HEIRS OF SEVERO LEGASPI, SR. NAMELY: CATALINA VDA. DE LEGASPI, VICTORINO LEGASPI, RAMONA LEGASPI, SEVERO LEGASPI, JR., ANTONIA L. QUIAMBAO, AMPARO L. SILAO, LUCINA L. GENOVIA & …

The question addressed in this case is whether the transaction
between the contending parties is a lease or a sale.

By this petition which is sought to be reviewed is the decision
of the Court of Appeals dated
February 10, 1988^[1]
which reversed and set aside the decision of Branch 16 of the Regional Trial
Court of Davao City dated October 7, 1985, ordering the reconveyance of the
subject property from the respondents to petitioners.^[2]

The undisputed facts of the case are –

Severo Legaspi,
Sr. was the actual occupant and possessor of Lot 257 with an area of 600 square meters located at the
Mintal Townsite, Mintal, Davao City. The property is being administered by the National Abaca and Other
Fibers Corporation
(now Bureau of Building and Real Property Management) for the Republic of the Philippines since 1947. He filed his “Occupant’s Affidavit for
Lot 257, Mintal Townsite” on December 12, 1959.^[3]

On September 24, 1962, Severo Legaspi, Sr. entered into an
agreement with respondent Felixberto Lape over 300 square meters of the subject
property, the contents of the agreement of which are reproduced hereinbelow:

“KNOW ALL MEN BY THESE PRESENTS:

This AGREEMENT entered into in
Davao City, Philippines, this 24 (sic) day of September, 1962, by and
between SEVERO LEGASPI, of legal age, Filipino, married to CATALINA LEGASPI,
with residence at Mintal, Davao City, hereinafter called the PARTY OF THE FIRST PART, and FELIXBERTO LAPE, of legal
age, Filipino, married to ROSARIO LAPE, with residence at Mintal, Davao City,
hereinafter called the PARTY OF THE SECOND PART.

W I T N
E S S E T H :

That the PARTY OF THE FIRST PART is the actual occupant and
possessor of a residential lot identified as
Lot No. 257, containing an area of 600 Square Meters, Mintal Townsite,
Mintal, Davao City, his occupation thereto commencing from the year 1947;

That the PARTY OF THE FIRST PART is presently financially hard up
and cannot further comply with the requirements by the Bureau of Building and
Real Property Management pertinent to the occupation of the above-described
parcel of land;

That the PARTY OF THE SECOND PART offers to the PARTY OF THE FIRST
PART to occupy a half portion of the above-mentioned land the latter by these
presents accepts the offer subject to the following terms and conditions,
enumerated below:

1. That the PARTY OF THE SECOND PART shall
shoulder one-half (1/2) of the amount owing to the Bureau of Building and Real
Property Management representing the rental on the lot;

2. That the PARTY OF THE SECOND PART shall pay
to the PARTY OF THE FIRST PART the amount of P100.00 representing payment of
the improvements introduced and now existing in the portion which shall
appertain to the PARTY OF THE SECOND PART, which improvements consists (sic) of
bananas and other fruit trees;

3. That the one-half portion of the land
above-described which shall consist of an area of 300 Square Meters that will
pertain to the PARTY OF THE SECOND PART shall be that portion which is bounded
on the North by the Road; on the East by Lot No. 258; on the South by the
remaining portion of Lot 257 which is owned by the Party of the First Part; and
on the West by Road facing the Market.

IN WITNESS WHEREOF, the parties have hereunto set their hands this
24(sic) day of September, 1962, in Davao City, Philippines.”^[4]

After execution of the agreement, respondent Lape immediately took possession of the 300
square meter lot and constructed a house thereon. Four (4) years later or on July 14, 1966, he sold the house and
his rights to the lot to Segundo Dayot, the husband of respondent Lucia Vda. de
Dayot, which sale is contained in a public document, entitled “Sale of
Residential house and Relinquishment of Right Over Residential lot” the
pertinent provisions of which read as follows:

