Title
Braulio Sto. Domingo vs. Chua Man
Case
G.R. No. L-9998
Decision Date
Feb 28, 1959
A 1952 lease for a cabaret was rescinded due to unpaid rent and taxes; lessee owed back payments, but liquidated damages were voided. Lessor must pay half the building's value to retain improvements.
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Case Digest (G.R. No. L-9998)

Facts:

Lease Agreement

  • On September 20, 1952, Braulio Sto. Domingo (plaintiff-lessor) leased two parcels of land totaling 4,028 square meters in San Juan, Rizal, to Chua Man (defendant-lessee).
  • The lease was for 15 years, effective January 1, 1953, with an option to extend for an additional 5 years if mutually agreed.
  • The purpose of the lease was for the lessee to construct a building of strong materials to operate a "cabaret."

Terms of the Contract

  • The lessee agreed to:
    1. Pay a monthly rental of P300, payable in advance within the first five days of each month.
    2. Insure the building for P40,000.
    3. Reconstruct the building if destroyed within five years using insurance proceeds.
    4. Divide insurance proceeds equally if destroyed between the fifth and eleventh year.
    5. Transfer full insurance proceeds to the lessor if destroyed after the tenth year.
    6. Comply with all regulations in operating the cabaret.
    7. Allow the lessor to hire and dismiss minor employees.
    8. Pay all taxes and services.
    9. Transfer ownership of the building and improvements to the lessor upon termination of the lease.

Breach of Contract

  • By September 13, 1954, the lessee had only paid P1,000 in rentals and failed to pay taxes on the land and building, forcing the lessor to pay P303.70.
  • The lessee failed to appear at the trial but filed an answer claiming that the lease was contingent on the cabaret's operation, which did not materialize.

Trial Court Decision

  • The trial court rescinded the lease contract.
  • Ordered the lessee to:
    1. Pay back rentals of P7,710 with 12% annual interest from February 10, 1953.
    2. Pay liquidated damages of P2,000.
    3. Deliver possession of the land and improvements to the lessor.

Issue:

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Ruling:

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Ratio:

  1. Obligation to Pay Rentals: The contract's express terms govern the parties' obligations. The lessee's failure to pay rentals constitutes a breach, and his defense of contingent operation is unsupported by the contract.
  2. Equitable Reduction of Penalties: Under Article 1229 of the Civil Code, penalties may be reduced if they are iniquitous or unconscionable. The liquidated damages were deemed excessive due to the shared error of both parties.
  3. Ownership of Improvements: Article 1678 of the Civil Code applies, requiring the lessor to compensate the lessee for improvements if the lessor chooses to retain them. This prevents unjust enrichment and ensures equity.

Modified Decision

  1. The lease contract is rescinded, and the lessee must return the leased premises.
  2. The lessee must pay back rentals from January 1, 1953, with 12% annual interest.
  3. The lessee must reimburse the lessor for taxes paid (P303.70) with 12% annual interest.
  4. The lessor must pay P40,000 (half the building's value) if he chooses to keep the building. Otherwise, the lessee may remove the improvements at his own expense.
  5. The P1,000 paid by the lessee shall be deducted from the back rentals.

No costs were awarded.


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