G.R. No. L-47350 - F. S. Divinagracia Agro-Commercial, Inc. vs. Court of Appeals

The original lease dates back to 1899 where the private respondent’s father was the original lessee of a building and lot owned by the late Dona Concepcion Gay de Loring and the spouses Mercedes Van Kauffman and Jaime Ibanez de Aldecoa.
After the father’s demise, the private respondent continued occupying the leased premises.

The petitioner, F. S. Divinagracia Agro-Commercial, Inc., purchased the building and lot from the intestate-estate of the original owners for P250,000.00 on July 9, 1974.
Before the sale, the private respondent had been paying a rental of P1,250.00 per month to the original owners.
After the purchase, for the month of July 1974, the rental was split: P625.00 was paid to the former owner for the first half of the month and P625.00 to the petitioner for the second half.

Following the purchase, a verbal agreement was reached between the petitioner and the private respondent to increase the monthly rent to P2,000.00 beginning August 1974.
The increased rent continued until September 1975.

In the second week of October 1975, the private respondent was informed by Atty. Santiago Divinagracia, representing the petitioner, that his lease would terminate on October 31, 1975.
Despite this advice, the private respondent refused to vacate on October 31, 1975.
A formal letter dated November 4, 1975, reiterated the termination with an extension to the end of November 1975; consequently, the petitioner refused to accept rental payments for December 1975.
In response, the private respondent began depositing the subsequent monthly rental payments with the Clerk of Court.

The petitioner filed a complaint for unlawful detainer before the City Court of Iloilo, Branch I, which rendered a decision favoring the private respondent:

Complaint dismissed.
Defendant (private respondent) was ordered to pay P3,000.00 per month as reasonable rent starting January 1976.
Lease was fixed for a duration calculated from the period since 1899, amounting to seven and a half (7-1/2) years.

The petitioner appealed the City Court decision to the Court of First Instance, which modified the lease term by extending it for one (1) year from finality of the decision while maintaining the dismissal and P3,000.00 monthly rent order.
The private respondent then filed a petition for review before the Court of Appeals, which further modified the decision:

The Court of Appeals extended the lease for an additional five (5) years.
All other parts of the decision were affirmed without pronouncement as to the costs.

The petitioner alleged that the Court of Appeals committed grave abuse of discretion in applying Article 1687 of the New Civil Code by extending the lease for five (5) years.
Specific arguments included:

The appellate decision effectively created a contract between the parties, contrary to the spirit of Article 1687.
The extension improperly based the duration on occupancy beginning in 1899 rather than the private respondent’s personal occupancy.
The circumstances of change in ownership, commercial nature of the premises, the prospective future use by the petitioner, the tenant’s multiple storeholdings, and the fact that the petitioner initiated the unlawful detainer, were factors allegedly not given proper weight.

The petitioner argued that such extension was arbitrary, unfair, and a deprivation of the parties’ contractual freedom.

Whether the Court of Appeals abused its discretion in applying Article 1687 of the New Civil Code by extending the lease for another five (5) years.

Did the appellate court make a de facto contract modification between the parties that was contrary to the intention of the statute?
Should the calculation of the lease period be based on the entire occupancy since 1899 or only on the private respondent’s personal occupancy post-change of ownership?

Whether the criteria under Articles 1687 and 1197 of the New Civil Code were correctly applied by recognizing the court’s equitable power to fix a longer term for an indefinite lease.

Is the discretionary power of the court to extend a lease, as an incident in the ejectment action, properly exercised when equities demand such extension?
Does the change in ownership, the commercial nature of the leased premises, and other circumstances justify or negate the appellate decision?

Whether the lower court’s decision, which was modified on appeal, amounts to an abuse of discretion warranting review by certiorari.

Were the factual findings of both the Court of First Instance and the Court of Appeals sufficiently supported by substantial evidence?
Did the petitioner fail to prove that the appellate court’s extension was arbitrary, despotically or capriciously exercised?