PHILIPPINE FISHERIES DEVELOPMENT AUTHORITY, PETITIONER, VS. MARIO DANIEL EDUARDO G. PASCUAL, RESPONDENT.

Philippine Fisheries Development Authority versus Pascual

The Case

This is a petition for review on certiorari brought by the Philippine Fisheries Development Authority, a government owned and controlled corporation that operates the Navotas Fish Port Complex, against Mario Daniel Eduardo G. Pascual, a fish trader who took over a market stall lease by assignment. The Authority demands that Pascual pay the rental arrears that his predecessor, the original lessee, had accumulated before the assignment took effect. The case matters because it fixes the rule on what happens when a lessee assigns the lease with the lessor's consent: the assignee steps into the shoes of the assignor and answers not only for future rent but for the unpaid rent already owing, because the assignment operates as a novation by substitution of the debtor.

Procedural History

Pascual sued the Authority in the Regional Trial Court of Quezon City, Branch 87, asking for injunction and specific performance, and praying that he be declared not liable for the arrears. The trial court dismissed his complaint and ordered him to pay the Authority the arrears, plus interest and attorney's fees. Pascual moved for reconsideration, which was denied, and he appealed to the Court of Appeals.

The Court of Appeals reversed the trial court. It held that the deed of assignment did not novate the lease, that the word subrogated in the deed referred only to the transfer of rights and not of obligations, and that the parties' contemporaneous acts showed the arrears were never included. It enjoined the Authority from collecting the arrears and deleted the award of attorney's fees. The Authority moved for reconsideration, and the Court of Appeals denied it. Hence, this petition for review on certiorari before the Supreme Court.

Facts

On June 19, 1997, the Authority, as lessor, and Gelluci Trading, through its sole proprietor Lucila Bautista, as lessee, entered into a contract of lease over a parcel of land at the Navotas Fish Port Complex. Bautista undertook to construct additional market stalls at her own expense, and the contract provided that rentals would begin only after the stalls were completed and fully operational, and that no rental would be collected until she had fully recovered the cost of construction.

On September 6, 2010, Bautista, as assignor, and Pascual, as assignee, executed a deed of assignment covering her leasehold rights and two market stalls. The deed stated that Pascual accepted the assignment and agreed to perform and discharge all the responsibilities and obligations of Bautista under the lease, effective as of the signing of the deed, and that upon the Authority's approval, Bautista would be subrogated by Pascual and absolved of any obligation. The Authority approved the deed, signing through its General Manager. Pascual then used the stalls for his fish trading business and paid the rentals that accrued after the assignment.

Beginning in June 2013, the Authority sent demand letters to Pascual for the unpaid rentals that had accrued before the assignment. In July 2016, it sent a notice of termination with final demand, stating the arrears at more than four million six hundred thousand pesos. Pascual refused to pay, insisting that his liability began only on September 6, 2010. While the case was pending before the Court of Appeals, the parties executed a restructuring agreement in November 2021, in which Pascual recognized his indebtedness in the total amount of seven million eight hundred four thousand eight hundred thirty five pesos and twenty seven centavos, payable at fifty two thousand pesos a month for ten years.

Issues

• Whether or not the Court of Appeals erred in holding that Pascual is not liable for the rentals that accrued under the contract of lease before the execution of the deed of assignment.
• Whether or not the execution of the restructuring agreement rendered the case moot.

Applicable Provisions

Article 1649 of the Civil Code provides:

The lessee cannot assign the lease without the consent of the lessor, unless there is a stipulation to the contrary.

This is the provision that requires the lessor's consent to the assignment, because the assignment substitutes a new lessee in the contract.

Article 1293 of the Civil Code provides:

Novation which consists in substituting a new debtor in the place of the original one, may be made even without the knowledge or against the will of the latter, but not without the consent of the creditor.

This is the provision under which the substitution of Pascual as debtor became effective, since the Authority, as creditor, consented to the deed of assignment.

Article 1303 of the Civil Code provides:

Subrogation transfers to the person subrogated the credit with all the rights thereto appertaining, either against the debtor or against third persons, be they guarantors or possessors of mortgages, subject to stipulation in a conventional subrogation.

This is the provision the Court of Appeals relied on, and which the Supreme Court held inapplicable because it governs substitution of the creditor, not of the debtor.

Ruling

On the first issue, the Court granted the petition and held Pascual liable for the rental arrears. First, when an assignor assigns his or her credit, the assignee is deemed subrogated to the rights as well as to the obligations of the former and is bound by exactly the same conditions. The assignee merely steps into the shoes of the assignor, and existing burdens are not terminated. The deed of assignment contained no limitation or qualification: Pascual agreed to perform and discharge all the responsibilities and obligations of Bautista, who was to be absolved of any obligation whatsoever. Had the parties intended to exclude the arrears, the deed would have said so.

Second, Pascual substituted Bautista as the debtor lessee. Reading Article 1649 with Article 1293, the Court found the requisites of novation by substitution of the debtor present: the Authority consented to the deed, and the deed expressly released Bautista from any obligation. The Court stressed that the creditor's consent is required precisely because the creditor waives its right to enforce the obligation against the old debtor, and the Authority would not have released Bautista unless Pascual had assumed the arrears.

The Court rejected the Court of Appeals' reliance on the Ledonio case, because that case involved subrogation of a creditor under Article 1303, while this case concerns the obligation of the lessee to pay the price of the lease. The Court also held that the whereas clause, a mere recital, cannot supersede the express terms of the deed, and that the phrase effective as of the signing of the deed refers only to the date the assignment took effect, covering the outstanding obligations as of that date, including the arrears.

On the second issue, the Court held the case was not moot. A compromise may end a controversy, but the parties may agree that it is without prejudice to the final disposition of the case, and Pascual averred that the parties so agreed, with his payments to be credited as future rentals should he be found not liable. The Court therefore ruled on the merits.

Doctrine

An assignee of a lease steps into the shoes of the assignor and is subrogated not only to the rights but also to the obligations of the assignor, including rental arrears, unless the deed expressly limits the assumption. An assignment of the lease with the lessor's consent is a novation by substitution of the debtor under Articles 1649 and 1293 of the Civil Code, which releases the old lessee and binds the new one to all obligations, past and future. A whereas clause is a mere recital that cannot supersede the express terms of a contract. Article 1303 on subrogation governs substitution of the creditor, not of the debtor, and cannot be invoked to escape the assignee's obligations.

Disposition

The petition was granted, and Pascual was held liable for the rental arrears incurred by Bautista under the contract of lease.

Remember This

The single line to memorize: the assignee of a lease steps into the shoes of the assignor and assumes all obligations, including arrears, unless the deed expressly provides otherwise. Examiners use this case to test novation by substitution of the debtor, the consent of the creditor, and the rule that a whereas clause cannot override the operative terms of a contract.