[G.R. No. 116285.

October 19, 2001]

DECISION

WHEREFORE, judgment is hereby rendered in favor of plaintiff and

against defendant, ordering defendant to pay plaintiff, the amount of
P7,996,314.67, representing defendants outstanding account as of
August 28, 1986, with the corresponding stipulated interest and charges
thereof, until fully paid, plus attorneys fees in an amount equivalent to
25% of said outstanding account, plus P50,000.00, as exemplary
damages, plus costs.

DE LEON, JR., J.:

Defendants counterclaims are ordered dismissed, for lack of merit.

Before us is a petition for review of the Decision [1] dated August 31,
1993 and Resolution[2] dated July 13, 1994 of the Court of Appeals
affirming the Decision[3] dated May 8, 1991 of the Regional Trial Court
(RTC) of Manila, Branch 27.

SO ORDERED.[4]

ANTONIO TAN, petitioner, vs. COURT OF APPEALS and the

CULTURAL CENTER OF THE PHILIPPINES, respondents.

The facts are as follows:

On May 14, 1978 and July 6, 1978, petitioner Antonio Tan obtained
two (2) loans each in the principal amount of Two Million Pesos
(P2,000,000.00), or in the total principal amount of Four Million Pesos
(P4,000,000.00) from respondent Cultural Center of the Philippines
(CCP, for brevity) evidenced by two (2) promissory notes with maturity
dates on May 14, 1979 and July 6, 1979, respectively. Petitioner
defaulted but after a few partial payments he had the loans restructured
by respondent CCP, and petitioner accordingly executed a promissory
note (Exhibit A) on August 31, 1979 in the amount of Three Million Four
Hundred Eleven Thousand Four Hundred Twenty-One Pesos and ThirtyTwo Centavos (P3,411,421.32) payable in five (5) installments. Petitioner
Tan failed to pay any installment on the said restructured loan of Three
Million Four Hundred Eleven Thousand Four Hundred Twenty-One
Pesos and Thirty-Two Centavos (P3,411,421.32), the last installment
falling due on December 31, 1980. In a letter dated January 26, 1982,
petitioner requested and proposed to respondent CCP a mode of paying
the restructured loan, i.e., (a) twenty percent (20%) of the principal
amount of the loan upon the respondent giving its conformity to his
proposal; and (b) the balance on the principal obligation payable in thirtysix (36) equal monthly installments until fully paid. On October 20, 1983,
petitioner again sent a letter to respondent CCP requesting for a
moratorium on his loan obligation until the following year allegedly due to
a substantial deduction in the volume of his business and on account of
the peso devaluation. No favorable response was made to said
letters. Instead, respondent CCP, through counsel, wrote a letter dated
May 30, 1984 to the petitioner demanding full payment, within ten (10)
days from receipt of said letter, of the petitioners restructured loan which
as of April 30, 1984 amounted to Six Million Eighty-Eight Thousand
Seven Hundred Thirty-Five Pesos and Three Centavos (P6,088,735.03).
On August 29, 1984, respondent CCP filed in the RTC of Manila a
complaint for collection of a sum of money, docketed as Civil Case No.
84-26363, against the petitioner after the latter failed to settle his said
restructured loan obligation. The petitioner interposed the defense that
he merely accommodated a friend, Wilson Lucmen, who allegedly asked
for his help to obtain a loan from respondent CCP. Petitioner claimed that
he has not been able to locate Wilson Lucmen. While the case was
pending in the trial court, the petitioner filed a Manifestation wherein he
proposed to settle his indebtedness to respondent CCP by proposing to
make a down payment of One Hundred Forty Thousand Pesos
(P140,000.00) and to issue twelve (12) checks every beginning of the
year to cover installment payments for one year, and every year
thereafter until the balance is fully paid. However, respondent CCP did
not agree to the petitioners proposals and so the trial of the case ensued.
On May 8, 1991, the trial court rendered a decision, the dispositive
portion of which reads:

