Republic of the Philippines vs. Belly H. Ng

Under Section 10 of the IRR of RA 8974, the improvements and/or structures on land acquired for a national government infrastructure project must be appraised using the replacement cost method, which requires consideration of the current market prices of materials, equipment, and labor, the contractor's profit and overhead, and all other attendant costs associated with the acquisition and installation of an acceptable substitute in place of the affected improvements; a valuation that merely considers the location, classification, value declared by the owner, and zonal valuation of the land does not satisfy the method and cannot be sustained as just compensation.

The Republic of the Philippines, represented by the Department of Public Works and Highways, sought to acquire two parcels of land registered in the name of Belly H. Ng under Transfer Certificate of Title Nos. V-92188 and V-92191, with a total area of 1,671 sq. m., together with the improvements thereon with an aggregate surface area of 2,121.7 sq. m., all situated in Kowloon Industrial Compound, Tatalon Street, Barangay Ugong, Valenzuela City. The properties were needed for the construction of the Mindanao Avenue Extension Project, Stage II-C, which runs from Valenzuela City to Caloocan City. Because the acquisition involved the implementation of a national infrastructure project, RA 8974 — "An Act to Facilitate the Acquisition of Right-of-Way, Site or Location for National Government Infrastructure Projects and for Other Purposes" — and its Implementing Rules and Regulations, approved on February 12, 2001, supplied the governing framework for the determination of just compensation, including the valuation of improvements and/or structures under the replacement cost method.

Belly H. Ng was the registered owner of two parcels of land covered by Transfer Certificate of Title Nos. V-92188, with an area of 1,379 sq. m., and V-92191, with an area of 292 sq. m., or a total area of 1,671 sq. m., together with the improvements thereon having an aggregate surface area of 2,121.7 sq. m. The properties were located in Kowloon Industrial Compound, Tatalon Street, Barangay Ugong, Valenzuela City, and were classified as industrial. The Department of Public Works and Highways needed the properties for the construction of the Mindanao Avenue Extension Project, Stage II-C, covering the stretch from Valenzuela City to Caloocan City.

On February 12, 2013, the Republic of the Philippines, represented by the DPWH, filed a complaint for expropriation before the Regional Trial Court of Valenzuela City, Branch 270, docketed as Civil Case No. 38-V-13. In its complaint, the Republic manifested that it was able and ready to pay Ng the amounts of ₱6,684,000.00, corresponding to ₱4,000.00/sq. m. for the lots, and ₱11,138,362.74, representing the combined relevant zonal value of the lots and the replacement cost of the improvements thereon.

In her answer, Ng, represented by Annabelle G. Wong, contended that the offer price was unreasonably low and that she should be compensated the fair market value of her properties at the time of taking, which she estimated at ₱25,000.00/sq. m. She further claimed that the fair and just replacement cost of the improvements on the lots should be ₱22,276,724.00, pursuant to Section 10 of the Implementing Rules and Regulations of RA 8974. A writ of possession was eventually issued in favor of the Republic after Ng received ₱17,822,362.74, representing 100% of the zonal value of the subject properties.

The RTC thereafter appointed a board of commissioners to determine the just compensation for the properties. In its Commissioner's Report dated June 10, 2013, the board recommended ₱7,000.00/sq. m. and ₱12,000.00/sq. m. as the just compensation for the lots and the improvements thereon, respectively, and the payment of 6% legal interest reckoned from the time of taking. Ng objected to the recommended ₱7,000.00/sq. m. for the lots, contending that the same was not the real, substantial, full, ample, and fair market value of her lots, given that the just compensation for nearby properties expropriated for the C-5 Northern Link Project had been fixed by the same RTC at ₱15,000.00/sq. m. She likewise objected to the imposition of 6% interest, insisting that the rate should be 12% p.a. in line with Land Bank of the Philippines vs. Imperial and Republic of the Philippines vs. Ker & Company, Limited, but she accepted the ₱12,000.00/sq. m. fixed as the replacement cost of the improvements. For its part, the Republic interposed no objection to the ₱7,000.00/sq. m. valuation for the lots and to the 6% legal interest recommended by the board, citing the letter dated July 30, 2013 of Director Patrick B. Gatan of the Infrastructure Right-of-Way and Resettlement–Project Management Office, although it failed to attach a copy of that letter.

