IMPERIAL INSURANCE, INC., PLAINTIFF AND APPELLANT, VS. PELAGIO B. SIMON, DEFENDANT AND APPELLEE.

Imperial Insurance versus Simon

The Case

This is a case about a tenant who tried to hold on to leased premises after the new owner of the building had terminated his month-to-month lease. Imperial Insurance, Incorporated, the purchaser of a building at the corner of Nueva and Escolta Streets in Manila, brought an action for unlawful detainer against Pelagio B. Simon, the lessee of the ground floor who ran a haberdashery shop there. The case matters because it draws a sharp line around Article 1687 of the New Civil Code: the provision that lets courts fix a longer lease term for a long-staying lessee cannot be used to defeat a lease that the parties themselves have already terminated, and it cannot be raised for the first time on appeal when it was never pleaded as a defense.

Procedural History

Imperial Insurance filed its complaint for unlawful detainer before the Municipal Court of Manila. After trial, the municipal court rendered judgment ordering Simon to vacate the premises, to pay rents from December 1961 until he actually vacated at the rate of 2,300 pesos a month, to pay 100 pesos as attorney's fees, and the costs of suit. Simon's counterclaim was dismissed.

Simon appealed to the Court of First Instance of Manila. There the parties agreed to submit the case for decision on the basis of their memoranda, the pleadings, and the documentary evidence. Simon then moved to reopen the case and set it for hearing, evidently to introduce evidence on his counterclaim, but the court denied the motion. The Court of First Instance then rendered its own judgment, allowing Simon to continue occupying the premises at 1,800 pesos a month for two years from the finality of the decision, ordering Imperial Insurance to reimburse him 20,000 pesos for improvements plus 1,000 pesos as attorney's fees, and taxing the costs against the plaintiff. After its motion for reconsideration was denied, Imperial Insurance appealed directly to the Supreme Court.

Facts

Pelagio Simon was the lessee of the ground floor of a building at the corner of Nueva and Escolta Streets in Manila, which he used for his haberdashery shop. He paid 1,800 pesos a month in rentals. On September 13, 1961, Imperial Insurance bought the property from the owner for 340,000 pesos.

The very next day, September 14, 1961, the former owner wrote Simon informing him of the sale and terminating the monthly lease effective one month from the date of the letter, because the new owners wished to occupy the whole premises. On the same date, Imperial Insurance itself wrote Simon, telling him of the purchase and asking him to vacate on or before October 14, 1961. Simon did not vacate. More letters followed, including a demand from the company's lawyer for 9,000 pesos in rentals in arrears from June to October 1961 and for vacating within five days.

Simon replied on December 9, 1961, offering to continue the lease at 2,300 pesos a month once the building was remodelled, and asking for a one-year extension from the date of the sale. On December 22, 1961, he paid the 9,000 pesos in arrears, and the receipt stated that he was still bound to pay rentals up to the end of February 1962, at which time the premises would be vacated in favor of Imperial Insurance. A later receipt for the November rentals repeated the same undertaking, including the commitment to vacate by the end of February 1962 without any further extension. Still, Simon failed to pay the December 1961, January 1962, and February 1962 rentals, and he refused to vacate. This led to the complaint for unlawful detainer filed on February 27, 1962.

Issues

• Whether or not the trial court erred in applying Article 1687 of the New Civil Code to the facts of this case.
• Whether or not the trial court erred in granting Simon a period of two years, computed from the finality of judgment, to occupy the premises.
• Whether or not the trial court erred in fixing 1,800 pesos as the monthly rental for that two-year period.
• Whether or not the trial court erred in ordering Imperial Insurance to pay Simon 20,000 pesos as one-half of the value of improvements, and in making it liable for attorney's fees.

Applicable Provisions

Article 1687 of the New Civil Code provides:

Article 1687. If the period for the lease has not been fixed, it is understood to be from year to year, if the rent agreed upon is annual; from month to month, if it is monthly; from week to week, if the rent is weekly; and from day to day, if rent is to be paid daily. However, even though a monthly rent is paid, and no period for the lease has been set, the courts may fix a longer term for the lease after the lessee has occupied the premises for over one year. If the rent is weekly, the courts may likewise determine a longer period after the lessee has been in possession for over six months. In case of daily rent, the courts may also fix a longer period after the lessee has stayed in the place for over one month.

