Special Contracts - Partnership
additional contributions, they may be paid after
the limited partnership has been formed.
Firm name
GR: The surname of a limited partnership shall
not appear in the partnership name.
XPNs:
1. Limited partner and general partner have
similar surnames; or
2. Prior to the time when the limited partner
became such, the business had been carried
on under a name in which his surname
appeared. (NCC, Art. 1846)
NOTE: A limited partner whose surname
appears in a partnership name is liable as a
general partner to partnership creditors who
extend credit to the partnership without actual
knowledge that he is not a general partner
Admission of additional limited partners
After a limited partnership had been formed,
additional limited partners may be admitted,
provided:
1. There is proper amendment to the
certificate which must be signed and sworn
to by all of the partners, including the new
limited partners; and
2. It is filed with the Securities and Exchange
Commission.
RIGHTS AND OBLIGATIONS OF A LIMITED
PARTNER
Rights of a limited partner (NCC, Art. 1851)
1. To require partnership books kept at
principal place of business;
2. To inspect or copy books at reasonable
hours;
3. To demand true and full information of all
things affecting partnership;
4. To demand formal account of partnership
affairs whenever circumstances render it
just and reasonable;
5. To ask for dissolution and winding up by
decree of court;
6. To receive share of profits or other
compensation by way of income; and
7. To receive return of contributions provided
the partnership assets are in excess of all its
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
liabilities. (De Leon, 2014)
Transactions allowed or prohibited in a
limited partnership
1. Allowed
a. Granting loans to partnership
b. Transacting business with
partnership
c. Receiving pro rata share of
partnership assets with general
creditors if he is not also a general
partner
2. Prohibited
a. Receiving/holding partnership
property as collateral security
b. Receiving any payment,
conveyance, release from liability if
it will prejudice right of 3rd persons
NOTE: The prohibition is not absolute because
there is no prohibition if the partnership assets
are sufficient to discharge partnership liabilities
to persons not claiming as general or limited
partners.
Substituted limited partner
It is a person admitted to all the rights of a
limited partner who has died or assigned his
interest in the partnership.
Rights and liabilities of a substituted limited
partner (NCC, Art. 1859)
GR: He has all the rights and powers and is
subject to all the restrictions and liabilities of
his assignor.
XPN: Those liabilities which he was ignorant of
at the time that he became a limited partner and
which could not be ascertained from the
certificate
Requirements for the admission of a
substituted limited partner
1. All the members must consent to the
assignee becoming a substituted limited
partner or the limited partner, being
empowered by the certificate must give the
assignee the right to become a limited
partner;
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 Civil Law
2. The certificate must be amended in
accordance with Art. 1865 of the NCC; and
The certificate as amended must be registered
in the SEC.
Basis of preference given to limited partners
over other limited partners
Priority or preference may be given to some
limited partners over other limited partners as
to the:
1. Return of their contributions;
2. Their compensation by way of income; or
3. Any other matter.
NOTE: In the absence of such statement in the
certificate, even if there is an agreement, all
limited partners shall stand on equal footing in
respect of these matters.
Requisites for return of contribution of a
limited partner (NCC, Art. 1857)
1. All liabilities of the partnership have been
paid or if they have not yet been paid, the
assets of the partnership are sufficient to
pay such liabilities;
2. The consent of all the members (general
and limited partners) has been obtained
except when the return may be rightfully
demanded; and
3. The certificate of limited partnership is
cancelled or amended.
When return of contribution is a matter of
right
When all liabilities of the partnership, except
liabilities to general partners and to limited
partners on account of their contributions, have
been paid or there remains property of the
partnership sufficient to pay them and the
certificate is cancelled or so amended as to set
forth the withdrawal or reduction:
1. On the dissolution of the partnership;
2. Upon the arrival of the date specified in
the certificate for the return; or
3. After the expiration of six (6)-month
notice in writing given by him to the
other partners if no time is fixed in the
certificate for the return of the
contribution or for the dissolution of
the partnership.
583
NOTE: Even if a limited partner has contributed
property, he has only the right to demand and
receive cash for his contribution. The exceptions
are:
1. When there is stipulation to the
contrary in the certificate; or
2. When all the partners (general and
limited partners) consent to the return
other than in the form of cash. (De Leon
2014)
Liabilities of a limited partner
1. To the partnership
Since limited partners are not principals in
the transaction of a partnership, their
liability as a rule, is to the partnership, not
to the creditors of the partnership. The
general partners cannot however waive any
liability of the limited partners to the
prejudice of such creditors.
2. To the partnership creditors and other
partners
a. A limited partner is liable for
partnership obligations when he
contributed services instead of only
money or property to the partnership;
b. When he allows his surname to appear
in the firm name;
c. When he fails to have a false statement
in the certificate corrected, knowing it
to be false;
d. When he takes part in the control of the
business;
e. When he receives partnership property
as collateral security, payment,
conveyance, or release in fraud of
partnership creditors;
f. When there is failure to substantially
comply with the legal requirements
governing the formation of limited
partnerships.
3. To separate creditors
As in a general partnership, the creditor of a
limited partner may, in addition to other
remedies allowed under existing laws, apply to
the proper court for a charging order subjecting
the interest in the partnership of the debtor
partner for the payment of his obligation. (De
Leon, 2014)
 Special Contracts - Partnership
Requisites for waiver or compromise of
liabilities
The waiver or compromise shall:
1. Be made with the consent of all partners;
and
2. Not prejudice partnership creditors who
extended credit or whose claims arose
before the cancellation or amendment of
the certificate.
When may a limited partner have the
partnership dissolved
1. When his demand for the return of his
contribution is denied although he has a
right to such return; or
2. When his contribution is not paid although
he is entitled to its return because the other
liabilities of the partnership have not been
paid or the partnership property is
insufficient for their payment.
Effect of retirement, death, civil interdiction,
insanity or insolvency of a partner
1. General partner – The partnership is
dissolved (NCC, Art. 1860) unless the
business is continued by the remaining
general partners:
a. Under the right stated in the
certificate; or
b. With the consent of all the partners.
2. Limited partner – The partnership is not
dissolved except all limited partners cease
to be such.
Rights of the executor/administrator on the
death of the limited partner
1. All the rights of a limited partner for the
purpose of settling his estate
2. To have the same power as the deceased
had to constitute his assignee as
substituted limited partner.
In setting accounts after dissolution, the
liabilities of the partnership shall be entitled
to payment in the following order
1. Those to creditors, in the order of priority
as provided by law, except those to limited
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
partners on account of their contributions,
and to general partners
2. Those to limited partners in respect to their
share of the profits and other compensation
by way of income on their contributions
3. Those to limited partners in respect to the
capital of their contributions
4. Those to general partners other than for
capital and profits
5. Those to general partners in respect to
profits
6. Those to general partners in respect to
capital. (NCC, Art. 1863)
NOTE: Subject to any statement in the
certificate or to subsequent agreement, limited
partners share in the partnership assets in
respect to their claims for capital, and in respect
to their claims for profits or for compensation
by way of income on their contribution
respectively, in proportion to the respective
amounts of such claims.
GR: A limited partner is not a proper party to
proceedings:
1. By a partnership; or
2. Against a partnership.
XPNs:
1. If he is also a general partner.
2. Where the object is to enforce a limited
partner’s right against or liability to the
partnership. (NCC, Art. 1866)
SUMMARY OF RIGHTS AND OBLIGATIONS OF
PARTNERS
GENERAL PARTNER
Rights
1. Right in specific partnership property.
2. Interest in the partnership (share in the
profits and surplus).
3. Right to participate in the management.
4. Right to associate another person with him
in his share without the consent of other
partners (sub- partnership).
5. Right to inspect and copy partnership
books at any reasonable hour.
584
 Civil Law
6. Right to a formal account as to partnership a. Knowledge of partner acting in the
affairs (even during existence of particular matter acquired while a
partnership): partner.
b. Knowledge of the partner acting in
a. If he is wrongfully excluded from the particular matter then present
partnership business or to his mind.
possession of its property by his c. Knowledge of any other partner
co-partners. who reasonably could and should
b. If right exists under the terms of have communicated it to the acting
any agreement. partner.
c. As provided in Art. 1807 of the
NCC. 5. Partners and the partnership are solidarily
d. Whenever the circumstances liable to 3rd persons for the partner's tort or
render it just and reasonable. breach of trust.
Obligations
6. Liability of incoming partner is limited to:
Obligations of partners among themselves
a. His share in the partnership
1. Contribution of property. property for existing obligations.
2. Contribution of money and money b. His separate property for
converted to personal use. subsequent obligations.
3. Prohibition in engaging in business for
himself. 7. Creditors of partnership are preferred in
4. Contribute additional capital. partnership property & may attach
5. Managing partner who collects debt. partner's share in partnership assets.
6. Partner who receives share of partnership
credit.
7. Damages to partnership. Other obligations
8. Render information.
9. Accountable as fiduciary. 1. Duty to render on demand true and full
information affecting partnership to any
Obligations of partners to 3rd persons partner or legal representative of any
deceased partner or of any partner under
1. Every partnership shall operate under a legal disability.
firm name. Persons who include their
names in the partnership name even if they 2. Duty to account to the partnership as
are not members shall be liable as a fiduciary.
partner.
LIMITED PARTNER
2. All partners shall be liable for contractual Rights
obligations of the partnership with their
property, after all partnership assets have
been exhausted: 1. To have partnership books kept at principal
place of business.
a. Pro rata
b. Subsidiary 2. To inspect/copy books at reasonable hours.