In its Decision dated November 26, 2013, the RTC fixed the just compensation for the lots at ₱15,000.00/sq. m., or a total of ₱25,065,000.00, taking into account the classification of the lots as industrial, their location, shape, and their being not prone to flood, as well as a previous case involving a neighboring property expropriated for the C-5 Northern Link Project which had been valued at ₱15,000.00/sq. m. by the same court. It adopted the replacement cost of ₱12,000.00/sq. m. recommended by its appointed commissioners, or a total of ₱25,460,400.00, noting that Ng had accepted the recommendation. The Republic was accordingly ordered to pay those amounts with 12% legal interest p.a. reckoned from the time of taking, less the provisional deposit of ₱17,822,362.74, plus consequential damages and attorney's fees.

On appeal, the CA affirmed the RTC in its Decision dated July 1, 2016, but deleted the award of consequential damages and reduced the legal interest to 6% p.a. computed from the date of the RTC Decision until full satisfaction. The CA upheld the ₱15,000.00/sq. m. valuation for the 1,671-sq. m. lots on the basis of relevant factors such as the BIR zonal valuation of the land, the tax declarations, the Commissioner's Report, and the market value of properties within the area. It likewise sustained the ₱12,000.00/sq. m. replacement cost of the improvements, or ₱25,460,400.00, holding that the ₱11,138,362.74 proposed by the Republic was inconceivably lower than the current construction cost of a commercial or warehouse building, which stood at ₱32,000.00/sq. m. even as early as November 2009, and that the Republic had interposed no objection to that amount. The award of consequential damages was struck down because the entirety of the subject properties was being expropriated, leaving no remaining portion that could suffer an impairment or decrease in value, while the legal interest was reduced to 6% p.a. in line with the amendment introduced by the Bangko Sentral ng Pilipinas Monetary Board in BSP-MB Circular No. 799, Series of 2013.

What the lower courts relied upon in fixing the replacement cost of the improvements was, as the Supreme Court later observed, merely the location and classification of the properties, the value declared by the owner, and the zonal valuation of the subject lots. No competent evidence was presented to show that the prevailing construction costs and all other attendant costs associated with the acquisition and installation of an acceptable substitute in place of the affected improvements and structures had been taken into account.

• Replacement Cost of Improvements: Petitioner sought reversal of the Court of Appeals' ruling insofar as it affirmed the ₱12,000.00/sq. m. replacement cost fixed by the RTC for the improvements, submitting that the appellate court committed reversible error in so affirming; it maintained its own proposed valuation of ₱11,138,362.74 for the improvements, which it had set out in its Replacement Cost Summary and embodied in its complaint.
• Attorney's Fees: Petitioner assailed the award of attorney's fees, which the RTC had granted and which the CA sustained in its dispositive portion, as having no factual and legal basis.
• Position on the Land Valuation and Interest Before the RTC: Before the trial court, petitioner interposed no objection to the ₱7,000.00/sq. m. valuation for the subject lots and to the imposition of 6% legal interest recommended by the board of commissioners, citing the letter dated July 30, 2013 of Director Patrick B. Gatan, Project Director, Infrastructure Right-of-Way and Resettlement–Project Management Office, DPWH, although it failed to attach a copy of the said letter.

• Valuation of the Lots: Respondent contended in her answer that the offer price of ₱4,000.00/sq. m. was unreasonably low, and that she should be compensated the fair market value of her properties at the time of taking, which she estimated at ₱25,000.00/sq. m.
• Replacement Cost of Improvements: Respondent claimed that the fair and just replacement cost of the improvements on the subject lots should be ₱22,276,724.00, pursuant to Section 10 of the Implementing Rules and Regulations of RA 8974; she later accepted the ₱12,000.00/sq. m. fixed by the commissioners as the replacement cost of the improvements.
• Objection to the Commissioner's Report: Respondent objected to the recommended ₱7,000.00/sq. m. for the lots, contending that the same was not the real, substantial, full, ample, and fair market value of her lots, considering that the just compensation for nearby properties expropriated for the C-5 Northern Link Project had been fixed by the same RTC at ₱15,000.00/sq. m.
• Rate of Legal Interest: Respondent objected to the imposition of 6% interest, insisting that the same should be pegged at 12% interest p.a. in line with the rulings in Land Bank of the Philippines vs. Imperial and Republic of the Philippines vs. Ker & Company, Limited.