The trial court gave five (5) reasons in ruling in favor of respondent
CCP. First, it gave little weight to the petitioners contention that the loan
was merely for the accommodation of Wilson Lucmen for the reason that
the defense propounded was not credible in itself. Second,
assuming, arguendo, that the petitioner did not personally benefit from
the said loan, he should have filed a third party complaint against Wilson
Lucmen, the alleged accommodated party but he did not. Third, for three
(3) times the petitioner offered to settle his loan obligation with
respondent CCP. Fourth, petitioner may not avoid his liability to pay his
obligation under the promissory note (Exh. A) which he must comply with
in good faith pursuant to Article 1159 of the New Civil Code. Fifth,
petitioner is estopped from denying his liability or loan obligation to the
private respondent.
The petitioner appealed the decision of the trial court to the Court
of Appeals insofar as it charged interest, surcharges, attorneys fees and
exemplary damages against the petitioner.In his appeal, the petitioner
asked for the reduction of the penalties and charges on his loan
obligation. He abandoned his alleged defense in the trial court that he
merely accommodated his friend, Wilson Lucmen, in obtaining the loan,
and instead admitted the validity of the same. On August 31, 1993, the
appellate court rendered a decision, the dispositive portion of which
reads:
WHEREFORE, with the foregoing modification, the judgment appealed
from is hereby AFFIRMED.
SO ORDERED.[5]
In affirming the decision of the trial court imposing surcharges and
interest, the appellate court held that:
We are unable to accept appellants (petitioners) claim for modification on
the basis of alleged partial or irregular performance, there being
none. Appellants offer or tender of payment cannot be deemed as a
partial or irregular performance of the contract, not a single centavo
appears to have been paid by the defendant.
However, the appellate court modified the decision of the trial court
by deleting the award for exemplary damages and reducing the amount
of awarded attorneys fees to five percent (5%), by ratiocinating as
follows:
Given the circumstances of the case, plus the fact that plaintiff was
represented by a government lawyer, We believe the award of 25% as
attorneys fees and P500,000.00 as exemplary damages is out of
proportion to the actual damage caused by the non-performance of the
contract and is excessive, unconscionable and iniquitous.
In a Resolution dated July 13, 1994, the appellate court denied the
petitioners motion for reconsideration of the said decision.

Hence, this petition anchored on the following assigned errors:

I
THE HONORABLE COURT OF APPEALS COMMITTED
A MISTAKE IN GIVING ITS IMPRIMATUR TO THE
DECISION OF THE TRIAL COURT WHICH
COMPOUNDED INTEREST ON SURCHARGES.
II
THE HONORABLE COURT OF APPEALS ERRED IN
NOT SUSPENDING IMPOSITION OF INTEREST FOR
THE PERIOD OF TIME THAT PRIVATE RESPONDENT
HAS FAILED TO ASSIST PETITIONER IN APPLYING
FOR RELIEF OF LIABILITY THROUGH THE
COMMISSION ON AUDIT AND THE OFFICE OF THE
PRESIDENT.
III

For value received, I/We jointly and severally promise to pay to the
CULTURAL CENTER OF THE PHILIPPINES at its office in Manila, the
sum of THREE MILLION FOUR HUNDRED ELEVEN THOUSAND
FOUR HUNDRED + PESOS (P3,411,421.32) Philippine Currency, xxx.
xxx xxx xxx
With interest at the rate of FOURTEEN per cent (14%) per annum from
the date hereof until paid. PLUS THREE PERCENT (3%) SERVICE
CHARGE.
In case of non-payment of this note at maturity/on demand or upon
default of payment of any portion of it when due, I/We jointly and
severally agree to pay additional penalty charges at the rate of TWO per
cent (2%) per month on the total amount due until paid, payable and
computed monthly. Default of payment of this note or any portion thereof
when due shall render all other installments and all existing promissory
notes made by us in favor of the CULTURAL CENTER OF THE
PHILIPPINES immediately due and demandable.(Underscoring supplied)
xxx xxx xxx

THE HONORABLE COURT OF APPEALS ERRED IN

NOT DELETING AWARD OF ATTORNEYS FEES AND
IN REDUCING PENALTIES.
Significantly, the petitioner does not question his liability for his
restructured loan under the promissory note marked Exhibit A. The first
question to be resolved in the case at bar is whether there are
contractual and legal bases for the imposition of the penalty, interest on
the penalty and attorneys fees.
The petitioner imputes error on the part of the appellate court in not
totally eliminating the award of attorneys fees and in not reducing the
penalties considering that the petitioner, contrary to the appellate courts
findings, has allegedly made partial payments on the loan. And if penalty
is to be awarded, the petitioner is asking for the non-imposition of
interest on the surcharges inasmuch as the compounding of interest on
surcharges is not provided in the promissory note marked Exhibit A. The
petitioner takes exception to the computation of the private respondent
whereby the interest, surcharge and the principal were added together
and that on the total sum interest was imposed. Petitioner also claims
that there is no basis in law for the charging of interest on the surcharges
for the reason that the New Civil Code is devoid of any provision allowing
the imposition of interest on surcharges.
We find no merit in the petitioners contention. Article 1226 of the
New Civil Code provides that:
In obligations with a penal clause, the penalty shall substitute the
indemnity for damages and the payment of interests in case of noncompliance, if there is no stipulation to the contrary. Nevertheless,
damages shall be paid if the obligor refuses to pay the penalty or is guilty
of fraud in the fulfillment of the obligation.
The penalty may be enforced only when it is demandable in accordance
with the provisions of this Code.
In the case at bar, the promissory note (Exhibit A) expressly
provides for the imposition of both interest and penalties in case of
default
on
the
part
of
the
petitioner in
the
paymentof the subject restructured loan. The pertinent[6] portion of the
promissory note (Exhibit A) imposing interest and penalties provides that:

