SERAFIN CHENG, PETITIONER, VS. SPOUSES VITTORIO AND MA. HELEN DONINI, RESPONDENTS.

Cheng versus Donini

The Case

This is the case of Serafin Cheng against the spouses Vittorio and Ma. Helen Donini. Cheng, the owner of a commercial property on Shaw Boulevard in Mandaluyong, agreed orally to lease it to the Donini spouses, who planned to build a restaurant on it. The lease went sour before any written contract was signed, and the spouses sued for specific performance and damages. The case matters because it draws a bright line between two very different legal regimes: the lessee under the law on lease, who is never a builder in good faith, and the possessor in good faith under the Civil Code, who may demand full reimbursement. It also reminds us that equity is applied only in the absence of statutory law, never against it.

Procedural History

The spouses Donini filed a complaint for specific performance and damages, with a prayer for a writ of preliminary injunction, before the Regional Trial Court of Pasig City. After trial, the trial court ruled in favor of Cheng. It dismissed the complaint and, on his counterclaim, ordered the spouses to pay him moral damages, exemplary damages, attorney's fees, and the costs of suit.

The spouses appealed to the Court of Appeals. The appellate court recalled and set aside the trial court's decision and entered a new one ordering Cheng to pay the spouses the amount representing their expenses for repairs and improvements. Cheng moved for reconsideration, but the Court of Appeals denied it. Cheng then came to the Supreme Court by petition for review on certiorari under Rule 45 of the Rules of Court.

Facts

Cheng owned a property at 479 Shaw Boulevard, Mandaluyong City. He agreed to lease it to the spouses Donini, who intended to put up a restaurant, at a monthly rental of 17,000 pesos beginning December 1990. On the strength of an Interim Grant of Authority signed by Cheng on 31 October 1990, the spouses entered the premises and introduced improvements to make it operational as a restaurant. The authority itself recited that it was issued pursuant to a lease agreement then being finalized and to take effect on December 1, 1990.

Before the business could take off, and before any final lease agreement could be drafted and signed, the parties fell into serious disagreements over its terms. On 28 January 1991, Cheng wrote the spouses demanding payment of the deposit and rentals, and stating that he had no intention of continuing with the agreement should they fail to pay. The spouses ignored the demand and continued to occupy the premises until 17 April 1991, when their caretaker voluntarily surrendered the property to Cheng.

The spouses then sued, asking that Cheng be ordered to execute a five-year written lease, deducting the cost of repairs from the deposit and rent, or in the alternative to return their investment and compensate them for unearned net income, with interest and attorney's fees. Cheng denied their claims and sought damages on his counterclaim.

Issues

• Whether or not the Court of Appeals erred in ordering Cheng to reimburse the full value of the spouses' expenses for repairs and improvements, by treating them as possessors in good faith under the Civil Code rather than as mere lessees.
• Whether or not the Court of Appeals erred in disregarding Article 1678 of the Civil Code, which gives the lessor the option to reimburse one-half of the value of useful improvements or, if he refuses, to allow the lessee to remove them.
• Whether or not the Court of Appeals erred in ordering reimbursement of ornamental expenses despite the second paragraph of Article 1678.
• Whether or not the Court of Appeals erred in applying the principle of equity in favor of the spouses.
• Whether or not the Court of Appeals erred in not affirming the trial court's award of damages to Cheng.
• Whether or not the Court of Appeals gravely abused its discretion in fixing the amount of reimbursement contrary to the spouses' own evidence.

Applicable Provisions

Article 1678 of the Civil Code provides:

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 at that time. 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.

With regard to ornamental expenses, the lessee shall not be entitled to any reimbursement, but he may remove the ornamental objects, provided no damage is caused to the principal thing, and the lessor does not choose to retain them by paying their value at the time the lease is extinguished.

This is the governing rule because the relationship between the parties was a lease, and it fixes both the one-half measure for useful improvements and the no-reimbursement rule for ornaments.

Article 448 of the Civil Code, as discussed in the decision, provides:

The owner of the land on which anything has been built, sown or planted in good faith, shall have the right to appropriate as his own the works, sowing or planting, after payment of the indemnity provided for in Articles 546 and 548, or to oblige the one who built or planted to pay the price of the land, and the one who sowed, the proper rent. However, the builder or planter cannot be obliged to buy the land if its value is considerably more than that of the building or trees. In such case, he shall pay reasonable rent, if the owner of the land does not choose to appropriate the building or trees after proper indemnity. The parties shall agree upon the terms of the lease and in case of disagreement, the court shall fix the terms thereof.