• Replacement Cost of Improvements: Whether the Court of Appeals committed reversible error in affirming the replacement cost for the improvements fixed by the RTC.
• Attorney's Fees: Whether the Court of Appeals committed reversible error in affirming the award of attorney's fees.
• Legal Interest: Whether the legal interest imposed on the unpaid balance of the just compensation should be corrected in light of the amendment introduced by BSP-MB Circular No. 799, Series of 2013.

• Replacement Cost of Improvements: No. The ₱12,000.00/sq. m. valuation was set aside, the lower courts having fixed it without competent evidence that the prevailing construction costs and all other attendant costs of acquiring and installing an acceptable substitute were considered as required by Section 10 of the IRR of RA 8974; the case was remanded to the RTC for reception of evidence on just compensation for the improvements.
• Attorney's Fees: No. The award of attorney's fees was deleted for lack of factual and legal bases, no sufficient showing of bad faith having been reflected in the Republic's persistence in the suit.
• Legal Interest: Yes, and it was corrected. The unpaid balance of the just compensation earns 12% p.a. from April 10, 2013 to June 30, 2013, and 6% p.a. from July 1, 2013 until full payment, pursuant to BSP-MB Circular No. 799, Series of 2013.

• Replacement Cost of Improvements: The construction of the Mindanao Avenue Extension Project, Stage II-C involves the implementation of a national infrastructure project, so RA 8974 and its IRR, effective at the time of the filing of the complaint, govern the determination of just compensation. Section 10 of the IRR requires the implementing agency to determine the valuation of the improvements and/or structures on the land to be acquired using the replacement cost method, defined as the amount necessary to replace the improvements or structures based on the current market prices for materials, equipment, labor, contractor's profit and overhead, and all other attendant costs associated with the acquisition and installation in place of the affected improvements or structures, taking into account the kinds and quantities of materials or equipment used, the location, configuration and other physical features of the properties, and prevailing construction prices. The method is premised on the principle of substitution, under which a rational, informed purchaser would pay no more for a property than the cost of building an acceptable substitute with like utility; accordingly, the implementing agency should consider (a) construction costs, or the current market price of materials, equipment, and labor, as well as the contractor's profit and overhead, and (b) attendant costs, or the cost associated with the acquisition and installation of an acceptable substitute in place of the affected improvements or structures. Republic vs. Mupas further instructs that in using the replacement cost method the courts may also consider the relevant standards under Section 5 of RA 8974, as well as equity consistent with the principle that eminent domain is a concept of equity and fairness that attempts to make the landowner whole, so that it is the value of the interest in land taken, and not the amount of the owner's investment, that is guaranteed. While various cost-approach methods exist — reproduction cost, replacement cost new, and depreciated replacement cost — Mupas declared the depreciated replacement cost method consistent with the principle that the property owner shall be compensated for his actual loss, bearing in mind that just compensation does not imply fairness to the property owner alone but must likewise be just to the public which ultimately bears the cost of expropriation; the owner is entitled to compensation only for what he actually loses, which is the actual value of the property at the time of the taking. Undervaluation would deprive the owner of his property without due process, but overvaluation would unduly favor him to the prejudice of the public. Courts must therefore consider and apply the parameters set by the law and its implementing rules so as not to arbitrarily fix an amount contradictory to the objectives of the law, although when acting within those parameters they are not strictly bound to apply the formula to its minutest detail, particularly where the situation does not warrant strict application; they may relax the formula in the exercise of discretion, subject to the limitation that the factual situation calls for it and that they clearly explain the reason for the deviation. Here, the RTC and the CA upheld the commissioners' recommendation fixing the just compensation for the improvements at ₱12,000.00/sq. m., which merely considered the location and classification of the properties, the value declared by the owner, and the zonal valuation of the subject lots; no competent evidence showed that it took into account the prevailing construction costs and all other attendant costs associated with the acquisition and installation of an acceptable substitute as required by the IRR. The valuation could not therefore be upheld and had to be set aside. Neither could the Court automatically adopt the Republic's proposed ₱11,138,362.74, it being unclear how the parameters set by the IRR had been factored into that computation, nor accept respondent's submitted valuation, which claimed to have used the prevailing replacement cost method but lacked proper substantiation of the correctness of the values or data used. Because the veracity of the facts and figures used in the parties' respective computations involves the resolution of questions of fact, which is improper in a petition for review on certiorari since the Court is not a trier of facts, a remand for the reception of further evidence was necessary so that the RTC could determine just compensation for the improvements in accordance with the guidelines under RA 8974 and its IRR.
• Attorney's Fees: The award of attorney's fees was improper and had to be deleted. Even when a claimant is compelled to incur expenses to protect his rights, attorney's fees may still be withheld where no sufficient showing of bad faith could be reflected in a party's persistence in a suit other than an erroneous conviction of the righteousness of his cause. The case of Republic vs. CA, cited by the CA to justify the award, is inapplicable because, unlike in this case where the Republic acquired possession of the expropriated properties only after paying respondent ₱17,822,362.74, representing 100% of the zonal valuation thereof, the petitioner in Republic took possession of the landowner's real property without initiating expropriation proceedings, and over the latter's objection.
• Legal Interest: In relation to the remand, the Court deemed it proper to correct the award of legal interest on the unpaid balance of the just compensation. The unpaid balance shall earn interest at 12% p.a. from the date of taking, that is, from April 10, 2013, when the RTC issued the writ of possession in favor of the Republic, until June 30, 2013; thereafter, beginning July 1, 2013 until fully paid, the just compensation due respondent shall earn interest at 6% p.a., in line with the amendment introduced by BSP-MB Circular No. 799, Series of 2013, as applied in Nacar vs. Gallery Frames.