3. Admission or representation made by any 3. To have on demand true and full

partner concerning partnership affairs information of all things affecting
within the scope of his authority is partnership.
evidence against the partnership.
4. To have formal account of partnership
4. Notice to partner of any matter relating to affairs whenever circumstances render it
partnership affairs operates as notice to just and reasonable.
partnership except in case of fraud:
5. To ask for dissolution and winding up by

585
 Special Contracts - Partnership
decree of court.
6. To receive share of profits/other
compensation by way of income.
subjecting the interest in the partnership of the
debtor partner for the payment of his
obligation.

7. To receive return of contributions,

provided the partnership assets are in
excess of all its liabilities.

Obligations

To the partnership

Since limited partners are not principals in the

transaction of a partnership, their liability as a
rule, is to the partnership, not to the creditors
of the partnership. The general partners
cannot, however waive any liability of the
limited partners to the prejudice of such
creditors.

To the partnership creditors and other

partners

1. A limited partner is liable for partnership

obligations when he contributed services
instead of only money or property to the
partnership.

2. When he allows his surname to appear in

the firm name.

3. When he fails to have a false statement in

the certificate corrected, knowing it to be
false.

4. When he takes part in the control of the

business

5. When he receives partnership property as

collateral security, payment, conveyance,
or release in fraud of partnership creditors.

6. When there is failure to substantially

comply with the legal requirements
governing the formation of limited
partnerships.

To separate creditors

As in a general partnership, the creditor of a

limited partner may, in addition to other
remedies allowed under existing laws, apply to
the proper court for a charging order

UNIVERSITY OF SANTO TOMAS 586

2021 GOLDEN NOTES
 Civil Law
AGENCY latter. Neither the principal nor the agent can
be legally made to remain in the relationship
DEFINITION OF AGENCY when they choose to have it terminated.

Classifications of Agency
Contract of agency (2000, 2003 BAR)
1. As to manner of creation
By the contract of agency, a person binds himself
to render some service or to do something in
a. Express – Agent has been actually
representation or on behalf of another, with the
authorized by the principal, either
consent or authority of the latter. (NCC, Art. 1868)
orally or in writing. (NCC, Art. 1869)
NOTE: The essence of agency is representation.
b. Implied – Agency is implied from the
For a Contract of Agency to exist, it is essential that
acts of the principal, from his silence
the principal consents that the agent shall act on
or lack of action, or his failure to
the former’s behalf and the agent consents so as
repudiate the agency, knowing that
to act. (Rabuya, 2017)
another person is acting on his
behalf without authority. (NCC, Art.
One factor which most clearly distinguishes
1869), or from the acts of the agent
agency from other legal concepts is control; one
which carry out the agency, or from
person – the agent – agrees to act under the
his silence or inaction according to
control or direction of another – the principal.
the circumstances. (NCC, Art. 1870)
Indeed, the very word “agency” has come to
connote control by the principal. (Victorias
2. As to character
Milling Co., Inc. v. Court of Appeals, G.R. No.
117356, June 19, 2000)
a. Gratuitous – Agent receives no
compensation for his services. (NCC,
NATURE, FORMS AND KINDS OF AGENCY Art. 1875)

Characteristics of a contract of agency b. Onerous or Compensated – Agent

receives compensation for his
1. Bilateral – If it is for compensation, it gives services. (NCC, Art. 1875)
rise to reciprocal rights and obligations.
2. Unilateral – If gratuitous, it creates 3. As to extent of business of the principal
obligations for only one of the parties.
3. Nominate – It has its own name. a. General – Agency comprises all the
4. Consensual – It is perfected by mere consent. business of the principal. (NCC, Art.
5. Principal – It can stand by itself without 1876)
need of another contract.
6. Preparatory and Progressive – It is entered b. Special – Agency comprises one or
into as a means for other purposes that deal more specific transactions. (NCC, Art.
with the public in a particular manner: for 1876)
the agent to enter into juridical acts with the
public in the name of the principal. 4. As to authority conferred
(Villanueva and Villanueva-Tiansay, 2015)
7. Generally onerous a. Couched in general terms – Agency is
8. Representative relation – The agent acts for created in general terms and is
and on behalf of the principal on matters deemed to comprise only acts of
within the scope of his authority and said administration. (NCC, Art. 1877)
acts have the same legal effect as if they were
personally executed by the principal. b. Couched in specific terms – Agency
(Rabuya, 2017) authorizing only the performance of
9. Fiduciary and Revocable – For the creation a specific act or acts. (NCC, Art. 1876)
of legal relationship of representation by the
agent on behalf of the principal, the powers 5. As to nature and effects
of the former are essentially derived from the