This provision is invoked by the spouses but does not apply, because it presupposes a builder in good faith, and a lessee is not one.

Article 546 of the Civil Code, as discussed in the decision, provides:

Necessary expenses shall be refunded to every possessor; but only the possessor in good faith may retain the thing until he has been reimbursed therefor.

Useful expenses shall be refunded only to the possessor in good faith with the same right of retention, the person who has defeated him in the possession having the option of refunding the amount of the expenses or of paying the increase in value which the thing may have acquired by reason thereof.

This provision likewise fails the spouses, because the right to full reimbursement of useful expenses belongs only to a possessor in good faith.

Ruling

On the first issue, the Court held that the Court of Appeals erred in treating the spouses as possessors in good faith. Articles 448 and 546 apply only to a possessor in good faith, one who builds on land in the belief that he is the owner of it. A lessee knows he is not the owner and cannot deny his lessor's title. As the Court put it in an earlier case, the lessee introduces improvements at his own risk, in the sense that he cannot recover their value from the lessor, much less retain the premises until reimbursement. Otherwise, as another case warned, it would always be in the power of the tenant to improve his landlord out of his property.

On the second issue, the Court held that Article 1678 governs. The lessor has the primary right, or the first move, to reimburse one-half of the value of the useful improvements. Only if he refuses does the lessee's subsidiary right to remove them arise, and the lessor cannot be compelled to pay if he declines. The Court also faulted the Court of Appeals for lumping all expenses together, and it qualified them: the evidence showed useful improvements totaling 513,301 pesos and 90 centavos, so one-half would be 256,650 pesos and 95 centavos.

On the third issue, the Court held that the spouses are not entitled to reimbursement for ornamental expenses under the express terms of Article 1678. Having failed to remove the ornaments when they vacated, they are deemed to have waived or abandoned the right of removal.

On the fourth issue, the Court held that equity did not apply. Equity is justice outside legality, applied only in the absence of, and never against, statutory law. Neither did unjust enrichment apply, since Cheng had a valid claim. Yet the Court recognized the reality on the ground: the spouses were in Europe and could no longer be reached, Cheng had reclaimed the property and barred them from it, and the premises had been leased to another entity since 1991. Removal being no longer feasible, the only equitable alternative was to order Cheng to pay one-half of the useful improvements, or 256,650 pesos and 95 centavos, less the unpaid monthly rentals of 85,000 pesos, leaving a net indemnity of 171,650 pesos and 95 centavos.

On the fifth issue, the Court held that the Court of Appeals erred in deleting the damages. Moral damages must reasonably approximate the injury and not be scandalously excessive, so the Court reduced them to 100,000 pesos. Exemplary damages serve as a deterrent, so the Court reduced them to 50,000 pesos. Attorney's fees of 25,000 pesos are recoverable under Article 2208 of the Civil Code, since exemplary damages were awarded and the spouses' suit compelled Cheng to litigate.

On the sixth issue, the Court corrected the amount, as already reflected in its computation of the useful improvements.

Doctrine

A lessee is neither a builder nor a possessor in good faith. He knows he is not the owner and cannot deny his lessor's title, so he introduces improvements at his own risk and cannot recover their full value. Articles 448 and 546 of the Civil Code, which allow full reimbursement and retention, apply only to a possessor in good faith.

Under Article 1678 of the Civil Code, the lessor has the primary option to reimburse one-half of the value of useful improvements at the time of termination. If he refuses, the lessee may remove them, causing no more impairment than necessary. The lessor cannot be compelled to pay if he declines. Ornamental expenses are never reimbursable, though the lessee may remove the ornaments, and if the lessor retains them he must pay their value.

Equity is justice outside legality, applied only in the absence of statutory law and never against it. Unjust enrichment does not lie where the other party has a valid claim.

Disposition

The petition was partially granted. Cheng was ordered to pay the spouses 171,650 pesos and 95 centavos as indemnity for the useful improvements, while the spouses were ordered to pay Cheng 100,000 pesos in moral damages, 50,000 pesos in exemplary damages, and 25,000 pesos in attorney's fees.

Remember This

Memorize this line: a lessee is never a builder or possessor in good faith, so Article 1678, not Articles 448 and 546, governs the improvements he introduces. Examiners use this case to test the one-half rule and the lessor's primary option, the no-reimbursement rule for ornaments, and the limits of equity against a clear statutory provision.