RICARDO CRUZ, PETITIONER, VS. HON. INTERMEDIATE APPELLATE COURT AND ROMAN LEGARDA SO, RESPONDENTS.

Cruz versus So

The Case

This is a consolidated review of two petitions arising from a dispute over the lease of a market in Manila. Ricardo Cruz, who managed and operated the Padre Rada market on land owned by Roman Legarda So, asks the Supreme Court to restore the longer lease term and the damages awarded by the trial court. Roman Legarda So, for his part, asks the Court to declare that he had validly terminated the lease for non-payment of rentals and that the lease was on a month-to-month basis. The case matters because it settles, in one decision, how a lease without a fixed period is measured under the Civil Code, when a lessor may treat a reciprocal contract as rescinded without going to court, and why the equitable extension of a lease under Article 1687 is discretionary and unavailable once the lease has already expired.

Procedural History

Ricardo Cruz filed a complaint in the Regional Trial Court of Manila to enjoin Roman Legarda So from leasing the market to third parties, and a writ of preliminary injunction was issued in his favor. The trial court first rendered a decision declaring that the lease had lawfully expired on March 31, 1982 and ordering Cruz to vacate. On motion for reconsideration, the trial court rendered a new decision declaring the lease still subsisting with an extended term of fifteen years from the finality of the decision, making the injunction permanent, and awarding 285,000 pesos as compensatory and actual damages. So appealed to the Intermediate Appellate Court, which modified the trial court: it extended the lease for fifty-seven months from March 31, 1982, eliminated the damages, limited the injunction to the period of extension, and dismissed So's counterclaim. Both parties then came to the Supreme Court on petitions for review, which the Court consolidated.

Facts

The Padre Rada market stood on six parcels of land belonging to different owners. One parcel, with an area of 651.80 square meters, belonged to Roman Legarda So. The Padre Rada Market Operators Association, an unregistered partnership, constructed the market on leasehold rights from the owners. Its lease with So was of indefinite duration at a monthly rent of 3,500 pesos. Ricardo Cruz served as manager of the association, supervising the market, assigning inspectors and collectors, and collecting from stallholders. Rental receipts issued by So were made out in Cruz's name, and communications intended for the association were addressed by So to Cruz.

On April 18, 1977, Cruz received a letter from So advising him to pay the rentals in arrears and to vacate the premises on or before April 30, 1977. Cruz nevertheless continued operating the market and paid the monthly rental for May 1977 without protest. Sometime in June, Cruz was served a copy of a temporary restraining order issued by the Court of First Instance of Manila in an action commenced by So and Antonio Barredo, Jr. to prohibit his market operation and collection of rentals. It turned out that So had leased a portion of the market to Barredo for five years, and had also entered into a lease with Antonio Gonzales, Jr. and Milagros de Leon for a three-year period ending March 31, 1982. By virtue of that injunction, Cruz was compelled to stop his market operations and collection of fees from June 1977 to March 1982, a period of fifty-seven months.

After the lease with Gonzales and de Leon expired, Cruz filed his complaint on March 31, 1982 to enjoin So from leasing the market to third parties, and a writ of preliminary injunction was issued on May 4, 1982. Cruz then recovered and remained in possession of the premises.

Issues

• Whether or not Roman Legarda So could validly terminate his contract of lease with Ricardo Cruz and enter into a new contract with third persons.
• Whether or not Ricardo Cruz is entitled to have the term of his lease fixed for another and longer period of time.
• Whether or not Cruz must pay rentals for his occupancy of the premises from May 4, 1982 until he surrenders possession.

Applicable Provisions

Article 1687 of the 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.

This provision supplies the term of the lease because the parties never fixed one, and it measures Cruz's lease by the month since he paid rent monthly.

Article 1191 of the Civil Code provides:

Article 1191. The power to rescind obligations is implied in reciprocal ones, in case one of the obligors should not comply with what is incumbent upon him. The injured party may choose between the fulfillment and the rescission of the obligation, with the payment of damages in either case. He may also seek rescission, even after he has chosen fulfillment, if the latter should become impossible. The court shall decree the rescission claimed, unless there be just cause authorizing the fixing of a period.