587
 Special Contracts - Agency
a. Ostensible or Representative – Agent
acts in the name and representation
of the principal. (NCC, Art. 1868)
b. Simple or Commission – Agent acts in
his own name but for the account of
the principal. (De Leon, 2014)
Parties to a contract of agency
1. Principal (Mandante) – One whom the agent
represents and from whom he derives his
authority; he is the person represented.
2. Agent (Mandatario) – One who acts for and
represents another; he is the person acting in
a representative capacity. The agent has
derivative authority in carrying out the
principal’s business. (De Leon, 2014)
Essential elements of an agency
1. Consent (express or implied) of the parties to
establish the relationship.
NOTE: A person may express his consent:
a. by contract (NCC, Art. 1868), orally
or in writing;
b. by conduct (NCC, Art. 1869);
c. by ratification (NCC, Art. 1910); or
d. the consent may arise by
presumption or operation of law. (De
Leon, 2014)
2. The object is the execution of a juridical act in
relation to third persons.;
3. The agent acts as a representative and not for
himself.; and
4. The agent acts within the scope of his
authority. (International Exchange Bank v.
Spouses Briones, et al., G.R. No. 205657, March
29, 2017, as penned by J. Leonen)
Appointment of an agent
GR: There are no formal requirements governing
the appointment of an agent.
XPN: When the law requires a specific form, i.e.
when sale of land or any interest therein is
through an agent, the authority of the latter must
be in writing; otherwise, the sale shall be void.
(NCC, Art. 1874; Yoshizaki v. Joy Training Center of
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Aurora, Inc., G.R. No. 174978, July 21, 2013) (2010
BAR)
Rules on implied acceptance of agency
1. Between persons who are present – The
acceptance of the agency may also be implied
if the principal delivers his power of attorney
to the agent and the latter receives it without
any objection. (NCC, Art. 1871)
2. Between persons who are absent – The
acceptance of the agency cannot be implied
from the silence of the agent except:
a. When the principal transmits his
power of attorney to the agent, who
receives it without any objection;
b. When the principal entrusts to him
by letter or telegram a power of
attorney with respect to the business
in which he is habitually engaged as
an agent and he did not reply to the
letter or telegram. (NCC, Art. 1872)
NOTE: Acceptance by the agent may also be
express or implied from his acts which carry out
the agency, or from his silence or inaction
according to the circumstances. (NCC, Art. 1870)
Communication of existence of agency
Ways of giving notice of agency:
1. By special information – The person
appointed as agent is considered such with
respect to the person to whom it was given.
2. By public advertisement – The agent is
considered as such with regard to any
person.
Nature of the relationship between principal
and agent
It is fiduciary in nature that is based on trust and
confidence. The agent is estopped from asserting
or acquiring an interest adverse to that of his
principal. (De Leon, 2014)
Qualifications of a Principal
1. Natural or juridical person; and
2. Must have capacity to act.
NOTE: If a person is capacitated to act for himself
588
 Civil Law
or his own right, he can act through an agent.
Insofar as third persons are concerned, it is
enough that the principal is capacitated. But
insofar as his obligations to his principal are
concerned, the agent must be able to bind
himself.
Kinds of principal
1. Disclosed principal – At the time of the
transaction contracted by the agent, the
other party knows that the agent is acting for
a principal and of the principal’s identity.
2. Partially disclosed principal – The other party
knows or has reason to know that the agent
is or may be acting for a principal but is
unaware of the principal’s identity.
3. Undisclosed principal – The party has no
notice of the fact that the agent is acting as
such for a principal. (De Leon, 2014)
Joint principals
Two or more persons appoint an agent for a
common transaction or undertaking. (NCC, Art.
1915)
Requisites for solidary liability of joint
principals
1. There are two or more principals;
2. They have all concurred in the appointment
of the same agent; and
3. Agent is appointed for a common transaction
or undertaking. (De Leon, 2014)
Theory of imputed knowledge
The importance of the duty to give information of
material facts becomes readily apparent when it
is borne in mind that knowledge of the agent is
imputed to the principal even though the agent
never communicated such knowledge to the
principal. (De Leon, 2010)
Exceptions to the theory of imputed
knowledge
1. The agent’s interests are adverse to those of
the principal;
2. The agent’s duty is not to disclose the
information, as where he is informed by way
of confidential information; and
3. The person claiming the benefit of the rule
colludes with the agent to defraud the
589
principal. (De Leon, 2014)
NOTE: The theory of imputed knowledge
ascribes the knowledge of the agent to the
principal, not the other way around. The
knowledge of the principal cannot be imputed to
his agent. (Sunace International Management
Services, Inc. v. NLRC, G.R. No. 161757, January 25,
2006)
Kinds of agents
1. Universal agent – employed to do all acts
which the principal may personally do, and
which he can lawfully delegate to another the
power of doing.
2. General agent – employed to transact all
business of the principal, or all the business
of a particular kind or in a particular place, or
in other words, to do all acts connected with
a particular trade, business or employment.
3. Special or particular agent – authorized to act
in one or more specific transactions, or to do
one or more specific acts, or to act upon a
particular occasion. (De Leon, 2014)
Rule with regard to the execution of the
agency
GR: The agent is bound by his acceptance to carry
out the agency, in accordance with the instruction
of the principal and is liable for damages which,
through his non-performance, the principal may
suffer. (NCC, Arts. 1884 and 1887)
XPN: If its execution could manifestly result in
loss or damage to the principal. (NCC, Art. 1888)
Responsibility of two or more agents
appointed simultaneously
GR: They are jointly liable.
XPN: Solidarity has been expressly stipulated.
Each of the agents becomes solidarily liable for:
1. The non-fulfillment of the agency
2. Fault or negligence of his fellow agent
XPNs to the XPN:
1. When one of the other agents acts beyond the
scope of his authority – innocent agent is not
liable.
2. When the fault or negligence of his fellow
agents was done beyond the scope of their
 Special Contracts - Agency
authority – innocent agent is not liable. (NCC,
Art. 1895)
Instances when the agent may incur personal
liability
1. Agent expressly bound himself;
2. Agent exceeded his authority;
3. Acts of the agent prevented the performance
on the part of the principal;
4. When a person acted as agent without
authority or without a principal; and
5. When a person acted as an agent of an
incapacitated principal unless the third
person was aware of the incapacity at the
time of the making of the contract. (De Leon,
2010)
Q: Spouses Briones took out a loan of
₱3,789,216.00 from iBank to purchase a
BMW Z4 Roadster. The monthly amortization
for two (2) years was ₱78,942.00. They
executed a promissory note with chattel
mortgage that required them to take out an
insurance policy on the vehicle. In the
promissory note, the Spouses Briones
constituted iBank as their attorney-in-fact
with full power and authority for the purpose
of filing claims with the insurance company
as may be necessary to prove the claim and
to collect from the latter the proceeds of
insurance in case of loss or damage to the
vehicle. The mortgaged BMW Z4 Roadster
was carnapped in Tandang Sora, Quezon City.
Spouses Briones declared the loss to iBank,
which instructed them to continue paying the
next three (3) monthly installments “as a
sign of good faith.” When the Spouses Briones
finished paying the three (3)-month
installment, iBank sent them a letter
demanding full payment of the lost vehicle.
The Spouses Briones submitted a notice of
claim with their insurance company, but the
latter denied the claim due to the delayed
reporting of the lost vehicle.
Thereafter, iBank filed a complaint for the
default of the Spouses to pay monthly
amortizations. RTC ruled that as the duly
constituted attorney-in-fact of the Spouses
Briones, iBank had the obligation to facilitate
the filing of the notice of claim and then to
pursue the release of the insurance proceeds.
The CA also dismissed the complaint. Did an
agency relationship exist between the parties
which obligated iBank to facilitate the filing
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
of the claim against the insurance company?
A: YES. All the elements of agency exist in this
case, namely (1) there is consent, express or
implied, of the parties to establish the
relationship of agency; (2) the object is the
execution of a juridical act in relation to a third
person; (3) the agent acts as a representative
and not for himself; and (4) the agent acts within
the scope of his authority.
Under the promissory note with chattel
mortgage, Spouses Briones appointed iBank as
their attorney-in-fact, authorizing it to file a
claim with the insurance company if the
mortgaged vehicle was lost or damaged. iBank
was also authorized to collect the insurance
proceeds as the beneficiary of the insurance
policy. Article 1370 of the Civil Code is
categorical that when “the terms of a contract
are clear and leave no doubt upon the intention
of the contracting parties, the literal meaning of
its stipulations shall control. (International
Exchange Bank Now Union Bank of the
Philippines v. Spouses Jerome and Quinnie
Briones, and John Doe, G.R. No. 205657, March 29,
2017, as penned by J. Leonen)
Presumption of contract of agency
GR: Agency is not presumed.
The relation between principal and agent must
exist as a fact. Thus, it is held that where the
relation of agency is dependent upon the acts of
the parties, the law makes no presumption of
agency, and it is always a fact to be proved, with
the burden of proof resting upon the person
alleging the agency to show, not only the fact of
its existence, but also its nature and extent.
(Victorias Milling Co., Inc. v. Consolidated Sugar
Corporation, G.R. No. 117356, June 19, 2000)
XPNs:
1. Operation of law; and
2. To prevent unjust enrichment. (De Leon,
2010)
Agency by necessity
Agency cannot be created by necessity. What is
created instead is additional authority in an agent
appointed and authorized before the emergency
arose. By virtue of the existence of an emergency,
the authority of an agent is correspondingly
590
 Civil Law
enlarged in order to cope with the exigencies or Mere representation of an alleged agent is not
the necessities of the moment. (De Leon, 2010) sufficient to prove the existence of a principal-
agent relationship. The declarations of the agent
Requisites for the additional authority of alone are generally insufficient to establish the
agent in cases of necessity fact or extent of agency. It is a settled rule that the
persons dealing with the assumed agent are
1. Real existence of emergency; bound at their peril, if they would hold the
2. Inability of the agent to communicate with principals liable, to ascertain not only the fact of
the principal; agency but also the nature and extent of
3. Exercise of additional authority is for the authority, and in case either is controverted, the
principal’s protection; and burden of proof is upon them to establish it. (Sps.
4. Adoption of fairly reasonable means, Yu v. Pan American World Airways, Inc., G.R. No.
premises duly considered. 123560, March 27, 2000)

Rule regarding double agency Q: A foreign manufacturer of computers and a

Philippine distributor entered into a contract
GR: Disapproved by law for being against public whereby the distributor agreed to order
policy and sound morality. 1,000 units of the manufacturer's computers
every month and to resell them in the
XPN: Where the agent acted with full knowledge Philippines at the manufacturer's suggested
and consent of the principals. prices plus 10%. All unsold units at the end of
the year shall be bought back by the
Acts that a principal may delegate to his agent manufacturer at the same price they were
ordered. The manufacturer shall hold the
GR: What a man may do in person, he may do distributor free and harmless from any claim
thru another. for defects in the units. Is the agreement one
for sale or agency? (2000 BAR)
XPNs:
A: The contract is one of agency not sale. The
1. Personal acts; and notion of sale is negated by the following indicia:
2. Criminal acts or acts not allowed by law. (1) the price is fixed by the manufacturer with
(De Leon, 2014) the 10% mark-up constituting the commission;
(2) the manufacturer reacquires the unsold units
Q: A granted B the exclusive right to sell his at exactly the same price; and (3) warranty for the
brand of Maong pants in Isabela, the price for units was borne by the manufacturer. The
his merchandise payable within 60 days from foregoing indicia negate sale because they
delivery, and promising B a commission of indicate that ownership over the units was never
20% on all sales. After the delivery of the intended to transfer to the distributor.
merchandise to B but before he could sell any
of them, B’s store in Isabela was completely Agency vs. Guardianship
burned without his fault, together with all of
A's pants. Must B pay A for the lost pants? BASIS AGENCY GUARDIANSHIP
Why? (1999 BAR) Agent Guardian
As to who
represents a represents an
they
A: YES. B must pay A for the lost pants. The contract capacitated incapacitated
represent
between A and B is a sale not an agency to sell person. person.
because the price is payable by B upon 60 days Agent derives
from delivery even if B is unable to resell it. If B authority
were an agent, he is not bound to pay the price if from the
he is unable to resell it. As a buyer, however, principal and Guardian
As to the
ownership passed to B upon delivery and, under his authority derives
source of
Art. 1504, the thing perishes for the owner. may at any authority from
authority
Hence, B must still pay the price. time be the court.
abrogated or
Proving the existence of principal-agent modified by
relationship through mere representation the principal.

