Case Summary (G.R. No. 176986)
Petitioner
NCLPI was lessee under a written ten-year lease, bound to pay monthly rentals and to obtain LMI’s prior written consent before subleasing or making structural improvements.
Respondents
LMI was the lessor and owner of the premises. Proton sought temporary use then entered into negotiations and renovations that led to a later lease with LMI; it was impleaded as third-party defendant by NCLPI.
Key Dates
- June 24, 1994: Lease between LMI and NCLPI (term: July 1, 1994 – June 30, 2004; monthly rent P308,000; annual escalation 10%).
- September 1994: NCLPI, with LMI’s consent, allowed subsidiary NSC to use premises.
- May 1996: Verbal agreement to convert arrearages into promissory note and 12 postdated checks (June 1996–May 1997).
- October 11, 1996: Memorandum of Agreement between NCLPI and Proton permitting renovation prior to sublease execution.
- October 16, 1996 (sent Oct 18, 1996 by registered mail): LMI’s letter terminating lease for nonpayment and demanding vacatur within five days and payment of unpaid rentals.
- November 8, 1996: LMI executed a Contract of Lease with Proton.
- November 12, 1996: LMI filed suit for sum of money with damages against NCLPI.
- June 7, 2002: RTC decision in favor of LMI.
- September 27, 2006: CA decision affirming with modifications.
- March 8, 2007: CA resolution clarifying interest inclusions.
- January 13, 2016: Supreme Court decision denying NCLPI’s petition and modifying awards. Applicable constitutional framework: 1987 Constitution (decision date is post-1990).
Applicable Law and Authorities
- 1987 Philippine Constitution (applicable as decision is post-1990).
- Civil Code: Article 1191 (rescission for breach of reciprocal obligations).
- Rules of Court: Rule 70, Sec. 2 (procedure for forcible entry and unlawful detainer) — discussed and distinguished.
- Relevant jurisprudence cited and applied: University of the Philippines v. De los Angeles; Nacar v. Gallery Frames (on interest rate when none stipulated); Golden Valley Exploration, Inc. v. Pinkian Mining Company; and precedent on verification authority (Swedish Match Philippines Inc., PCI Travel Corp., etc.).
Procedural Posture
LMI sued NCLPI for unpaid rentals and damages. NCLPI filed an answer and a third-party complaint against Proton alleging collusion and seeking damages. RTC found for LMI, awarding unpaid rentals plus exemplary damages and attorney’s fees, and denied NCLPI’s third-party relief. CA affirmed with modifications, reducing exemplary damages and attorney’s fees and adjusting unpaid rentals and ordering return of part of security deposit. NCLPI petitioned to the Supreme Court; the Court denied the petition and further clarified/modifed awards.
Undisputed and Central Facts
- NCLPI defaulted in paying contractual rentals, accruing arrearages admitted by NCLPI.
- NCLPI permitted Proton to enter and renovate the premises under a Memorandum of Agreement and accepted a deposit check conditioned on execution of a sublease.
- LMI sent a termination/demand letter for unpaid rentals and vacatur; shortly thereafter LMI entered a lease with Proton.
- NCLPI ceased paying postdated checks after being ousted and later filed suit alleging wrongful collusion; Proton countered that it paid NCLPI for temporary use and incurred renovation costs prior to formalizing its lease with LMI.
Issues Presented to the Supreme Court
- Whether a contract may be rescinded extrajudicially in the absence of an express contractual stipulation authorizing extrajudicial rescission.
- Whether the prevailing facts warranted dismissal of LMI’s claims and an award in favor of NCLPI.
- The correct interest to be applied to delay in releasing a security deposit.
Preliminary Procedural Determination on Verification Authority
The Court addressed a procedural challenge to the petition based on authority to sign the verification and certification against forum shopping. The person who signed was NCLPI’s president (Luis Manuel T. Banson). Given precedent allowing certain corporate officers (including a corporate president) to sign verification without a board resolution, the verification was held sufficient and the technical objection was overruled.
Holding — Disposition
The Supreme Court denied NCLPI’s petition for lack of merit. The CA decision was affirmed subject to the Court’s modifications: exemplary damages and attorney’s fees awarded to LMI and Proton reduced to P50,000.00 each; unpaid rentals fixed at P2,365,569.61 (inclusive of interest and penalties up to Nov. 12, 1996) with interest at 6% per annum from Oct. 18, 1996 until finality and continuing thereafter until satisfaction; LMI ordered to return the security deposit balance of P883,253.72 with interest at 6% per annum computed from March 25, 2003 until finality and thereafter until satisfaction.
