Pen Development Corporation and Las Brisas Resort Corporation vs. Martinez Leyba, Inc.

A possessor who continues to construct improvements on disputed land after receiving actual notice of encroachment from the registered owner ceases to be a builder in good faith, notwithstanding prior acquisition of title in good faith, and becomes liable under Articles 449 and 450 of the Civil Code for demolition or payment of land value without right to indemnity.

Martinez Leyba, Inc. held registered title to three contiguous lots in Antipolo, Rizal (Lots 29, 30, and 31), covered by Transfer Certificate of Title Nos. 250242, 250243, and 250244. Adjacent thereto stood property owned by Pen Development Corporation and Las Brisas Resort Corporation (subsequently merged as Las Brisas), covered by TCT No. 153101. In 1968, Martinez discovered that Las Brisas had fenced portions of Martinez's land. Despite seven written demands sent between 1968 and 1994 informing Las Brisas of the encroachment and requesting cessation of construction activities, Las Brisas continued developing its resort complex, constructing riprapping, an old building, and a new multi-story edifice on the disputed portions.

• Nature of Properties: Martinez Leyba, Inc. owned three contiguous lots (Lots 29, 30, and 31) covered by TCT Nos. 250242, 250243, and 250244, registered under the Torrens system with titles emanating from OCT No. 756 (registered August 14, 1915). Las Brisas owned adjacent land covered by TCT No. 153101, registered under OCT No. 9311 (September 14, 1973).
• Discovery of Encroachment: In 1968, Martinez discovered that Las Brisas had constructed a fence overlapping Martinez's property. Martinez sent a letter dated March 11, 1968, informing Las Brisas of the encroachment and requesting cessation of construction.
• Continued Construction: Las Brisas did not respond and continued developing the property. Martinez sent additional letters dated March 31, 1970, and November 3, 1970, reiterating its ownership and the encroachment. Las Brisas replied only once, through Paul Naidas on July 31, 1971, claiming inability to trace the origin of Martinez's titles.
• Verification Survey: Martinez engaged geodetic engineer Ricardo S. Cruz to conduct a verification survey. The Regional Technical Director for Lands approved Verification Survey Plan Vs-04-000394 on May 23, 1996, revealing that Las Brisas encroached on: (a) 567 square meters of Lot 29 (riprapping); (b) 1,389 square meters of Lot 30 (old building); and (c) 1,498 square meters of Lot 31 (new multi-story building).
• Final Demand: On November 24, 1994, Martinez sent a final demand letter to cease and desist. Las Brisas failed to act.
• Lower Court Proceedings: Martinez filed the complaint in 1997. The RTC admitted Martinez's documentary evidence, including the verification survey, over petitioners' objections. Petitioners presented evidence of their purchase from Republic Bank in 1967 and their good faith as innocent purchasers.

• Good Faith as Builders: Petitioners maintained that they were builders in good faith, having purchased the land from Republic Bank in 1967 with no knowledge of any irregularity or overlapping titles. They argued that reliance on the validity and indefeasibility of TCT No. 153101 precluded a finding of bad faith.
• Entitlement to Reimbursement: As builders in good faith, petitioners argued they were entitled either to reimbursement of necessary expenses with retention of the land until payment, or to removal of improvements without damage to respondent's property.
• Laches: Petitioners argued that respondent's delay of almost thirty years in filing the action constituted laches, barring recovery.
• Hearsay Evidence: Petitioners contended that the Verification Survey Plan and related documents were inadmissible hearsay, not having been properly authenticated during trial.

• Bad Faith: Respondent countered that petitioners were possessors and builders in bad faith because they continued construction despite receiving seven written notices between 1968 and 1994 informing them of the encroachment. Good faith ceased upon actual knowledge of the defect in title.
• No Reimbursement Entitlement: As builders in bad faith under Articles 449 and 450 of the Civil Code, petitioners were not entitled to reimbursement or retention.
• Imprescriptible Right: Respondent argued that as a registered owner under the Torrens system, its right to recover possession is imprescriptible and not barred by laches.
• Waiver of Objection: Respondent maintained that the hearsay objection was waived for having been raised for the first time on appeal.

• Builder in Bad Faith: Whether petitioners were builders in bad faith liable for demolition and damages.
• Laches: Whether respondent's delay in filing the action barred recovery by laches.
• Admissibility of Evidence: Whether petitioners could raise the issue of hearsay for the first time on appeal.