The stipulated fourteen percent (14%) per annum interest charge

until full payment of the loan constitutes the monetary interest on the
note and is allowed under Article 1956 of the New Civil Code. [7] On the
other hand, the stipulated two percent (2%) per month penalty is in the
form of penalty charge which is separate and distinct from the monetary
interest on the principal of the loan.
Penalty
on
delinquent
loans
may
take
different
forms. In Government Service Insurance System v. Court of Appeals,
[8]
this Court has ruled that the New Civil Code permits an agreement
upon a penalty apart from the monetary interest. If the parties stipulate
this kind of agreement, the penalty does not include the monetary
interest, and as such the two are different and distinct from each other
and may be demanded separately. Quoting Equitable Banking Corp. v.
Liwanag,[9] the GSIS case went on to state that such a stipulation about
payment of an additional interest rate partakes of the nature of a penalty
clause which is sanctioned by law, more particularly under Article 2209 of
the New Civil Code which provides that:
If the obligation consists in the payment of a sum of money, and the
debtor incurs in delay, the indemnity for damages, there being no
stipulation to the contrary, shall be the payment of the interest agreed
upon, and in the absence of stipulation, the legal interest, which is six per
cent per annum.
The penalty charge of two percent (2%) per month in the case at
bar began to accrue from the time of default by the petitioner. There is no
doubt that the petitioner is liable for both the stipulated monetary interest
and the stipulated penalty charge. The penalty charge is also called
penalty or compensatory interest. Having clarified the same, the next
issue to be resolved is whether interest may accrue on the penalty or
compensatory interest without violating the provisions of Article 1959 of
the New Civil Code, which provides that:
Without prejudice to the provisions of Article 2212, interest due and
unpaid shall not earn interest. However, the contracting parties may by
stipulation capitalize the interest due and unpaid, which as added
principal, shall earn new interest.
According to the petitioner, there is no legal basis for the imposition
of interest on the penalty charge for the reason that the law only allows
imposition of interest on monetary interest but not the charging of interest
on penalty. He claims that since there is no law that allows imposition of

interest on penalties, the penalties should not earn interest. But as we

have already explained, penalty clauses can be in the form of penalty or
compensatory interest. Thus, the compounding of the penalty or
compensatory interest is sanctioned by and allowed pursuant to the
above-quoted provision of Article 1959 of the New Civil Code considering
that:
First, there is an express stipulation in the promissory note (Exhibit
A) permitting the compounding of interest. The fifth paragraph of the said
promissory note provides that: Any interest which may be due if not paid
shall be added to the total amount when due and shall become part
thereof, the whole amount to bear interest at the maximum rate allowed
by law.[10] Therefore, any penalty interest not paid, when due, shall earn
the legal interest of twelve percent (12%) per annum, [11] in the absence of
express stipulation on the specific rate of interest, as in the case at bar.
Second, Article 2212 of the New Civil Code provides that Interest
due shall earn legal interest from the time it is judicially demanded,
although the obligation may be silent upon this point. In the instant case,
interest likewise began to run on the penalty interest upon the filing of the
complaint in court by respondent CCP on August 29, 1984. Hence, the
courts a quo did not err in ruling that the petitioner is bound to pay the
interest on the total amount of the principal, the monetary interest and
the penalty interest.
The petitioner seeks the elimination of the compounded interest
imposed on the total amount based allegedly on the case of National
Power Corporation v. National Merchandising Corporation, [12] wherein we
ruled that the imposition of interest on the damages from the filing of the
complaint is unjust where the litigation was prolonged for twenty-five (25)
years through no fault of the defendant. However, the ruling in the
said National Power Corporation (NPC) case is not applicable to the
case at bar inasmuch as our ruling on the issue of interest in that NPC
case was based on equitable considerations and on the fact that the said
case lasted for twenty-five (25) years through no fault of the defendant.
In the case at bar, however, equity cannot be considered inasmuch as
there is a contractual stipulation in the promissory note whereby the
petitioner expressly agreed to the compounding of interest in case of
failure on his part to pay the loan at maturity. Inasmuch as the said
stipulation on the compounding of interest has the force of law between
the parties and does not appear to be inequitable or unjust, the said
written stipulation should be respected.
The private respondents Statement of Account (marked Exhibits C
to C-2)[13] shows the following breakdown of the petitioners indebtedness
as of August 28, 1986:

