Case Summary (G.R. No. 188467)
Factual Background
The dispute arose from a forty-year Contract of Lease executed on February 19, 1974 between spouses Flaviano Arzaga, Sr. and Magdalena Agcaoili-Arzaga as lessors and Renato Ma. R. Peralta as lessee over Lot Nos. 9128-A and 9128-B in San Jose, Laoag, Ilocos Norte and the improvements thereon. The lease fixed staggered monthly rentals, required the lessee to construct improvements that would become lessors' property upon termination, to pay realty taxes, and to develop a water system for both parties. In May 1988 the heirs of the lessors litigated against Peralta, but that case was dismissed and the dismissal affirmed by the Court of Appeals. In 1995 Flaviano Arzaga, Jr. assigned his interests in the properties to Jose Roy B. Raval by a notarized deed of assignment for P500,000.00. Peralta thereafter deposited rental payments in bank accounts opened in the name “Gloria F. Peralta ITF Flaviano Arzaga, Jr.,” but he refused to recognize the assignment and continued paying to the accounts for the benefit of the Arzaga heir.
Procedural History in the Trial Court
After repeated extrajudicial demands and barangay conciliation sessions, Jose Roy B. Raval filed a complaint for rescission of lease with the RTC of Laoag City in 1998 seeking rescission, possession, unpaid rentals, damages and attorney’s fees. Renato Ma. R. Peralta denied that Raval was a proper party, questioned the validity of the deed of assignment, invoked prescription and asserted compliance with the lease; he counterclaimed for moral and exemplary damages and attorney’s fees. On May 17, 2005 the RTC dismissed both the complaint and the counterclaim. The trial court held that the deed of assignment could not be collaterally attacked because Torrens titles had already issued in Raval’s name in a separate cadastre proceeding, and that Peralta had not defaulted as he had deposited rentals in ITF bank accounts for the benefit of the lessor.
Ruling of the Court of Appeals
On appeal the Court of Appeals sustained the validity of the deed of assignment and declared Raval a proper party to sue. The CA denied rescission as unfeasible because rescission would require return of the object of the contract and it would be unjust after Peralta’s long compliance. Nevertheless the CA concluded that Peralta had an obligation to pay unpaid rentals to Raval, ordered rentals from August 1998 to the present plus twelve percent interest, and awarded moral damages of P10,000.00. The CA also dismissed Peralta’s counterclaim. Both parties moved for reconsideration, which the CA denied.
Consolidated Petitions to the Supreme Court
Both parties filed separate petitions for review on certiorari under Rule 45, consolidated by the Supreme Court. Peralta assailed the CA’s denial of his counterclaim and urged the deed of assignment was void, alleged forum shopping and prescription under Article 1389. Raval sought affirmation of his right to rescind or to recover unpaid rentals and damages under Article 1659 of the New Civil Code.
The Court’s Determination on the Deed of Assignment and Title
The Court upheld the validity of the deed of assignment and of the Torrens titles subsequently issued in Raval’s name pursuant to Cad. Case No. 51, which had ordered cancellation of the Arzagas’ TCTs and issuance of new titles under Raval. The Court reiterated that a certificate of title cannot be collaterally attacked and cited Section 48 of Presidential Decree No. 1529 and controlling jurisprudence to sustain the RTC’s and CA’s rejection of Peralta’s collateral attack upon the assignment and the new TCTs. As assignee, Raval obtained the rights and standing of the predecessors-in-interest, including the right to seek contractual remedies against the lessee.
Application of Rescission Law to Lease Contracts
The Court explained that rescission of lease contracts is governed primarily by Article 1659 in relation to Article 1657, and that general provisions on rescission in Articles 1380 and 1381 are not the rule for leases. The Court emphasized that remedies under Article 1659 permit an aggrieved lessor to seek rescission and indemnification or only indemnification while keeping the contract in force. The Court therefore applied the special rules for lease rescission rather than the general rules on rescissible contracts.
Prescription and Accrual of Cause of Action
The Court rejected Peralta’s reliance on Article 1389 and held that the four-year prescription there stated does not govern rescission of lease under Article 1659. Instead the prescriptive period for such contractual actions is ten years under Article 1144 when founded on a written contract. The Court held that Raval’s cause of action accrued not on the date of the 1974 lease but upon the later alleged breaches and defaults that gave rise to his extrajudicial demands beginning in August 1995. Accordingly, the action filed in 1998 was within the ten-year prescriptive period.
