G.R. No. L-11028 - Lao Chit vs. Security Bank and Trust Co.

In May 1949, Consolidated Investments, Inc. (the lessor) leased a part of the lobby on the ground floor of the Consolidated Building, Plaza Goiti, Manila, to Domingo T. Dikit, for the proposed establishment of the Bank of Manila.
Under the lease, Dikit was obligated to construct the necessary walls, partitions, and other improvements to adapt the space for banking purposes. The contract stipulated that such improvements “shall become the property” of the lessor upon the termination and/or rescission of the lease.
A separate contract was executed in June 1949 between Dikit, his associate Jose Silva, and Lao Chit, wherein Lao Chit agreed to furnish materials and labor for the improvements at a total cost of P59,365, with payment scheduled “as soon as the Bank of Manila opens for business and is given a permit by the Central Bank.”

The proposed Bank of Manila never opened for business, as the required Central Bank permit was never issued.
Dikit failed to pay the agreed monthly rental of P5,000 starting October 1949 according to the lease contract.
On December 3, 1949, the lessor instituted Civil Case No. 9708 for unlawful detainer, which led to a judgment on March 27, 1950, ordering Dikit to vacate the premises and pay accrued rentals and other charges.

Dikit appealed the decision, even filing a petition for certiorari (Case G.R. No. L-3621) against the municipal judge, though both cases (Civil Case No. 11214 and L-3621) were ultimately dismissed by mutual agreement dated May 22, 1951.
As part of the agreement, Dikit relinquished any rights to the leased premises and disclaimed any interest in the improvements he had caused to be built.

Prior to the resolution of the ejectment case, Lao Chit had filed Civil Case No. 10178 against Dikit and Silva, seeking recovery for the amount advanced for the construction of the improvements.
On June 30, 1953, judgment in that case ordered the defendants to pay Lao Chit P59,365 (aggregating claims under several causes of action) with additional damages, attorney’s fees, and costs, and provided that the permanent fixtures would remain Lao Chit’s property until fully compensated.
The corresponding writ of execution was later issued but returned unsatisfied when it was discovered that neither Dikit nor Silva had any registered property, and Silva's whereabouts were unknown.

On September 10, 1953, Lao Chit brought suit against the Security Bank and Trust Company, the new tenant after the premises were leased by the lessor effective July 1, 1951, and later amended the complaint to include the lessor as a defendant.
Lao Chit claimed rental payments for the use of the improvements (at P1,000 per month) along with litigation expenses, attorney’s fees, and costs.
The Bank responded that it occupied the premises under a valid lease with the lessor, had paid the rentals due, and denied any liability regarding the improvements.
The lessor, in its answer, insisted that the improvements were constructed at the expense and initiative of Dikit and Silva, and by right of accession (as stipulated in the lease), the improvements were an integral part of the building and belonged to the lessor. It also counterclaimed for P50,000 as damages for being joined as a defendant.

On December 28, 1955, the Court of First Instance of Manila rendered judgment awarding Lao Chit the value of the improvements (P59,365) and additional sums for the use of the improvements, along with legal interest and reimbursement for litigation expenses, while dismissing the counterclaims of the defendants.
Both the Bank and the lessor appealed the decision, contesting the holding that Lao Chit was entitled to recover from them for the value of the improvements, given the contractual and statutory framework governing the lease and the ownership of the improvements.

Whether the improvements made by Lao Chit, although constructed at his expense and with his materials and labor, should be considered his property or whether they automatically became the property of the lessor by operation of the lease agreement.
How the specific contractual clause (providing that improvements become the property of the lessor upon termination or rescission of the lease) affects the property rights over the constructed improvements.

Applicability of the Builder in Good Faith Provision (Article 361 of the Spanish Civil Code)

Whether Lao Chit, as the builder of the improvements, could invoke Article 361 which entitles a builder in good faith to appropriate his construction upon payment or compensation, given that he did not act under the belief of owning the property.
The distinction between “edificar” (to build an edifice) versus merely constructing fixtures or partitions in an existing building, and how that impacts the claim under Article 361.

Whether Lao Chit could recover the amount advanced under the principle of unjust enrichment (as reflected in Article 2142 of the Civil Code of the Philippines) since he did not receive payment from Dikit and Silva.
Whether the enrichment of the lessor, despite the nonpayment by Dikit, would legally constitute unjust enrichment given the losses and the contractual framework.

Whether the Bank, as a bona fide tenant who had fulfilled its rental obligations under a valid lease with the lessor, could be held liable for the improvements made by Lao Chit.
If the Bank’s possession and use of the premises (including the improvements) were based entirely on its contractual relationship with the lessor, exempting it from any liability toward Lao Chit.