G.R. No. 82813 - Blas vs. Court of Appeals

Petitioner Emilia S. Blas was the lessee of the Premier Theater Building, owned by Alfonso Bichara, located on Rizal Avenue, Grace Park, Caloocan City.
The principal lease contract between Blas and Bichara was originally effective from January 1, 1980, to December 31, 1984, and provided that the lessee had the right to sublease the premises.
Under the lease, Blas subleased portions of the premises:

One portion was sublet to respondent Arthur Yao at a monthly rental of P5,000.00.
Another portion was sublet to Emilio Sia at a monthly rental of P3,000.00.

Respondent Yao consistently paid his monthly sublease rentals to petitioner Blas during the original term and after its expiration, up until March 1985.
On March 27, 1985, Alfonso Bichara notified respondent Yao that, due to the expiration of the original lease on December 31, 1984, rental payments accruing from January 1985 onward were to be made directly to him.
Bichara reiterated his demand in another letter dated July 24, 1985, prompting Yao to subsequently remit payments directly to Bichara.

Alfonso Bichara filed an ejectment suit against petitioner Blas, resulting in a Metropolitan Trial Court decision (dated November 11, 1985) which extended the principal lease for another five years—from January 1, 1985, to December 31, 1989.
This extension was affirmed by the Regional Trial Court of Caloocan City and became final and executory on July 2, 1986.
Despite the extension, petitioner Blas demanded that respondent Yao pay the accrued sublease rentals due to her, yet Yao continued making payments to Bichara.

On February 7, 1987, petitioner Blas sent a formal demand to respondent Yao to pay the accrued sublease rentals (covering both the portion originally subleased to him and that taken over from sublessee Sia) and to vacate the premises.
Upon Yao’s refusal to vacate, Blas initiated an ejectment suit against him before the Metropolitan Trial Court of Caloocan City, Branch 51.
After trial, the court ordered Yao to vacate the premises and to pay compensation at rates of P5,000.00 per month for his original subleased space and P3,000.00 per month for the space subleased to Sia, starting March 1, 1987, continuing until vacatur.

Respondent Yao appealed the Metropolitan Trial Court decision before the Regional Trial Court, Branch 123. On March 17, 1987, the Regional Trial Court reversed the ejectment order and dismissed Blas’ suit, also awarding attorney’s fees of P5,000.00 against petitioner.
Subsequently, petitioner Blas filed a Petition for Review with the Court of Appeals.
On March 28, 1988, the Court of Appeals denied the petition, holding that:

The sublease period had not yet expired as it was deemed automatically renewed for five (5) years along with the principal lease.
Respondent Yao had not defaulted on the payment of sublease rentals since his payments, made to Bichara, were credited to Blas’ account.

Whether the sublease contract was automatically renewed for a period of five (5) years, co-terminous with the renewal of the principal lease.
Whether respondent Yao defaulted on the payment of sublease rentals.

Whether the sublease automatically extended its term to remain co-terminous with the renewed principal lease (i.e., for another five years), or whether the original sublease expired on December 31, 1984, thereby reverting to a month-to-month arrangement.

Whether respondent Yao’s practice of paying the sublease rentals directly to lessor Bichara effectively discharged his payment obligations under the sublease agreement with petitioner Blas.
Whether Yao’s payment arrangement constituted a default in the context of the distinct legal relationship inherent in a sublease.