Primary Holding

A lessee of land who constructs improvements thereon is not considered a builder in good faith under Articles 448 and 546 of the Civil Code and therefore does not have the right to retain possession until reimbursed for the full value of the improvements. The rights of a lessee regarding improvements are governed by Article 1678 of the Civil Code, which limits reimbursement to one-half of the improvement's value at the lessor's option and does not grant a right of retention.

Background

Atty. Rodolfo N. Pelaez originally owned the land and leased it to Henry L. Sia's parents who built a structure on it with permission in 1970. After Rodolfo Pelaez passed away, the land was inherited by his son, Atty. Pacifico Pelaez, who then sold it to Torre de Oro Development Corporation. Henry L. Sia succeeded his parents as lessee. Torre de Oro Development Corporation and Sia entered into a new one-year lease contract in 1988. Upon expiry, the lessor decided not to renew the lease and sought to eject Sia, leading to this legal dispute concerning Sia's rights as a lessee with improvements on the land.

Facts

• 1. Atty. Rodolfo N. Pelaez owned a parcel of land and leased it to Henry L. Sia's parents, who built a commercial building on it in 1970 with the lessor's consent.
• 2. Rodolfo N. Pelaez died, and his son Pacifico Pelaez inherited the land and sold it to Torre de Oro Development Corporation.
• 3. Henry L. Sia succeeded his parents as lessee.
• 4. On March 22, 1988, Sia and Torre de Oro entered into a one-year lease contract, commencing January 1988 and expiring December 1988, renewable upon agreement.
• 5. The monthly rent was P2,000.00.
• 6. The contract prohibited subleasing without the lessor's written consent.
• 7. Torre de Oro informed Sia in December 1988 that the lease would not be renewed, citing subleasing as the reason. Sublessees were also notified.
• 8. Sia attempted to negotiate a lower rental increase than demanded by Torre de Oro.
• 9. Torre de Oro filed an ejectment suit when Sia refused to vacate after the lease expired.
• 10. Sia claimed he was a builder in good faith and entitled to retain possession until fully reimbursed for the building's value based on Articles 448 and 546 of the Civil Code.

Arguments of the Petitioners

• 1. The lease contract had not yet expired when the ejectment complaint was filed.
• 2. Petitioner did not sublease the area.
• 3. Petitioner owns the building on the land.
• 4. Petitioner is a builder in good faith under Articles 448 and 546 of the Civil Code, entitling him to retain possession until reimbursed for the full market value of the building.
• 5. Article 1678 of the Civil Code is inapplicable because it refers to improvements, not buildings, and should apply only when the land alone is leased, not land with existing structures.
• 6. The Regional Trial Court had no power to fix a monthly rental of P5,000.00 as it exceeded the original agreed rental.
• 7. The award of monthly rental of P5,000.00 is excessive, exorbitant, and unreasonable.
• 8. The Municipal Trial Court lacked jurisdiction to determine the applicability of Article 448 and fix the reasonable value of improvements in an ejectment case.

Arguments of the Respondents

• 1. The lease contract had expired, giving the respondent the right to terminate it and eject the petitioner.
• 2. Petitioner violated the lease contract by subleasing the property without written consent.
• 3. Article 1678 of the Civil Code governs the rights of the lessee regarding improvements on leased property, not Articles 448 and 546.
• 4. Petitioner is not a builder in good faith and has no right to retain possession.
• 5. The rental increase to P5,000.00 is reasonable given the location, value, and prevailing rates in the vicinity.
• 6. The court has the authority to fix a reasonable rental after the lease expiration.

Issues

• 1. Whether the lease contract had expired, justifying ejectment.
• 2. Whether the petitioner subleased the property in violation of the lease contract.
• 3. Whether Article 448 and 546 or Article 1678 of the Civil Code governs the rights of the lessee regarding improvements.
• 4. Whether the petitioner is a builder in good faith entitled to retain possession until reimbursed the full value of the building.
• 5. Whether the Regional Trial Court had the authority to fix the monthly rental at P5,000.00.

Ruling

• 1. The Supreme Court ruled in favor of the respondent, Torre de Oro Development Corporation, affirming the Court of Appeals' decision with modification.
• 2. The lease contract had indeed expired by the time the ejectment suit was filed.
• 3. The petitioner, as a lessee, is not a builder in good faith under Articles 448 and 546 of the Civil Code and cannot claim the right to retain possession until fully reimbursed for the building.
• 4. Article 1678 of the Civil Code is the applicable provision, governing the rights of lessees regarding improvements. This article does not grant a right of retention but provides for reimbursement of one-half of the value of useful improvements at the lessor's option, or the right of the lessee to remove the improvements.
• 5. The Regional Trial Court and Court of Appeals were correct in applying Article 1678 and ordering ejectment.
• 6. The fixed rental of P5,000.00 was reasonable considering the property's location and increased value and the prevailing rental rates, and the court has authority to fix reasonable rent after lease expiry.
• 7. The petitioner is estopped from questioning the jurisdiction of the Municipal Trial Court after submitting to it and obtaining a favorable decision, albeit reversed on appeal.

Doctrines

• 1. Doctrine of Estoppel: A party cannot question the jurisdiction of a court after voluntarily submitting to it, participating in the proceedings, and only raising the issue after an adverse judgment.
• 2. Interpretation of Contracts: Contracts must be interpreted to give effect to the intention of the parties, considering the entire document and all its provisions.
• 3. Rights of a Lessee Regarding Improvements: The rights of a lessee who makes improvements on leased property are governed by Article 1678 of the Civil Code, not Articles 448 and 546.
• 4. Builder in Good Faith (in relation to lessee): A lessee is not considered a builder in good faith in the context of Articles 448 and 546 of the Civil Code because a lessee knows they are not the owner of the land.