Legal Analysis — Validity of Extrajudicial Rescission
The Court affirmed that extrajudicial rescission is available to an aggrieved contracting party under Article 1191 of the Civil Code even without an express contractual clause authorizing extrajudicial rescission. The Court explained that the power to rescind is implied in reciprocal obligations where one party fails to perform; an injured party need not await a judicial judgment before treating the contract as rescinded in order to mitigate damages. The Court recognized prior decisions that appear to limit extrajudicial rescission absent explicit contractual stipulation, but reconciled those authorities by explaining that the remedy of rescission exists by operation of law; resort to extrajudicial rescission without judicial imprimatur subjects the rescinding party to risk and possible liability if the rescission is later judicially found unwarranted. Thus, extrajudicial rescission is provisional and reviewable; it is nonetheless valid in appropriate circumstances.
Application of Doctrine to the Facts — Breaches and Justification for Rescission
The Court found substantial breaches by NCLPI: admitted unpaid rentals and unauthorized sublease/renovation activity without LMI’s prior written consent in violation of contractual Paragraphs 4 and 5. Factual findings by the trial court and CA established that NCLPI permitted Proton to enter and renovate the premises and accepted payment commitments in anticipation of a sublease, even as its lease with LMI had been terminated. Those findings were binding on the Supreme Court absent clear grounds for reversal. Given these breaches, LMI’s extrajudicial rescission was affirmed as justified under Article 1191; LMI’s termination notice and demand for payment were valid as acts of rescission rather than acts governed by Rule 70 (forcible entry and unlawful detainer), and Rule 70’s 15/5-day demand requirement was inapplicable because LMI’s action was a suit for sum of money and damages, not forcible entry/unlawful detainer.
Computation of Rental Arrearages and Interest
The Court accepted the CA’s computation of unpaid rentals as P2,365,569.61 (aggregate of admitted arrears up to October–November 1996). Because the lease did not stipulate an interest rate for default, the Court applied the rule in Nacar v. Gallery Frames: contractual obligations bearing no stipulated interest will earn 6% per annum, computed from the date of demand. The Court fixed October 18, 1996 (date of LMI’s registered notice) as the start date for interest on arrearages until finality of judgment, and continuing at 6% thereafter until satisfaction.
Security Deposit — Return and Interest
Paragraph 3 of the lease required LMI to refund the balance of the security deposit within seven days of termination. The Court held that LMI retained P883,253.72 (after permitted deductions) and must return it with interest. Because no interest rate was stipulated, the Court again applied the 6% per annum rule from Nacar. The Court identified March 25, 2003 (the date NCLPI first raised the security deposit issue in its appellant’s brief before the CA) as the appropriate date when judicial demand for its return was first made; interest on the deposit is to run from that date until finality, and thereafter at 6% per annum until satisfaction.
Improvements and Equipment
Under the lease’s Paragraph 5, improvements ma
Case Syllabus (G.R. No. 176986)
Case Caption, Docket, and Decision Dates
- Supreme Court, Third Division, G.R. No. 176986.
- Decision of the Supreme Court rendered January 13, 2016; original received by the Office on February 11, 2016 at 9:37 a.m.
- Case below: Court of Appeals Decision dated September 27, 2006 (CA-G.R. CV No. 75985) and Resolution dated March 8, 2007.
- Trial court Decision promulgated June 7, 2002 (Regional Trial Court, Branch 60, Makati City; docketed as Civil Case No. 96-1840).
- Additional docketed matter referenced: Civil Case No. 98-595 (related to improvements dispute involving NCLPI’s subsidiary NSC).
Parties and Roles
- Petitioner: Nissan Car Lease Philippines, Inc. (NCLPI).
- Plaintiff-Appellee / Respondent in Supreme Court context: Lica Management, Inc. (LMI).
- Third-party respondent and defendant in lower courts: Proton Pilipinas, Inc. (Proton).
- NCLPI subsidiary involved in possession/use: Nissan Smartfix Corporation (NSC).
Core Facts: Lease Contract and Possession
- Lease executed June 24, 1994: LMI (lessor) leased property at 2326 Pasong Tamo Extension, Makati City (~2,860 sq. meters) to NCLPI (lessee) for ten (10) years (July 1, 1994 to June 30, 2004).
- Contract terms included a monthly rental of P308,000.00 and an annual escalation rate of ten percent (10%).
- Sometime in September 1994, with LMI’s consent, NCLPI allowed its subsidiary NSC to use the leased premises.
- NCLPI became delinquent in paying monthly rent; source references a total rental arrearage of P1,741,520.85 (as stated in the facts section) and other detailed accounting (see arrearages computation below).