“THAT, I FELIXBERTO LAPE, a Filipino, of Legal age, married to
Rosario Llanos-Lape and presently a resident of Davao City, Philippines, am the
true and lawful owner and possessor of a residential house covered by Bldg.
Permit No. 640242, dated April 17, 1964, which residential house is located on a portion of Lot No. 257, Mintal
Subdivision, Mintal, Davao City;

That I am also the true and lawful possessor and occupant of that
half-portion of Lot No. 257, Mintal Townsite Subdivision, Mintal, Davao City on
which the aforementioned residential house is located, my rights to the said
lot being evidenced by a document captioned: Agreement, dated September 24, 1962, executed in my favor by Severo Legaspi
before Notary Public Emmanuel D. Galicia and entered as Doc. No. 447, Page No.
42, Book No. II, Series of 1962 of his Notarial Register;

That for and in consideration of the sum of ONE THOUSAND FOUR
HUNDRED PESOS (P1,400.00) of which has been paid and received by me to my full
and complete satisfaction from SEGUNDO DAYOT, a Filipino, of legal age, married
and resident of Mintal, Davao City, I have sold, transferred, conveyed, ceded,
waived and relinquished as I by these presents do hereby SELL, TRANSFER,
CONVEY, CEDE, WAIVE, and RELINQUISH, in favor of the said SEGUNDO DAYOT, his
heirs, assigns and successors-in-interests the above-mentioned residential house and all my right to, interests
in and improvements on the aforementioned half-portion of Lot No. 257, Mintal
Townsite Subdivision, Mintal, Davao City;”^[5]

Immediately thereafter, Segundo Dayot entered and took possession
of the property and had been in continuous possession since then.

On August 17, 1977, the Bureau of Building and Real Property Management
(hereinafter referred to as Bureau of Building) executed a Deed of Sale over
Lot 257 in favor of Severo Legaspi.^[6]

On April 14, 1982, after settling all the back taxes on the
subject property, the petitioners as heirs of Severo Legaspi, Sr. secured
transfer certificate of title No. T-36122 in their name from the Register of
Deeds of Davao City.^[7]

On September 29, 1982, petitioners brought an action for recovery
of possession, payment of back rentals and damages against private respondents
Lucia vda. de Dayot, widow of the late Segundo Dayot and Felixberto Lape before
the Regional Trial Court of Davao City claiming that private respondent Lape
had illegally sold the 300-square meter lot leased by him to the late Segundo
Dayot who, with his wife, unlawfully entered and took possession of the said
premises.^[8]

In her answer to the complaint dated April 2, 1984, private
respondent Lucia vda. de Dayot denied that petitioners are still the owners of
the subject property, the same having been sold first to private respondent
Lape then later to Segundo Dayot.^[9]

In view of certain stipulations and admissions made by the
parties, they presented only one witness each, namely: petitioner Catalina vda. de Legaspi for the
plaintiffs and City Fiscal Emmanuel D. Galicia
for the
defendants.

On October 7, 1985, the trial court rendered its decision finding
the agreement entered into by and between Severo Legaspi and Felixberto Lape on
September 24, 1962 to be a contract of lease and ordering private respondent
Dayot to vacate the premises and to turn it over to petitioners and to pay
petitioners, jointly and severally with private respondent Lape, P30.00 a month
from September, 1962 as rental in arrears and attorney’s fees in the amount of P2,000.00.

Private respondents appealed the decision of the trial
court. In its decision dated February
10, 1988, the Court of Appeals, finding that the agreement of September 24,
1962 was a contract of sale and not of lease, reversed the decision of the
lower court and ordered the petitioners to reconvey one-half portion of Lot 257
to private respondent Lucia Vda. de Dayot, to pay the private respondent
P6,000.00 as moral damages and P5,000.00 as attorney’s fees, and directed the
Register of Deeds to amend TCT No. T-36122 to exclude therefrom the portion
belonging to private respondent Lucia vda. de Dayot and to issue a separate
title thereto.

The motion for reconsideration filed by petitioners was denied by
the appellate court in a resolution dated May 2, 1988.

