Sulo sa Nayon, Inc. vs. Nayong Pilipino Foundation

A lessee who introduces improvements on leased property with the lessor's permission is not a builder in good faith under Article 448 of the Civil Code; such lessee's rights are exclusively governed by Article 1678, which grants the lessor the option to pay one-half the value of the improvements or allow their removal, without granting the lessee a right of retention.

Nayong Pilipino Foundation leased a 36,289-square-meter portion of the Nayong Pilipino Complex to Sulo sa Nayon, Inc. (later Philippine Village Hotel, Inc.) for the construction and operation of the Philippine Village Hotel. The initial 21-year lease was renewed for another 25 years under a Voluntary Addendum executed in 1995, with monthly rental subject to periodic increases. Beginning January 2001, PVHI defaulted on rental payments, accumulating over ₱26,000,000 in arrears. After repeated demands, including a final letter on March 26, 2001, respondent filed an unlawful detainer complaint.

• Lease Agreement: On June 1, 1975, respondent leased a portion of the Nayong Pilipino Complex to petitioner Sulo sa Nayon, Inc. for hotel construction. The initial 21-year term was renewable for 25 years.
• Renewal and Terms: On July 4, 1995, the parties executed a Voluntary Addendum, renewing the lease until 2021. Monthly rental was set at ₱20.00 per square meter, increasing by 20% every three years.
• Default and Demand: Petitioners defaulted on monthly rentals beginning January 2001. Respondent sent a demand letter on March 26, 2001, requiring payment of ₱26,183,225.14 in arrears within ten days or face legal action and repossession of the premises.
• Unlawful Detainer: On September 5, 2001, respondent filed a complaint for unlawful detainer before the MeTC of Pasay City.

• Builder in Good Faith Status: Petitioners argued they were builders in good faith because they introduced substantial and valuable improvements on the leased premises with respondent's permission, warranting the application of Articles 448 and 546 of the Civil Code instead of Article 1678.
• Implied Waiver of Article 1678: Petitioners maintained that the lease contract governed the parties' relationship and its provisions impliedly waived the application of Article 1678, particularly the default clause which did not grant respondent the right to appropriate improvements or evict upon cancellation.
• Mutual Bad Faith: Petitioners asserted that respondent acted in bad faith by breaching the lease contract, placing both parties in a position as if they were in good faith.
• Unjust Enrichment: Petitioners contended that applying Article 1678 instead of Article 448 would cause substantial injury to them and unjustly enrich respondent, given that the hotel's value exceeded two billion pesos while their arrears were only slightly over twenty-six million pesos.
• Jurisdictional Defect: Petitioners claimed the MeTC lacked jurisdiction because the demand letter did not explicitly contain the word "vacate," a purported jurisdictional requirement for unlawful detainer.

• Lessee Status Precludes Builder in Good Faith: Respondent countered that as mere lessees, petitioners could not validly claim builder in good faith status to invoke Articles 448 and 546.
• Exclusive Application of Article 1678: Respondent argued that Article 1678 exclusively governed the rights of the parties regarding improvements made by the lessee, granting the lessor the option to acquire the improvements or let the lessee remove them.
• No Contractual Waiver: Respondent maintained that existing laws are deemed incorporated into contracts and no special agreement waived the application of Article 1678; the default clause did not prohibit the filing of an ejectment suit.

• Jurisdiction: Whether the Metropolitan Trial Court acquired jurisdiction over the unlawful detainer case despite the absence of the word "vacate" in the demand letter.
• Applicable Regime on Improvements: Whether a lessee who introduces substantial improvements on leased premises with the lessor's consent is a builder in good faith entitled to the rights under Article 448 in relation to Article 546 of the Civil Code, rather than Article 1678.
• Implied Waiver: Whether the parties impliedly waived the application of Article 1678 based on the lease contract's default provision.