restructured loan has been reduced to Two Million Eight Hundred ThirtyEight Thousand Four Hundred Fifty-Four Pesos and Sixty-Eight
Centavos (P2,838,454.68). Thus, petitioner contends that reduction of
the penalty is justifiable pursuant to Article 1229 of the New Civil Code
which provides that: The judge shall equitably reduce the penalty when
the principal obligation has been partly or irregularly complied with by the
debtor. Even if there has been no performance, the penalty may also be
reduced by the courts if it is iniquitous or unconscionable. Petitioner
insists that the penalty should be reduced to ten percent (10%) of the
unpaid debt in accordance with Bachrach Motor Company v. Espiritu.[15]
There appears to be a justification for a reduction of the penalty
charge but not necessarily to ten percent (10%) of the unpaid balance of
the loan as suggested by petitioner.Inasmuch as petitioner has made
partial payments which showed his good faith, a reduction of the penalty
charge from two percent (2%) per month on the total amount due,
compounded monthly, until paid can indeed be justified under the said
provision of Article 1229 of the New Civil Code.
In other words, we find the continued monthly accrual of the two
percent (2%) penalty charge on the total amount due to be
unconscionable inasmuch as the same appeared to have been
compounded monthly.
Considering petitioners several partial payments and the fact he is
liable under the note for the two percent (2%) penalty charge per month
on the total amount due, compounded monthly, for twenty-one (21) years
since his default in 1980, we find it fair and equitable to reduce the
penalty charge to a straight twelve percent (12%) per annum on the total
amount due starting August 28, 1986, the date of the last Statement of
Account (Exhibits C to C-2). We also took into consideration the offers of
the petitioner to enter into a compromise for the settlement of his debt by
presenting proposed payment schemes to respondent CCP. The said
offers at compromise also showed his good faith despite difficulty in
complying with his loan obligation due to his financial
problems. However, we are not unmindful of the respondents long
overdue deprivation of the use of its money collectible from the petitioner.
The petitioner also imputes error on the part of the appellate court
for not declaring the suspension of the running of the interest during that
period when the respondent allegedly failed to assist the petitioner in
applying for relief from liability. In this connection, the petitioner referred
to the private respondents letter[16] dated September 28, 1988 addressed
to petitioner which partially reads:
Dear Mr. Tan:

Principal P2,838,454.68

xxx xxx xxx

Interest P 576,167.89

With reference to your appeal for condonation of interest and surcharge,

we wish to inform you that the center will assist you in applying for relief
of liability through the Commission on Audit and Office of the President
xxx.

Surcharge P4,581,692.10
P7,996,314.67
The said statement of account also shows that the above amounts stated
therein are net of the partial payments amounting to a total of Four
Hundred Fifty-Two Thousand Five Hundred Sixty-One Pesos and FortyThree Centavos (P452,561.43) which were made during the period from
May 13, 1983 to September 30, 1983.[14] The petitioner now seeks the
reduction of the penalty due to the said partial payments. The principal
amount of the promissory note (Exhibit A) was Three Million Four
Hundred Eleven Thousand Four Hundred Twenty-One Pesos and ThirtyTwo Centavos (P3,411,421.32) when the loan was restructured on
August 31, 1979. As of August 28, 1986, the principal amount of the said

While your application is being processed and awaiting approval, the

center will be accepting your proposed payment scheme with the
downpayment of P160,000.00 and monthly remittances of P60,000.00
xxx.
xxx xxx xxx
The petitioner alleges that his obligation to pay the interest and
surcharge should have been suspended because the obligation to pay
such interest and surcharge has become conditional, that is dependent
on a future and uncertain event which consists of whether the petitioners

request for condonation of interest and surcharge would be

recommended by the Commission on Audit and the Office of the
President to the House of Representatives for approval as required
under Section 36 of Presidential Decree No. 1445. Since the condition
has not happened allegedly due to the private respondents reneging on
its promise, his liability to pay the interest and surcharge on the loan has
not arisen. This is the petitioners contention.

Before us is a Petition for Review under Rule 45 of the Rules of Court,

assailing the October 29, 1999 Decision[1] and the March 9, 2000
Resolution[2] of the Court of Appeals[3] (CA) in CA-GR SP No. 50618.
The decretal portion of the Decision reads as follows:
WHEREFORE, the petition for review is hereby DISMISSED for lack of
merit.[4]
The assailed Resolution denied petitioners Motion for Reconsideration.

