by Flor Pelayo, Freddie Bringas, and Edwin Pugal.

• Demand and Ejectment Suit: Respondent, then residing in the United States, made several demands for petitioners and the other occupants to vacate. When they refused, respondent, through his attorney-in-fact, filed a complaint for ejectment with damages and prayer for preliminary injunction in the MTC of Bantay, Ilocos Sur on February 4, 2002.

• Lower Courts’ Orders: The MTC ordered petitioners and all persons claiming under them to vacate, pay ₱50,000.00 as reasonable compensation, ₱10,000.00 attorney’s fees, and costs, and directed respondent to reimburse petitioners ₱2,000,000.00 for improvements. The RTC affirmed in toto. The Court of Appeals, however, reversed and set aside the reimbursement order, ruling that petitioners’ “tolerated occupancy” did not make them builders or possessors in good faith under Article 546 and that they did not claim title to the land.

• Subsequent Condition of Improvements: By their own admission, of the original structures, only the “bodega-like” sari-sari store and the parking lot remained at the time of the petition. No receipts or documentary evidence of the alleged ₱2,000,000.00 construction costs were presented.

• Builder in Good Faith and Bad Faith on Owner: Petitioners argued that neither respondent nor his agents prevented them from introducing improvements, amounting to bad faith on the part of the landowner, thus invoking Article 453 of the New Civil Code. They maintained that where both parties act in bad faith, their rights are the same as though both had acted in good faith, entitling petitioners to treatment as builders in good faith.

• Right to Full Reimbursement and Retention: Petitioners contended that, as builders in good faith, they should be reimbursed the full ₱2,000,000.00 value of the improvements under Article 448 in relation to Article 546, and that they possess the right to retain the property until reimbursement is made, otherwise respondent would be unjustly enriched.

• Fact of Expenditure: Petitioners asserted that the building they erected was actually worth, and they actually spent, ₱2,000,000.00, a finding they claimed the appellate court ignored.

• Not Possessors in Good Faith: Respondent argued, consistent with the Court of Appeals’ ruling, that petitioners’ occupancy was merely tolerated and that they could not be considered possessors in good faith or builders in good faith under Article 546 because they did not claim title to the property; their interest was only that of a lessee or agent.

• Applicable Provision is Article 1678: Respondent maintained that the reimbursement of improvements introduced on the leased premises was governed by Article 1678 of the Civil Code, not by the general rules on accession or possession, and that under that provision, the lessor has the sole option to appropriate the improvements by paying half their value or to allow removal.

• Applicability of Articles 448 and 546: Whether the Court of Appeals erred in not holding that petitioners are builders in good faith entitled to full reimbursement of useful improvements and the right of retention under Articles 448 and 546 of the Civil Code.

• Applicability of Article 1678: Whether the specific rules on lease, particularly Article 1678, govern petitioners’ claim for reimbursement of improvements introduced on the leased property.

• Right of Retention: Whether petitioners may retain the premises until they are reimbursed the value of the improvements.

• Applicability of Articles 448 and 546: Petitioners were not builders or possessors in good faith within the meaning of Articles 448 and 546. These provisions apply only when the builder, sower, or planter believes himself to be the owner of the land or has a claim of title thereto. Here, petitioners’ interest was merely that of a holder—an agent of Pilipinas Shell under a lease contract—and their occupancy was at all times tolerated. A tenant, agent, or usufructuary cannot claim to be a builder in good faith because there is no pretense of ownership.

• Applicability of Article 1678: Article 1678 of the Civil Code, a special provision on lease, governed the dispute. Under this article, upon termination of the lease, the lessee who in good faith made useful improvements suitable to the lease’s purpose is entitled to be paid one-half of the value of the improvements only if the lessor opts to appropriate them. The lessor has the exclusive option either to reimburse half the value and keep the improvements or to refuse reimbursement, in which case the lessee may remove the improvements even if the leased property suffers some damage. Petitioners’ reliance on Article 448 and Article 546 was thus misplaced.

• Right of Retention: No right of retention arose in favor of petitioners. The right of retention for reimbursement of useful expenses under Article 546 is accorded only to a possessor in good faith, which petitioners were not. Under Article 1678, the lessee’s remedy upon the lessor’s refusal to reimburse is removal, not retention. The lessor having opted not to reimburse, petitioners could not hold the property.