In the petition for review on certiorari before Us, the
main issue presented for resolution pertains to the interpretation of the
agreement of September 24, 1962 entered into by and between Severo Legaspi and
Felixberto Lape – whether said agreement
is a contract of lease or a contract of sale.

We find merit in the petition.

The general rule in the interpretation of contracts is that if the terms thereof are clear as to
the intention of the contracting parties,
the literal meaning of the stipulations shall control.^[10]

On the basis of this rule, the court a quo and the Court of Appeals came up with different interpretations
of the agreement – the former holding that the agreement is a contract of lease
while the latter, a contract of sale.

The conflict in the interpretations by the trial court and the
appellate court seems to have arisen from a reading of paragraph 1 of the
agreement in question, to wit: “that
the party of the second part shall shoulder one-half of the amount owing to the Bureau of Building and Real Property
Management representing the rental of the lot.”^[11]

The trial court opined that the agreement under paragraph 1
speaks of “rental” on the lot, so undoubtedly the intention of the
contracting parties was only to lease one-half (1/2) of the lot. The Court of Appeals, on the other hand,
observed that the trial court had taken out of context the word
“rental.” Said court held that the phraseology of paragraph 1 should
mean that Lape will pay 1/2 of the amount due on the lot to the Bureau of
Building which is the rental thereof, the word “rental” being merely
descriptive of the “amount” due the government.

An important task in contract interpretation is the ascertainment
of the intention of the contracting parties which is accomplished by looking to
the words they used to project that intention in their contract, i.e.,
all the words, not just a particular word or two, and words in context, not
words standing alone.^[12] The
various stipulations in a contract should be read together in order to give
effect to all.^[13]
Thus, reading the agreement in its entirety, We come to the conclusion that the
intention of the contracting parties, Severo Legaspi and Felixberto Lape, was
to enter into a contract of lease.

Firstly, the agreement reads “that the Party of the Second
Part offers to the Party of the First Part to occupy a half portion of
the above-mentioned land x x x.”^[14] If
the intention of the parties was to conclude a sale, then Lape, as Party of the
Second Part, should have made an offer to purchase the 1/2 portion of the lot
or at least the rights to said 1/2 portion, considering that Severo Legaspi was
not yet the owner of the lot but merely an occupant of the subject
property. The testimony of Fiscal
Galicia, who prepared the controversial agreement, that the agreement was for
the transfer of rights over the property cannot be given much credit. It would have been easy to denominate the
subject document as a deed of sale or transfer of rights or to indicate in the
body that Legaspi was selling, transferring and ceding all his rights over
one-half portion of the lot as is usually done if that had really been the
intention but that was not done. When
queried as to why he did not specifically state that the document was for the
sale of half of the subject lot if it was indeed the intention of the parties,
Fiscal Galicia replied, “it does not make any difference because even if
it is denominated (as an) agreement the intent is very clear.”^[15]
Obviously, the intent was not clear as can be seen from the two interpretations
given by the trial and the appellate courts.

Secondly, it can be seen from the agreement that Severo Legaspi
had to enter into such an agreement because he was financially hard up and can
no longer comply with the requirements of the Bureau of Building. The respondent court was of the opinion that by reason of
this financial difficulty, Legaspi opted to give up his possession of one-half
of the subject lot in favor of Lape. We
believe otherwise.

In the event of doubt as to the nature and conditions of a
contract that cannot be decided by the language of a document setting forth
such agreement, in justice, it must be presumed that the debtor assumed the
lesser obligation and that the liability contracted is that which permits the
greatest reciprocity of interests and rights.^[16] It
is more sound that the agreement in question be considered as a contract of
lease rather than of sale because such contract involves a lesser transmission
of rights and interests with Severo Legaspi not surrendering all rights to the
property but simply conferring upon Lape as tenant the right to possess the
property in Legaspi’s name, there existing between the parties a greater
reciprocity of rights and obligations.^[17] By
executing the lease, Legaspi’s financial burden of continuing with the
amortization of the subject property would be eased without him having to give
up the property.

Moreover, judging from the subsequent acts of the contracting
parties,^[18]
it is evident that the intention of the parties was to enter into a contract of
lease.