• Replacement Cost Method under Section 10 of the IRR of RA 8974 — For national government infrastructure projects, the improvements and/or structures on the land to be acquired shall be appraised using the replacement cost method, defined as the amount necessary to replace the improvements or structures based on the current market prices for materials, equipment, labor, contractor's profit and overhead, and all other attendant costs associated with the acquisition and installation in place of the affected improvements or structures. In valuation, the implementing agency shall consider, among other things, the kinds and quantities of materials or equipment used, the location, configuration and other physical features of the properties, and prevailing construction prices. The Court applied this provision and found the lower courts' valuation deficient because it rested only on location, classification, the owner's declared value, and zonal valuation, without competent evidence of prevailing construction costs and attendant costs.
• Principle of Substitution — The replacement cost method is premised on the principle that, all things being equal, a rational, informed purchaser would pay no more for a property than the cost of building an acceptable substitute with like utility. From this principle, the Court derived the two categories of costs that must be considered: (a) construction costs, or the current market price of materials, equipment, and labor, as well as the contractor's profit and overhead; and (b) attendant costs, or the cost associated with the acquisition and installation of an acceptable substitute in place of the affected improvements or structures.
• Depreciated Replacement Cost Method — Among the cost-approach methods of appraisal — reproduction cost, replacement cost new, and depreciated replacement cost — the depreciated replacement cost method is consistent with the principle that the property owner shall be compensated for his actual loss. The computation adds the market value of the land for existing use to the depreciated replacement cost of the improvements, the latter being the current gross replacement cost of the improvements less allowances for physical deterioration and all relevant forms of obsolescence, whether functional or technical and economic or external. The Court invoked this method, as declared in Republic vs. Mupas, in explaining why the replacement cost valuation of the subject improvements had to be set aside and recomputed on remand.
• Just Compensation as Equity and Fairness to Both Owner and Public — Eminent domain is a concept of equity and fairness that attempts to make the landowner whole, and what is guaranteed to the owner is the value of the interest in land taken, not the amount of his investment. The concept of just compensation, however, does not imply fairness to the property owner alone; it must likewise be just to the public which ultimately bears the cost of expropriation. The owner is entitled to compensation only for what he actually loses, which is the actual value of the property at the time of the taking. Hence, even as undervaluation would deprive the owner of his property without due process, overvaluation would unduly favor him to the prejudice of the public.
• Judicial Relaxation of the Statutory Valuation Formula — In determining just compensation, courts must consider and apply the parameters set by law and its implementing rules and regulations so as not to arbitrarily fix an amount contradictory to the objectives of the law. When acting within those parameters, however, courts are not strictly bound to apply the formula to its minutest detail, particularly in situations that do not warrant strict application; they may relax the formula in the exercise of discretion, subject to the jurisprudential limitation that the factual situation calls for it and that the courts clearly explain the reason for the deviation.
• Remand Where Valuation Lacks Evidentiary Basis — The veracity of the facts and figures used by the parties in their respective computations of just compensation involves the resolution of questions of fact, which is improper in a petition for review on certiorari because the Court is not a trier of facts. Where neither the lower courts' valuation nor either party's computation is supported by competent evidence, a remand for the reception of further evidence is necessary so that the trial court may determine just compensation in accordance with the governing law and its implementing rules.
• Attorney's Fees Absent Bad Faith — Even when a claimant is compelled to incur expenses to protect his rights, attorney's fees may still be withheld where no sufficient showing of bad faith could be reflected in a party's persistence in a suit other than an erroneous conviction of the righteousness of his cause. The award was deleted because the Republic's erroneous valuation did not amount to bad faith, and the precedent invoked by the Court of Appeals involved a taking without expropriation proceedings and over the landowner's objection.
• Legal Interest on Just Compensation — The unpaid balance of just compensation earns 12% p.a. from the date of taking until June 30, 2013, and 6% p.a. from July 1, 2013 until full payment, in line with the amendment introduced by BSP-MB Circular No. 799, Series of 2013, as applied in Nacar vs. Gallery Frames.

