G.R. No. 139540 - Wheelers Club International, Inc. vs. Bonifacio

Case Summary (G.R. No. 139540)

Factual Background: Ownership, Lease Development Authority, and Sublease to Wheelers

On 5 May 1994, BDAI, represented by Jaime C. Bonifacio, Sr. (Jaime) as President and Chairman of its Board of Directors, entered into a Contract of Lease with Wheelers for a term of five years from 1 June 1994 to 31 May 1999. Under that contract, Wheelers bound itself to pay monthly rental of P108,750.

On 31 May 1994, JRBDC, represented through the co-owners as its Board members and lessors, executed a Lease Development Agreement with BDAI for a term of five years from 31 May 1994 to 31 May 1999. The agreement authorized BDAI to renovate, manage, develop, and sublease the property, and it set the monthly rental to be based on actual income, to be shared between the co-owners and BDAI.

In conjunction with those arrangements, the co-owners executed a General Power of Attorney in favor of Jaime, granting him authority to administer the property, renovate the building, introduce improvements, and lease the property to any person.

Factual Background: Termination of Jaime’s Authority, Appointment of Jovito, and Demands to Vacate

On 16 June 1996, the co-owners demanded that BDAI submit accounting records of all income from the property. BDAI responded by demanding receipts and records of cash and check advances allegedly made to the co-owners. On 18 August 1996, the co-owners, acting as directors of JRBDC, approved a Resolution terminating Jaime’s authority to manage and administer the property due to BDAI’s failure to submit an accounting.

On 20 August 1996, Rosario, as President and Chairman of JRBDC, wrote Jaime terminating the agreement with JRBDC for non-payment of whatever was due to JRBDC under the agreement. On 26 January 1997, the co-owners approved a resolution appointing Jovito as the new administrator of the property. The following day, Rosario notified Wheelers of Jovito’s appointment and Jaime’s termination. On 11 February 1997, BDAI, through Jaime, insisted that there was no valid reason for the termination, attributing the co-owners’ inability to receive complete accounting records to the alleged non-furnishing of receipts by Rosario. On 4 March 1997, Jovito wrote Wheelers claiming the co-owners did not authorize the contract of lease between BDAI and Wheelers and demanding that Wheelers vacate within ten days.

Wheelers continued paying rentals to BDAI from February to September 1997. On 9 October 1997, Jovito and the other co-owners, through counsel, demanded payment of rental arrears from February to October 1997 and demanded that Wheelers vacate within five days from receipt.

MTC Unlawful Detainer Case: Dismissal for Lack of Cause of Action

On 21 October 1997, Jovito filed with the MTC a complaint for unlawful detainer against Wheelers, docketed as Civil Case No. 15760. Jovito alleged that Wheelers refused to pay him, as the new administrator, rentals due from February to October 1997.

Wheelers, in its Answer dated 19 November 1997, stated that it paid BDAI rentals from February to September 1997 but held in abeyance the October 1997 rental because of Jovito’s demand letter and Wheelers’ intention to consign the rental in court.

The MTC ruled that although JRBDC did not own the property, the co-owners who composed JRBDC’s Board of Directors signed the Lease Development Agreement, indicating consent to JRBDC’s act. It found no evidence showing the nullity of the Lease Development Agreement. It further reasoned that one not a party to a contract has no personality to assail its validity, in response to Jovito’s theory that he did not consent to the lease development arrangement.

In a joint disposition dated 5 June 1998, the MTC dismissed the ejectment cases for lack of cause of action.

RTC Appellate Ruling: Reversal and Order to Vacate and Pay Rentals

Wheelers appealed to the RTC. The RTC reversed the MTC and held that once Jaime’s management authority was terminated, Wheelers could not simply rely on its lease contract with BDAI while denying Jovito and the co-owners their right to collect rentals. The RTC treated Wheelers’ continued payments to BDAI as made at Wheelers’ own risk because Wheelers allegedly knew that Jaime no longer had authority to receive rentals.

Citing Aranas v. Tutaan, the RTC ruled that payment to one without authority to receive payment is void. It ordered Wheelers and all persons claiming rights under it to vacate and surrender possession, to pay rentals and monthly increments from February 1997 up to the time of final vacation, to pay attorney’s fees, and to pay costs.

Court of Appeals Ruling: Petition Dismissed

Wheelers then sought review with the Court of Appeals, which dismissed the petition on 30 July 1999. The Court of Appeals found that Wheelers signed the Contract of Lease with knowledge that BDAI signed as administrator and developer, not on its own account. It held that the principals were the co-owners, not BDAI. It concluded that the co-owners had the power to revoke BDAI’s authority to manage and administer the property.

The Court of Appeals also reasoned that even if the co-owners may have revoked authority in bad faith or in contravention of the Lease Development Agreement, the remedy of BDAI would be damages rather than insistence on continued management. It therefore held that Wheelers’ payments were made to BDAI whose authority the co-owners had already revoked, and that Wheelers failed to pay rentals from February to October 1997 to Jovito as the rightful representative of the co-owners. The Court of Appeals further indicated that Wheelers could not remain because its lease arrangements had expired, given the expiration of the lease development and lease terms.

