Philippine National Bank vs. De Jesus

Article 448 of the Civil Code does not apply to a scenario where the builder himself was the original owner of the land and later lost title, because the issue of good faith or bad faith is entirely irrelevant in such a case. Moreover, a builder in good faith under that provision is one who builds on land believing himself to be its owner and without awareness of any flaw in his title or mode of acquisition.

Generoso de Jesus owned a 1,144‑square‑meter parcel of land in Mamburao, Occidental Mindoro, covered by Transfer Certificate of Title No. T‑17197. Philippine National Bank had earlier acquired, sometime in 1981, an adjacent lot and building from then Mayor Bienvenido Ignacio. At the time of acquisition, PNB was aware that the building’s footprint extended onto a 124‑square‑meter portion of the neighboring lot, which still belonged to Ignacio. Ignacio offered to sell the encroached area to PNB at P100.00 per square meter, an offer PNB accepted, but the sale was never consummated because Ignacio subsequently mortgaged the lot to the Development Bank of the Philippines without PNB’s knowledge. De Jesus eventually obtained ownership of the mortgaged lot, conducted a verification survey on 26 March 1993, and discovered the encroachment. Two letters of demand were sent to PNB, which refused to vacate.

• Ownership and Discovery: Generoso de Jesus owned a 1,144‑square‑meter property covered by TCT No. T‑17197 in Mamburao, Occidental Mindoro. A verification survey conducted on 26 March 1993 revealed that a building owned by Philippine National Bank encroached on 124 square meters of the northern portion of his lot.

• PNB’s Acquisition: PNB acquired its adjacent lot and the building from then Mayor Bienvenido Ignacio sometime in 1981. Prior to acquisition, PNB was already aware that the building extended onto a portion of Ignacio’s other lot. Ignacio offered to sell the encroached area to PNB at P100.00 per square meter, which PNB accepted. However, the sale was not consummated because Ignacio mortgaged the lot to the Development Bank of the Philippines without PNB’s knowledge or consent.

• Demand and Refusal: De Jesus sent two letters of demand to PNB asking it to vacate the encroached portion. PNB failed and refused to vacate, asserting that it believed the area had been sold to it by Ignacio.

• Trial Court Findings: The RTC found that de Jesus was the lawful owner of the 124‑square‑meter portion and that PNB’s encroachment was made in bad faith, as it had been aware of the defect in its mode of acquisition.

• Appellate Court Findings: The Court of Appeals affirmed the RTC’s factual conclusions, finding no basis to deem PNB a builder in good faith, but deleted the monetary awards for attorney’s fees, moral and exemplary damages, and litigation expenses.

• Builder in Good Faith: PNB contended that the Court of Appeals gravely erred in adjudging it a builder in bad faith over the encroached property. It maintained that it had acted under an honest belief that the disputed area had been validly acquired.

• Applicability of Article 448 and Tecnogas Precedent: PNB argued that the Court of Appeals should have applied Article 448 of the Civil Code and the ruling in Tecnogas Philippines Manufacturing Corp. vs. Court of Appeals (G.R. No. 108894, 10 February 1997), which it claimed entitled a builder in good faith to the rights provided under that provision, including the option to compel the landowner to choose between appropriating the building or selling the land.

• Absence of Good Faith: De Jesus maintained that PNB could not be considered a builder in good faith because it was fully aware, prior to acquiring the property, that the building encroached on a separate lot to which it held no title.

• Inapplicability of Article 448: De Jesus argued that Article 448 of the Civil Code did not govern the case, as the builder, Ignacio, had originally owned both the land and the building, and the issue of good faith was irrelevant to a structure built by the landowner himself.

• Good Faith: Whether PNB could be considered a builder in good faith under Article 448 of the Civil Code.

• Applicability of Article 448: Whether Article 448 of the Civil Code applied in favor of PNB given that the building was constructed by the original landowner, Ignacio, and later acquired by PNB with knowledge of the encroachment.

• Good Faith: PNB was not a builder in good faith. The findings of both the RTC and the Court of Appeals established that PNB had prior knowledge, before acquiring the lot and building from Ignacio, that a portion of the building stood on land not covered by the conveyance. Good faith under Article 448 of the Civil Code denotes an honest belief in the validity of one’s title, ignorance of a superior claim, and absence of intent to overreach. A builder in good faith is one who builds on land believing himself to be its owner and who is unaware of any defect in his title or mode of acquisition. PNB’s knowledge of the encroachment negated any claim of honest belief, rendering it a builder in bad faith.

• Applicability of Article 448: Article 448 of the Civil Code did not apply because the building was constructed by Ignacio on land that he himself owned at the time of construction, before subsequently losing ownership of the encroached portion. The provision contemplates a situation where the land is owned by one person and another person, not the landowner, builds on it. Where the true owner himself is the builder of works on his own land, the issue of good faith or bad faith is entirely irrelevant; the subsequent loss of ownership by sale or otherwise does not retroactively convert the situation into one governed by Article 448. Consequently, PNB, which merely stepped into Ignacio’s shoes as purchaser, could not invoke the rights of a builder in good faith under the Civil Code.

