Title
Muller vs. Philippine National Bank
Case
G.R. No. 215922
Decision Date
Oct 1, 2018
Spouses Muller occupied PNB-owned land post-lease expiry, refused to vacate or pay rent. Courts ruled they owed back rent from initial demand, with interest, as their occupation created a forced lease.
rental arrears
ejectment case
prescription

Case Summary (G.R. No. 215922)

Factual Background

The CA, whose narration the Supreme Court substantially adopted, found that the Muller spouses were the occupants of two parcels of land with improvements in Abeto Subdivision, Iloilo City, owned by PNB, with an aggregate area of one thousand two hundred fifty (1,250) square meters. On May 26, 1987, PNB informed them that their lease would expire on June 1, 1987, and that they had rental arrears for two and a half years amounting to PhP18,000.00.

The Muller spouses sought renewal and also attempted to propose to purchase the properties, but PNB denied renewal on June 13, 1987 and later informed Fritz that the offer to purchase was not given due course by the Head Office. On March 17, 1988, PNB demanded that the Muller spouses vacate within fifteen (15) days due to the lease expiration, yet they did not comply. In July 17, 2006, PNB sent a final demand letter requiring payment of rental arrears from June 1984 up to June 1, 2006, and the Muller spouses failed to respond properly. As a result, PNB instituted a Complaint for Ejectment.

MTCC Decision and the Initial Award of Rentals

On October 19, 2007, the MTCC rendered a decision in favor of PNB. The MTCC ordered the Muller spouses to vacate and to pay PNB specified amounts: PhP18,000.00 as rent from June 1984 to June 1987, PhP2,000.00 a month from June 1, 1987 to June 1, 1997, and PhP2,500.00 a month from June 1, 1997 to August 1, 2007, with no cost imposed in that decision. The Muller spouses filed a notice of appeal. Later, on February 1, 2008, PNB moved for execution because the appellants failed to file a supersedeas bond to stay execution.

RTC Ruling: Reckoning from Last Demand, Judicial Notice, and Prescription

In its June 2, 2008 decision, the RTC modified the MTCC ruling. The RTC held that the reckoning point from which PNB could invoke accrual of its claims in the unlawful detainer setting was the date of receipt of the last demand. It also ruled that the MTCC could not take judicial notice of the fair rental value of the premises. The RTC further held that prescription applied.

The RTC reasoned that the receipt of the June 17, 2006 demand letter was when the Muller spouses became deforciant, but it refused to award compensation for the earlier period in a manner inconsistent with unlawful detainer rules. It also ruled, as to prescription, that because possession from 1984 to 1987 was based on a written lease, actions to pay rent were governed by Article 1144 and thus prescribed in ten (10) years; however, for the period after 1987, it treated the basis as oral and applied Article 1145, treating the relevant actions as prescribing in six (6) years. Based on that theory, it reduced the reasonable rental award and fixed it at PhP1,000.00 per month reckoned only from the date of receipt of the latest demand letter until August 1, 2007 when the Muller spouses vacated.

Court of Appeals Decision: Initial Demand, Non-Applicability of Prescription, and Rental Determination

PNB appealed to the Court of Appeals. In its October 30, 2013 decision, the CA reversed the RTC. The CA ruled that, contrary to the RTC’s last-demand approach, reasonable compensation for the use and occupancy should be reckoned from the date of initial demand rather than from the receipt of the last demand. The CA treated May 26, 1987 as the relevant starting point because PNB had already demanded rentals in arrears amounting to PhP18,000.00 as early as that date.

The CA also ruled that prescription did not apply in the manner applied by the RTC. It relied on the concept that prescription requires adverse possession, and it concluded that the Muller spouses’ continued occupation after lease expiration was by mere tolerance and thus did not trigger the running of prescription. The CA further held that PNB’s action had not prescribed.

On damages and the nature of recoverable amounts in ejectment, the CA cited the rule that in unlawful detainer cases, the plaintiff may recover damages limited to “rent” or fair rental value or reasonable compensation for use and occupation, consistent with Section 17, Rule 70 of the 1997 Rules of Civil Procedure. It reasoned that these damages arise from the loss of use and possession, and not from disconnected damages for losses that have no direct relation to that loss of material possession. It also held that since the Muller spouses did not submit evidence and did not file an answer, the MTCC could properly decide based on the record and that the RTC had erred by reducing the monthly rental without factual and legal bases.