591
 Special Contracts - Agency
Agent is representation represents lessor of
Guardian is
As to the appointed by by the agent the principal. services
appointed by
appointin the principal or worker does not
the court, and
g and can be represent
stands in loco
authority removed by his
parentis.
the latter. employer.
As to being Guardian is not
subject to Agent is subject to the Relationship
Generally,
the subject to directions of the can be
relationship
person directions of ward, but must As to terminated
can be
they the principal. act for the termination of at the will of
terminated
represent ward’s benefit. relationship either
only at the
principal or
Agent can Guardian has no will of both.
agent.
make the power to
As to
principal impose personal The lessor
liability
personally liability on the Agent ordinarily
liable. ward. As to the kind
exercises performs
of function he
discretionary only
Agency vs. Judicial Administration exercises
powers. ministerial
functions.
JUDICIAL
BASIS AGENCY ADMINISTRA Agency vs. Partnership
TION
Judicial BASIS AGENCY PARTNERSHIP
As to the Agent is A partner acts
administrator
source of appointed by not only for his
is appointed
authority the principal Agent acts in co-partners and
by the court As to his
the name of the partnership
Represents actions
the principal. but also as
not only the principal of
As to
Represents court but also himself.
whom they
the principal the heirs and A partner’s
represent
creditors of power to bind
the estate. An agent
his co-partner is
Judicial must submit
As to the not subject to
Administrator, to the
control by the co-partner’s
As to the Agent does before principal’s
the principal right to control,
requireme not file a entering into right to
unless there is
nt of bond bond. his duties, is control.
an agreement to
required to file that effect.
a bond The ordinary
The acts of an agent A partner acting
As to administrator assumes no as agent for the
Agent is personal partnership
control of are subject to
controlled by As to liability liability binds not only
the specific
the principal where he acts the firm
Agent/Ad provisions of
through the within the members but
ministrato law and
agreement. scope of his himself as well.
r orders from
the court. authority.
The alleged The profits
owner or belong to all the
Agency vs. Lease of Services
As to sharing partner takes parties as
of profits his agreed common
LEASE OF
BASIS AGENCY share of proprietors in
SERVICES profits, not as agreed
As to Agent Worker or

UNIVERSITY OF SANTO TOMAS 592

2021 GOLDEN NOTES
 Civil Law
owner but as proportions. 2. Specific terms – It is necessary to perform any
an agreed act of strict ownership. (De Leon, 2014)
measure of
compensation Scope of authority of an agent
for his
services or The agent must act within the scope of his
the like. authority. He may do such acts as may be
conducive to the accomplishment of the purpose
Agency vs. Trust of the agency. (NCC, Art 1881)

BASIS AGENCY TRUST However, the limits of the agent’s authority shall
As to the Agent not be considered exceeded should it have been
Trustee may performed in a manner more advantageous to the
capacity to usually
hold legal title principal than that specified by him. (NCC, Art.
hold title overholds no
to the property. 1882)
the property title at all.
Agent
usually Instances when the act of an agent is binding
Trustee may act to the principal
As to his acts in the
in his own
actions name of
name. 1. When the agent acts as such without
the
principal. expressly binding himself or does not exceed
Agency Trust usually the limits of his authority. (NCC, Art. 1897)
As to the usually ends by the 2. If principal ratifies the act of the agent which
termination may be accomplishment exceeded his authority. (NCC, Art. 1898)
of the terminated of the purposes 3. Circumstances where the principal himself
relationship or revoked for which it was was, or ought to have been aware. (NCC, Art.
any time. formed. 1899)
Agency 4. If such act is within the terms of the power of
As to the attorney, as written. (NCC, Arts. 1900 & 1902)
may not be Trust involves
scope of 5. Principal has ratified, or has signified his
connected control over
authority willingness to ratify the agent’s act. (NCC, Art.
at all with property.
over property 1901)
property.
Agent has
As to the authority Trustee does Effects of the acts of an agent
binding effect to make not necessarily
of the contracts or even possess 1. With authority
contracts which will such authority
entered by be binding to bind the a. In principal’s name – Valid
them on his trustor. b. In his own name – Not binding on the
principal. principal; agent and stranger are the
Trust may be only parties, except regarding things
Agency is belonging to the principal or when
the result of a
As to its really a the principal ratifies the contract or
contract; it may
creation contractual derives benefit therefrom.
also be created
relation.
by law.
2. Without authority
POWERS
a. In principal’s name – Unenforceable
Kinds of agency as to the extent of powers but may be ratified, in which case,
conferred may be validated retroactively from
the beginning.
An agency may be couched in: b. In his own name – Valid on the agent,
but not on the principal.
1. General terms – It is one which is created in
general terms and is deemed to comprise Rule as to when the principal is not bound by
only acts of administration. (NCC, Art. 1877) the act of the agent