Issue on Review: Cause of Action for Unlawful Detainer Based on Rental Non-Payment and Expiration

The determinative issue was whether the co-owners had a cause of action for unlawful detainer against Wheelers grounded on alleged non-payment of rentals and on the expiration of the term of the lease agreement.

Supreme Court’s Legal Framework: Unlawful Detainer Requires Termination of the Right to Possess

The Court explained that in unlawful detainer, the defendant’s possession is initially lawful, but becomes illegal due to termination of the right to possess under the contract with the plaintiff. The filing of an unlawful detainer case therefore implies admission that the defendant’s occupation at inception was lawful.

The Court noted that Jovito and the co-owners admitted that Wheelers began possession lawfully by virtue of the Contract of Lease it executed with BDAI as lessor. Absent proof contradicting such recognition, it debunked Jovito’s claim that the co-owners did not authorize BDAI to lease the property. This also weakened Jovito’s position that the Contract of Lease between BDAI and Wheelers was void and inexistent.

Supreme Court’s Core Determination: No Privity and the Transaction Was a Sublease

The Court focused on when Wheelers’ possession would become without legal basis. Jovito alleged non-payment of rentals from February to October 1997. The Court held, however, that Wheelers’ obligation to pay rentals arose from its Contract of Lease with BDAI. Wheelers had no separate lease agreement with Jovito or the co-owners. It also held there was no privity of contract between Wheelers and Jovito or the co-owners.

The Court clarified that the claim that the co-owners and Wheelers were bound by a month-to-month arrangement was untenable because, based on the record, the case involved a sublease arrangement. Under the Lease Development Agreement, the co-owners were the actual lessors of the property, and BDAI was the lessee-sublessor that subleased to Wheelers. Thus, although the two arrangements were connected, they remained distinct juridical relationships: the lessee’s rights and obligations vis-à-vis the lessor were not automatically transferred to the sublessee.

Accordingly, since the co-owners were strangers to the Contract of Lease between BDAI and Wheelers, Wheelers had no authority to pay the rentals directly to the co-owners as lessors because the rentals were payable to BDAI as the lessee-sublessor.

Subsidiary Liability Under Civil Code Article 1652 Requires Judicial Ousting or Cancellation

The Court further held that although Article 1652 of the Civil Code permits the lessor to proceed against the sublessee for rent due from the lessee, the action is based on subsidiary liability. It stressed that the lessor must first obtain a judgment canceling the lessee’s principal lease or ousting the lessee from the premises so that the sublessee’s subsidiary liability may be triggered.

Relying on Duellome v. Gotico and earlier explanations on Article 1652, the Court held that a sublessee cannot be held liable to the lessor under that provision based on mere demand. The sublessee’s primary liability runs to the sublessor, and it is a court order that can extinguish or modify that liability if the sublessor contests pre-termination by the lessor.

In the case at bar, the Court found no judgment cancelling BDAI’s Lease Development Agreement or ousting BDAI from the property. It therefore concluded that a sublessee was not liable to the lessor solely upon extrajudicial demand. The Court also rejected the notion that BDAI was an agent of the co-owners in a manner that would justify direct payment obligations, and it cited the absence of circumstances supporting such agency-based shifts of obligations.

Revocation of Jaime’s Authority Did Not Automatically Terminate BDAI’s Sublease

Even assuming agency, the Court reasoned that it could not be revocable at will if it was an agency coupled with interest. Under the Lease Development Agreement, BDAI had authority to construct improvements at its own expense and it had, in fact, constructed permanent improvements. The Court thus treated BDAI’s interest in the subject matter as sufficient to make any agency coupled with interest non-revocable at will, invoking Sevilla v. Co

Case Syllabus (G.R. No. 139540)

Wheelers Club International, Inc. filed a petition for review under Rule 45 assailing the Court of Appeals Decision dated 30 July 1999.
The assailed Court of Appeals ruling dismissed Wheelers petition questioning a Regional Trial Court of Mandaluyong City, Branch 214 (RTC) Decision dated 11 March 1999.
The RTC Decision had reversed an earlier Metropolitan Trial Court of Mandaluyong City, Branch 59 (MTC) disposition that dismissed respondent Jovito Bonifacio, Jr. unlawful detainer complaint.
The controversy involved ejectment by way of unlawful detainer premised on alleged rental arrears and the asserted expiration of the lease term.
The Supreme Court ultimately granted the petition, reversed the Court of Appeals, and reinstated the MTC Decision dismissing the unlawful detainer complaint.