This is the provision the trial court relied on to extend Simon's stay, and the provision the Supreme Court holds cannot benefit him.

Article 1678 of the New Civil Code, which the Court discusses, provides:

Article 1678. If the lessee makes, in good faith, useful improvements which are suitable to the use for which the lease is intended, without altering the form or substance of the property leased, the lessor upon the termination of the lease shall pay the lessee one-half of the value of the improvements. Should the lessor refuse to reimburse said amount, the lessee may remove the improvements, even though the principal thing may suffer damage thereby. He shall not, however, cause any more impairment upon the property leased than is necessary.

This governs Simon's claim for reimbursement of improvements, which the Court finds unproven and, in any event, unavailable to a lessee who built at his own risk.

Ruling

On the first issue, the Court held that Article 1687 cannot benefit Simon. First, he never interposed that provision as a defense in his answer to the complaint, and all defenses available but not pleaded are deemed waived; the trial court should not have applied the provision on its own motion. Second, the article was never meant to authorize an unwarranted extension of a lease, making the contract's terms indefinite until judicial intervention. The former owner and the new owner had formally informed Simon of the termination of the lease, and Simon himself had asked for only a one-year extension from the purchase and had expressly committed to pay 2,300 pesos monthly. By the time of the decision, not only one year but much longer had lapsed.

On the second issue, the Court found no legal or factual basis for giving Simon two years from the finality of judgment. Simon had asked for only one year from the date of the sale, and the lower court cited no provision of law to support its award.

On the third issue, the Court held that fixing the future monthly rental at 1,800 pesos was arbitrary, since Simon himself had made clear in his letters that he was willing to pay 2,300 pesos, and the receipts showed that starting December 1961 he was to pay that amount. This amounted to a recognition that the premises were worth that much in rentals, and the increase in assessments on the property justified the increase. If he did not agree to pay the increased rentals, he was free to leave; having stayed, he must pay 2,300 pesos a month until he vacates.

On the fourth issue, the Court held that the award of 20,000 pesos for improvements had no basis. There was no evidence that the improvements existed or that they were worth 40,000 pesos, because the motion to reopen the case, which would have allowed such evidence, was denied. Even with such evidence, Simon could not recover, because a lessee must show that the improvements were made in good faith, were useful and suitable to the use for which the lease is intended, and did not alter the form or substance of the premises. A lessee cannot pretend to act in good faith in making improvements, knowing that his occupation continues only during the life of the lease and that he must vacate upon its termination; he is deemed to have introduced the improvements at his own risk and cannot recover their value, much less retain the premises until reimbursement. The Court also found no valid reason for awarding attorney's fees to Simon; on the contrary, Imperial Insurance was forced to litigate to protect its plainly just and demandable claim.

Doctrine

Article 1687 of the New Civil Code, which allows courts to fix a longer lease term for a lessee who has occupied the premises for over one year, cannot be applied to extend a lease that the parties have already terminated, nor can it make the terms of the contract indefinite until judicial intervention. A defense that is available but not pleaded in the answer is deemed waived, and the trial court may not apply such a provision on its own motion. A lessee who introduces improvements knowing that his occupation lasts only during the life of the lease is deemed to have acted at his own risk and cannot recover their value, much less retain the premises until reimbursement, absent proof of the requirements of Article 1678.

Disposition

The Supreme Court modified the judgment: Simon was ordered to vacate the premises immediately upon finality of the decision, to pay Imperial Insurance 2,300 pesos monthly starting December 1961 until he vacates, with legal interest, and to pay 1,500 pesos as attorney's fees, while Imperial Insurance was relieved of any liability in favor of Simon.

Remember This

The single line worth memorizing is that Article 1687 cannot be used to revive a lease the parties have already terminated, and an unpleaded defense is waived. Examiners like to use this case to test whether a long-staying lessee can invoke the court's power to fix a longer term, and whether a lessee may recover the value of improvements made at his own risk.