It is our view, however, that the running of the interest and

surcharge was not suspended by the private respondents promise to
assist the petitioners in applying for relief therefrom through the
Commission on Audit and the Office of the President.
First, the letter dated September 28, 1988 alleged to have been
sent by the respondent CCP to the petitioner is not part of the formally
offered documentary evidence of either party in the trial court. That letter
cannot be considered evidence pursuant to Rule 132, Section 34 of the
Rules of Court which provides that: The court shall consider no evidence
which has not been formally offered xxx. Besides, the said letter does not
contain any categorical agreement on the part of respondent CCP that
the payment of the interest and surcharge on the loan is deemed
suspended while his appeal for condonation of the interest and
surcharge was being processed.
Second, the private respondent correctly asserted that it was the
primary responsibility of petitioner to inform the Commission on Audit and
the Office of the President of his application for condonation of interest
and surcharge. It was incumbent upon the petitioner to bring his
administrative appeal for condonation of interest and penalty charges to
the attention of the said government offices.
On the issue of attorneys fees, the appellate court ruled correctly
and justly in reducing the trial courts award of twenty-five percent (25%)
attorneys fees to five percent (5%) of the total amount due.
WHEREFORE, the assailed Decision of the Court of Appeals is
hereby AFFIRMED with MODIFICATION in that the penalty charge of two
percent (2%) per month on the total amount due, compounded monthly,
is hereby reduced to a straight twelve percent (12%) per annum starting
from August 28, 1986. With costs against the petitioner.
SO ORDERED.
Bellosillo,
JJ., concur.

(Chairman),

Mendoza,

Quisumbing, and Buena,

The CA sustained the Decision of the Regional Trial Court (RTC) of

Quezon City (Branch 217), which had disposed as follows:
WHEREFORE, premises considered, the Decision appealed from is
AFFIRMED insofar as it dismissed the complaint and it extended the
lease contract up to September 16, 2001; and is MODIFIED such that,
defendants-appellees are ordered to pay plaintiff-appellant the amount of
P444,800.00 less 5% as withholding tax, as their rentals on subject
premises from July 16, 1994 to November 13, 1994.
Costs against the plaintiff-appellant.[5]
The Facts
The factual antecedents of the case are summarized by the Court of
Appeals as follows:
[The present case] originated from an unlawful detainer case filed by
petitioner before the Metropolitan Trial Court of Quezon City on October
9, 1996 which was docketed as Civil Case No. 16349.
In its Complaint, petitioner alleged that respondents Huang Chao Chun
and Yang Tung Fa violated their amended lease contract over a 1,112
square meter lot it owns, designated as Lot No. 1-A-1, when they did not
pay the monthly rentals thereon in the total amount of P4,322,900.00. It
also alleged that the amended lease contract already expired on
September 16, 1996 but respondents refused to surrender possession
thereof plus the improvements made thereon, and pay the rental
arrearages despite repeated demands.
The amended lease contract was entered into by the parties sometime in
August, 1991. [Exact day is not mentioned in amended contract]. The
same amended the lease contract previously entered into by the parties
on August 8, 1991. The amended contract contains the following
provisions:
1. That the LESSOR agrees as by the[se] presents hereby agreed to
change the lot from LOT 1-A-2 with an area of 1,091 sq. meters, to LOT
1-A-1 with an area of 1,112 sq. meters, covered by the same TCT No.
219417 and located at the same address at No. 2 Scout Chuatuco
Street, Quezon City, Metro Manila.
2. The monthly rental shall be the same at P100.00 per square meters
and/or P111,200.00 per month, Philippine Currency. All other terms and
conditions are the same for strict compliance thereof.
The terms and conditions referred to in paragraph 2 above are the
following:

[G.R. No. 142378. March 7, 2002]

LL AND COMPANY DEVELOPMENT AND AGRO-INDUSTRIAL
CORPORATION, petitioner, vs. HUANG CHAO CHUN AND YANG
TUNG FA, respondents.
DECISION
PANGANIBAN, J.:
A stipulation in a lease contract stating that its five-year term is subject to
an option to renew shall be interpreted to be reciprocal in character.
Unless the language shows an intent to allow the lessee to exercise it
unilaterally, such option shall be deemed to benefit both the lessor and
the lessee who must both consent to the extension or renewal, as well as
to its specific terms and conditions.
Statement of the Case

1. x x x It is expressly agreed and understood that the payment of the

rental herein stipulated shall be made without the necessity of express
demand and without delay on any ground whatsoever.
2. The term of this lease is FIVE (5) YEARS from the effectivity of said
lease, and with the option to renew, specifically shall commence from
September 15, 1991 and shall expire on September 16, 1996, and
maybe adjusted depending upon the ejectment of tenants.
3. The LESSEES shall have the option to reconstruct and/or renovate the
improvement found thereon at the expense of the LESSEES, and
whatever improvement introduced therein by the LESSEES in the
premises the ownership of it shall become the property of the LESSOR
without extra compensation of the same.
4. Upon signing of this Contract of Lease, the LESSEES shall make a
one (1) year deposit to be paid unto the LESSOR as follows:
50% percent upon signing of this Contract of Lease;

50% percent as payment in full of the one (1) year deposit. Payment of
which shall be made unto the LESSOR on the day of the effectivity date
of the Contract of Lease, said deposit shall be refundable 30 days prior
to the termination of the same.