593
 Special Contracts - Agency
1. GR: When the act is without or beyond the
scope of his authority in the principal’s name.
XPNs:
a. Where the acts of the principal have
contributed to deceive a 3rd person
in good faith;
b. Where the limitations upon the
power created by the principal could
not have been known by the 3rd
person;
c. Where the principal has placed in
the hands of the agent instruments
signed by him in blank; and
d. Where the principal has ratified the
acts of the agent.
2. GR: When the act is within the scope of the
agent’s authority but in his own name.
XPN: When the transaction involves things
belonging to the principal. (NCC, Art. 1883)
NOTE: The limits of the agent’s authority shall not
be considered exceeded should it have been
performed in a manner more advantageous to the
principal than that specified by him. (NCC, Art.
1882)
RIGHTS OF AGENTS
Right of agent to retain in pledge object of
agency (Legal Pledge) (2015 BAR)
The agent may retain in pledge the things which
are the object of the agency until the principal
effects the reimbursement and pays the
indemnity:
1. If principal fails to reimburse the agent the
necessary sums, including interest, which the
latter advanced for the execution of the
agency. (NCC, Art. 1912)
2. If principal fails to indemnify the agent for all
damages which the execution of the agency
may have caused the latter, without fault or
negligence on his part. (NCC, Art. 1913)
Rule where two persons deal separately with
the agent and the principal
If the two contracts are incompatible with each
other, the one of prior date shall be preferred.
This is subject however to the rule on double sale
under Art. 1544 of the NCC. (NCC, Art. 1916)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
NOTE: Rules of preference in double sale
1. Personal property – possessor in good faith
2. Real property
a. Registrant in good faith;
b. In the absence of inscription, possessor in
good faith;
c. In the absence of possession, person with
the oldest title in good faith. (NCC, Art.
1544)
If agent acted in good faith, the principal shall be
liable for damages to the third person whose
contract must be rejected. If agent is in bad faith,
he alone shall be liable. (NCC, Art. 1917)
A person acting as an agent cannot escape
criminal liability by virtue of the contract of
agency
The law on agency has no application in criminal
cases. When a person participates in the
commission of a crime, he cannot escape
punishment on the ground that he simply acted
as an agent of another party. (Ong v. CA, G.R. No.
119858, April 29, 2003)
An agent cannot maintain an action against
persons with whom they contracted on behalf
of his principal.
Agents are not a party with respect to that
contract between his principal and third persons.
As agents, they only render some service or do
something in representation or on behalf of their
principals. The rendering of such service did not
make them parties to the contracts of sale
executed in behalf of the latter.
The fact that an agent who makes a contract for
his principal will gain or suffer loss by the
performance or non-performance of the contract
by the principal or by the other party thereto does
not entitle him to maintain an action on his own
behalf against the other party for its breach.
An agent entitled to receive a commission from
his principal upon the performance of a contract
which he has made on his principal's account
does not, from this fact alone, have any claim
against the other party for breach of the contract,
either in an action on the contract or otherwise.
An agent who is not a promisee cannot maintain
594
 Civil Law
an action at law against a purchaser merely
because he is entitled to have his compensation
or advances paid out of the purchase price before
payment to the principal. (Uy v. CA, G.R. No.
120465, September 9, 1999)
OBLIGATIONS OF THE AGENT
RESPONSIBILITIES AND OBLIGATIONS OF AN
AGENT
Specific obligations of an agent to the
principal
1. Carry out the agency (NCC, Art. 1884);
2. Answer for damages which, through his non-
performance, the principal may suffer (Ibid.);
3. Finish the business already begun on the
death of the principal, should delay entail any
danger (Ibid.);
NOTE: The agency shall also remain in full
force even after the death of the principal if it
has been constituted in the common interest
of the latter and of the agent, or in the
interest of a third person who has accepted
the stipulation in his favor. (NCC, Art. 1930)
4. Observe the diligence of a good father of a
family in the custody and preservation of the
goods forwarded to him by the owner in case
he declines an agency, until an agent is
appointed. (NCC, Art. 1885);
NOTE: The owner shall as soon as
practicable either appoint an agent or take
charge of the goods.
5. Advance the necessary funds should there be
a stipulation to do so except when the
principal is insolvent (NCC, Art. 1886);
6. Act in accordance with the instructions of the
principal and in default thereof, do all that a
good father of a family would do (NCC, Art.
1887);
7. Not to carry out the agency if its execution
would manifestly result in loss or damage to
the principal (NCC, Art. 1888);
8. Answer for damages if there being a conflict
between his interests and those of the
principal, he should prefer his own (NCC, Art.
1889);
595
9. Not to loan to himself without the consent of
the principal if he has been authorized to
lend money at interest (NCC, Art. 1890);
10. Render an account of his transactions and to
deliver to the principal whatever he may
have received by virtue of the agency, even
though it may not be owing to the principal
(NCC, Art. 1891);
NOTE: Every stipulation exempting the agent
from the obligation to render an account
shall be void. [NCC, Art. 1891(2])
11. Distinguish goods by countermarks and
designate the merchandise respectively
belonging to each principal, in the case of a
commission agent who handles goods of the
same kind and mark, which belong to
different owners (NCC, Art. 1904);
12. Be responsible in certain cases for the acts of
the substitute appointed by him (NCC, Art.
1892); (1999 BAR)
13. Pay interest on funds he has applied to his
own use (NCC, Art. 1896);
14. Inform the principal, where an authorized
sale of credit has been made, of such sale
(NCC, Art. 1906);
15. Bear the risk of collection and pay the
principal the proceeds of the sale on the
same terms agreed upon with the purchaser,
should he receive also on sale, a guarantee
commission (NCC, Art. 1907); (2004 BAR)
16. Indemnify the principal for damages for his
failure to collect the credits of his principal at
the time that they become due (NCC, Art.
1908);
17. Be responsible for fraud or negligence. (NCC,
Art. 1909; De Leon, 2014)
NOTE: The court shall judge with more or less
rigor, the fault or negligence of the agent,
according to whether the agency was or was not
for compensation. (NCC, Art. 1909)
Instructions
Private directions which the principal may give
the agent in regard to the manner of performing
his duties as such agent but of which a third party
 Special Contracts - Agency
is ignorant are said to be secret if the principal
intended them not to be made known to such
party. (De Leon, 2014)
Obligation of a person who declines an
agency
A person who declines an agency is still bound to
observe the diligence of a good father of the
family in the custody and preservation of goods
forwarded to him by the owner. This is based on
equity. (De Leon, 2014)
apparent scope of the authority with which he
has been clothed, it matters not that it is directly
contrary to the instructions of the principal. The
principal will, nevertheless, be liable unless the
third person with whom the agent dealt knew
that he was exceeding his authority or violating
his instructions.
Third persons dealing with an agent do so at their
peril and are bound to inquire as to the extent of
his authority but they are not required to
investigate the instructions of the principal.

Authority v. Principal’s instructions Breach of loyalty of the agent

BASIS AUTHORITY INSTRUCTIONS In case of breach of loyalty, the agent is NOT

entitled to commission. The forfeiture of the
Contemplates commission will take place regardless of whether
Sum total of only a private the principal suffers any injury by reason of such
the powers rule of guidance breach of loyalty. It does not even matter if the
As to the agency is for a gratuitous one, or that the
committed to to the agent;
scope principal obtained better results, or that usage
the agent by independent
the principal and distinct in and customs allow a receipt of such a bonus.
character
NOTE: An agent has an absolute duty to make a
full disclosure or accounting to his principal of all
Refers to the his transactions and material facts that may have
Relates to the
manner or some relevance with the agency. (Switzerland
subject/
mode of agent’s General Insurance Company, Ltd. v. Ramirez, G.R.
business or
As to the action with No. L-48264, February 21, 1980)
transactions
relationship respect to
with which
to the agent matters within When the obligation to account not applicable
the agent is
the scope of
empowered
permitted 1. If the agent acted only as a middleman with
to deal or act
action the task of merely bringing together the
vendor and vendees.
Limitations of 2. If the agent informed the principal of the
Without
authority are gift/bonus/profit he received from the
significance as
operative as purchaser and his principal did not object
against those
against those thereto.
As to third dealing with the
who have or 3. Where a right of lien exists in favor of the
persons agent with
are charged agent. (De Leon, 2014)
neither
with
knowledge nor
knowledge of Sub-Agent
notice of them
them
A sub-agent is a person employed or appointed
by an agent as his agent, to assist him in the
Contemplated Not expected to performance of an act for the principal which the
to be made be made known agent has been empowered to perform.
As to known to to those with
purpose third persons whom the agent Unless prohibited by the principal, the agent may
dealing with deals (De Leon, appoint a sub-agent or substitute. However, an
the agent 2014) agent may not delegate to a sub-agent where the
work entrusted to him by the principal to carry
out requires special knowledge, skill or
NOTE: If an act done by an agent is within the competence unless he has been authorized to do

UNIVERSITY OF SANTO TOMAS 596

2021 GOLDEN NOTES
 Civil Law
so by the principal. comply with the agency.

Effects of Substitution

1. When substitution is prohibited – All acts of

the substitute shall be void. [NCC, Art.
1892(2)]
Within the scope of the written power of
attorney but agent has actually exceeded his
2. When substitution is authorized
authority according to an understanding
between him and the principal
a. The principal did not designate any
particular person – The substitution
has the effect of releasing the agent 1. Insofar as 3rd persons are concerned (they
from his responsibility unless the are not required to inquire further than the
person appointed is notoriously terms of the written power), agent acted
incompetent or insolvent. [NCC, Art. within scope of his authority;
1892(2)] 2. Principal is estopped.
b. The principal designated the
substitute – Results in the absolute With improper motives
exemption of the agent.
Motive is immaterial; as long as within the scope
3. When substitution not authorized, but not of authority, valid.
prohibited – Valid if the substitution is
beneficial to the principal but if the With misrepresentations by the agent
substitution has occasioned damage to the
principal, the agent shall be primarily
responsible for the act of the substitute. 1. Authorized – principal still liable
2. Beyond the scope of the agent’s authority
SUMMARY OF RULES: ACTS OF AN AGENT
GR: Principal is not liable.
In behalf of the principal, within the scope of
authority XPN: Principal takes advantage of a contract or
receives benefits made under false
1. Binds principal;
representation of his agent.
2. Agent not personally liable.
Without or beyond scope of authority
Mismanagement of the business by the agent
Contract is unenforceable as against the principal 1. Principal still responsible for the acts
but binds the agent to the third person.
contracted by the agent with respect to 3rd
Binding on the principal when: persons;
2. Principal, however, may seek recourse from
1. Ratified; or
the agent.
2. The principal allowed the agent to act as
though he had full powers. Tort committed by the agent

Within the scope of authority but in the Principal civilly liable so long as the tort is
agent’s name committed by the agent while performing his
duties in furtherance of the principal’s business.
1. Not binding on the principal;
2. Principal has no cause of action against the Agent in good faith but prejudices 3rd parties
3rd parties and vice versa Principal is liable for damages.