• "The replacement cost method is premised on the principle of substitution, which means that 'all things being equal, a rational, informed purchaser would pay no more for a property than the cost of building an acceptable substitute with like utility.'" — This passage states the theoretical foundation of the replacement cost method mandated by Section 10 of the IRR of RA 8974 and supplies the rationale for requiring evidence of construction and attendant costs rather than mere land-based indicators.
• "Hence, even as undervaluation would deprive the owner of his property without due process, so too would its overvaluation unduly favor him to the prejudice of the public." — This is the Court's canonical formulation of the bilateral fairness that governs just compensation, explaining why the valuation of the improvements could not be sustained merely because the landowner had accepted it and the Republic had not objected.
• "It must be emphasized that in determining just compensation, the courts must consider and apply the parameters set by the law and its implementing rules and regulations in order to ensure that they do not arbitrarily fix an amount as just compensation that is contradictory to the objectives of the law." — This passage states the mandatory character of the statutory and regulatory parameters and frames the limited discretion of courts to deviate from the prescribed formula.
• "Even when a claimant is compelled to incur expenses to protect his rights, attorney's fees may still be withheld where no sufficient showing of bad faith could be reflected in a party's persistence in a suit other than an erroneous conviction of the righteousness of his cause." — This passage supplies the ratio for deleting the award of attorney's fees and is the formulation commonly cited in later expropriation cases involving claims for attorney's fees against the expropriating authority.

