Peralta vs. Raval

Rescission of lease contracts is governed exclusively by Article 1659 of the Civil Code, which provides that the aggrieved party may ask for rescission and indemnification, or only indemnification allowing the contract to remain in force; consequently, Articles 1380, 1381, and 1389 (which provide a four-year prescriptive period for rescissible contracts) do not apply to lease agreements, and the proper prescriptive period is ten years under Article 1144 for written contracts.

Spouses Flaviano Arzaga, Sr. and Magdalena Agcaoili-Arzaga owned two residential lots in San Jose, Laoag, Ilocos Norte covered by Transfer Certificate of Title Nos. T-2406 and T-3538. On February 19, 1974, they entered into a 40-year Contract of Lease with Renato Ma. R. Peralta over the lots and improvements thereon, with monthly rentals starting at ₱500.00 and increasing periodically. The contract required Peralta to construct a building that would become the lessors' property upon termination, pay realty taxes, and develop a water system. In May 1988, Flaviano Arzaga, Jr., the adopted son and sole heir of the Spouses Arzaga, filed an action for annulment of the lease contract against Peralta, which was dismissed by the Regional Trial Court in December 1990 and affirmed by the Court of Appeals.

• The Lease Agreement: On February 19, 1974, Spouses Flaviano Arzaga, Sr. and Magdalena Agcaoili-Arzaga executed a Contract of Lease with Renato Ma. R. Peralta over Lots 9128-A and 9128-B (660 sq.m. each) and improvements in San Jose, Laoag, Ilocos Norte. The lease term was 40 years with graduated monthly rentals: ₱500.00 from May 1974; ₱600.00 after the 10th year; ₱700.00 after the 20th year; and ₱800.00 after the 30th year. Peralta agreed to construct a building that would become the lessors' property upon lease termination, pay realty taxes, and develop a water system.
• Prior Litigation: In May 1988, Flaviano Arzaga, Jr., the adopted son and heir of the Spouses Arzaga, filed a complaint for annulment of the lease contract against Peralta, alleging breach of obligations. The RTC dismissed the complaint on December 10, 1990, and the CA affirmed the dismissal in CA-G.R. CV No. 30396. The CA ruling became final.
• Assignment of Rights: On July 28, 1995, Flaviano Jr. executed a Deed of Assignment transferring all his rights, interests, and participation in the subject properties to Jose Roy B. Raval for ₱500,000.00. The deed included the right to substitute Flaviano Jr. in pending cases and to file new actions for protection of rights as assignee.
• Payment Arrangement: Peralta refused to recognize the assignment and continued depositing monthly rentals in bank accounts opened by his wife, Gloria Peralta, under the name "Gloria F. Peralta [in-trust-for] (ITF): Flaviano Arzaga, Jr." with various banks (Land Bank, PCIB, Asiabank, China Bank). This mode of payment had been previously adopted during the lease relationship with Flaviano Jr.
• Demands and Disputes: Beginning August 1995, Raval demanded compliance with the lease terms. In October and November 1995, Raval's counsel, Atty. Castor Raval, sent letters demanding removal of structures allegedly built on portions of Lot 9128-B not covered by the lease, access to the second floor of the residential house, and accounting of rentals paid. Further demands were made in June 1996 regarding unauthorized constructions and proposed occupancy of the second storey. The matter underwent barangay conciliation twice but remained unresolved.
• Complaint for Rescission: In 1998, Raval filed a complaint for rescission of lease against Peralta, alleging: (a) refusal to render accounting of unpaid rentals prior to July 28, 1995 and pay rentals thereafter; (b) refusal to vacate the second storey; (c) refusal to remove improvements on areas not covered by the lease; (d) refusal to operate and provide a water system; and (e) refusal to refund taxes paid by Flaviano Jr. Raval sought rescission, vacation of the premises, back rentals, and damages.
• Counterclaim: Peralta opposed the complaint, questioning Raval's capacity as assignee and asserting that the assignment was void for lack of his consent. He claimed faithful compliance with lease obligations and sought ₱500,000.00 moral damages, ₱50,000.00 exemplary damages, and ₱30,000.00 attorney's fees, alleging the complaint was filed to harass him as a public official.
• Registration of Assignment: In a separate proceeding (Cad. Case No. 51), the RTC of Laoag City, Branch 15, registered the Deed of Assignment and cancelled TCT Nos. T-3538 and T-2406, issuing new titles (TCT Nos. T-30107 and T-30108) in Raval's name. The decision became final and executory on April 17, 1998.

