Facts:

The case involves a dispute between Eufemia Almeda and Romel Almeda (Petitioners) and Bathala Marketing Industries, Inc. (Respondent). The events leading to the case began in May 1997 when Bathala Marketing, represented by its president Ramon H. Garcia, renewed a Contract of Lease with Ponciano L. Almeda, the husband of Eufemia and father of Romel. The lease pertained to a portion of the Almeda Compound located at 2208 Pasong Tamo Street, Makati City, covering an area of 7,348.25 square meters, with a monthly rental of P1,107,348.69 for a term of four years. The contract included provisions regarding rental adjustments based on tax assessments and extraordinary inflation or devaluation.

After Ponciano's death, the Respondent continued dealings with the Petitioners. On December 29, 1997, the Petitioners informed the Respondent that they would begin assessing Value Added Tax (VAT) on the monthly rentals. The Respondent contested this, arguing that the rental amount alrea...

Facts:

Lease Agreement

• In May 1997, Bathala Marketing Industries, Inc. (respondent), represented by its president Ramon H. Garcia, renewed a Contract of Lease with Ponciano L. Almeda (lessor), husband of petitioner Eufemia Almeda and father of petitioner Romel Almeda.
• The lease covered a portion of the Almeda Compound in Makati City, consisting of 7,348.25 square meters, for a monthly rental of P1,107,348.69, for a term of four (4) years from May 1, 1997, unless sooner terminated.
• The contract contained two key provisions:
  1. Clause 6: The rental rate was based on the current property assessment. If the assessment increased or new taxes were imposed, the lessee would pay the additional rental corresponding to the leased portion. If the assessment or tax was reduced, the lessee would be entitled to a rental reduction.
  2. Clause 7: In case of extraordinary inflation or devaluation of the Philippine peso, the value of the peso at the time of the obligation’s establishment would be the basis of payment.

Death of Ponciano and Subsequent Dispute

• Ponciano died during the lease term, and petitioners Eufemia and Romel Almeda took over as lessors.
• On December 29, 1997, petitioners informed respondent that they would assess and collect Value Added Tax (VAT) on the monthly rentals.
• Respondent contested this, arguing that the rental amount already included VAT, as the contract was executed in May 1997 when the VAT law was already in effect.
• On January 26, 1998, petitioners demanded a 73% rental increase, citing Clause 7 of the contract and Article 1250 of the Civil Code (extraordinary inflation or deflation).
• Respondent refused to pay the VAT and the adjusted rental, continuing to pay the original stipulated amount.

Legal Actions

• On February 18, 1998, respondent filed an action for declaratory relief (Civil Case No. 98-411) before the Regional Trial Court (RTC) of Makati, seeking clarification on the interpretation of Clauses 6 and 7 of the lease contract.
• On March 10, 1998, petitioners filed an action for ejectment, rescission, and damages against respondent for failure to vacate the premises. However, they later dismissed this action and refiled it before the Metropolitan Trial Court (MTC) of Makati (Civil Case No. 53596).
• Petitioners moved to dismiss the declaratory relief case, arguing it was improper since respondent was already in breach of the contract. The RTC denied the motion.

RTC Decision

• On May 9, 2000, the RTC ruled in favor of respondent:
  1. Respondent was not liable to pay 10% VAT on the rent.
  2. Respondent was not liable for rental adjustment, as there was no extraordinary inflation or devaluation.
  3. Petitioners were ordered to return P1,119,102.19 (erroneous VAT and rental adjustment payments) and P1,107,348.69 (balance of rental deposit).

Court of Appeals Decision

• The Court of Appeals (CA) affirmed the RTC decision but deleted the order for the return of the rental deposit and excess payments, as the trial court exceeded its jurisdiction in granting affirmative relief in a declaratory relief action.

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Issue:

1. Whether the action for declaratory relief was proper.
2. Whether respondent was liable to pay 10% VAT under Republic Act (RA) 7716.
3. Whether the rental amount should be adjusted due to extraordinary inflation or devaluation.

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Ruling:

• (Subscriber-Only)

Ratio:

• (Subscriber-Only)

Conclusion:

The Supreme Court denied the petition and affirmed the Court of Appeals' decision. Respondent was not liable to pay the 10% VAT or the rental adjustment, and the action for declaratory relief was proper.