Key Excerpts

• 1. "It is the strong conviction of this court that in the interpretation of contracts the entire document must be fully read, evaluated and considered, taking into consideration the intention of the parties and giving effect and force to all its provisions."
• 2. "It is too late in the day for petitioners to question the jurisdiction of the trial court...Our law and policy do not sanction such a somersault."
• 3. "Petitioner asserts this obviously in utter desperation if only to salvage his case."
• 4. "It is worth stressing at this juncture that the trial court had the authority to fix the reasonable value for the continued use and occupancy of the leased premises after the termination of the lease contract, and that it was not bound by the stipulated rental in the contract of lease..."

Precedents Cited

• 1. Bocaling vs. Laguna, et al. 54 SCRA 243: Cited to support the ruling that lessees are neither builders in good faith nor in bad faith, and their rights are governed by Article 1678.
• 2. Southwestern University vs. Salvador, 90 SCRA 318, 329-330: Cited to reinforce the lessee's right to remove improvements if the lessor refuses to reimburse, but without the right to buy the land.
• 3. Tolentino, Civil Code of the Philippines 222 (1959): Used as authority to explain that Article 546 applies to builders in good faith who believe they have title, not to tenants.
• 4. Salonga v. Farrales, 105 SCRA 359 (1981); Balacunag v. Francisco, 122 SCRA 498 (1983); Gabrito v. Court of Appeals, 167 SCRA 771 (1988); Maceda v. Court of Appeals, 176 SCRA 440 (1989): Cited as jurisprudence supporting that Article 546 applies to builders believing they have title, not lessees.
• 5. Mantruste System, Inc. v. Court of Appeals, 179 SCRA 137 (1989); Vda. de Bacaling v. Laguna, 54 SCRA 243 (1973); Racaza v. Susana Realty, Inc. 18 SCRA 1172 [1966]; Lopez, Inc. vs. Phil. & Eastern Trading Co., 98 Phil. 348 [1956]: Cited for the principle that a lessee's right is limited to reimbursement for useful improvements under Article 1678, without a right of retention.
• 6. Shoemart, Inc. v. Court of Appeals, 190 SCRA 189 (1990); Felisilda v. Villanueva, 139 431 (1985): Cited to support the court's power to fix reasonable rental compensation when the lessee remains after lease expiry.
• 7. Abrograr v. IAC, 157 SCRA 57 (1988); Buan v. Camaganacan, 16 SCRA 321 (1966): Cited against the automatic award of attorney's fees without justification.
• 8. Cloma v. Court of Appeals, 324 SCRA 665 [1994]: Cited for the doctrine of estoppel in questioning jurisdiction after submitting to the court.
• 9. Tijam v. Sibonghanoy (23 SCRA 29, 35-36): Cited as the polestar case for estoppel in questioning jurisdiction.
• 10. Cabangis v. Court of Appeals, 200 SCRA 414 [1991]: Cited as a similar case where Article 1678 was held applicable to lessee's improvements, not Articles 448 and 546.
• 11. Guzman v. Court of Appeals, 177 SCRA 604 [1989]; Guiang v. Samano, 196 SCRA 114 [1991]; Heirs of the late Jaime Binuya v. Court of Appeals, 211 SCRA 761 [1992]; Chua v. Court of Appeals, 242 SCRA 744 [1995]: Cited as recent cases uniformly applying the doctrine regarding Article 1678 and lessee's improvements.
• 12. Manila Bay Club v. Court of Appeals, 245 SCRA 715 [1995]: Cited for the principle that if the lessee fails to prove excessive rentals, the court's valuation stands.
• 13. Alburo v. Villanueva, 7 Phil. 277 [1907]; Valencia V. Roxas, 13 Phil. 45 (1909): Cited as authorities on useful improvements by lessee.
• 14. Dean v. Dean, 136 Or. 694, 86 A.L.R. 79; Pease v. Rathbun-Jones etc., 243 U.S. 273, 61 L. Ed. 715, 37 S. Ct. 283; St. Louis etc. v. McBridge, 141 U.S. 127, 35 L. Ed. 659; Littleton v. Burgessm 16 Wyo. 58: Cited for the general principle against questioning jurisdiction after an adverse decision on merits.
• 15. Pindangan etc. v. Dans, et al., G.R. L-14591, September 26, 1962; Montelibano, et al. v. Bacolod-Murcia Milling Co., Inc., G.R. L-15092; Young Men Labor Union, etc. v. The Court of Industrial Relations, et al. G.R. L-20307, Feb. 26, 1965; Mejia v. Lucas, 100 Phil. p. 277: Cited as cases where the Supreme Court frowned upon the practice of questioning jurisdiction only after an unfavorable judgment.

Statutory and Constitutional Provisions

• 1. Civil Code of the Philippines, Article 448: Relates to rights of accession for builders in good faith on another's land.
• 2. Civil Code of the Philippines, Article 546: Relates to rights of possessors in good faith, including retention for necessary and useful expenses.
• 3. Civil Code of the Philippines, Article 1673(1): States that a lease contract may be terminated at the end of the stipulated period.
• 4. Civil Code of the Philippines, Article 1678: Governs rights of a lessee for useful improvements made on leased property.