G.R. No. L-2395 - Cortes vs. Dy-Jia

On September 25, 1901, the plaintiff, Doroteo Cortes, leased a tract of land in Manila to the lessees, Dy-Jia and Dy-Guico, for a period of five years starting October 1, 1901.
The lease was purportedly set to terminate on September 30, 1900, though this appears to be an error given the five‐year term.
Clause E of the contract explicitly provided that the lessees were forbidden from subleasing the premises or mortgaging any building constructed thereon. Violation of this clause would result in the lease being rescinded as if the full term had expired, with all improvements reverting to the lessor.

The lessees took possession of the leased property and proceeded to erect a building, incurring construction costs estimated at about 11,000 pesos.
The construction was done under the terms of the lease, notwithstanding the strict prohibition contained in Clause E regarding subleasing or transferring interests.

In a series of actions suggesting a deviation from the original parties, Dy-Guico on December 31, 1902, signed a statement attributing the building’s ownership to the defendant, Li Tsung Ling, and directing payment of the due rent to the plaintiff.
Subsequently, on May 18, 1903, Dy-Jia made a similar written declaration, assigning all of his leasehold interest in the property to Li Tsung Ling.
The defendant paid the rent from November 1902 up to January 1904, while the receipts issued by the plaintiff continued to be in the name of the original lessees, Dy-Jia and Dy-Guico.

On January 8, 1904, the lawyer of Li Tsung Ling sent a letter to the plaintiff regarding the rent for January, asserting that the lessees acted as his agents.
The plaintiff testified that he only discovered the transfer of leasehold interest in November 1902 upon receiving this letter.
On January 10, 1904, after receiving the January rent from Li Tsung Ling, the plaintiff issued a receipt reflecting payment from Dy-Jia and Dy-Guico.
On January 16, 1904, the plaintiff initiated legal action seeking to rescind the lease contract effective November 12, 1902, and to be declared the owner of the building constructed on the leased land.

The trial court rendered a judgment in favor of the plaintiff based on the purported violation of Clause E by the assignment.
The defendant, Li Tsung Ling, subsequently moved for a new trial on grounds that the findings of fact were not supported by evidence, and after the motion was denied, he brought the case to the appellate level through a bill of exceptions.
Additionally, Li Tsung Ling filed a counterclaim to reform the lease by striking out Clause D (which required the removal of buildings at lease expiration) and substituting it with a clause that would either require the plaintiff to pay the reasonable value of the buildings or extend the lease term.

Whether the assignment of the leasehold interest by Dy-Jia and Dy-Guico to Li Tsung Ling was valid despite the restrictive language of Clause E, which prohibited subleasing or transferring of the lease.
Whether the plaintiff’s receipt of rent from Li Tsung Ling constituted an implied consent to the assignment.

Whether the act of receiving rent from the assignee, once the plaintiff had actual knowledge of the assignment, amounted to an affirmation of the tenant-assignee relationship.
Whether such conduct voids the strict enforcement of the contractual restriction imposed by Clause E.

Whether the counterclaim for reforming Clause D of the lease, aiming to substitute the removal provision with a payment for the reasonable value of the buildings or an extension of the lease, holds any merit under the circumstances.
Whether the proposed reformation would be consistent with the established contractual and legal principles governing lease agreements and their modifications.