• Distinction between builder in good faith and lessee — Articles 448 and 546 cover only cases where the builder, sower, or planter believes himself to be the owner of the land or has a claim of title thereto. One whose interest is merely that of a holder—such as a lessee, tenant, agent, or usufructuary—is not a builder in good faith under those articles. The rationale is that it would always be in the power of a tenant to “improve” his landlord out of his property.

• Article 1678 on lessee’s useful improvements — If a lessee makes useful improvements in good faith, suitable to the use for which the lease is intended, without altering the form or substance of the property, the lessor upon 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, the lessee may remove the improvements even if the principal thing suffers damage, but the lessee may not cause more impairment than necessary. The option to appropriate or to allow removal lies exclusively with the lessor. This provision is designed to prevent unjust enrichment of the lessor, who would otherwise indefinitely enjoy the improvements after the lessee had already done so during the lease.

• Unjust enrichment and partial reimbursement — The modification introduced by Article 1678, entitling the lessee to partial (one-half) reimbursement, was intended to balance the equities: the lessee has already benefited from the improvements during the lease term, while the lessor may continue to benefit thereafter.

• “[Articles 448 and 546 apply] 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.”

• “The improvements that the private respondent’s father had introduced in the leased premises were done at his own risk as lessee. The right to indemnity equivalent to one-half of the value of the said improvements … is governed … by the provisions of Art. 1678 … But this right to indemnity exists only if the lessor opts to appropriate the improvements … The refusal of the lessor to pay the lessee one-half of the value of the useful improvements gives rise to the right of removal.”

• “Under Article 1678, it is the lessor who is given the option, upon termination of the lease contract, either to appropriate the useful improvements by paying one-half of their value at that time, or to allow the lessee to remove the improvements. This option solely belongs to the lessor as the law is explicit …”

• Quemuel v. Olaes, No. L-11084, April 29, 1961, 1 SCRA 1159 — Held that a tenant cannot be considered a builder in good faith because he has no pretense to be the owner; followed as controlling authority on the inapplicability of Article 448 to lessees.

• Cabangis v. Court of Appeals, G.R. No. 83722, Aug. 9, 1991, 200 SCRA 414 — Established that improvements introduced by a lessee on leased land are governed by Article 1678, not Articles 448 and 546; the lessee’s right to indemnity is limited to one-half of the value and depends on the lessor’s choice to appropriate; extensively quoted and followed.

• Sia v. Court of Appeals, G.R. No. 108222, May 5, 1997, 272 SCRA 141 — Reiterated the Cabangis doctrine and explained the exclusive option of the lessor under Article 1678; relied upon for the proposition that a lessee may not be ejected only upon payment of full market value of improvements.

• Geminiano v. Court of Appeals, G.R. No. 120303, July 24, 1996, 259 SCRA 344 — Affirmed that a possessor in good faith is one who builds with belief of ownership, not a lessee; cited for the policy concern against allowing a tenant to “improve” a landlord out of his property.

• Article 1678, New Civil Code — Applied as the governing provision. On termination of the lease, the lessor must pay the lessee one-half of the value of useful improvements made in good faith if the lessor chooses to appropriate them; otherwise, the lessee may remove the improvements. Respondent’s refusal to reimburse triggered the lessee’s right of removal, not a right to retention or full reimbursement.

• Article 448, New Civil Code — Not applied. Covers the rights of an owner of land where a builder, sower, or planter acted in good faith believing himself the owner. Petitioners, as mere agents of the lessee, did not qualify.

• Article 546, New Civil Code — Not applied. Provides for reimbursement of necessary and useful expenses to a possessor in good faith, with right of retention. Petitioners were not possessors in good faith.

• Article 453, New Civil Code — Invoked by petitioners but not applied. The provision, which equalizes the rights of parties when both owner and builder acted in bad faith, had no application because petitioners were not builders in the sense of Article 448 but lessees governed by Article 1678.

• Articles 1868–1869, New Civil Code — Cited to classify petitioners as agents of Pilipinas Shell, reinforcing their status as mere holders without pretension of ownership.

Justices Leonardo A. Quisumbing (Chairperson), Antonio T. Carpio, Dante O. Tinga, and Presbitero J. Velasco, Jr. concurred.