• Republic vs. Mupas, 769 Phil. 21 (2015) — Controlling precedent. Cited for the propositions that RA 8974 and its IRR govern the determination of just compensation for national infrastructure projects; that the courts may consider the standards under Section 5 of RA 8974 and equity in applying the replacement cost method; that the depreciated replacement cost method is consistent with the principle that the owner is compensated for his actual loss; and that courts may relax the statutory formula provided the factual situation calls for it and the deviation is explained.
• Republic vs. Mupas (Resolution), G.R. Nos. 181892, 209917, 209696, and 209731, April 19, 2016, 790 SCRA 217 — Cited for the principle that just compensation does not imply fairness to the property owner alone but must likewise be just to the public, and that the owner is entitled to compensation only for the actual value of the property at the time of the taking.
• Nacar vs. Gallery Frames, 716 Phil. 267 (2013) — Cited as the authority for the applicable legal interest, in light of the amendment introduced by BSP-MB Circular No. 799, Series of 2013, fixing the rate at 6% p.a. beginning July 1, 2013.
• National Power Corporation vs. Spouses Malijan, G.R. Nos. 211731 & 211818, December 7, 2016 — Cited for the rule that attorney's fees may be withheld where no sufficient showing of bad faith is reflected in a party's persistence in a suit other than an erroneous conviction of the righteousness of his cause.
• Republic vs. CA, 612 Phil. 965 (2009) — Distinguished. Although cited by the Court of Appeals to justify the award of attorney's fees, it was held inapplicable because the expropriating authority therein took possession of the landowner's property without initiating expropriation proceedings and over the latter's objection, whereas the Republic in this case acquired possession only after paying 100% of the zonal valuation.
• Alfonso vs. LBP, G.R. Nos. 181912 & 183347, November 29, 2016 — Cited for the rule that courts must consider and apply the parameters set by law and its implementing rules in determining just compensation.
• LBP vs. Omengan, G.R. No. 196412, July 19, 2017 — Cited for the declaration that there is no cause to treat differently the manner and method by which just compensation is determined solely because it is paid in implementation of the agrarian reform law.
• Land Bank of the Philippines vs. Imperial, 544 Phil. 378 (2007) and Republic of the Philippines vs. Ker & Company, Limited, 433 Phil. 70 (2002) — Cited by respondent as the basis for her insistence on a 12% legal interest rate; the Court instead applied the rates under BSP-MB Circular No. 799, Series of 2013.
• Republic vs. Hobart Realty and Development Corporation, G.R. No. 201136 — Cited as the prior case involving a neighboring property expropriated for the C-5 Northern Link Project, in which ₱15,000.00/sq. m. was fixed as just compensation, and which the RTC used as a reference in valuing the subject lots.

• Section 10, Implementing Rules and Regulations of RA 8974 — Requires the implementing agency to determine the valuation of improvements and/or structures on land to be acquired using the replacement cost method, defined as the amount necessary to replace the improvements or structures based on current market prices for materials, equipment, labor, contractor's profit and overhead, and all other attendant costs associated with the acquisition and installation in place of the affected improvements or structures, considering the kinds and quantities of materials or equipment used, the location, configuration and other physical features of the properties, and prevailing construction prices. The Court held that the lower courts' ₱12,000.00/sq. m. valuation failed to comply with this provision because it did not rest on competent evidence of prevailing construction costs and attendant costs.
• Section 4, Republic Act No. 8974 — Provides that whenever it is necessary to acquire real property for the right-of-way or location of a national government infrastructure project through expropriation, the appropriate implementing agency shall initiate the expropriation proceedings before the proper court. The Court applied this provision to hold that RA 8974 and its IRR governed the determination of just compensation because the complaint was filed pursuant thereto and the project involved was a national infrastructure project.
• Section 5, Republic Act No. 8974 — Enumerates the standards for the assessment of the value of land subject of expropriation or negotiated sale, including the classification and use for which the property is suited, developmental costs, the value declared by the owners, the current selling price of similar lands in the vicinity, reasonable disturbance compensation, the size, shape or location, tax declaration and zonal valuation of the land, the price manifested in ocular and other evidence, and such facts and events as would enable affected owners to acquire similarly situated lands and rehabilitate themselves. The Court held that these standards may also be considered in using the replacement cost method to ascertain the value of improvements.
• BSP-MB Circular No. 799, Series of 2013 — Entitled "Rate of interest in the absence of stipulation" and dated July 1, 2013, it amended the rate of legal interest from 12% to 6% p.a. The Court applied it to fix the interest on the unpaid balance of the just compensation at 12% p.a. from April 10, 2013 to June 30, 2013 and 6% p.a. from July 1, 2013 until full payment.
• Section 13, Article VIII, 1987 Constitution — Invoked in the Chief Justice's certification that the conclusions in the Decision had been reached in consultation before the case was assigned to the writer of the opinion of the Court's Division.

• Antonio T. Carpio (Associate Justice, Chairperson)
• Diosdado M. Peralta (Associate Justice)
• Alfredo Benjamin S. Caguioa (Associate Justice)
• Andres B. Reyes, Jr. (Associate Justice)

Maria Lourdes P.A. Sereno, Chief Justice, signed the Certification pursuant to Section 13, Article VIII of the 1987 Constitution and the Division Chairperson's Attestation. No separate concurring opinion adding reasoning beyond the majority is reflected in the text.