Agreements, Letters, and Memoranda Relevant to Dispute
- May 1996: verbal agreement between NCLPI and LMI to convert arrearages into a promissory note and twelve (12) postdated checks of P162,541.95 monthly (June 1996–May 1997); NCLPI delivered postdated checks but failed to sign promissory note and failed to pay checks for June–October 1996.
- LMI’s letter dated October 16, 1996 (sent October 18, 1996 registered mail) terminated the Contract of Lease due to arrears and demanded payment of P2,651,570.39 for unpaid rentals (covering portion of July 1996 to October 1996) and ordered vacation of premises within five (5) days from receipt.
- Proton sent NCLPI an undated request to use premises as temporary display center for “Audi” cars for ten (10) days; Proton undertook not to disturb NCLPI and LMI’s lease agreement and to ensure NCLPI would not breach it by lending the premises without consideration.
- October 11, 1996: NCLPI entered into a Memorandum of Agreement with Proton allowing Proton to commence renovation prior to execution of a Contract of Sublease; Proton agreed to transmit a check representing three (3) months’ rent to be deposited upon execution of the sublease.
- October 24, 1996: NCLPI, through counsel, acknowledged arrearages but requested LMI defer court action citing negotiations for a possible sublease.
- November 8, 1996: LMI entered into a Contract of Lease with Proton over the subject premises.
Procedural Course in Lower Courts
- November 12, 1996: LMI filed Complaint for sum of money with damages against NCLPI (seeking P2,696,639.97, interest, penalties, exemplary damages, attorney’s fees, costs).
- November 20, 1996: NCLPI demanded Proton vacate; Proton asserted occupation under LMI’s lease.
- NCLPI filed Answer and Third-Party Complaint against Proton alleging collusion and seeking damages (P3,000,000.00 anticipated loss; P1,000,000.00 exemplary damages; P500,000.00 attorney’s fees and P2,000.00 per court appearance).
- Trial court admitted NCLPI’s third-party complaint over LMI’s opposition.
- April 17, 1998: Proton filed Answer with Compulsory Counterclaim alleging NCLPI prepared the undated letter-request and had been paid P200,000.00 for 10 days’ use; alleged NCLPI had vacated premises earlier and authorized Proton to renovate; Proton later contracted directly with LMI and sought dismissal of third-party complaint and counterclaims for exemplary damages and attorney’s fees.
Trial Court Findings and Decree (June 7, 2002)
- Trial court found that NCLPI willfully violated the lease: non-payment of rentals and attempted/actual sublease and renovations without prior written consent.
- Held LMI entitled to rescind the lease under Article 1191 of the Civil Code and under contractual paragraphs 16 and 18.
- Found NCLPI misrepresented its standing to Proton and had “unclean hands.”
- Decretal orders:
- NCLPI to pay P2,696,639.97 representing unpaid rentals inclusive of interest and penalties up to November 12, 1996, plus 12% interest from that date until paid.
- Awarded exemplary damages and attorney’s fees totaling P200,000.00 and litigation expenses P50,000.00 in favor of LMI.
- Denied NCLPI’s third-party complaint; ordered NCLPI to pay Proton P200,000.00 representing exemplary damages and attorney’s fees.
Court of Appeals Ruling (Affirmed with Modification)
- CA affirmed trial court decision but modified awards:
- Reduced exemplary damages from P100,000.00 each (as trial court had split amounts) to P50,000.00 each in favor of LMI and Proton.
- Reduced attorney’s fees from P100,000.00 each to P50,000.00 each.
- Reduced amount of unpaid rentals from P2,696,639.97 to P2,365,569.61 (exclusive of interest).
- Ordered LMI to return balance of security deposit amounting to P883,253.72 to NCLPI.
- CA denied NCLPI’s motion for reconsideration.
- CA clarified that the reduced unpaid rentals amount P2,365,569.61 was inclusive of interest and penalties up to November 12, 1996, plus 12% interest from that date until full payment.
Issues Raised in the Petition to the Supreme Court
- Whether a contract may be rescinded extrajudicially in the absence of a special contractual stipulation permitting extrajudicial rescission.
- Whether the prevailing facts warranted dismissal of LMI’s claims and an award in favor of NCLPI.
- How much interest should be paid on the delay in release of a security deposit in a lease contract.
Technical Procedural Issue: Authority to Verify Petition
- LMI contended the petition should be denied because Luis Manuel T. Banson (who prepared and signed the Verification and Certification against Forum Shopping) lacked authority; his authority was claimed via a Special Power of Attorney signed by Corporate Secretary Robel C. Lomibao rather than a board resolution.
- Supreme Court found Banson was President of NCLPI at filing and therefore could sign verification and certi