Finally, the CA reinstated the MTCC decision with modification on interest. It ordered that unpaid rentals earn six percent (6%) per annum, to be computed from May 26, 1987 until the CA decision became final and executory, and then twelve percent (12%) per annum after finality until full payment. It also awarded attorney’s fees of PhP10,000.00 and judicial costs.

When petitioners moved for reconsideration, the CA denied the motion in a resolution dated November 14, 2014, prompting the petitioners to file the present Supreme Court review.

Issues Raised by Petitioners

The petitioners framed the controversy around three main issues. First, whether rentals in an ejectment case could be reckoned from a date beyond the latest demand to vacate. Second, whether the CA properly relied on Racaza v. Gozum to allow rentals to be retroactively reckoned beyond the latest demand. Third, whether the award of rentals beyond the latest demand had prescribed.

Parties’ Contentions

The petitioners maintained that rentals should be awarded only from the date of receipt of the latest demand—July 17, 2006—and not from earlier demands. They argued that before that latest demand, PNB had no right to collect rent because they were not yet illegal occupants, and that their prior possession should be treated as tolerated. They also argued that PNB’s claim for rentals in arrears had prescribed because more than ten years had elapsed since 1987, the date of the written lease agreement. They further argued that any rentals arising after the expiration of the written lease agreement in 1987 had prescribed because actions arising from written contracts prescribe in ten years and those arising from oral contracts prescribe in six years, invoking Articles 1144 and 1145 of the Civil Code.

PNB, for its part, argued that petitioners’ claims should not bar recovery. It contended that as owner, it was entitled to reasonable compensation for continued use and occupation that prevented it from enjoying the property and its fruits. It also argued that petitioners’ occupation was not merely by tolerance, since there was an oral lease agreement between the parties, and it emphasized that the right to recover in ejectment flows from the detainer and illegal occupation, regardless of whether the claim is denominated as rental, reasonable compensation, or damages. PNB also argued that the continuing lease agreement concept defeated the prescription argument.

Legal Basis and Reasoning of the Supreme Court

The Supreme Court denied the petition. It focused on whether PNB was entitled to rentals in arrears prior to July 17, 2006 and whether PNB’s claims had prescribed.

The Court rejected the petitioners’ theory that rentals could be demanded only upon receipt of the latest demand to vacate. It found their reasoning logically flawed because, if accepted, it would effectively permit lessees to withhold rent until the lessor makes a demand to vacate, thereby condoning outstanding rental obligations through the lessee’s unilateral delay. The Court explained that under Article 1670 of the Civil Code, if at the end of the contract the lessee continues enjoying the thing leased for fifteen days with the lessor’s acquiescence, an implied new lease arises for the time established in Articles 1682 and 1687, and the other terms of the original contract are revived. Thus, when the written lease expired on June 1, 1987 and the petitioners did not vacate, the lease terms other than those covering the expired period were deemed revived and the lease continued in that legal sense. Because of this, the prescription periods relied on by petitioners under Articles 1144 and 1145 were treated as inapplicable, as prescription did not begin to run in the manner petitioners proposed.

The Court further reasoned that the Muller spouses could not avoid paying rent so long as they continued occupying the properties, whether with or without consent. It invoked principles of justice and good faith under Article 19 and indemnity for willful or negligent causing of damage under Article 20, emphasizing that allowing continued occupation without compensation would contravene fair play and law. The Court also characterized the situation after expiration and refusal to vacate as creating a relationship akin to a forced lessor-lessee arrangement, because the occupant detained the property without the owners’ consent and thus remained liable to pay rent as reasonable compensation for use and occupation.

The Court also addressed the doctrinal framing for ejectment damages. It recalled that in ejectment cases, the plaintiff is entitled to damages arising from loss of use and possession, and that under Section 17, Rule 70, such damages are limited to rent or fair rental value or reasonable compensation for the use and occupation. It held that the Muller spouses’ obstinate refusal to pay rent and vacate, paired with insistence that PNB sell the property to them at their demanded price, operated as an improper maneuver that effectively deprived PNB of the use and enjoyment of the property and “held the properties hostage.”

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