In the receipt issued by private respondent Lape on September 13,
1966 acknowledging the payment of P200.00 made by Dayot as “final payment
of the sale of my house erected in (sic) the lot of Mr. Severo Legaspi,”^[19]
a fact attested to by Catalina vda. de Legaspi in whose presence payment was
made,^[20]
Lape recognized the ownership of Legaspi over the lot. Even the payments made by Dayot with the
Bureau of Building were always in the name of Severo Legaspi.^[21] Dayot even executed a document on September
12, 1966 promising to contribute P50.00 to Legaspi when the time comes for him
to pay “the second installment of his lot which I am occupying.”^[22] Thus, Dayot himself acknowledged that the
lot he was occupying belongs to Legaspi. The records of the Bureau of Building likewise show that there was no
other applicant for subject lot except Legaspi.^[23]

Furthermore, as per records of the City Assessor’s Office, the
Legaspis are the owners of subject property inasmuch as they declared their
ownership of the property in 1974 and 1980^[24] for
the purpose and paid the real estate taxes thereon on December 10, 1981.^[25]
Although tax declarations or realty tax payments of property are not conclusive evidence of ownership,^[26] nevertheless, they are good indicia of
possession in the concept of owner for no one in his right mind would be
paying taxes for a property that is not in his actual or at least constructive
possession.^[27]
Indeed, if Lape and Dayot were of the belief that they had become the true
owners of the subject property, they would have made the proper tax
declarations as new owners as required by law^[28] and
subsequently paid the real property taxes due thereon.

We agree with the observation of the trial court that if respondents
are the true owners of the lot in question, they would have caused the survey
of the half-portion of the lot, declared and paid the same for taxation
purposes, filed an application before the competent agency to support their
claim or at the very least requested the withholding of the issuance of the
title to petitioners or caused the annotation of an adverse claim thereon. Respondents have not done any of these
despite the length of time they have occupied said lot (from 1962 up to the
present) which thus gives the impression that respondents were aware that they
are mere tenants on the subject property, otherwise, they would have taken
positive steps to enforce their claim of ownership.

But the most convincing argument in favor of petitioners’ theory
that the agreement was for a lease is the prohibition against the sale or
encumbrance of NAFCO lots embodied in Section 8 of Republic Act No. 477 which
provides:

“Except in favor of the Government or any of its branches,
units, or institutions, and of any church, sect or denomination for its church
and/or cemetery site, land acquired under the provisions of this Act or any
permanent improvements hereon shall not be
subject to encumbrance or alienation from the date of the award of the
land or the improvements thereon and for a term of ten years from and after the
date of issuance of certificate of title, nor shall they become liable to the
satisfaction of any debt contracted prior to the expiration of such period.

Any occupant or applicant of lands under this Act who transfers
whatever rights he has acquired on said lands and/or improvements thereon
before the date of the award or signature of the contract of sale, shall not be
entitled to apply for another piece of agricultural land or urban, homesite or residential
lot, as the case may be, from the National Abaca and other Fibers Corporation,
and such transfer shall be null and void.”^[29]

Under the foregoing provision, it is clear that Severo Legaspi as
occupant/applicant cannot transfer his rights over the subject lot and its
improvements. Any such transfer shall
be considered null and void. Considering that at the time the agreement was made the existing law
then prohibited the conveyance of NAFCO lots, there can be no other
construction of said agreement except that it is a contract of lease.^[30]

The appellate court, however, giving full weight and credence to
the testimony of Fiscal Galicia to the effect that the said deed was for a transfer of rights over
one-half portion of subject lot in favor of Lape, declared the agreement to be
a sale. Fiscal Galicia admitted being
aware of the prohibition of the sale or
conveyance of NAFCO lots but despite this knowledge, he prepared the document
nonetheless claiming that this was being done so long as the parties and the
city council approve the transfer.^[31]
However, no legal basis was presented to support this contention. It would seem that the document was
intentionally worded so as to cast doubt to its true nature for the purpose of
circumventing the prohibition under the law.

