G.R. No. 169656 - Felsan Realty and Development Corp. vs. Commonwealth of Australia

Felsan Realty & Development Corporation (petitioner) is the owner of a three-storey duplex residential house in San Lorenzo Village, Makati City.
On February 25, 1997, the respondent, Commonwealth of Australia, entered into a contract of lease with the petitioner.
The lease was for a period of two years (February 22, 1997 – February 21, 1999) with an agreed monthly rental of ₱100,000.00.
The respondent paid a security deposit of ₱200,000.00 (two months’ rent) and advanced rental payments amounting to ₱2,400,000.00.

On November 4, 1997, at approximately 2:30 a.m., a fire broke out on the ground floor of the leased property, destroying a major portion of the house.
The Bureau of Fire Protection’s Investigation Report determined that the fire was accidental, caused by an overheated electric fan that produced intense heat/sparks and ignited combustible materials.
On November 21, 1997, the respondent declared that the property had become uninhabitable and unsuitable for living, based on an appraisal by its Facilities Manager estimating a three-month repair period.
Consequently, the respondent demanded an immediate pre-termination of the lease and reimbursement of the advance rentals and security deposit.

The petitioner denied the respondent’s demand for pre-termination, arguing that the fire was due to the alleged gross negligence of the occupants (as per the fire report).
Instead of agreeing to terminate the lease outright, the petitioner offered to refund any balance from the advance rentals and security deposit from the time a new lessee was found until February 22, 1999.
On May 29, 1998, after finishing repairs, the petitioner communicated with the respondent regarding reoccupancy, but the respondent rejected the proposal and reiterated its request for a full refund of the advance rentals paid.

On November 13, 1998, the respondent filed a complaint seeking ₱1,556,666.67 (the balance of the prepaid rental), along with exemplary damages, attorney’s fees, and costs.
In its Answer with Counterclaim, the petitioner argued that the respondent failed to comply with the mandatory requirement of having a public document under Article 1358 of the Civil Code for the pre-termination or rescission of a lease.
The petitioner also contended that the damage was due to the respondent’s negligence, which should disqualify the latter from receiving a reimbursement.

Edgardo A. Nogales, then-Chief of the Investigation and Intelligence Unit of Fire Station 2, testified that the fire was accidental, as the overheated fan was plugged in but not switched on.
Reynaldo D. Gonzales, a Fire and Arson Investigator, testified that the fire likely started in the maid’s quarters, with evidence pointing to the burnt electric fan still plugged in as the only ignition source.
The conflicting testimonies of these officers raised issues regarding the exact cause and whether negligence was involved.

On October 23, 2000, the Regional Trial Court (RTC) ruled in favor of the respondent, upholding the right to pre-terminate the lease based on Section 13 of the lease contract.
The RTC found that the fire was accidental, a conclusion supported by the fire investigators, and held that the defect in public documentation under Article 1358 did not invalidate the rescission.
The RTC also awarded the respondent the balance of the prepaid rentals, the security deposit, and attorney’s fees.
On December 2, 2004, the Court of Appeals (CA) affirmed the RTC decision.
The CA denied the respondent’s motion for reconsideration on September 13, 2005.

The petitioner alleged several grave and reversible errors committed by the CA, including:

Erroneously placing the burden on the petitioner to prove that the respondent was negligent, contrary to Civil Code Articles 1667 and 1668.
Equating the term “accidental” with a lack of negligence, regardless of any potential contributory fault.
Improperly weighing conflicting testimonies, specifically dismissing SFO4 Nogales’ evidence as hearsay and preferring FO3 Gonzales’ account without proper justification.
Relying on speculative conjecture regarding potential faulty wiring despite the absence of factual evidence.
Erroneously applying the principle of estoppel against the petitioner in connection with its reliance on the certification for indemnity recovery.
Incorrectly upholding the respondent’s automatic rescission rights and the reimbursement of advance rentals and security deposits under Section 13 of the lease contract.

Whether the Court of Appeals erred in placing on the petitioner the burden of proving the respondent’s negligence, considering the presumption under Civil Code Articles 1667 and 1668.
Whether the CA wrongly conflated the term “accidental” with the absence of negligence, thereby supporting the respondent’s pre-termination rights.
Whether the CA incorrectly assessed and gave weight to the conflicting testimonies of the fire investigators, particularly regarding the electric fan’s operational status.
Whether the CA should have deemed certain evidence as inadmissible or incompetent (i.e., SFO4 Nogales’ testimony) in favor of alternative evidence presented by FO3 Gonzales.
Whether the interpretation and application of Section 13 of the lease contract, especially regarding automatic rescission and reimbursement due to force majeure (fire), were correctly rendered by the appellate courts.
Whether the award of attorney’s fees to the respondent was factually and legally justified under the circumstances.