Unimasters Conglomeration Inc. vs. Tacloban City Government

A private entity that holds beneficial use and possession of government-owned property is personally liable for real property taxes thereon under Section 234(a) of the Local Government Code, and a contractual stipulation in a lease agreement allocating tax liability to the government lessor cannot exonerate the lessee from tax liability as against a local government unit that is not privy to the contract.

Leyte Park Hotel Inc. (LPHI) is a 61,322-square-meter property covered by Transfer Certificate of Title No. T-1883, co-owned by Assets Privatization Trust (APT), now the Privatization and Management Office (PMO), holding 34% of the shares; the Philippine Tourism Authority (PTA), now the Tourism Infrastructure and Enterprise Zone Authority (TIEZA), holding 40%; and the Province of Leyte, holding 26%. PMO and PTA are government instrumentalities exempt from real property taxation, while the Province of Leyte is a political subdivision. On September 15, 1994, APT, representing all co-owners, entered into a 12-year Contract of Lease over LPHI with Unimasters Conglomeration Inc. (UCI), a private corporation, through its President Wilson Chan. Section 11.04 of the lease contract provided that real property taxes shall be for the account of the lessor, with any payment of real property taxes by the lessee to be credited against amounts due from the lessee to the lessor.

Leyte Park Hotel Inc. (LPHI) is a 61,322-square-meter property standing on Magsaysay Boulevard, Tacloban City, covered by Transfer Certificate of Title No. T-1883. It is co-owned by Assets Privatization Trust (APT), now the Privatization and Management Office (PMO), holding 34% of the shares; the Philippine Tourism Authority (PTA), holding 40%; and the Province of Leyte, holding 26%. On September 15, 1994, APT, representing all co-owners, and Unimasters Conglomeration Inc. (UCI), through its President Wilson Chan, entered into a Contract of Lease over LPHI with a duration of 12 years. Section 11.04 of the contract provided that real property taxes shall be for the account of the lessor, and that any payment of real property taxes by the lessee shall be credited against any amount due from the lessee to the lessor.

Initially, UCI faithfully paid its monthly rentals and real property taxes, with the latter payments subsequently credited to its rental obligations. However, starting December 16, 2000, UCI stopped paying its obligations. PMO sent several demand letters requiring compliance with the contract's provisions, but the agreement expired without UCI settling its obligations. UCI nonetheless retained possession and enjoyment of the premises without paying any rentals or taxes due.

Meanwhile, the City Treasurer of Tacloban sent several demand letters to Chan to collect the unpaid real property taxes of LPHI for the years 1989 to 2012 in the amount of P65,969,406.74, but the same remained unpaid despite notice. The City Treasurer of Tacloban then instituted a collection case against LPHI, UCI, APT, PTA, and the Province of Leyte before the Court of Tax Appeals, docketed as CTA OCA No. 012. After trial, the CTA Special First Division rendered a Decision dated November 15, 2011, finding UCI liable to pay P22,826,902.20, while recognizing the crediting clause in the lease contract. UCI's motion for reconsideration was denied, prompting it to file a petition for review before the CTA En Banc.

The CTA En Banc issued its Decision dated August 22, 2014, affirming UCI's liability to pay realty taxes for the period covering 1995-2004. Citing GSIS vs. City Treasurer and City Assessor of the City of Manila and Republic vs. City of Kidapawan, the CTA En Banc ruled that realty tax on government assets attaches to the property and is chargeable against the taxable person who had actual or beneficial use and possession of it regardless of ownership. As regards the enforceability of the contractual obligation to credit paid realty taxes against UCI's account, the CTA En Banc deferred resolution, noting the pendency of a case before the RTC involving the validity of the lease agreement. Dissatisfied, UCI elevated the case to the Supreme Court.

• Beneficial Use Principle Misapplied: Petitioner argued that the CTA erred in holding UCI liable for real property taxes over LPHI, urging the Court to nullify the CTA rulings that applied the beneficial use principle. Citing City of Pasig vs. Republic of the Philippines, petitioner contended that payment of realty taxes over LPHI should rest on the Republic in case the beneficial user failed to pay, especially since the Republic, through PMO, PTA, and the Province of Leyte, had waived its tax exemption by contractually assuming payment of real property taxes in the lease contract.
• Contractual Assumption of Tax Liability: Petitioner invoked Section 11.04 of the Contract of Lease, under which PMO and PTA contractually assumed liability to pay real property taxes, arguing that this stipulation should exonerate UCI from the tax burden imposed by the Tacloban City Government.