• Validity of the Deed of Assignment (Peralta): Peralta argued that the Deed of Assignment between Flaviano Jr. and Raval was null and void ab initio because he was not consulted and his prior approval was not obtained, rendering Raval without rights to sue for rescission.
• Forum Shopping (Peralta): Peralta contended that Raval violated the rule against forum shopping by filing the rescission action after Flaviano Jr.'s prior action for cancellation of lease was dismissed.
• Prescription (Peralta): Peralta maintained that the action for rescission had prescribed under Article 1389 of the New Civil Code, which requires that actions for rescission be commenced within four years from the execution of the contract in 1974.
• Damages (Peralta): Peralta insisted he was entitled to moral damages, exemplary damages, and attorney's fees because Raval filed the complaint to harass and humiliate him as a member of the Sangguniang Panlalawigan and Provincial Administrator.
• Substantial Breach (Raval): Raval argued that Peralta failed to comply with his obligations under the lease contract, specifically regarding payment of rentals, vacation of the second floor, removal of unauthorized structures, and provision of a water system, giving Raval the statutory right to rescind under Article 1191 of the New Civil Code.

• Validity of Assignment and Title (Raval): Raval countered that the Deed of Assignment was valid and had been confirmed by the RTC in Cad. Case No. 51, resulting in the issuance of new TCTs in his name. Peralta's challenge to the assignment constituted an impermissible collateral attack on registered land titles under Section 48 of Presidential Decree No. 1529.
• Substantial Breach (Raval): Raval maintained that Peralta's refusal to pay rentals directly to him, unauthorized constructions, and failure to provide access to the second floor constituted substantial breaches warranting rescission under Article 1659 of the New Civil Code.
• Good Faith (Raval): Raval argued that his filing of the complaint was not motivated by malice or bad faith but was necessary to protect his rights as the new owner and lessor, preceded by numerous extrajudicial demands and barangay conciliation attempts.

• Applicability of Article 1389: Whether the four-year prescriptive period under Article 1389 of the New Civil Code applies to actions for rescission of lease contracts.
• Validity of the Deed of Assignment: Whether the Deed of Assignment executed by Flaviano Arzaga, Jr. in favor of Jose Roy B. Raval is valid and binding upon the lessee.
• Substantial Breach: Whether Peralta's alleged failures—non-payment of rentals, refusal to vacate the second floor, unauthorized constructions, and failure to provide a water system—constitute substantial breach warranting rescission of the lease.
• Payment of Rentals: Whether deposit of rentals in "in trust for" bank accounts constitutes valid payment that negates claims of unpaid rentals.
• Moral Damages: Whether Raval is entitled to moral damages for Peralta's alleged refusal to recognize the assignment and comply with lease obligations.
• Counterclaim for Damages: Whether Peralta is entitled to moral damages, exemplary damages, and attorney's fees on his counterclaim.