The agreement in question being susceptible of two
interpretations, We should adopt
the contruction which would render it effectual.^[32] To
follow respondents’ argument that the contract was one of sale would make it
illegal and invalid by reason of the prohibition under Republic Act No.
477. Therefore, the interpretation
given by the court a quo that the agreement is one of lease
should prevail.

In view of the foregoing, We hold that the agreement entered into
by and between Severo Legaspi and Felixberto Lape was a contract of lease.

WHEREFORE, the decision of the Court of Appeals
promulgated February 10, 1988 is hereby REVERSED AND SET ASIDE and the decision
of the trial court dated October 7, 1985 is REINSTATED. No pronouncement as to costs.

SO ORDERED.

Narvasa, (Chairman), Cruz, Griño-Aquino, and Medialdea, JJ., concur.

^[1]
Penned by Associate Justice Antonio M. Martinez and concurred in by Associate
Justices Lorna S. Lombos-de la Fuente and Cecilio Pe. Page 47, Rollo.

^[2]
Penned by Judge Roque A. Agton. Page 88, Original Record.

^[3]
Exhibit A.

^[4]
Exhibit C.

^[5]
Exhibit 1-B.

^[6]
Exhibit “M”.

^[7]
Page 6, Original Records.

^[8]
Page 1, Original Records.

^[9]
Page 14, Original Record.

^[10]
Article 1370, Civil Code of the Philippines;
Herrera vs. Petrophil Corp., 146 SCRA 385 (1986); GSIS vs. CA,
145 SCRA 311 (1986); Sy vs. CA, 131 SCRA 116 (1984); Labasan vs.
Lacuesta, 86 SCRA 16 (1978).

^[11]
Exhibit “C”.

^[12]
Fernandez vs. Court of Appeals, 166 SCRA 577 (1988).

^[13]
Article 1374, Civil Code of the Philippines; Bank of the Philippine Islands vs.
Ty Camco Sobrino, 57 Phil. 801 (1933).

^[14]
Exhibit “C”, emphasis
supplied.

^[15]
Tsn., Page 61, March 27, 1985.

^[16]
Article 1378, Civil Code of the
Philippines; Perez vs. Cortez, 15 Phil. 212 (1910).

^[17]
Ibid; Olino vs. Medina, 13 Phil. 379
(1909).

^[18]
Article 1371, Civil Code of the
Philippines.

^[19]
Exhibit E.

^[20]
Tsn., Page 25, January 11, 1985.

^[21]
Exhibits 1C to 1E; 1K2 to 1K3.

^[22]
Exhibit D.

^[23]
TSN., page 2, January 11, 1985.

^[24]
Exhibits H to H-1.

^[25]
Exhibit I.

^[26]
Ferrer-Lopez vs. CA, 150 SCRA 393 (1987); Rizal Cement Co. Inc. vs.
Villareal, 135 SCRA 15 (1985); Municipality of Santiago, Isabela vs.
Court of Appeals, 120 SCRA 734 (1983).

^[27]
Ramos vs. Court of Appeals, 112
SCRA 542 (1982); Detera vs. Dulay, et al., Vol. 49 No. 11, O.G.,
November 1953, p. 4883.

^[28]
Gonzales vs. Intermediate Appellate Court, 157 SCRA 587
(1988).

^[29]
Amended by Presidential Decree No. 967 on July 24, 1976 and by Presidential
Decree No. 1304 on February 24, 1978 to read as follows:

“SEC.
8. Any provision of law, executive order, rules or regulations to the
contrary notwithstanding, an applicant who has acquired land pursuant to the
provisions of this Act and to whom a certificate of title has been issued
covering such land may sell, cede, transfer, or convey his rights and interests
therein, including the permanent improvements on the land, to any interested
party; and all previous sales, transfers, conveyances and encumbrances
regarding such land including the permanent improvements therein, made and
consummated prior to July 24, 1976, are hereby confirmed, ratified and
validated.”

^[30]
Section 11, Rule 130, Revised Rules of
Court.

^[31] Tsn., Page 67, March 27, 1985.

^[32]
Article 1373, Civil Code of the
Philippines; Luna vs. Linatoc, 74 Phil. 15 (1942).