In addition, the RTC ruled that petitioner was not entitled to legal interest,
and that the 25 percent increase provided in the Contract of Lease
should be based on the imposed real estate tax, not on the monthly
rental.
Ruling of the Court of Appeals

5. The monthly rental is subject to increase, said increase shall be based

upon the imposition of Real Estate Tax for every two (2) years upon
presentation of the increased real estate tax to the Le[ssees], but said
increase shall not be less than 25% percent.

The Court of Appeals affirmed in toto the RTCs dismissal of the unlawful
detainer case and extension of the lease period for another five years,
holding that the errors raised had already been fully taken into account
by the two courts below.

xxxxxxxxx
9. The parties agree as by these presents have agreed to strictly observe
the terms and conditions of the Contract of Lease. Violation by the
Lessees of any of the terms and condition of said contract is equivalent
to forfeitures of the deposit in favor of the Lessor, furthermore the
Lessees agreed to vacate the lease[d] premises for any violation of the
terms and condition of said contract, without going to court.

It also reasoned that [t]he elliptical construction of paragraph 5 of the

Lease Contract made it awkward to the point of being ambiguous. There
being no agreement on the proven rent, an ejectment suit based on the
non-payment of rents that were not agreed upon x x x will not lie.
Hence, this Petition.[8]
Issues

Respondent were joined by the Tsai Chun International Resources Inc. in

their answer to the Complaint, wherein they alleged that the actual
lessee over Lot No. 1-A-1 is the corporation.
Respondents and the corporation denied petitioners allegations, claiming
instead that:
1. The amended lease contract did not reflect the true intention of the
parties because it did not contemplate an obsolete building that can no
longer be renovated, such that petitioner did not become the owner of
the new P24,000,000.00 two-storey building they introduced on Lot No.
1-A-1 when their contract expired.
2. Their failure to pay the monthly rentals on the property was due to
petitioners fault when it attempted to increase the amount of rent in
violation of their contract; and

In its Memorandum, petitioner raises the following issues for the Courts
consideration:
I
Whether the court could still extend the term of the lease, after its
expiration. Is expiration of the lease a proper ground in [a] case of
unlawful detainer[?]
II
Whether non-payment of rentals is a ground to eject, in an unlawful
detainer. Is refusal of the lessor to accept or collect rentals a valid reason
for non-payment of rentals[?]
III

3. They are entitled to a renewal of their contract in view of the provision

therein providing for automatic renewal, and also in view of the
P24,000,000.00 worth of improvements they introduced on the leased
premises.

May the court allow the introduction of issues other than the elements of
a case for ejectment[?][9]
This Courts Ruling

After the parties were accorded their respective rights to due process of
law, Branch 32 of the MTC rendered decision on June 23, 1998, the
decretal portion of which reads:
WHEREFORE, premises considered, the Court hereby orders the
dismissal of this case, without pronouncement as to costs.
SO ORDERED.

The Petition is meritorious.

First Issue:
Extension of Lease Period
Petitioner contends that because the Contract, as amended, had already
expired, the MTC had no power to extend the lease period. We are
convinced.

The aforequoted decision was premised on the resolution of two issues:

(a) Whether or not the Contract of Lease dated August 8, 1991 had
expired; and
(b) Did defendants and/or the corporation incur rental arrearages.
The MTC ruled that the contract entered into by the parties may be
extended by the lessees for reasons of justice and equity, citing as its
legal bases the case of Legarda Koh v. Ongsi[a]co (36 Phil. [185]) and
Cruz v. Alberto (39 Phil. 991). It also ruled that the corporations failure to
pay the monthly rentals as they fell due was justified by the fact that
petitioner refused to honor the basis of the rental increase as stated in
their Lease Agreement.[6] (Citations omitted)

In general, the power of the courts to fix a longer term for a lease is
discretionary. Such power is to be exercised only in accordance with the
particular circumstances of a case: a longer term to be granted where
equities demanding extension come into play; to be denied where none
appear -- always with due deference to the parties freedom to contract.
[10] Thus, courts are not bound to extend the lease.[11]
Article 1675 of the Civil Code excludes cases falling under Article 1673
from those under Article 1687. Article 1673 provides among others, that
the lessor may judicially eject the lessee upon the expiration of the
period agreed upon or that which is fixed for the duration of the leases.
Where no period has been fixed by the parties,[12] the courts, pursuant
to Article 1687, have the potestative authority to set a longer period of
lease.[13]

Ruling of the Trial Court

The RTC affirmed the Decision of the Metropolitan Trial Court (MeTC)
dismissing the unlawful detainer case. The RTC likewise agreed that the
Contract of Lease entered into by the parties could be extended
unilaterally by the lessees for another five years or until September 16,
2001, on the basis of justice and equity.
It also held that the parties had a reciprocal obligation: unless and until
petitioner presented the increased realty tax, private respondents were
not under any obligation to pay the increased monthly rental.[7]

