TALA REALTY SERVICES CORPORATION, PETITIONER, VS. BANCO FILIPINO SAVINGS AND MORTGAGE BANK, RESPONDENT.

Tala Realty versus Banco Filipino

The Case

This is a petition for review on certiorari brought by Tala Realty Services Corporation against Banco Filipino Savings and Mortgage Bank, arising from a complaint for ejectment over the Lucena City property on which the bank had built one of its branch sites. Tala Realty sought to eject the bank after the parties failed to agree on new rental rates, insisting that the lease had expired under an eleven-year contract. The bank resisted, claiming that the real agreement was a twenty-year lease, renewable for another twenty years at its option, and that the shorter contract was a forgery. The case matters because it gathers into one decision the Court's settled rulings on the validity of these twin lease contracts and, more importantly, because it teaches the limits of an ejectment suit: a complaint grounded on a lease that has not yet expired, and on rentals that were never in arrears, states no cause of action.

Procedural History

Tala Realty filed its complaint for ejectment before the Municipal Trial Court in Cities, Branch Two, Lucena City. That court dismissed both the complaint and the bank's counterclaim, holding that it had no jurisdiction because the issues raised, namely which lease contract was valid and whether Tala Realty was a mere trustee of the bank, were incapable of pecuniary estimation and belonged to the Regional Trial Court. Ejectment under Rule 70, it noted, is summary in nature and unfit for threshing out such questions. The Regional Trial Court, Branch Fifty-Five, Lucena City affirmed the dismissal and denied reconsideration. Tala Realty elevated the matter to the Court of Appeals, which, in a decision rendered on December 29, 2000, likewise ruled that the complaint had been correctly dismissed. The appellate court went further and held that the first contract of lease was the valid one, so the bank's refusal to pay the new rate was justified because the twenty-year lease had not yet expired. It added that nonpayment of rent was not the ground of the complaint and could not be raised for the first time on appeal. Reconsideration was denied on April 26, 2001, and the case came to the Supreme Court by petition for review on certiorari.

Facts

On August 25, 1981, Tala Realty leased several properties scattered across the country to Banco Filipino for a period of twenty years, renewable for another twenty years at the bank's option, at a monthly rental of 19,300 pesos. These properties were formerly owned by the bank itself, which had unloaded them to Tala Realty, a corporation organized by its own major stockholders, because as a savings and mortgage bank it could hold only so much real estate under the banking laws. On the same date, a second lease contract purporting to cover the same properties was allegedly executed, this time for eleven years, renewable for nine years at the lessee's option, with the advance rental converted into a security deposit.

In August 1992, eleven years after the contracts were signed, Tala Realty wrote the bank's president notifying him of the expiration of the lease under the second contract, and later demanded goodwill money as a condition for renewal. In June 1993 it informed the bank that it would charge the difference between what had been paid and its proposed new rates, and that it had decided to dispose of the properties. The parties failed to agree, and Tala Realty gave the bank until April 30, 1994 to vacate the Lucena property and to remit 3,090,886 pesos in alleged unpaid rentals.

The bank refused to vacate. Tala Realty then filed its ejectment complaint in November 1994, praying that the bank be ordered to vacate and to pay 2,782,890 pesos and 57 centavos as unpaid rentals up to September 30, 1994, thereafter 144,301 pesos and 57 centavos monthly with an annual ten percent escalation, plus costs. The bank answered that Tala Realty was formed by its own major stockholders precisely to hold and lease back properties it could not retain under banking regulations; that the twenty-year contract was the valid one; that the eleven-year contract was spurious, fabricated, and falsified; that Tala Realty was a mere trustee; and that a derivative suit for reconveyance was pending before the Securities and Exchange Commission. It filed a compulsory counterclaim for damages.