Parties and Procedural Posture

Respondent Jovito Bonifacio, Jr. pursued unlawful detainer before the MTC as the newly appointed administrator of the property.
Petitioner Wheelers Club International, Inc. occupied the premises under a lease arrangement entered into through Bonifacio Development Associates, Inc. (BDAI).
The MTC dismissed the unlawful detainer complaint, concluding that the complaint lacked cause of action.
The RTC reversed the MTC and ordered Wheelers to vacate and to pay rentals, increments, attorney’s fees, and costs.
The Court of Appeals denied due course to Wheelers petition for review and dismissed it with costs.
Wheelers then elevated the case to the Supreme Court to challenge the judgments against it, including the RTC order granting execution of the RTC Decision.

Property, Ownership, and Corporate Roles

The subject property was a parcel with improvements at No. 83 EDSA, Mandaluyong City, covered by Transfer Certificate of Title No. 5350.
The registered co-owners were Rosario, Romeo, Virgilio, Generoso, Andres, Jovito, Jose (all surnamed Bonifacio), and Zenaida B. Lafiguera, Corazon B. Calub, and Ma. Cristina B. De Guzman.
The co-owners also comprised the Board of Directors of J & R Bonifacio Development Corporation (JRBDC).
The corporate structure mattered because the co-owners and JRBDC exercised governance over lease-related administration.
The arrangement further involved BDAI acting as administrator/developer/lessee-sublessor under agreements connected to the property.

Key Contractual Arrangements

On 5 May 1994, BDAI, represented by Jaime C. Bonifacio, Sr., entered into a Contract of Lease with Wheelers for a term from 1 June 1994 to 31 May 1999.
Under the Contract of Lease, Wheelers agreed to pay monthly rental of P108,750 to BDAI.
On 31 May 1994, the co-owners, represented through JRBDC, executed a Lease Development Agreement with BDAI for a term from 31 May 1994 to 31 May 1999.
The Lease Development Agreement authorized BDAI to renovate, manage, develop, and sublease the property.
The monthly rental was structured as shared income based on actual earnings, with specified split shares between the co-owners and BDAI.
On the same day, the co-owners issued a General Power of Attorney in favor of Jaime to administer, renovate, introduce improvements, and lease the property to any person.

Power of Revocation and Administrative Changes

On 16 June 1996, the co-owners demanded submission of accounting records from BDAI.
In response, BDAI demanded receipts and records regarding cash and check advances to the co-owners.
On 18 August 1996, the co-owners approved a Resolution terminating Jaime’s authority to manage and administer the property due to BDAI’s failure to submit the required accounting.
On 20 August 1996, Rosario wrote Jaime terminating the agreement with JRBDC for non-payment of whatever was due to JRBDC under the agreement.
On 26 January 1997, the co-owners approved another Resolution appointing Jovito as the new administrator of the property.
The following day, Rosario informed Wheelers of Jovito’s appointment and of the termination of Jaime’s authority to manage the property.
On 11 February 1997, BDAI through Jaime insisted that there was no valid reason for termination and claimed obstacles to accounting due to Rosario’s failure to furnish receipts.
On 4 March 1997, Jovito wrote Wheelers claiming the co-owners did not authorize the Contract of Lease between BDAI and Wheelers and demanded vacation within ten days.
Wheelers continued paying BDAI rentals from February to September 1997 despite Jovito’s demand.

Demand for Rentals and Filing of Unlawful Detainer

On 9 October 1997, Jovito and the other co-owners, through counsel, demanded payment of rental arrears from February to October 1997 and required Wheelers to vacate within five days.
On 21 October 1997, Jovito filed with the MTC a complaint for unlawful detainer against Wheelers, docketed as Civil Case No. 15760.
Jovito alleged that Wheelers refused to pay him as the new administrator the rentals due from February to October 1997.

MTC Ruling: Dismissal for Lack of Cause

The MTC held that although JRBDC did not own the property, the co-owners who made up JRBDC’s Board of Directors signed the Lease Development Agreement, evidencing consent to JRBDC’s act.
The MTC reasoned that the co-owners did not question the execution of the Lease Development Agreement after signing it.
The MTC found no evidence establishing nullity of the Lease Development Agreement.
The MTC rejected Jovito’s position on lack of consent, holding that one who is not a party to a contract has no personality to assail its validity.
The MTC dismissed the unlawful detainer complaints for lack of cause of action.

RTC Ruling: Ejectment and Rentals

The RTC reversed the MTC and held that after Jaime’s management authority was terminated, Wheelers could not simply rely on its lease contract with BDAI to deny the co-owners their right to collect rentals.
The RTC found that Wheelers paid rentals at its own risk because it knew Jaime no longer had authority to receive the rentals.
Relying on Aranas v. Tutaan, the RTC reasoned that payment to a person without authority to receive is void.
The RTC ordered Wheelers to vacate, surrender possession to Jovito, pay a monthly sum of P103,312.50 computed from February 1997 up to the time of decision plus the agreed yearly increment until final vacation, pay P10,000 attorney’s fees, and pay costs.

Court of Appeals Ruling: Liability to Co-owners

The Court of Appeals found that Wheelers signed