In the case before us, the Contract of Lease provided for a fixed period
of five (5) years -- specifically from September 16, 1991 to September
15, 1996. Because the lease period was for a determinate time, it
ceased, by express provision of Article 1669 of the Civil Code, on the day
fixed, without need of a demand.[14] Here, the five-year period expired
on September 15, 1996, whereas the Complaint for ejectment was filed
on October 6, 1996. Because there was no longer any lease that could
be extended, the MeTC, in effect, made a new contract for the parties, a
power it did not have.[15] Early on, in Bacolod-Murcia Milling v. Banco
Nacional Filipino,[16] we said that a court could not supply material
stipulations to a contract, as follows:

It is not the province of the court to alter a contract by construction or to

make a new contract for the parties; its duty is confined to the
interpretation of the one which they have made for themselves, without
regard to its wisdom or folly, as the court cannot supply material
stipulations or read into contract words which it does not contain.
Furthermore, the extension of a lease contract must be made before the
term of the agreement expires, not after.[17] Upon the lapse of the
stipulated period, courts cannot belatedly extend or make a new lease
for the parties,[18] even on the basis of equity.[19] Because the Lease
Contract ended on September 15, 1996, without the parties reaching any
agreement for renewal, respondents can be ejected from the premises.
[20]
On the other hand, respondents and the lower courts argue that the
Contract of Lease provided for an automatic renewal of the lease period.
We are not persuaded.
Citing Koh v. Ongsiaco[21] and Cruz v. Alberto,[22] the MeTC -- upheld
by the RTC and the CA -- ruled that the stipulation in the Contract of
Lease providing an option to renew should be construed in favor of and
for the benefit of the lessee.[23] This ruling has however, been expressly
reversed in Fernandez v. CA, from which we quote:[24]
It is also important to bear in mind that in a reciprocal contract like a
lease, the period of the lease must be deemed to have been agreed
upon for the benefit of both parties, absent language showing that the
term was deliberately set for the benefit of the lessee or lessor alone. We
are not aware of any presumption in law that the term of a lease is
designed for the benefit of the lessee alone. Koh and Cruz in effect
rested upon such a presumption. But that presumption cannot
reasonably be indulged in casually in an era of rapid economic change,
marked by, among other things, volatile costs of living and fluctuations in
the value of the domestic currency. The longer the period the more
clearly unreasonable such a presumption would be. In an age like that
we live in, very specific language is necessary to show an intent to grant
a unilateral faculty to extend or renew a contract of lease to the lessee
alone, or to the lessor alone for that matter. We hold that the abovequoted rulings in Koh v. Ongsiaco and Cruz v. Alberto should be and are
overruled.[25]
The foregoing doctrine was recently reiterated in Heirs of Amando
Dalisay v. Court of Appeals.[26] Thus, pursuant to Fernandez, Dalisay
and Article 1196[27] of the Civil Code, the period of the lease contract is
deemed to have been set for the benefit of both parties. Its renewal may
be authorized only upon their mutual agreement or at their joint will.[28]
Its continuance, effectivity or fulfillment cannot be made to depend
exclusively upon the free and uncontrolled choice of just one party. While
the lessee has the option to continue or to stop paying the rentals, the
lessor cannot be completely deprived of any say on the matter.[29]
Absent any contrary stipulation in a reciprocal contract, the period of
lease is deemed to be for the benefit of both parties.[30]
In the instant case, there was nothing in the aforesaid stipulation or in the
actuation of the parties that showed that they intended an automatic
renewal or extension of the term of the contract.[31] First, demonstrating
petitioners disinterest in renewing the contract was its letter[32] dated
August 23, 1996, demanding that respondents vacate the premises for
failure to pay rentals since 1993. As a rule, the owner-lessor has the
prerogative to terminate the lease upon its expiration.[33] Second, in the
present case, the disagreement of the parties over the increased rental
rate and private respondents failure to pay it precluded the possibility of
a mutual renewal. Third, the fact that the lessor allowed the lessee to
introduce improvements on the property was indicative, not of the
formers intention to extend the contract automatically,[34] but merely of
its obedience to its express terms allowing the improvements. After all, at
the expiration of the lease, those improvements were to become its
property.
As to the contention that it is not fair to eject respondents from the
premises after only five years, considering the value of the improvements
they introduced therein, suffice it to say that they did so with the
knowledge of the risk -- the contract had plainly provided for a five-year
lease period.
Parties are free to enter into any contractual stipulation, provided it is not
illegal or contrary to public morals. When such agreement, freely and