Evidence of Payment and the Court’s Conclusion on Unpaid Rentals
The Court found dispositive the RTC’s factual finding that Peralta had been depositing rental payments into bank accounts titled “Gloria F. Peralta ITF Flaviano Arzaga, Jr.” and that such deposits continued even after the assignment and up to 2004. The Court held that these ITF deposits constituted valid payments of rent and that it was incumbent upon Flaviano Jr. and Raval to arrange withdrawal of the funds. Because the record showed that rental sums were in the bank and had been so deposited, the Court concluded that Peralta was not remiss in his payment obligation. Consequently the Court deleted the CA’s award of unpaid monthly rentals and interest.
Moral Damages and Bad Faith
The Court addressed the CA’s award of moral damages and concluded that such damages require proof of fraud, bad faith, wanton or oppressive conduct. The Court found no evidence that Peralta acted in bad faith or with the requisite malicious or fraudulent intent that would warrant moral damages. The record showed re
...continue reading
Case Syllabus (G.R. No. 188467)
Parties and Procedural Posture
- Renato Ma. R. Peralta and Jose Roy B. Raval filed consolidated petitions for review on certiorari under Rule 45, Rules of Court, docketed as G.R. No. 188467 and G.R. No. 188764.
- The present controversy arose from Civil Case No. 11424-14 before the Regional Trial Court (RTC) of Laoag City, Branch 14, which dismissed the complaint and counterclaim in a Decision dated May 17, 2005.
- The Court of Appeals (CA) rendered a Decision dated October 8, 2008 in CA-G.R. CV No. 85685 that affirmed with modification the RTC ruling and awarded unpaid rentals, interest and P10,000.00 moral damages in favor of Raval, while dismissing Peralta’s appeal.
- Both parties filed motions for partial reconsideration with the CA, which were denied by a Resolution dated June 30, 2009, prompting the present petitions to the Supreme Court.
- The Supreme Court resolved G.R. No. 188764 by denying the petition of Raval and resolved G.R. No. 188467 by partly granting Peralta’s petition and modifying the CA decision to delete awards of unpaid monthly rentals, interest and attorney’s fees.
Key Factual Allegations
- The lease dated February 19, 1974 was executed by spouses Flaviano and Magdalena Arzaga as lessors and Peralta as lessee over Lot Nos. 9128-A and 9128-B, each measuring 660 square meters, including specified improvements.
- The parties agreed to a forty-year lease with graduated monthly rental rates starting at P500.00 and with stipulations that Peralta would construct buildings that would become lessors’ property, pay realty taxes and develop a water system.
- In May 1988, Flaviano Arzaga, Jr. filed Civil Case No. 9121-16 for annulment of the lease, which the RTC dismissed on December 10, 1990 and which dismissal the CA affirmed.
- By Deed of Assignment dated July 28, 1995, Flaviano Jr. assigned all his rights and interests in the subject properties to Raval for P500,000.00.
- Peralta thereafter deposited rental payments into bank accounts opened by his wife in the name “Gloria F. Peralta ITF Flaviano Arzaga, Jr.” and resisted recognizing Raval’s claim to the rentals after the assignment.
- Raval made repeated extrajudicial demands beginning August 1995, and after failed attempts at barangay conciliation, filed the complaint for rescission of lease in 1998 alleging multiple breaches by Peralta including refusal to render accounting, to vacate the second storey, to remove unauthorized improvements, to operate a water system, and to refund taxes.
- Peralta answered, denied the assignor’s validity and sought damages by counterclaim for alleged harassment.
Statutory Framework
- The petitions were filed under Rule 45, Rules of Court.
- The Court applied lease-specific provisions of the New Civil Code, chiefly Article 1659, with reference to Articles 1654 and 1657 governing lessor and lessee obligations.
- The Court contrasted Article 1659 with rescission provisions in Articles 1191, 1380, 1381, 1389, and 1592 and relied on the prescriptive rule of Article 1144 where applicable.
- The Court invoked Section 48, Presidential Decree No. 1529 (Property Registration Decree) to prohibit collateral attacks on Torrens titles.
- The Court relied on prior jurisprudence including Unlad Resources Development Corporation v. Dragon, Cetus Development, Inc. v. Court of Appeals, and Philippine Savings Bank v. Spouses Castillo for doctrinal principles on rescission, prescription and moral damages.
Issues Presented
- Whether the Deed of Assignment from Flaviano Jr. to Raval was valid and conferred upon Raval the rights to prosecute the action for rescission and collect rentals.
- Whether Raval’s action for rescission prescribed at the time of filing in 1998.
- Whether Peralta materially breached the lease entitling Raval to rescission or to unpaid rentals and moral damages.
- Whether Peralta was entitled to moral, exemplary damages and attorney’s fees on his counterclaim for alleged harassment and malicious litigation.