• Beneficial Use Principle: Whether UCI, as a private lessee of government-owned property, is liable for real property taxes under the beneficial use principle embodied in Section 234(a) of the Local Government Code.
• Contractual Stipulation vs. Tax Liability: Whether the contractual stipulation in the lease agreement allocating real property tax liability to the government lessors exonerates UCI from tax liability as against the Tacloban City Government, which was not a party to the lease contract.

• Beneficial Use Principle: Yes. UCI, as a taxable person granted beneficial use and possession of government-owned property, is personally liable for real property taxes thereon under Section 234(a) of the Local Government Code, the tax exemption of the government owners having been withdrawn upon the grant of beneficial use to a taxable entity.
• Contractual Stipulation vs. Tax Liability: No. The contractual stipulation allocating tax liability to the lessors cannot exonerate UCI from tax liability as against the Tacloban City Government, which was not a party to the lease contract and therefore cannot be bound by its terms under the principle of relativity of contracts.

• Beneficial Use Principle: Section 234(a) of the Local Government Code exempts real properties owned by the Republic or its political subdivisions from real property tax, except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person. The term "Republic" includes government instrumentalities, as held in Philippine Heart Center vs. The Local Government of Quezon City. The co-owners of LPHI — PMO and PTA as government instrumentalities, and the Province of Leyte as a political subdivision — retained their exempt status despite leasing out the property. However, the moment beneficial use of the property was granted to UCI, a taxable private entity, the tax exemption was lifted and liability to pay devolved on UCI as the beneficial user and possessor. The Court cited MWSS vs. Central Board of Assessment Appeals and City Treasurer of Taguig vs. Bases Conversion and Development Authority for the principle that unpaid realty tax attaches to the property but is directly chargeable against the taxable person who has actual and beneficial use and possession regardless of ownership. Petitioner's reliance on City of Pasig vs. Republic of the Philippines was deemed inaccurate, as that case actually reinforced the same principle: the Republic retains its exempt status, but the exemption is withdrawn when beneficial use is granted to a taxable person. In Estampador vs. City of Manila, the Court reiterated that it is the taxable person with beneficial use who is responsible for payment, and since tax collection is a personal action, the tax authority should go after the taxable person.
• Contractual Stipulation vs. Tax Liability: While the Court recognized the existence of Section 11.04 of the lease contract pertaining to the lessors' assumption of tax liability, such contractual assumption does not automatically exonerate UCI from the burden created by law, especially since the validity of the contractual stipulation was being questioned before the RTC of Makati. More fundamentally, the Tacloban City Government was not a party to the lease contract. Under Article 1311 of the Civil Code, contracts take effect only between the parties, their assigns, and heirs. Under the general principle of relativity of contracts, a contract can only bind the parties who entered into it and cannot favor or prejudice a third person, even if aware of the contract and has acted with knowledge thereof. Where there is no privity of contract, there is no obligation or liability to speak of. The CTA En Banc correctly observed that it could only determine the extent of UCI's real property tax liability in relation to the beneficial use clause under Section 234(a) of the Local Government Code, as the contractual obligations under the lease agreement concern only UCI and the lessors. The validity and enforceability of Section 11.04 should be threshed out in the appropriate forum, as a case had in fact been filed before the RTC of Makati.

• Beneficial Use Principle — Under Section 234(a) of the Local Government Code, real properties owned by the Republic or any of its political subdivisions are exempt from real property tax, except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person. When the beneficial use of government-owned property is granted to a taxable private entity, the tax exemption is withdrawn and the liability to pay real property taxes devolves on the taxable beneficial user and possessor, regardless of whether that person is the owner. The unpaid realty tax attaches to the property but is directly chargeable against the taxable person who has actual and beneficial use and possession. Tax collection is an action in personam directed against the taxable person.
• Relativity of Contracts (Article 1311, Civil Code) — Contracts take effect only between the parties, their assigns, and heirs. A contract can only bind the parties who entered into it or their successors; it cannot favor or prejudice a third person, even if that person is aware of the contract and has acted with knowledge thereof. Where there is no privity of contract, there is no obligation or liability to speak of. Applied here, the Tacloban City Government, not being a party to the lease contract, could not be bound by Section 11.04's allocation of tax liability to the lessors.

