Case Summary (G.R. No. 74938-39)
Background and Factual Findings
Gaw Ching leased a building and lot at 697-699 Asuncion Street, Binondo, Manila from the lessor and later from Malabanan after the original lessor’s death. The lease was month-to-month and without a fixed written duration. Malabanan sought to sell the property to Gaw Ching in 1980 at a price of P5,000.00 per square meter, a price Gaw Ching considered prohibitive and refused. Malabanan then purportedly sold the property to Senolos in August 1979, a fact that Gaw Ching denied receiving official notice of until November 1980. Despite multiple offers to purchase, Gaw Ching did not consummate a sale with Malabanan. Later, the building was condemned by the City Engineer due to its condition, demolition orders were issued and executed, during which Gaw Ching's belongings were allegedly damaged. Gaw Ching contested the demolition, claiming lack of proper notice and damages resulting from its execution.
Trial Court’s Decision
The RTC upheld the validity of the contract of sale between Malabanan and Senolos and ruled that there was no violation of the lessee’s right of preemption under P.D. No. 1517, Proclamation No. 1893, or LOI No. 935. The trial court found that Gaw Ching had ample opportunity to exercise any right of first refusal but failed to act affirmatively. It further held the demolition order was valid and lawful under the exercise of police power following proper procedures. Claims for damages by Gaw Ching were largely dismissed due to lack of evidence and his failure to safeguard his belongings.
Intermediate Appellate Court’s Reversal
The IAC reversed the RTC by a 3-2 vote, annulling the contract between Malabanan and Senolos on grounds of fraud, deceit, and bad faith. It found the sale to Senolos was null and void because the sale price offered to Gaw Ching was inflated after the purported earlier sale to Senolos at a lower price. The appellate court held that Gaw Ching, as a long-time tenant, had a preemptive right to purchase the property and that the demolition of the building was unwarranted, contravened civil and procedural laws, and caused damages. Consequently, it awarded Gaw Ching moral, exemplary, and actual damages totaling P350,000, plus attorney’s fees of P20,000, holding petitioners jointly liable.
Legal Principles Regarding Third-Party Actions to Annul Contracts
The Supreme Court reiterated settled legal doctrines that generally, only parties to a contract or those with direct legal interest may seek annulment of that contract (Civil Code, Articles 1311 and 1397). Strangers to a contract lack capacity to impugn its validity. An exception may exist if a non-party shows direct prejudice caused by the contract, but such nullification must be strictly necessary to protect the non-party’s lawful rights.
Application of Legal Principles to Gaw Ching’s Case
Gaw Ching, as a lessee and not a party to the contract of sale between Malabanan and Senolos, was considered a stranger to that contract. The Court emphasized that:
- The property was outside declared Urban Land Reform Zones where P.D. No. 1517's preemptive rights apply.
- Even if it were inside such a zone, the preemptive right under P.D. No. 1517 exists only when the lessee has established a home on the land and resided there continuously for at least ten years—a criterion not met here.
- No contractual stipulation granted Gaw Ching any preemptive or preferential right.
- Malabanan made valid offers to sell to Gaw Ching, who declined them; hence, there was no prejudice or fraud in the subsequent sale to Senolos.
- A lessee cannot challenge the title of his lessor; the lease automatically lapsed after issuance and execution of the demolition order, which terminated the tenancy.
On the Demolition and Alleged Damages
The Supreme Court found that:
- The demolition order issued by the proper authorities, specifically the City Engineer and approved by the Mayor, was valid and a lawful exercise of police power to abate a nuisance under applicable laws (Civil Code Articles 436 and 482; P.D. 1096).
- Only the owner of the building was entitled to appeal the demolition order to the Secretary of Public Works and Highways; Gaw Ching, as lessee, had no such right and did not formally appeal.
- A letter from MPWH to hold demolition in abeyance was issued during the final stages of demolition and
Case Syllabus (G.R. No. 74938-39)
Facts of the Case
- The case involves two consolidated civil actions: Civil Case No. R-81-416 and Civil Case No. R-82-6798, concerning the sale of land located at 697-699 Asuncion Street, Binondo, Manila.
- Respondent Gaw Ching was a lessee of the property from 1951, conducting his business on the ground floor and residing on the second floor. The lease was originally with Mr. Jabit, later continued with his daughter, petitioner Angelina Malabanan.
- Rental payments were monthly, initially at P700, later increased to P1,000 per month. There was no written lease contract specifying duration.
- Petitioner Malabanan offered to sell the property to respondent Gaw Ching at P5,000 per square meter on April 27, 1980, repeating the offer in May and October 1980.
- Gaw Ching declined the offered price, considering it prohibitive, and did not make a written counter-offer.
- Malabanan ultimately sold the property to petitioner Leonida Senolos, with the Deed of Sale dated August 23, 1979, but registered December 9, 1980.
- Gaw Ching received notice of the sale only after its execution and was demanded to vacate the premises for conversion into a warehouse.
- The building was subsequently demolished despite a cease-and-desist order during demolition, leading to claims of damages by Gaw Ching.
- Gaw Ching admitted he was not yet a Filipino citizen at the time the offers to sell were made, acquiring citizenship only on October 7, 1980, but failed to inform Malabanan of this change.
- The trial court upheld the contract of sale and ruled Malabanan did not violate applicable laws concerning preemptive rights.
- The Intermediate Appellate Court reversed the trial court’s decision, nullifying the sale and awarding damages to respondent Gaw Ching.
Legal Issue on Standing to Sue for Annulment of Contract
- The fundamental legal question was whether a third party, specifically respondent Gaw Ching, a lessee and thus a stranger to the contract between petitioners Malabanan and Senolos, has the legal right to annul the contract of sale.
- Article 1397 of the Civil Code limits annulment actions to those who are principally or subsidiarily obliged under the contract.
- Article 1311 of the Civil Code states contracts only take effect between parties, assigns, and heirs, except where rights and obligations are non-transmissible by nature, stipulation, or law.
- Jurisprudence from Ybanez v. Hongkong and Shanghai Bank affirms that only a party or one with