• Jurisdiction: Jurisdiction was properly acquired. The word "vacate" is not a talismanic word required in all notices. A demand to pay arrears within a specified period, coupled with a threat of legal action and repossession of the premises upon failure to pay, constitutes a sufficient notice to vacate.
• Applicable Regime on Improvements: Articles 448 and 546 do not apply to lessees. Article 448 applies only to one who builds on land believing they have a claim of title, not to a holder such as a lessee who recognizes the lessor's ownership. A lessee is neither a builder in good faith nor in bad faith under Article 448. The introduction of valuable improvements with the lessor's permission does not give the lessee a right of retention and reimbursement belonging to a builder in good faith. The lessee's rights are exclusively governed by Article 1678, which grants the lessor the option to pay one-half the value of useful improvements or allow their removal.
• Implied Waiver: No implied waiver of Article 1678 occurred. Laws are deemed incorporated into every contract. The lease contract's default provision did not prohibit respondent from filing an ejectment suit to enforce its rights as lessor.

• Lessee Not a Builder in Good Faith — A lessee is neither a builder in good faith nor in bad faith calling for the application of Articles 448 and 546 of the Civil Code. Article 448 applies only where one builds on land believing oneself to have a claim of title, not where the builder's interest is merely that of a holder or tenant. The introduction of valuable improvements on leased premises does not vest in the lessee the right of retention and reimbursement belonging to a builder in good faith, as this would allow a lessee to "improve" the lessor out of its property.
• Rights of a Lessee Over Improvements — Governed exclusively by Article 1678 of the Civil Code. Upon termination of the lease, the lessor has the option to pay one-half the value of useful improvements made in good faith, or refuse reimbursement and allow the lessee to remove the improvements. The lessee has no right of retention over the leased premises pending reimbursement.
• Sufficiency of Demand to Vacate — The word "vacate" is not a talismanic word that must be employed in all notices to satisfy the jurisdictional requirement in unlawful detainer cases. A demand to pay arrears with the alternative consequence of surrendering the premises constitutes a sufficient notice to vacate.

• "This article [Article 448] is manifestly intended to apply only to a case where one builds, plants, or sows on land in which he believes himself to have a claim of title, and not to lands where the only interest of the builder, planter or sower is that of a holder, such as a tenant."
• "The word 'vacate' is not a talismanic word that must be employed in all notices. The alternatives in this case are clear cut. The tenants must pay rentals which are fixed and which became payable in the past, failing which they must move out."
• "A lessee is neither a builder in good faith nor in bad faith that would call for the application of Articles 448 and 546 of the Civil Code. His rights are governed by Article 1678 of the Civil Code."

• Golden Gate Realty Corporation v. Intermediate Appellate Court, G.R. No. L-74289, July 31, 1987 — Followed. Cited for the proposition that the word "vacate" is not a jurisdictional requisite in a demand letter if the alternative consequence of non-payment is surrender of the premises.
• Southwestern University v. Salvador, G.R. No. L-45013, May 28, 1979 — Followed. Cited for the doctrine that a lessee is neither a builder in good faith nor in bad faith calling for the application of Articles 448 and 546, and that lessee's rights are governed by Article 1678.
• Floreza v. Evangelista, G.R. No. L-25462, February 21, 1980 — Followed. Cited alongside Tolentino's commentary to establish that Article 448 applies only to one who believes they have a claim of title, not to a mere holder or tenant.

• Article 448, Civil Code — Governs the rights of a landowner against one who builds, plants, or sows in good faith, granting the landowner the right to appropriate the work after indemnity or oblige the builder to pay the price of the land. Held inapplicable to lessees because a lessee does not build under a belief of title but merely as a holder.
• Article 546, Civil Code — Grants a possessor in good faith the right to be reimbursed for useful expenses and the right of retention until reimbursed. Held inapplicable to lessees making improvements on leased premises.
• Article 1678, Civil Code — Governs the rights of a lessee who makes useful improvements in good faith. Provides that the lessor, upon termination of the lease, shall pay one-half the value of the improvements, or refuse reimbursement and allow the lessee to remove them. Held to exclusively govern the petitioners' rights over the improvements.

Antonio T. Carpio, Renato C. Corona, Adolfo S. Azcuna, Teresita J. Leonardo-De Castro