NOTE: When the transaction involves things

belonging to the principal, his remedy is to sue EXPRESS vs. IMPLIED AGENCY
the agent for damages because of failure to

597
 Special Contracts - Agency
BASIS EXPRESS IMPLIED Q: When is a third person required to inquire
AGENCY AGENCY into the authority of the agent?
Agent has Implied from
been actually the acts of A:
authorized the principal
As to
by the 1. Where authority is not in writing – Every
definition
principal, person dealing with an assumed agent is put
either orally upon an inquiry and must discover upon his
or in writing peril, if he would hold the principal liable, not
Directly Incidental to only the fact of the agency but the nature and
conferred by the extent of the authority of the agent. (Safic
words transaction Alcan & CIE v. Imperial Vegetable Oil Co., Inc.,
or reasonably G.R. No. 126751, March 28, 2001) If he does
necessary to not make an inquiry, he is chargeable with
accomplish knowledge of the agent’s authority, and his
the purpose ignorance of that authority will not be an
of the agency, excuse.
and
As to therefore, the 2. Where authority is in writing – 3rd person is
authority principal is not required to inquire further than the
deemed to terms of the written power of attorney.
have actually
intended the NOTE: A third person with whom the agent
agent to wishes to contract on behalf of the principal may
possess the require the presentation of the power of attorney
necessary or the instructions as regards the agency. (NCC,
authority to Art. 1902)
act on his
behalf Q: When may the actual or apparent authority
of the agent bind the principal?
Third party’s liabilities toward agent
A: The principal is bound by the acts of the agent
GR: A third party’s liability on agent’s contracts is on his behalf, whether or not the third person
to the principal, not to the agent. dealing with the agent believes that the agent has
actual authority, so long as the agent has actual
XPNs: A third party subjects himself to liability at authority, express or implied.
the hands of the agent where the:
Doctrine of Apparent Authority
1. Agent contracts in his own name for an
undisclosed principal; The doctrine provides that even if no actual
2. Agent possesses a beneficial interest in the authority has been conferred on an agent, his or
subject matter of the agency; her acts, as long as they are within his or her
3. Agent pays money of his principal to a third apparent scope of authority, bind the principal.
party by mistake under a contract which (Calubad v. Ricarcen Development Corporation,
proves subsequently to be illegal, the agent G.R. No. 202364, August 30, 2017, as penned by J.
being ignorant of the illegality; and Leonen)
4. Third party commits a tort against the agent.
The existence of apparent authority may be
Scope of the agent’s authority as to third ascertained through:
persons
1. The general manner in which the principal
It includes not only the actual authorization holds out an agent as having the power to act,
conferred upon the agent by his principal but also with which it clothes him; or
that which is apparent or impliedly delegated to
him. (De Leon, 2014) 2. The acquiescence of the principal in the
agent’s acts of a particular nature, with actual

UNIVERSITY OF SANTO TOMAS 598

2021 GOLDEN NOTES
 Civil Law
or constructive knowledge thereof, within or Resolution and Secretary’s Certificates, later
beyond the scope of his authorities. (Sargasso alleged to be falsified. Due to Ricarcen’s
Construction & Development Corp. v. failure to pay its loan, the mortgage was
Philippine Ports Authority, G.R. No. 170530, foreclosed, eventually resulting to the
July 5, 2010) issuance of a Certificate of Sale in favour of
Calubad as the highest bidder, and thus, the
The principal is liable only as to third persons issuance of a certificate of title in his name.
who have been led reasonably to believe by the
conduct of the principal that such actual When Ricarcen discovered these
authority exists, although none has been given. transactions of Marilyn, it filed before the
(Banate, et al. v. Philippine Countryside Rural Regional Trial Court (“RTC”) a complaint for
Bank, Inc., G.R. No. 163825, July 13, 2010) Annulment of Real Estate Mortgage and
Extrajudicial Foreclosure of Mortgage and
Apparent Authority v. Authority by Estoppel Sale, with Damages against Marilyn and
Calubad. Should Ricarcen be bound by the
BASIS Apparent Authority by allegedly representative acts of Marilyn?
Authority Estoppel
As to the Though not Arises when A: YES. Ricarcen should be bound by the acts of
knowledge of actually the principal, Marilyn, whom it had clothed with apparent
the principal granted, the by his authority. The doctrine of apparent authority
of the principal culpable that is based on the principle of estoppel, in
authority of knowingly negligence, accordance with Articles 1431 and 1869 of the
the agent permits the permits his New Civil Code, provides that even if no actual
agent to agent to authority has been conferred on an agent, his or
exercise or exercise her acts, as long as they are within his or her
holds him out powers not apparent scope of authority, bind the principal.
as possessing granted to
him, even In the case at bar, it was within Marilyn’s scope
though the of authority as president to act for and enter into
principal may contracts in Ricarcen’s behalf. This could be seen
have no with how the corporate secretary entrusted her
notice or with blank yet signed sheets of paper to be used
knowledge of at her discretion, which apparently caused the
the agent’s execution of the allegedly falsified secretary
conduct certificates. It reasonably appeared that
As to the Founded in Founded on Ricarcen’s officers knew of the mortgage
establishment conscious the principal’s contracts entered into by Marilyn in Ricarcen’s
of the permission of negligence in behalf as proved by the checks drawn and issued
authority acts beyond failing by Ricarcen as payments to Calubad for the
the powers properly to monthly interest and principal loans. Calubad, as
granted supervise the an innocent third party dealing in good faith
affairs of the with Marilyn, should not be made to suffer
agent because of Ricarcen's negligence in conducting
its own business affairs. If a private corporation
Q: Marilyn R. Soliman (“Marilyn”), allegedly intentionally or negligently clothes its officers or
acting on behalf of Ricarcen Development agents with apparent power to perform acts for
Corporation (“Ricarcen”) of which she was it, the corporation will be estopped to deny that
president, took out a total of P 7,000,000.00 such apparent authority is real, as to innocent
loan from Arturo C. Calubad (“Calubad”) at a third persons dealing in good faith with such
compounded monthly interest rate, which officers or agents. (Calubad vs. Ricarcen
was secured by a real estate mortgage over Development Corporation, G.R. No. 202364,
Ricarcen’s real property in Quezon City. August 30, 2017, as penned by Justice Leonen)

To prove her authority to execute the three Q: Performance Forex Corp. is a corporation
mortgage contracts on Ricarcen’s behalf, operating as a financial broker/agent
Marilyn presented Calubad with a Board between market participants in foreign