voluntarily entered into, turns out to be disadvantageous to a party, the

courts cannot rescue it without crossing the constitutional right to
contract. They are not authorized to extricate parties from the necessary
consequences of their acts, and the fact that the contractual stipulations
may turn out to be financially disadvantageous will not relieve the latter
of their obligations.[35]
Second Issue:
Non-Payment of Rentals
Petitioner further argues that respondents should be ejected for
nonpayment of the new rental rates. On the other hand, the latter counter
that they did not agree to these new rates. True, mere failure to pay
rentals does not make possession unlawful, but when a valid demand to
vacate the premises is made by the lessor, the lessees continued
withholding of possession becomes unlawful.[36] Well-settled is the rule
that the failure of the owners/lessors to collect or their refusal to accept
the rentals is not a valid defense.[37]
Respondents justify their nonpayment of rentals on the ground that
petitioners refused to accept their payments. Article 1256 of the Civil
Code, however, provides that if the creditor to whom tender of payment
has been made refuses without just cause to accept it, the debtor shall
be released from responsibility by the consignation of the thing or sum.
This provision is more explicit under the Rent Control Law,[38] the
pertinent portions of which are similar to the prevailing law -- the Rental
Reform Act of 2002[39] -- which we reproduce hereunder:
Section 7. Grounds for Judicial Ejectment.-Ejectment shall be allowed on
the following grounds:
(a) Assignment of lease or subleasing of residential units in whole or in
part, including the acceptance of boarders or bedspacers, without the
written consent of the owner/lessor.
(b) Arrears in payment of rent for a total of three (3) months: Provided,
That in the case of refusal by the lessor to accept payment of the rental
agreed upon, the lessee may either deposit, by way of consignation, the
amount in court, or with the city or municipal treasurer, as the case may
be, or in a bank in the name of and with notice to the lessor, within one
month after the refusal of the lessor to accept payment.
The lessee shall thereafter deposit the rental within ten days of every
current month. Failure to deposit the rentals for three (3) months shall
constitute a ground for ejectment. If an ejectment case is already
pending, the court upon proper motion may order the lessee or any
person or persons claiming under him to immediately vacate the leased
premises without prejudice to the continuation of the ejectment
proceedings. At any time, the lessor may, upon authority of the court,
withdraw the rentals deposited.
The lessor, upon authority of the court in case of consignation or upon
joint affidavit by him and the lessee to be submitted to the city or
municipal treasurer and to the bank where deposit was made, shall be
allowed to withdraw the deposits.
xxxxxxxxx
(e) Expiration of the period of the lease contract.[40]
On the other hand, the Civil Code provides as follows:
Art. 1673. The lessor may judicially eject the lessee for any of the
following causes:
(1) When the period agreed upon, or that which is fixed for the duration
of lease under Articles 1682 and 1687, has expired;
(2) Lack of payment of the price stipulated;
(3) Violation of any of the conditions agreed upon in the contract;
(4) When the lessee devotes the thing leased to any use or service not
stipulated which causes the deterioration thereof; or if he does not
observe the requirement in No. 2 of Article 1657, as regards the use
thereof.

The ejectment of tenants of agricultural lands is governed by special

laws.

authorizing an increase -- upon presentation of the increased real estate

tax to lessees -- has not been complied with by petitioner.

Based on the foregoing, respondents should have deposited in a bank or

with judicial authorities the rent based on the previous rate.[41] In the
instant case, respondents failed to pay the rent from October 1993 to
March 1998 or for four (4) years and three (3) months. They should
remember that Article 1658 of the Civil Code provides only two instances
in which the lessee may suspend payment of rent; namely, in case the
lessor fails to make the necessary repairs or to maintain the lessee in
peaceful and adequate enjoyment of the property leased.[42] None of
these is present in the case at bar.

Third Issue:
Issues on Ejectment

Moreover, the mere subsequent payment of rentals by the lessee and

the receipt thereof by the lessor does not, absent any other circumstance
that may dictate a contrary conclusion, legitimize the unlawful character
of the possession. The lessor may still pursue the demand for ejectment.
[43]
Having said that, we cannot, on the other hand, authorize a unilateral
increase in the rental rate, considering that (1) the option to renew is
reciprocal and, thus, the terms and conditions thereof -- including the
rental rate -- must likewise be reciprocal; and (2) the contracted clause

Petitioner proceeds to argue that the MeTC should not have allowed the
intervention of the Tsai Chun International Resources, Inc., allegedly the
real lessor of the leased premises. In view of our foregoing discussion,
there is no more need to rule on this issue.
WHEREFORE, the Petition is GRANTED and the assailed Decision SET
ASIDE. Respondents and all persons claiming rights under them are
hereby ORDERED TO VACATE the subject premises and to restore
peaceful possession thereof to petitioner. They are also DIRECTED TO
PAY the accrued rentals (based on the stipulated rent) from October
1993 until such time that they vacate the subject property, with interest
thereon at the legal rate. No pronouncement as to costs.
SO ORDERED.
Melo, (Chairman), Vitug, Sandoval-Gutierrez, and Carpio, JJ., concur.