• Builder in Good Faith — A builder in good faith under Article 448 of the Civil Code is one who, not being the owner of the land, builds on that land believing himself to be its owner and is unaware of any defect in his title or mode of acquisition. Good faith is an honest belief in the validity of one’s right, ignorance of a superior claim, and absence of intention to overreach another. It cannot be conclusively determined by protestations alone; it implies honesty of intention and freedom from knowledge of circumstances that ought to put the holder upon inquiry. In this case, PNB’s prior knowledge of the encroachment defeated any claim of good faith.

• Inapplicability of Article 448 to the Original Owner‑Builder — Article 448 of the Civil Code governs a situation where a person builds on land owned by another. It does not apply where the builder was originally the owner of the land and later loses title, because in that scenario the issue of good faith or bad faith is entirely irrelevant. The rights and obligations under Articles 448, 449, and 450 arise only when the builder and the landowner are distinct persons from the outset. Since Ignacio built on his own land, the subsequent sale of that land to de Jesus did not bring the case within the coverage of Article 448.

• Option of the Landowner under Article 448 — Under Article 448, the landowner holds the exclusive option to choose between appropriating the building after paying proper indemnity or obliging the builder to pay the price of the land. This choice accords with the principle of accession that the accessory follows the principal. However, this option becomes available only if the builder proves he acted in good faith.

• “A builder in good faith is one who, not being the owner of the land, builds on that land believing himself to be its owner and unaware of any defect in his title or mode of acquisition.”

• “Good faith, here understood, is an intangible and abstract quality with no technical meaning or statutory definition, and it encompasses, among other things, an honest belief, the absence of malice and the absence of design to defraud or to seek an unconscionable advantage.”

• “Article 448 of the Civil Code refers to a piece of land whose ownership is claimed by two or more parties, one of whom has built some works (or sown or planted something) and not to a case where the owner of the land is the builder, sower, or planter who then later loses ownership of the land by sale or otherwise for, elsewise stated, ‘where the true owner himself is the builder of works on his own land, the issue of good faith or bad faith is entirely irrelevant.’”

• “Even as the option lies with the landowner, the grant to him, nevertheless, is preclusive. He must choose one. He cannot, for instance, compel the owner of the building to instead remove it from the land.”

• Depra vs. Dumlao, G.R. No. L‑57348, 16 May 1985, 136 SCRA 475 — Cited as authority for the principle that the option under Article 448 belongs exclusively to the landowner, in line with the principle of accession.

• Ignacio vs. Hilario, 76 Phil. 605; Sarmiento vs. Agana, G.R. No. L‑57288, 30 April 1984, 129 SCRA 122; Tecnogas Philippines Manufacturing Corp. vs. Court of Appeals, G.R. No. 108894, 10 February 1997, 268 SCRA 7 — Consistently applied to show that the landowner cannot compel the builder to remove the building, but must choose between appropriation and sale.

• Pecson vs. Court of Appeals, G.R. No. 115814, 26 May 1995, 244 SCRA 407 — Directly applied as controlling precedent for the rule that Article 448 does not apply when the true owner himself constructed the building, as good faith or bad faith becomes irrelevant.

• Bernardo vs. Bernardo, 96 Phil. 202; Negrete vs. CFI of Marinduque, G.R. No. L‑31267, 24 November 1972, 48 SCRA 113 — Cited for the definition of good faith as an honest belief in the validity of one’s right and ignorance of a superior claim.

• Article 448, Civil Code — Governs the rights of a landowner and a builder, sower, or planter in good faith. The provision was held inapplicable because the builder was the original landowner, not a third party.

• Article 449, Civil Code — Provides that one who builds, plants, or sows in bad faith loses what is built, planted, or sown without right to indemnity. The Court’s finding of PNB’s bad faith would ordinarily trigger this provision, but the dispositive rested on the broader ground that Article 448 as a whole did not apply.

• Article 450, Civil Code — Allows the landowner to demand demolition or removal of works built in bad faith at the builder’s expense. The Court affirmed the order for PNB to remove its encroaching improvement at its own cost, consistent with this provision.

• Article 526, Civil Code — Defines a possessor in good faith as one who is not aware of any flaw in his title or mode of acquisition that invalidates it. This definition was used to assess—and reject—PNB’s claim of good faith.

Chief Justice Hilario G. Davide, Jr., Justice Consuelo Ynares‑Santiago, and Justice Antonio T. Carpio concurred. Justice Adolfo S. Azcuna was on sick leave.

N/A. The decision was unanimous among the Members of the First Division present.