G.R. No. 197022 - Philippine-Japan Active Carbon Corp. vs. Borgaily

On July 17, 2002, Philippine-Japan Active Carbon Corporation (petitioner) leased two apartment units from Habib Borgaily (respondent) for P15,000.00 each, covering the period from August 1, 2002 to August 1, 2003.
The lease contracts required a security deposit of P45,000.00 per unit as security for faithful performance and coverage of any liabilities arising from the use of the premises. Accordingly, petitioner deposited P90,000.00 as security.
The lease contracts expressly stated the security deposit would not apply to rental payments and was refundable only after lease termination and verification that the lessee had no further obligations.

After the lease expired on August 1, 2003, petitioner continued to occupy the premises until October 31, 2003.
Upon vacating, petitioner demanded the return of the P90,000.00 security deposit, claiming no outstanding obligations.
Respondent counterclaimed that petitioner failed to maintain the premises as required, including keeping them neat and the lawns trimmed, and that the units were significantly damaged and rendered inhabitable.
Respondent asserted he spent P79,534.00 on repairs, supported by receipts, and thus had the right to withhold and apply the security deposit toward these damages.
Respondent further claimed petitioner had misrepresented the intended use of the apartments, which led to reckless use by petitioner’s occupants causing the damage.

Ruled in favor of petitioner ordering the return of the full security deposit with interest and attorney's fees.
Held that the lessor cannot withhold the deposit outright but must seek judicial determination first.

Reversed the MTCC decision and held respondent entitled to offset the repair costs against the security deposit.
Found petitioner’s premises were damaged beyond ordinary wear and tear and validated the counterclaim with supporting receipts and photos.
Awarded nominal damages to respondent.

Dismissed petitioner’s complaint for lack of jurisdiction, ruling that the action was essentially for breach of contract and specific performance, which is not pecuniarily estimable.
Held the case should have been filed with the RTC, and that the MTCC lacked jurisdiction over the complaint for collection of security deposit.

Petitioner assailed the CA decision, arguing the case was a simple collection suit for the return of money, not one for breach of contract or specific performance.
Petitioner emphasized the lease had already expired and no breach was possible after termination.
Respondent maintained that the CA was correct in treating the matter as breach of contract and justified withholding the deposit due to damages caused by petitioner.

Whether the MTCC has jurisdiction over petitioner’s complaint for the return of the security deposit.
Whether the RTC correctly offset the P90,000.00 security deposit against the amount of repairs amounting to P79,534.00 and awarded nominal damages.