Title
Lao vs. Lao
Case
G.R. No. 149599
Decision Date
May 16, 2005
A dispute over property possession arose when the new owner filed unlawful detainer against a manager, not the lessee. SC ruled lease binding, improper filing.
property dispute
unlawful detainer
complaint

Case Summary (G.R. No. 149599)

Factual Background

After the spouses had constructed the building, they occupied and leased the premises without any written agreement. Anita Lao also established a business in the same premises. On May 12, 1982, Alfredo Alava and Anita Lao formalized their arrangement by executing a Contract of Lease for a term of 35 years and annual rental of P120.00. However, the contract was not registered and was not annotated at the dorsal portion of TCT No. 28382, and thus did not appear on the title.

Petitioner later purchased the property from Alava on March 21, 1995 and received TCT No. 152,097 in his name. By that time, the property had been classified as commercial. Yet the annual rental stated in the written lease contract between Alava and Anita Lao remained the same. Petitioner also leased another portion of the same property where he put up his business, adjacent to Anita Lao’s building. Jaime was managing and maintaining Anita Lao’s building and her business thereon. Petitioner knew, even before purchasing, that Anita Lao owned the building, that she had leased a portion of the property, and that Jaime managed the building and business.

Initiation of the Unlawful Detainer Case

On July 14, 1997, petitioner filed a complaint for unlawful detainer against respondent Jaime Lao before the 1st Municipal Circuit Trial Court (MCTC) of Carles-Balasan, Iloilo City. Petitioner alleged that respondent occupied a portion of the property without any lease agreement and without paying rentals, and that such occupancy was only by petitioner’s tolerance and generosity. Petitioner prayed for: (a) respondent’s vacation of the premises and removal of improvements, with restoration of possession to petitioner; (b) payment of P50,000.00 as attorney’s fees; (c) at least P15,000.00 for miscellaneous litigation and necessary expenses; (d) compensation for use and occupation at P5,000.00 per month from January 24, 1997 until full surrender; and (e) costs of suit.

Respondent denied liability and asserted that he had no cause of action against him. He claimed that Anita Lao was the lessee, evidenced by the contract of lease executed by Alava and Anita. He alleged that Anita Lao paid rentals, with the last payment made on July 16, 1997, evidenced by a receipt. Respondent also averred that he had been designated as manager to maintain the building, pay rentals, and operate the business. During the preliminary conference, respondent admitted that he was in actual possession of the property. Petitioner admitted that he rented another portion from Alava for years and that the businesses were adjacent. He also admitted that Anita Lao had been renting the portion of the property for years before petitioner bought it. Respondent presented the contract of lease in evidence.

MCTC Ruling

On March 4, 1999, the MCTC rendered judgment for petitioner, ordering respondent to vacate the portion of Lot No. 3 he occupied and to deliver physical possession to petitioner. The MCTC further ordered respondent to pay petitioner monthly rentals of the premises on Lot No. 3 starting January 1997 until possession was delivered, as well as attorney’s fees and litigation expenses, plus costs.

RTC Proceedings and Modified Affirmance

Respondent appealed to the Regional Trial Court (RTC) of Barotac Viejo, Iloilo City, Branch 66. On January 28, 2000, the RTC affirmed the MCTC decision with modification. The RTC increased specificity regarding the “reasonable use of the land,” ordering respondent to pay petitioner P1,000.00 per month from January 1997 until possession was turned over. It also adjusted the amounts for attorney’s fees and litigation expenses, and imposed costs against respondent.

The RTC grounded its ruling on Article 1676 of the New Civil Code, reasoning that because petitioner was the purchaser of the property and the lease was not registered with the Office of the Register of Deeds, petitioner had the right to terminate the lease between Alava and Anita Lao. The RTC also held that respondent was the real party as defendant because it was respondent who had actual possession, and it reasoned that any judgment against Anita Lao would not bind respondent if respondent was not impleaded.

CA Reversal on Real Party-in-Interest

Respondent sought review with the Court of Appeals (CA). He argued, in substance, that the RTC misidentified the real party-in-interest by affirming the MCTC’s finding that the proper defendant was respondent despite respondent being only an agent of Anita Lao, the lessee. Respondent also contended that the trial courts ignored admissions made in the record, particularly petitioner’s knowledge of the lease.

On February 27, 2001, the CA reversed and set aside the RTC decision. The CA held that the real party-in-interest as defendant in the unlawful detainer case was Anita Lao, the lessee. It ruled that respondent was merely the administrator/manager of Anita Lao’s building and the occupant whose possession was derived from the lease relationship.

After petitioner’s motion for reconsideration was denied, petitioner filed a petition for review on certiorari, maintaining that the CA improperly converted his ejectment theory against respondent into one against respondent’s mother.

Issues for Resolution

The Court framed the controversy around who should be considered the real party-in-interest in an unlawful detainer action, specifically whether respondent’s physical possession made him a proper defendant in his personal capacity or whether his possession was referable to the subsisting lease in favor of Anita Lao.

Parties’ Contentions in the Supreme Court

Petitioner maintained that respondent was the real party-in-interest because respondent possessed the premises personally and not as a caretaker or agent of the lessee. Petitioner urged that in ejectment suits, the threshold inquiry concerns the right to material or de facto possession rather than de jure possession rooted in ownership. Petitioner further insisted that since respondent had admitted actual possession and since Anita Lao was no longer staying in the property after her husband died, respondent was the person that should have been sued. Petitioner also argued that suing Anita Lao would have resulted in dismissal because it was respondent, not his mother, who was in actual possession.

Respondent, on the other hand, relied on the existence of the lease between Alava and Anita Lao and argued that his occupancy and management activities were on behalf of his mother, the lessee.

Legal Basis and Reasoning

The Court agreed with petitioner on the doctrinal point that in ejectment cases, the term “possession” refers to actual physical possession rather than legal possession in the civil-law sense. The Court also agreed that the sole issue in unlawful detainer is the entitlement to physical or material possession, independent of ownership. It further recognized the general rule that in an unlawful detainer action, the real party-in-interest as defendant is the person in possession without the benefit of a lease and who occupies only by the owner’s tolerance and generosity.

However, the Court found that the facts in this case did not fit the “mere tolerance” model invoked by petitioner. Respondent had not been in possession by mere tolerance of petitioner, but as the manager of the building and business conducted by Anita Lao, who was the lessee under the lease executed by Alava. Thus, respondent’s possession was held for and in behalf of Anita Lao, and not independently in his own right.

The Court emphasized that petitioner could not credibly claim ignorance of the lease relationship or the factual basis of respondent’s occupancy. It noted that petitioner admitted during the preliminary conference his knowledge of the building and Anita Lao’s business and rental arrangement, as well as respondent’s management role. While it was true that the lease contract was not filed and annotated on the title, the Court held that petitioner, as the vendee, was nevertheless bound by the lease terms, which became part of the contract of sale.

The Court anchored the procedural right of the purchaser in Section 2, Rule 70 of the Rules of Court, which requires that the lessor proceed a

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