G.R. No. 245461 - Dakak Beach Resort Corporation and Romeo G. Jalosjos vs. Spouses Jose Ma. M. Mendezona and Pilar L. Mendezona

Case Summary (G.R. No. 245461)

Factual Background

On December 1, 1987, Violeta Saguin de Luzuriaga executed a written lease of Lot No. 8771-A in favor of Dakak Beach Resort Corporation, represented by Romeo G. Jalosjos. The lease covered January 1, 1988 to December 31, 1997, with a ten-year rental schedule that began at PHP 500.00 monthly and provided for twenty-percent annual escalations until a PHP 2,000.00 monthly rate in the tenth year. The contract stipulated that all permanent and fixed improvements introduced by the lessee would become the property of the lessor upon termination. Violeta repeatedly demanded a copy of the lease but was not furnished one. In 1993 she returned checks representing rental for August to December 1992, believing the lease had expired. Violeta demanded vacation of the property in May 1994, and she sold the lot to her daughter, Pilar, on April 13, 1998. Pilar demanded turnover in August 1999, and when possession was not surrendered, the Spouses Mendezona filed an action for recovery of possession, specific performance, rentals, and damages on April 2, 2003.

Trial Court Proceedings

In their amended answer, Dakak and Jalosjos admitted that the lease expired on December 31, 1997, but they continued in possession and made considerable improvements on the lot as part of the resort. They contended entitlement to reimbursement, retention, or compensation under doctrines of builder in good faith (Articles 448 and 546) and under Article 1678 for useful improvements, and they asserted a preferential right of redemption under Articles 1621 and 1623. The defendants argued that the lease was not lawfully terminated, that the corporation had invested substantially in the area, and that equity and their alleged rights should permit continued possession or compensation. At trial, Jalosjos testified regarding adjoining properties owned by his family and proffered an unsuccessful offer to buy the lot.

Ruling of the Regional Trial Court

The RTC rendered judgment in favor of the Spouses Mendezona on August 1, 2016. The court ordered the defendants to vacate Lot No. 8771-A and to return possession within thirty days from finality. It declared that all improvements on the lot became the property of the plaintiffs pursuant to the lease. The RTC computed unpaid rentals and awarded PHP 4,401,309.68 as unpaid rental with six percent interest per annum until paid. The court fixed reasonable rent at PHP 50,000.00 per month after finality until surrender of possession, and it ordered defendants to pay costs. The RTC reasoned that Article 1678 did not apply because the parties expressly provided in the lease that permanent improvements would belong to the lessor upon termination, and that the right of redemption under Articles 1621 and 1623 required agricultural use which was absent in the trial court’s view.

Ruling of the Court of Appeals

On June 28, 2018 the Court of Appeals affirmed the RTC decision with modifications. The CA ordered vacation within thirty days and declared the improvements owned by the plaintiffs pursuant to the lease. It rejected defendants’ claims under Articles 448 and 546 and held Article 1678 inapplicable because the lease expressly vested improvements in the lessor upon termination. The CA adjusted the monetary awards: it accepted unpaid rentals for August 1992 to 1997, deemed PHP 4,000.00 a reasonable monthly rent for 1998, and sustained annual escalations of PHP 2,000.00 thereafter until surrender; it struck down the RTC’s PHP 50,000.00 monthly rate as baseless and computed total rent due from 1997 to June 2018 at PHP 5,865,309.68, with six percent interest from finality until paid. The CA further found the title classification to be agricultural but concluded that the right of redemption did not apply because the land and the surrounding lots were used for commercial purposes.

Issues Presented

The petition presented five questions: whether the total rent awarded by the CA was unconscionable or contrary to law; whether the lease was validly terminated; whether Dakak was a builder in good faith entitled to retain the property until reimbursement; whether the Spouses Mendezona must pay one-half of the value of improvements under Article 1678 upon termination of the lease; and whether Dakak and Jalosjos, as owners of adjoining rural lands, had a right of redemption under Article 1621 when Violeta sold the lot on April 13, 1998.

Supreme Court’s Disposition

The Supreme Court denied the Petition for Review on Certiorari for lack of merit. The Court observed the Rule 45 limitation that generally confines review to questions of law and noted that no exception applied to warrant reconsideration of the CA’s factual findings. The Court found no reversible error in the CA’s determinations and affirmed the CA decision with further modification of certain computations and awards.

Legal Basis and Reasoning on Improvements and Reimbursement

The Court held that Articles 448 and 546 concerning a builder in good faith did not apply because those provisions presuppose assertion of title and do not ordinarily apply where a contractual relationship exists between lessor and lessee. The Court distinguished the exceptional factual context of Spouses Macasaet v. Spouses Macasaet and found its facts absent here. The Court further held that Article 1678 on reimbursement for useful improvements did not govern because the lease expressly provided that permanent and fixed improvements would become the property of the lessor upon termination. Under Article 1306, parties may stipulate lawful contractual terms, and jurisprudence has upheld stipulations that improvements vest in the lessor at lease expiration. The Court also found that defendants waived or prescribed any claim under Article 1678 by failing to plead it timely and by asserting it for the first time on appeal; the ten-year prescription under Article 1144 and procedural rules requiring defenses to be raised in the answer barred belated claims.