599
 Special Contracts - Agency
exchange transactions. Cancio and
Pampolina accepted the invitation of
Performance Forex Corp.’s agent, Hipol, to
open a joint account with Performance Forex
Corp. Hipol was authorized by Performance
Forex Corp. to follow and execute the trade
orders of Cancio and Pampolina.
However, it was later found out that Hipol
did not execute the orders of Cancio and
Pampolina and instead made unauthorized
transactions resulting into the loss of all of
their money. Hence, Cancio and Pampolina
filed a complaint for damages against both
Performance Forex Corp. and its agent, Hipol
for what happened. Is Performance Forex
Corp. solidarily liable to Cancio and
Pampolina for Hipol’s acts?
A: NO. A principal who gives broad and
unbridled authorization to his or her agent
cannot later hold third persons who relied on
that authorization liable for damages that may
arise from the agent's fraudulent acts. Hipol was
not employed with Performance Forex Corp. He
was categorized as an independent broker for
commission. Cancio and Pampolina conferred
trading authority to Hipol and thus made him
their agent. Performance Forex Corp. was not
privy to how Cancio and Pampolina instructed
Hipol to carry out their orders.
Thus, since the acts of Hipol were the direct
cause of the injury, there is no reason to hold
Performance Forex Corp. liable for actual and
moral damages. If there was any fault, the fault
remains with Hipol and him alone. (Belina
Cancio and Jeremy Pampolina v. Performance
Foreign Exchange Corporation, G.R. No. 182307,
June 6, 2018, as penned by J. Leonen)
AGENCY BY ESTOPPEL
It is when one leads another to believe that a
certain person is his agent, when as a matter of
fact such is not true, and the latter acts on such
misrepresentation, the former cannot disclaim
liability, for he has created an agency by estoppel.
(Paras, 1969)
Requisites of Agency by Estoppel
1. The principal manifested a representation of
the agent’s authority or knowingly allowed
the agent to assume such authority;
2. The third person, in good faith, relied upon
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
such representation; and
3. Relying upon such representation, such third
person has changed his position to his
detriment. (Country Bankers Insurance Corp.
v. Keppel Cebu Shipyard, et al., G.R. No.
166044, June 18, 2012)
Rules regarding estoppel in agency
1. Estoppel of agent – One professing to act as
agent for another may be estopped to deny
his agency both as against his asserted
principal and the third persons interested in
the transaction in which he engaged.
2. Estoppel of principal
a. As to agent – One who knows that
another is acting as his agent and
fails to repudiate his acts, or accepts
the benefits, will be estopped to deny
the agency as against the other.
b. As to sub-agent – To estop the
principal from denying his liability to
a third person, he must have known
or be charged with knowledge of the
fact of the transaction and the terms
of the agreement between the agent
and sub-agent.
c. As to third persons – One who
knows that another is acting as his
agent or permitted another to
appear as his agent, to the injury of
third persons who have dealt with
the apparent agent as such in good
faith and in the exercise of
reasonable prudence, is estopped to
deny the agency.
3. Estoppel of third persons – A third person,
having dealt with one as agent may be
estopped to deny the agency as against the
principal, agent, or third persons in interest.
4. Estoppel of the government – The government
is not estopped by the mistake or error on
the part of its agents. (Republic v. Bacas, et al.,
G.R. No. 182913, November 20, 2013)
Q: In an expropriation case between RP and
several property owners in Mandaluyong for
construction of the EDSA-Shaw Boulevard
Overpass Project, decision was rendered
against the RP. The RP through the OSG
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 Civil Law
received the decision on October 7, 2002 but
it was only October 20, 2003 that RP filed a
petition for certiorari. It resorted to an
independent civil action because it failed to
file within the 15-day reglementary period. Is
the Republic bound and put in estoppel by the
gross negligence/mistake of its agent/former
counsel?
A: While the Republic or the government is
usually not estopped by the mistake or error on
the part of its officials or agents, the Republic
cannot now take refuge in the rule as it does not
afford a blanket or absolute immunity. The
pronouncement in Republic v. CA is instructive:
the Solicitor-General may not be excused from its
shortcomings by invoking the doctrine as if it
were some magic incantation that could benignly,
if arbitrarily, condone and erase its errors.
The rule on non-estoppel of the government is
not designed to perpetrate an injustice. In
general, the rules on appeal are created and
enforced to ensure the orderly administration of
justice. The judicial machinery would run
aground if late petitions, like the present one, are
allowed on the flimsy excuse that the attending
lawyer was grossly lacking in vigilance. (Leca
Realty Corp. v. Republic, G.R. Nos. 155605 &
160179, September 27, 2006)
Implied Agency v. Agency by Estoppel
selling for a principal of personal property, which
for this purpose has to be placed in his
possession and at his disposal. (Jurado, 2019)
Broker
He is a middleman or intermediary who, in behalf
of others, and for a commission or fee, negotiates
contracts or transactions relative to real or
personal property.
NOTE: Distinguished from an agent: An agent is
authorized to enter into judicial acts in behalf of
the principal but a true broker is merely an
intermediary between the parties and he has no
power to enter into a contract in behalf of any of
the parties. (Pacific Commercial Co. v. Yatco, 68
Phil. 398, July 20, 1939)
Rules
1. Efficient and procuring cause – a principle in
the law on agency whereby the broker, to be
entitled to compensation, must be the
efficient agent or procuring cause of the sale;
2. Ready-willing-and-able Rule – a principle
which states that for a broker to be entitled
to commission, he must provide a person
who is ready, willing and able both to accept
and live up to the terms offered by his
principal. (Albano, 2013)

BASIS IMPLIED AGENCY BY 3. Procuring Cause - Procuring cause is meant to

AGENCY ESTOPPEL be the proximate cause. The term procuring
As to Agent is a If caused by the cause, in describing a broker’s activity, refers
liability true agent, “agent,” he is not to a cause originating a series of events
between with rights considered a true which, without break in their continuity,
principal and duties of agent, hence, he has result in accomplishment of prime objective
and agent an agent. no rights as such. of the employment of the broker producing a
1. If caused by the purchaser ready, willing and able to buy real
principal, he is estate on the owner’s terms. A broker will be
liable, but only regarded as the procuring cause of a sale, so
The principal as to be entitled to commission, if his efforts
is always if the 3rd
As to person acted on are the foundation on which the negotiations
liable; resulting in a sale are begun. The broker must
liability the
The agent is be the efficient agent or the procuring cause
to third misrepresentat
never of the sale. The means employed by him and
persons ion;
personally his efforts must result in the sale. He must
liable. 2. If caused by the
agent alone, find the purchaser, and the sale must proceed
only the agent from his efforts acting as broker. (Medrano, et
is liable. al. v. CA, et al., G.R. No. 150678, February 18,
2005)
Factor or Commission agent
Factorage
One who is engaged in the business of buying and