Issues

• Whether or not the Municipal Trial Court in Cities, Branch Two, Lucena City correctly dismissed the complaint for ejectment against the bank.
• Whether or not the lease of the Lucena property was for twenty years, renewable for another twenty years at the bank's option, or for eleven years, renewable for another nine years at the bank's option.
• Whether or not the bank is liable for nonpayment of rentals, either under the original twenty-year lease or under the new rate demanded after the alleged expiration of the eleven-year lease.

Applicable Provisions

The decision quotes paragraph three of the Contract of Lease, which fixes the nature of the 962,500 pesos paid at the outset:

That upon the signing and execution of this Contract, the LESSEE shall pay the LESSOR NINE HUNDRED SIXTY TWO THOUSAND FIVE HUNDRED PESOS ONLY (P962,500.00) Philippine Currency representing advance rental to be applied on the monthly rental for the period from the eleventh to the twentieth year;

This clause is decisive on the third issue, because it shows that the amount was advance rental for the eleventh to the twentieth year of the lease, not a sum that could be treated as unpaid rent.

Ruling

On the first issue, the Court held that the Municipal Trial Court in Cities was competent to adjudicate the validity of the lease contracts. Ejectment is concerned with physical or material possession, but where the issue of possession depends on the resolution of ownership sufficiently alleged in the complaint, the municipal court may resolve it, although its judgment is conclusive only as to possession and not as to ownership. Here the case hinged on which of the two lease contracts governed.

On the second issue, the Court held that the twenty-year contract governed. The facts were substantially the same as those in the earlier case involving the Urdaneta property, where the Court had ruled that the eleven-year contract was a forgery, because the bank's executive vice-president denied signing it, the notary public's records did not include it, and it was never submitted to the Central Bank as required. Although that earlier ruling would have constituted res judicata only had the property been the same, the principle of stare decisis, meaning that settled rulings should be followed for the sake of certainty and stability in the law, dictated the same conclusion, as did the later cases involving the Davao City, Iloilo City, and Malabon properties. The eleven-year contract was therefore void.

On the third issue, the Court held that the bank was not liable for nonpayment of rent and that no cause of action for ejectment existed. The complaint itself alleged that the bank had refused to comply with the new rental rates unilaterally imposed by Tala Realty, and it was that refusal which was made the ground for demanding that the bank vacate. But the twenty-year lease had not yet expired, and the bank had paid 962,500 pesos as advance rental for the eleventh to the twentieth year. The Court explained that this advance rental covered forty-nine months of rent at 19,300 pesos monthly, corresponding to the period of the bank's liquidation, so that the bank had no arrearages under the valid contract. As the Court put it, there is thus no cause of action for nonpayment of rent under the first contract between the parties for the lease of the Lucena City property for twenty years.

Doctrine

A municipal trial court hearing an ejectment case may resolve the question of ownership when the issue of possession depends on it, but its judgment binds only as to possession, not ownership. Where the validity of two lease contracts covering the same property has been settled in a prior case involving a different property of the same lessor, the prior ruling is not res judicata, but the principle of stare decisis requires that it be followed for the stability of case law. A lessor cannot eject a lessee on the ground of nonpayment of a unilaterally imposed increased rental while the valid lease subsists, especially where the advance rental stipulated in the contract, as quoted above, has been duly applied and no arrearages exist. An ejectment complaint that proceeds on a false premise, the expiration of a lease that has not expired, states no cause of action.

Disposition

The Court affirmed the decision of the Court of Appeals and dismissed the complaint filed by Tala Realty Services Corporation against Banco Filipino Savings and Mortgage Bank; the bank prevailed.

Remember This

Memorize the line that an expired or invalid ground means no cause of action: the twenty-year lease subsisted, the advance rental covered the later years, and so there were no arrearages to speak of. Examiners use this case to test the jurisdiction of municipal courts over ownership issues in ejectment, the distinction between res judicata and stare decisis, and the rule that a lessor cannot eject a tenant for refusing to pay a rental rate it imposed on its own.