Legal Basis and Reasoning on Right of Redemption

The Court agreed with the CA that Lot No. 8771-A was agricultural in title because it was acquired by free patent, but it concluded that the right of redemption under Article 1621 requires that the land sought to be redeemed and the adjoining lands be used for agricultural purposes. Citing precedents, the Court emphasized that the statutory redemption protects agricultural exploitation and that when both the subject and adjoining lands are used for commercial purposes the doctrine does not apply. Because Lot No. 8771-A and surrounding parcels were used commercially as part of the resort, Dakak and Jalosjos could not invoke the statutory right of redemption.

Computation of Rentals and Corrections

The Court corrected the RTC’s computation of unpaid rentals for August to December 1992 to December 31, 1997. It found that the proper monthly rental for 1992 was PHP 844.00 and that the RTC erred by omitting the amount for 1993. Applying the rental schedule in the lease, the Court computed unpaid rent from August 1992 to December 1997 at PHP 93,463.28. The Court upheld the CA’s determination that PHP 4,000.00 was a fair monthly rent for 1998 and that an annual escalation of PHP 2,000.00 in the monthly rate for succeeding years was fair and reasonable until surrender of possession. The Court directed that unpaid rentals and reasonable rent awarded would earn interest at six percent per annum from April 2, 2003, the date of filing of the complaint, until fully paid.

Damages, Executory Relief, Interest, and Costs

Case Syllabus (G.R. No. 245461)

Parties and Procedural Posture

Dakak Beach Resort Corporation and Romeo G. Jalosjos filed a Petition for Review on Certiorari under Rule 45, Rules of Court from the decision of the Court of Appeals affirming with modification the Regional Trial Court ruling.
Spouses Jose Ma. M. Mendezona and Pilar L. Mendezona were the plaintiffs below and the appellees in the proceedings before the Court of Appeals and this Court.
The RTC rendered judgment on August 1, 2016 in Civil Case No. 5812, the Court of Appeals issued its decision on June 28, 2018 and denied reconsideration on January 25, 2019, and the present petition assailed those rulings.
The Supreme Court denied the Petition for lack of merit and affirmed with modification the Court of Appeals decision.

Key Factual Allegations

Lot No. 8771-A is a 1,602-square-meter parcel in Taguilon, Dapitan City covered by OCT No. P-26943-26 acquired under Free Patent No. (IX-8)2977 and originally owned by Violeta Saguin de Luzuriaga.
On December 1, 1987, Violeta executed a written lease with Dakak, represented by Jalosjos, for ten years from January 1, 1988 to December 31, 1997, renewable for five years by mutual agreement.
The lease fixed monthly rents starting at PHP 500.00 for the first two years and prescribed a 20% annual increase thereafter up to PHP 2,000.00 for the tenth year, and it expressly provided that all permanent and fixed improvements introduced by the lessee would become the lessor's property upon termination.
Violeta never received a copy of the lease despite repeated demands, ceased accepting rent checks in 1992, and sold the property on April 13, 1998 to her daughter Pilar L. Mendezona.
Pilar demanded turnover on August 16, 1999, and Spouses Mendezona filed a complaint for recovery of possession, specific performance, rentals, and damages on April 2, 2003.

Lower Court Findings

The RTC ordered defendants to vacate within thirty days, declared the improvements to belong to the plaintiffs, awarded unpaid rentals and fixed post-lease reasonable rent at PHP 50,000.00 per month, and computed unpaid rent totaling PHP 4,401,309.68 as of 2015.
The Court of Appeals affirmed the RTC with modification, declared the improvements owned by the plaintiffs, struck down the PHP 50,000.00 monthly post-decision rent as baseless, continued the yearly escalation rule, and computed total rent due up to mid-2018 at PHP 5,865,309.68.
The CA denied reconsideration and its Decision and Resolution became the subject of the present Rule 45 petition.

Issues Presented

Whether the total rent awarded by the Court of Appeals was unconscionable and contrary to law.
Whether the contract of lease was validly terminated.
Whether Dakak qualified as a builder in good faith under Article 448 and was entitled to retain the property until reimbursement.
Whether the lessees were entitled to one-half of the value of improvements under Article 1678 upon lease termination.
Whether Dakak and Jalosjos, as owners of adjoining rural lands, had a right of redemption under Articles 1621 and 1623 when Violeta sold the lot.

Petitioners' Contentions

Dakak and Jalosjos asserted they were builders in good faith under Articles 448 and 546 and thus could require indemnity and retention until reimbursed.
Petitioners alternatively asserted entitlement to one-half the value of improvements under Article 1678 if not considered builders in good faith.
Petitioners claimed a right of redemption as adjoining landowners under Articles 1621 and 1623 and contended that the rental awards were excessive and unconscionable.
Petitioners argued that they had a preferential right to acquire the property and claimed to have consigned the amount paid by Spouses Mendezona for the sale.