• Applicability of Article 1389: Article 1389 does not apply to rescission of lease contracts. Rescission of leases is governed exclusively by Article 1659 of the New Civil Code, which provides specific remedies for non-compliance with obligations under Articles 1654 and 1657. Consequently, the prescriptive period is ten years under Article 1144 for written contracts, not four years under Article 1389. Raval's cause of action accrued not in 1974 but from the time of Peralta's alleged violations and default, which occurred in the mid-1990s; thus, the 1998 filing was within the prescriptive period.
• Validity of the Deed of Assignment: The Deed of Assignment is valid and binding. The RTC had already confirmed its validity in Cad. Case No. 51, resulting in the cancellation of the original TCTs and issuance of new titles in Raval's name. Peralta's challenge to the assignment constitutes a collateral attack on the certificates of title, which is prohibited under Section 48 of Presidential Decree No. 1529. As assignee, Raval acquired the rights of his predecessors-in-interest, including the right to seek rescission.
• Rescission of Lease: The issue of rescission is moot and academic because the 40-year lease term expired in 2014. However, rescission was properly denied because Raval was incapable of restoring the rental payments received prior to the assignment, making rescission unfeasible. Moreover, Peralta had complied with his obligations for over 20 years, and the alleged lapses were minor.
• Payment of Rentals: The award of unpaid rentals is deleted. Peralta's deposit of rentals in bank accounts opened "in trust for" Flaviano Arzaga, Jr. constituted valid payment. This mode of payment had been previously accepted and sustained by the CA in the prior case (CA-G.R. CV No. 30396). The money remained available in the bank; it was incumbent upon Flaviano Jr. and Raval to arrange for withdrawal. Payments made through these ITF accounts up to 2004 are deemed valid payments of monthly rentals.
• Moral Damages: The award of moral damages is deleted. Moral damages are not recoverable for mere breach of contract; they require fraud, bad faith, or wanton disregard of contractual obligations. Peralta's conduct did not meet this standard. The filing of the complaint by Raval was not tainted by bad faith, as it was preceded by repeated demands and conciliation attempts.
• Counterclaim for Damages: Peralta's counterclaim for moral damages, exemplary damages, and attorney's fees is denied. The filing of a suit to protect one's rights, even if unsuccessful, does not constitute bad faith or harassment warranting damages. No damages can be charged for the exercise of the right to litigate in good faith.

• Prohibition Against Collateral Attack on Torrens Title: A certificate of title shall not be subject to collateral attack. It cannot be altered, modified, or cancelled except in a direct proceeding in accordance with law (Section 48, Presidential Decree No. 1529). A collateral attack is made when, in another action to obtain different relief, the certificate of title is assailed as an incident in said action. In this case, Peralta's challenge to the Deed of Assignment was deemed a collateral attack on the TCTs issued to Raval.
• Rescission of Lease Contracts: Rescission of lease agreements is governed exclusively by Article 1659 of the New Civil Code, which allows the aggrieved party to ask for: (1) rescission of the contract; (2) rescission and indemnification for damages; or (3) only indemnification for damages, allowing the contract to remain in force. Articles 1380, 1381, and 1389 (which provide a four-year prescriptive period for rescissible contracts) do not apply to lease contracts.
• Prescriptive Period for Rescission of Reciprocal Obligations: The rescission contemplated in Articles 1191 and 1592 (and by extension Article 1659 for leases) is a principal action seeking resolution or cancellation of the contract, distinct from the subsidiary action for rescission under Article 1381 for lesion. The prescriptive period for the former is ten years under Article 1144 for written contracts, counted from the time the right of action accrues.
• Payment via "In Trust For" Accounts: Deposit of rental payments in bank accounts designated as "in trust for" the lessor constitutes valid performance of the lessee's obligation to pay rent, provided the funds are available for withdrawal by the lessor. The lessee is not remiss in his obligation if the lessor fails to arrange for withdrawal of the deposited funds.
• Moral Damages in Contractual Breach: Moral damages are not recoverable simply because a contract has been breached. They are recoverable only if the party from whom it is claimed acted fraudulently or in bad faith or in wanton disregard of his contractual obligations. The breach must be wanton, reckless, malicious or in bad faith, and oppressive or abusive.
• Damages for Exercise of Right to Litigate: No damages can be charged on those who exercise the right to litigate in good faith, even if done erroneously. It is not sound public policy to place a premium on the right to litigate or to penalize parties for seeking judicial redress for perceived violations of their rights.