• "The liability for taxes generally rests on the owner of the real property at the time the tax accrues. This is a necessary consequence that proceeds from the fact of ownership. However, personal liability for realty taxes may also expressly rest on the entity with the beneficial use of the real property, such as the tax on property owned by the government but leased to private persons or entities, or when the tax assessment is made on the basis of the actual use of the property. In either case, the unpaid realty tax attaches to the property but is directly chargeable against the taxable person who has actual and beneficial use and possession of the property regardless of whether or not that person is the owner." — This passage, quoted from City Treasurer of Taguig vs. Bases Conversion and Development Authority, articulates the canonical formulation of the beneficial use principle as applied in this case.
• "Clearly, this Court can only determine the extent of petitioner's real property tax liability for respondent Tacloban City Government in relation to the beneficial use clause under Section 234 (a) of R.A. 7160. The contractual obligations of the parties under the lease agreement concern petitioner and the lessors only. Respondent Tacloban City Government is not privy to the lease contract." — This quotation from the CTA En Banc, adopted by the Supreme Court, establishes the boundary between statutory tax liability and contractual obligations, anchoring the ruling on the relativity of contracts.
• "Indeed, not being a party to the contract and without showing that it had knowledge of the same, the local government of Tacloban City cannot be automatically bound by said agreement." — This statement applies the relativity of contracts doctrine to bar UCI's defense that the lease stipulation should shield it from tax liability.

• Philippine Heart Center vs. The Local Government of Quezon City, G.R. No. 225409, March 11, 2020 — Controlling precedent establishing that the term "Republic" in Section 234(a) includes government instrumentalities, and that the Republic and its instrumentalities retain their exempt status despite leasing properties to private individuals; the exemption is lifted only when beneficial use is granted to a taxable person, making the taxable person liable.
• City of Pasig vs. Republic of the Philippines, 671 Phil. 791 (2011) — Cited by petitioner but distinguished by the Court; the case actually reinforced that properties owned by the Republic are exempt except when beneficial use is granted to a taxable person, supporting rather than undermining the beneficial use principle.
• City Treasurer of Taguig vs. Bases Conversion and Development Authority, G.R. No. 232278, July 13, 2020 — Followed for the explicit formulation that personal liability for realty taxes rests on the entity with beneficial use of government property leased to private persons.
• MWSS vs. Central Board of Assessment Appeals, G.R. No. 215955, January 13, 2021 — Followed for the principle that while liability for taxes generally falls on the owner, personal liability may expressly rest on the entity with beneficial use.
• Estampador vs. City of Manila, G.R. No. 227288, March 18, 2021 — Followed for the distinction between property owner and beneficial user as to whom tax liability falls, reiterating that the taxable person with beneficial use is responsible for payment.
• GSIS vs. City Treasurer and City Assessor of the City of Manila, 623 Phil. 964 (2009) — Cited by the CTA En Banc for the proposition that realty tax on government assets attaches to the property and is chargeable against the taxable person with actual or beneficial use.
• Republic vs. City of Kidapawan, 513 Phil. 440 (2005) — Cited by the CTA En Banc alongside the GSIS case for the same beneficial use principle.

• Section 234(a), Republic Act No. 7160 (Local Government Code of 1991) — Exempts real property owned by the Republic or its political subdivisions from real property tax, except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person. This provision is the statutory source of the beneficial use principle applied to hold UCI liable for realty taxes on the government-owned LPHI property.
• Article 1311, Civil Code — Provides that contracts take effect only between the parties, their assigns, and heirs. Applied to hold that the Tacloban City Government, not being a party to the lease contract, cannot be bound by the stipulation allocating tax liability to the lessors.

Leonen (Chairperson), Lazaro-Javier, M. Lopez, and Kho, Jr., JJ., concurred.