• Builder in Bad Faith: Petitioners were properly declared builders in bad faith. Possession in good faith ceases from the moment the possessor becomes aware of defects in title through extraneous evidence or suit. Despite receiving multiple written notices from 1968 onwards, petitioners continued construction without conducting an independent survey to verify boundaries. While they may have been innocent purchasers for value initially, their obstinate refusal to cease construction after actual notice converted their status to bad faith. Under Articles 449 and 450, they forfeit improvements without right to indemnity.
• Laches: The action was not barred by laches. Registered owners have an imprescriptible right to recover possession of their property under Section 47 of Presidential Decree No. 1529. No title to registered land may be acquired by prescription or adverse possession in derogation of the registered owner's rights.
• Admissibility of Evidence: The hearsay objection was properly disregarded. Issues not raised during trial or pre-trial cannot be raised for the first time on appeal. Petitioners failed to object during respondent's formal offer of evidence, thereby waiving the objection. Moreover, the Verification Survey Plan constitutes a public document approved by the Regional Technical Director for Lands, admissible without further proof of due execution under the rules on public documents.

• Cessation of Good Faith — Possession in good faith ceases from the moment facts exist showing the possessor is not unaware that he possesses the thing improperly or wrongfully, including actual notice of a superior claim or extraneous evidence of title defects. The Court applied Article 528 of the Civil Code to hold that petitioners' good faith terminated upon receipt of respondent's letters asserting ownership.
• Builder in Bad Faith — A builder who constructs improvements on another's land after receiving actual notice of encroachment loses the improvements without right to indemnity, and the landowner may demand demolition at the builder's expense or compel payment of the land's price. The Court applied Articles 449 and 450 of the Civil Code, denying petitioners reimbursement for necessary expenses under Article 452 because respondent's lands were not preserved but damaged by the construction.
• Imprescriptibility of Registered Land — Under Section 47 of Presidential Decree No. 1529 (Property Registration Decree), no title to registered land shall be acquired by prescription or adverse possession in derogation of the registered owner's title. Consequently, the defense of laches is unavailable against registered owners seeking to recover possession from illegal occupants.
• Public Documents — Documents issued by public officials in the exercise of their official functions, such as verification surveys approved by the DENR Regional Technical Director pursuant to the Manual on Land Survey Procedures, are public documents admissible in evidence without further proof of authenticity and enjoy the presumption of regularity.

• "Possession in good faith ceases from the moment defects in the title are made known to the possessors, by extraneous evidence or by suit for recovery of the property by the true owner." — The Court cited this principle from Article 528 of the Civil Code to establish when petitioners' good faith ceased.
• "While petitioners may have been innocent purchasers for value with respect to their land, this does not prove that they are equally innocent of the claim of encroachment upon respondent's lands." — The Court distinguished between good faith in acquiring title versus good faith in continuing possession after notice of encroachment.
• "Prescription and laches cannot apply to registered land covered by the Torrens system because under the Property Registration Decree, no title to registered land in derogation to that of the registered owner shall be acquired by prescription or adverse possession." — The Court reaffirmed the imprescriptibility of rights over Torrens-registered land.

• Arroyo vs. Bocage Inland Dev't Corp. — Cited for the principle that registered owners have an imprescriptible right to eject illegal occupants, which right is never barred by laches.
• Iwasawa v. Gangan — Cited regarding the admissibility of public documents without further proof of due execution and genuineness.
• Cambridge Realty and Resources Corporation v. Eridanus Development, Inc. — Cited for the practice of appointing surveyors in overlapping title disputes, though held not mandatory.
• Heirs of Durano, Sr. v. Spouses Uy — Cited regarding the landowner's entitlement to damages from a builder in bad faith under Article 451 of the Civil Code.

• Article 449, Civil Code — Provides that a builder in bad faith loses what is built, planted, or sown without right to indemnity.
• Article 450, Civil Code — Grants the landowner the option to demand demolition of the work at the builder's expense or compel the builder to pay the price of the land.
• Article 451, Civil Code — Entitles the landowner to damages from the builder, planter, or sower in bad faith.
• Article 476, Civil Code — Defines the action to quiet title as an instrument to remove clouds or doubts from title.
• Article 528, Civil Code — Defines when possession in good faith ceases, specifically upon knowledge of defects in title.
• Section 47, Presidential Decree No. 1529 (Property Registration Decree) — Provides that no title to registered land shall be acquired by prescription or adverse possession in derogation of the registered owner's title.

Maria Lourdes P.A. Sereno, Mariano C. Del Castillo, Estela M. Perlas-Bernabe.

• Alfredo Benjamin S. Caguioa — Issued a Concurring and Dissenting Opinion, joined by Associate Justice Teresita J. Leonardo-De Castro. (Specific reasoning not provided in the extracted text.)