• "A certificate of title shall not be subject to collateral attack. It cannot be altered, modified, or cancelled except in a direct proceeding in accordance with law." — Section 48 of Presidential Decree No. 1529, as applied to reject Peralta's challenge to the Deed of Assignment.
• "Article 1389 specifically refers to rescissible contracts, as clearly, this provision is under the chapter entitled 'Rescissible Contracts.' x x x We must stress however, that the 'rescission' in Article 1381 is not akin to the term 'rescission' in Article 1191 and Article 1592. In Articles 1191 and 1592, the rescission is a principal action which seeks the resolution or cancellation of the contract while in Article 1381, the action is a subsidiary one limited to cases of rescission for lesion as enumerated in said article." — Distinguishing the types of rescission and their applicable prescriptive periods.
• "Moral damages are not recoverable simply because a contract has been breached. They are recoverable only if the party from whom it is claimed acted fraudulently or in bad faith or in wanton disregard of his contractual obligations. The breach must be wanton, reckless, malicious or in bad faith, and oppressive or abusive." — Standard for awarding moral damages in breach of contract cases.
• "It is not sound public policy to place a premium on the right to litigate. No damages can be charged on those who may exercise such precious right in good faith, even if done erroneously." — Principle protecting the right to litigate from damages claims.

• Sps. Decaleng v. Bishop of the "Missionary District of the Philippine Islands of Protestant Episcopal Church in the United States of America, et al., 689 Phil. 422 (2012) — Cited for the principle that a certificate of title serves as evidence of an indefeasible title and cannot be attacked collaterally; the issue on its validity can be raised only in an action expressly instituted for that purpose.
• Unlad Resources Development Corporation, et al. v. Dragon, et al., 582 Phil. 61 (2008) — Applied to distinguish rescission under Articles 1191/1592 (principal action, ten-year prescriptive period) from rescission under Article 1381 (subsidiary action for lesion, four-year prescriptive period under Article 1389).
• Cetus Development, Inc. v. Court of Appeals, 257 Phil. 73 (1989) — Cited for the rule that under Article 1659, the lessor has the right to ask for rescission and indemnification, or only indemnification allowing the contract to remain in force; if rescission is chosen, the demand must be for the lessee to pay rents or comply with conditions and to vacate.
• Philippine Savings Bank v. Spouses Castillo, et al., 664 Phil. 774 (2011) — Cited for the standard on moral damages in contractual breach.
• J. Marketing Corporation v. Sia, Jr., 349 Phil. 513 (1998) — Applied for the principle that the adverse result of an action does not per se make an act unlawful or subject the actor to moral damages.

• Article 1659, New Civil Code — Governs rescission of lease contracts, allowing the aggrieved party to ask for rescission and indemnification, or only indemnification allowing the contract to remain in force.
• Article 1654, New Civil Code — Enumerates the obligations of the lessor.
• Article 1657, New Civil Code — Enumerates the obligations of the lessee, including payment of the price of the lease according to the terms stipulated and use of the thing leased as a diligent father of a family.
• Article 1144, New Civil Code — Provides that actions upon written contracts must be brought within ten years from the time the right of action accrues; applied as the prescriptive period for rescission of lease under Article 1659.
• Article 1389, New Civil Code — Provides that the action to claim rescission must be commenced within four years; held inapplicable to rescission of lease contracts.
• Section 48, Presidential Decree No. 1529 (Property Registration Decree) — Provides that a certificate of title shall not be subject to collateral attack and cannot be altered, modified, or cancelled except in a direct proceeding in accordance with law.

Presbitero J. Velasco, Jr. (Chairperson), Lucas P. Bersamin, Mariano C. Del Castillo, and Francis H. Jardeleza.