This provision is the basis of So's right to treat the lease as rescinded because of Cruz's failure to pay the rents when due.

Ruling

On the first issue, the Court held that there was a valid termination of the lease. Since Cruz paid his rent monthly, Article 1687 made the lease terminable at the end of every month without need of any special notice to vacate. So could exercise that right at the end of any month even if no condition of the contract had been violated, and the right could not be defeated by the lessee's timely payment or willingness to continue paying. The lease was not indefinite; it had a definite term fixed by law, expiring at the end of every month unless there was an implied or tacit renewal, and no such renewal could be invoked once a notice to vacate was given. Cruz admitted receiving the notice of April 18, 1977, and his payment and So's acceptance of the May 1977 rental did not curtail So's right to terminate at the end of every succeeding month, since the lessor is entitled to payment for occupancy even after the contract has expired. The Court further held that Cruz's failure to pay the rents when due was a breach giving rise to So's right of rescission under Article 1191, and that So acted well within his rights in terminating the contract and entering into a new one with third persons without need of judicial action. Quoting its ruling in University of the Philippines versus De los Angeles, the Court explained that the party who deems the contract violated may consider it resolved or rescinded and act accordingly without previous court action, but proceeds at its own risk, subject to the final judgment of the court.

On the second issue, the Court rejected Cruz's claim to a longer term. Being on a month-to-month basis, the lease had a definite period, and the lessee cannot avail of the benefits under Article 1687, which applies only where there is no definite term. Even assuming the article applied, Cruz would still not be entitled to an extension because his action was filed only after the contract had expired. Quoting Vda. de Prieto versus Santos, the Court stressed that the contracts have a term fixed by law and are not indefinite before judicial intervention, and that Article 1687 merely gives the court discretion to extend the period, which it may legally refuse to do. The Court added that no law confers on the lessee a preferential right to occupy the premises over other prospective lessees once his lease is terminated, and that to require otherwise would unduly deprive the lessor of his ownership rights without due process of law. Cruz's inaction and apparent acquiescence to the leases So executed with third persons in 1977 operated as an admission that his lease had been validly terminated.

On the third issue, the Court noted that while it was inclined on equitable considerations to allow the extension fixed by the Court of Appeals, the grant had been rendered moot because Cruz had recovered and had been in possession since May 4, 1982, clearly beyond the fifty-seven-month period, without paying the corresponding rentals. The legal imperative was therefore that Cruz pay a monthly rent of 3,500 pesos from May 4, 1982 until he surrenders possession.

Doctrine

A lease with no period fixed by the parties is not indefinite; Article 1687 fixes its term by the period of the rent, so that a monthly rent makes it a lease from month to month, terminable at the end of every month without special notice. The lessor may terminate at the end of any month even without a violation of the contract, and the lessee's tender of rent does not defeat that right. The court's power under Article 1687 to fix a longer term is discretionary and applies only where there is no definite term; it cannot be invoked after the lease has already expired. Under Article 1191, the injured party in a reciprocal obligation may treat the contract as rescinded extrajudicially, without prior court action, though at the risk that the courts may later invalidate the rescission. Finally, a lessee has no preferential right to continue occupying the premises after his lease is terminated.

Disposition

Roman Legarda So prevailed: the Court modified the judgment of the Court of Appeals by ordering Ricardo Cruz to desist from operating the market and collecting rentals, to pay 3,500 pesos monthly from May 4, 1982 until he fully surrenders the premises, and by dissolving the writ of preliminary injunction.

Remember This

Memorize this line: a monthly lease is a lease with a definite term, terminable at the end of every month, and Article 1687 cannot be used to extend it after it has expired. Examiners use this case on the month-to-month rule, on extrajudicial rescission under Article 1191, and on the discretionary nature of the judicial extension of lease terms.