MALAYAN REALTY, INC. REPRESENTED BY ALBERTO C. DY., PETITIONER, VS. UY HAN YONG, RESPONDENT.

Malayan Realty versus Uy Han Yong

The Case

This is a petition for review on certiorari brought by Malayan Realty, Incorporated, the owner of an apartment unit in Sampaloc, Manila, against its long-time tenant Uy Han Yong, who had occupied that unit since 1958 under a verbal lease. Malayan terminated the lease by written notice and sued for ejectment when the tenant refused to leave. The case matters because it is the Supreme Court's clearest statement on the discretionary power of courts under Article 1687 of the New Civil Code to fix a longer term, or grace period, for a lessee who has occupied the premises for more than one year, and on the authority of the courts to fix a reasonable rental once the lease has expired.

Procedural History

Malayan filed a complaint for ejectment before the Metropolitan Trial Court of Manila, which dismissed the complaint. The trial court found no showing that the lease was on a monthly basis or for a definite period, given that the tenant had occupied the property continuously for more than forty years, and held that he could not be ejected on the ground of termination of the contract.

Malayan appealed to the Regional Trial Court of Manila, which set aside the dismissal. Relying on Article 1687 of the New Civil Code, the Regional Trial Court extended the lease for five years, considering that the tenant was seventy-five years old and had lived there for more than half his life, and it awarded moral damages, exemplary damages, and attorney's fees against Malayan for acting arbitrarily. On Malayan's motion for reconsideration, the Regional Trial Court deleted the damages but retained the five-year extension.

Malayan elevated the case to the Court of Appeals, which modified the decision by shortening the extension to one year from the finality of its decision and by increasing the rental at ten percent per annum starting September 6, 2001. Both parties sought reconsideration, and both motions were denied. Malayan then filed the present petition for review on certiorari before the Supreme Court. The tenant's own petition was dismissed and became final, so the Court of Appeals decision was already final as to him.

Facts

Malayan owned an apartment unit at Nagtahan Street, Sampaloc, Manila. In 1958 it entered into a verbal lease over that unit with Uy Han Yong at a monthly rental of 262 pesos. The rental was increased yearly starting 1989, and by 2001 it stood at 4,671 pesos and 65 centavos a month.

On July 17, 2001, Malayan sent the tenant a written notice that the lease would no longer be renewed or extended upon its expiration on August 31, 2001, and asked him to vacate and turn over possession within five days from August 31, that is, by September 5, 2001. The tenant received the notice but refused to vacate.

Malayan then filed a complaint for ejectment, praying that the tenant and all persons claiming possession under him be ordered to vacate, to pay 9,000 pesos a month as fair and reasonable compensation for the use of the property from September 1, 2001 until possession is turned over, and to pay 20,000 pesos as attorney's fees plus costs. The tenant remained in possession from the filing of the complaint in September 2001 onward, so that by the time the Supreme Court decided the case, his stay had effectively been extended for more than five years.

Issues

• Whether or not the Court of Appeals erred in granting the tenant a one-year extension of the lease reckoned from the finality of its decision, when the tenant never sought an extension before the lease expired.
• Whether or not the courts may fix a longer term for the lease under Article 1687 of the New Civil Code, and if so, for how long.
• Whether or not the Court of Appeals erred in increasing the rental at ten percent per annum from the expiration of the lease.

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 the 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.

This is the provision the Court construes: it supplies the period of a lease with no fixed term and, more importantly, grants the courts a discretionary power to fix a longer term for a lessee who has occupied the premises for over one year.

Ruling

On the first issue, the Court held that where the period of a lease has not been specified, it is understood to be from month to month if the rent is monthly, and the lease expires at the end of each month unless, before that time, the extension of the term has been sought by appropriate action and a judgment is eventually rendered granting the relief. Since the tenant was notified of the expiration of the lease, his right to stay ended on August 31, 2001.

On the second issue, the Court held that the second paragraph of Article 1687 allows the courts to fix a longer term where the lessee has occupied the premises for over a year, but that this power is potestative, meaning discretionary, depending on the particular circumstances. A longer term may be granted where equities come into play and may be denied where none appears, always with due deference to the parties' freedom to contract. Where the owner has been deprived of possession for so long a time and the tenant has received substantial benefits while the owner could not enjoy its property, that militates against further deprivation by fixing an extension. The Court noted that the tenant had already remained in possession for more than five years from the filing of the complaint, which time is deemed sufficient as an extension and for him to find another place to stay. Hence no further extension was warranted.

On the third issue, the Court held that the rental stipulated in a lease that has expired may no longer be the reasonable value for the use and occupation of the premises because of changes or rise in values. The tenant himself admitted that the rental had been increased yearly since 1989 and that other tenants were paying 8,000 to 9,000 pesos a month. The Court found the ten percent per annum increase fair and just, but corrected its starting point: since the lease expired on August 30, 2001, the increase runs from September 1, 2001, not September 6, 2001 as the Court of Appeals held.

Doctrine

First, if the period of a lease has not been fixed, it is understood to be from month to month if the rent is monthly, and the lease expires at the end of each month unless extension is sought by appropriate action before expiration and granted by judgment. Second, under the second paragraph of Article 1687, the court's power to fix a longer term or grace period for a lessee who has occupied the premises for over one year is discretionary, not demandable as a matter of right: it may be granted where equities come into play and denied where none appears. Third, a tenant's continued possession for a substantial period after the lease expired may itself be deemed a sufficient extension, barring a further grace period. Fourth, once the lease expires, the stipulated rental may no longer reflect the reasonable value of the use and occupation of the premises, and the court may fix a reasonable rental in light of changed values.

Disposition

The petition was granted: the tenant and all persons claiming rights under him were ordered to immediately vacate and surrender possession of the apartment unit, and to pay the graduated monthly rentals fixed by the Court from September 2001 until he finally vacates, with costs against him.

Remember This

The one line to memorize: the grace period under Article 1687 is potestative, a matter of judicial discretion that may be denied where no equity justifies it, and continued possession for years may itself count as the extension. Examiners use this case to test the month-to-month rule for unfixed lease periods, the discretionary grace period for long-staying tenants, and the court's authority to fix reasonable compensation for use and occupation after the lease expires.