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 Special Contracts - Agency
It is the compensation of a factor or commission
agent.
Ordinary commission
It is the fee or compensation for the sale of goods
which are placed in the agent’s possession and at
his disposal.
Guarantee commission or del credere
commission (2004 BAR)
It is the additional fee or compensation which is
given in return for the risk that the agent has to
bear in the collection of credits.
Should the commission agent receive on sale, in
addition to the ordinary commission, a guarantee
commission shall (i) bear the risk of collection
and (ii) pay the principal the proceeds of the sale
on the same terms agreed upon with the
purchaser. (NCC, Art. 1907)
The purpose of the guarantee commission is to
compensate the agent for the risks he will have to
bear in the collection of the credit due the
principal. (De, Leon, 2014)
Del credere agent
He is the agent who guarantees payment of the
customer’s account in consideration of the higher
commission. A del credere agent may sue in his
name for the purchase price in the event of non-
performance by the buyer. (De Leon, 2014)
AGENCY COUCHED IN GENERAL TERMS (1992
BAR)
It is created in general terms and is deemed to
comprise only acts of administration even if the
principal should state:
1. That he withholds no power;
2. That the agent may execute such acts as he
may consider appropriate; or
3. That the agency should authorize a general
and unlimited management. (NCC, Art. 1877)
Acts of administration
Refers to those acts which do not imply the
authority to alienate for the exercise of which an
express power is necessary. (De Leon, 2014)
Unless the contrary appears, the authority of an
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2021 GOLDEN NOTES
agent is presumed to include all the necessary
and usual means to carry out the agency into
effect.
NOTE: Payment is an act of administration when
it is made in the ordinary course of management.
(NCC, Art. 1878; De Leon, 2014)
The making of customary gifts for charity, or
those made to employees in the business
managed by the agent are considered acts of
administration. (NCC, Art. 1878; De Leon, 2014)
Q: P granted to A a special power to mortgage
the former’s real estate. By virtue of said
power, A secured a loan from C secured by a
mortgage on said real estate. Is P personally
liable for said loan?
A: NO. A special power to mortgage property is
limited to such authority to mortgage and does
not bind the grantor personally to other
obligations contracted by the grantee in the
absence of any ratification or other similar act
that would estoppe the grantor from questioning
or disowning such other obligations contracted
by the grantee.
AGENCY REQUIRING SPECIAL POWER OF
ATTORNEY
Special power of attorney (SPA)
It is an instrument in writing by which one
person, as principal, appoints another as his
agent and confers upon him the authority to
perform certain specified acts or kinds of acts on
behalf of the principal with a primary purpose to
evidence agent’s authority to third parties with
whom the agent deals. (De Leon, 2014)
NOTE: The requirement of a special power of
attorney refers to the nature of the authorization
and not to is form. If the SPA is not written, then
it must be duly established by evidence. Gozun v.
Mercado, G.R. No. 167812, December 19, 2006)
Intervention of a notary public in the validity
of an SPA
GR: A power of attorney is valid although no
notary public intervened in its execution.
(Barretto v. Tuason, G.R. Nos. L-36811, 36827,
36840, 36872, March 31, 1934; Angeles v.
Philippine National Railway, G.R. No. 150128,
August 31, 2006)
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 Civil Law
XPN: When SPA is executed in a foreign country,
it must be certified and authenticated in
accordance with Sec. 24, Rule 132, Rules of Court.
(Sps. Alcantara, et al. v. Nido, G.R. No. 165133,
April 19, 2010)
NOTE: The failure to have the special power of
attorney (executed in a foreign country)
authenticated is not merely a technicality – it is a
question of jurisdiction. Jurisdiction over the
person of the real party-in-interest was never
acquired by the courts. (Heirs of Medina v.
Natividad, G.R. No. 177505, November 27, 2008)
A special power of attorney is required (1992,
2004 BAR)
1. To create or convey real rights over
immovable property;
2. To enter into any contract by which the
ownership of an immovable is transmitted or
acquired either gratuitously or for a valuable
consideration;
3. To loan or borrow money, unless the latter
act be urgent and indispensable for the
preservation of the things which are under
administration;
4. To lease any real property to another person
for more than one year;
5. To make such payments as are not usually
considered as acts of administration;
6. To obligate principal as guarantor or surety;
7. To bind the principal to render some service
without compensation;
8. To bind the principal in a contract of
partnership;
9. To ratify obligations contracted before the
agency;
10. To accept or repudiate an inheritance;
11. To effect novation which put an end to
obligations already in existence at the time
the agency was constituted;
12. To make gifts, except customary ones for
charity or those made to employees in the
business managed by the agent;
13. To compromise, to submit questions to
arbitration, to renounce the right to appeal
from a judgment, to waive objections to the
venue of an action or to abandon a
prescription already acquired;
14. Any other act of strict dominion; and
15. To waive an obligation gratuitously. (NCC,
Art. 1878)
Limitations to a special power of attorney
603
1. A special power to sell excludes the power to
mortgage (NCC, Art. 1879);
2. A special power to mortgage does not include
the power to sell (Ibid.); and
3. A special power to compromise does not
authorize submission to arbitration. (NCC,
Art. 1880)
NOTE: The scope of the agent’s authority is what
appears in the written terms of the power of
attorney. While third persons are bound to
inquire into the extent or scope of the agent’s
authority, they are not required to go beyond the
terms of the written power of attorney. Third
persons cannot be adversely affected by an
understanding between the principal and his
agent as to the limit of the latter’s authority. In
the same way, third persons need not concern
themselves with instruction given by the
principal to his agent outside of the written
power of attorney. (Siredy Enterprises, Inc. v. CA,
G.R. No. 129039, September 27, 2002)
Construction of Powers of Attorney
Powers of attorney are generally construed
strictly, and courts will not infer or presume
broad powers from deeds which do not
sufficiently include property or subject under
which the agent is to deal. However, the rule is
not absolute and should not be applied to the
extent of destroying the very purpose of the
power. (De Leon, 2014)
Q: X was the owner of an unregistered parcel
of land in Cabanatuan City. As she was abroad,
she advised her sister Y via overseas call to
sell the land and sign a contract of sale on her
behalf.
Y thus sold the land to B1 on March 31, 2001
and executed a deed of absolute sale on behalf
of X. B1 fully paid the purchase price. B2,
unaware of the sale of the land to B1, signified
to Y his interest to buy it but asked Y for her
authority from X.
Without informing X that she had sold the
land to B1, Y sought X for a written authority
to sell. X e-mailed Y an authority to sell the
land. Y thereafter sold the land on May 1,
2001 to B2 on monthly installment basis for
two years, the first installment to be paid at
the end of May 2001. Who between B1 and B2
has a better right over the land? Explain.
(2010 BAR)
 Special Contracts - Agency
A: B-2 has a better title. This not a case of double
sale since the first sale was void. The law
provides that when a sale of a piece of land or any
interest therein is through an agent, the authority
of the latter shall be in writing; otherwise, the
sale shall be void. (NCC, Art. 1874)
The property was sold by Y to B1 without any
written authority from the owner X. Hence, the
sale to B1 was void.
AGENCY BY OPERATION OF LAW
Instances where an agency is created by
operation of law
When the agent withdraws from the agency for a
valid reason, he must continue to act until the
principal has had a reasonable opportunity to
take the necessary steps like the appointment of a
new agent to remedy the situation caused by the
withdrawal (NCC, Art. 1929); and
In case a person declines an agency, he is bound
to observe the diligence of good father of the
family in the custody and preservation of the
goods forwarded to him by the owner until the
latter should appoint an agent. (NCC, Art. 1885)
NOTE: The law reconciles the interests of the
agent with those of the principal, and if it permits
the withdrawal of the agent, it is on the condition
that no damage results to the principal, and if the
agent desires to be relieved of the obligation of
making reparation when he withdraws for a just
cause, he must continue to act so that no injury
may be caused to the principal. (De Leon, 2014)
OBLIGATIONS OF THE PRINCIPAL
RIGHTS AND OBLIGATIONS OF THE
PRINCIPAL (2004 BAR)
Specific obligations of the principal to the
agent
1. Comply with all obligations which the agent
may have contracted within the scope of his
authority [NCC, Art. 1910(1)] and in the name
of the principal;
2. Advance to the agent, should the latter so
request, the sums necessary for the execution
of the agency. (NCC, Art. 1912);
3. Reimburse the agent for all advances made
by him, even if the business or undertaking
was not successful, provided the agent is free
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
from fault. (Ibid.);
4. Indemnify the agent for all damages which
the execution of the agency may have caused
the latter without fault or negligence on his
part. (NCC, Art. 1913); and
5. Pay the agent the compensation agreed upon,
or if no compensation was specified, the
reasonable value of the agent’s services.
(NCC, Arts. 1875 and 1306)
Liability for the expenses incurred by the
agent
GR: Principal is liable for the expenses incurred
by the agents.
XPNs:
1. If the agent acted in contravention of the
principal’s instructions, unless principal
should wish to avail himself of the benefits
derived from the contract;
2. When the expenses were due to the fault of
the agent;
3. When the agent incurred them with
knowledge that an unfavorable result would
ensue, if the principal was not aware thereof;
or
4. When it was stipulated that the expenses
would be borne by the agent, or that the
latter would be allowed only a certain sum.
(NCC, Art. 1918)
Liability for the contracts entered by the
agent
GR: The principal must comply with all the
obligations which the agent may have contracted
within the scope of his authority.
XPN: Where the agent exceeded his authority.
XPN to the XPN: When the principal ratifies it
expressly or tacitly. (NCC, Art. 1910)
NOTE: Based on the principle of estoppel, the
principal becomes solidarily liable with the agent
if the former allowed the latter to act as though
he had full powers even if the agent has exceeded
his authority. (NCC, Art. 1911)
Liability for tort committed by the agent
GR: Where the fault or crime committed by the
agent is not in the performance of an obligation of
the principal, the latter is not bound by the illicit
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 Civil Law
acts of the agent, even if it is done in connection
with the agency.
XPNs:
1. Where the tort was committed by the agent
because of defective instructions from the
principal or due to lack of necessary vigilance
or supervision on his part; or
2. When the tort consists in the performance of
an act which is within the powers of an agent
but becomes criminal only because of the
manner in which the agent has performed it;
the principal is civilly liable to 3rd persons
who acted in good faith.
Q: CX executed a special power of attorney
authorizing DY to secure a loan from any bank
and to mortgage his property covered by the
owner’s certificate of title. In securing a loan
from bank, DY did not specify that he was
acting for CX in the transaction with said
bank. Is CX liable for the bank loan? Why or
why not? Justify your answer. (2004 BAR)
A: While as a general rule the principal is not
liable for the contract entered into by his agent in
case the agent acted in his own name without
disclosing his principal, such rule does not apply
if the contract involves a thing belonging to the
principal. In such case, the principal is liable
under Article 1883 of the Civil Code. The contract
is deemed made on his behalf. (Sy-Juco v. Sy-Juco,
G.R. No. L-13471, January 12, 1920)
Ratification
In agency, ratification is the adoption or
confirmation by one person of an act performed
on his behalf by another without authority. The
substance of ratification is the confirmation after
the act, amounting to a substitute for a prior
authority. (Prieto v. Court of Appeals, G.R. No.
158597, June 18, 2012; see also NCC, Art, 1393)
Conditions for Ratification
1. The principal must have the capacity and
power to ratify;
2. He must have had knowledge or had reason
to know of material or essential facts about
the transaction;
3. He must ratify the acts in its entirety;
4. The act must be capable of ratification; and
5. The act must be done in behalf of the
605
principal.
Acts that May be Ratified
1. Void acts
2. Voidable acts
3. Unrevoked acts – a principal must ratify his
agent’s unauthorized contact before it is
revoked by the other contracting party
4. Criminal acts
5. Tortious acts
Effects of ratification by principal
The relation of the principal and agent is created
since ratification by a principal is equivalent to
prior authority.
Ratification relieved the agent from liability to
the third party to the unauthorized transaction,
and to his principal for acting without authority.
The principal thereby assumes responsibility for
the unauthorized act.
Retroactive effect of ratification
GR: Ratification operates upon an unauthorized
act to have retroactive effect.
XPNs:
1. Where to do so would defeat the rights of
third parties which have accrued between
the time of the making of the unauthorized
contract and the time of the ratification;
2. Where to do so would render wrongful an
otherwise rightful act or omission;
3. Where to do so would allow the
circumvention of a rule of law formulated in
the interest of public policy; and
4. If the third party has withdrawn from the
contract.
MODES OF EXTINGUISHMENT
1. By its revocation;
2. By the withdrawal of the agent;
3. By the death, civil interdiction, insanity or
insolvency of the principal or of the agent;
4. By the dissolution of the firm or corporation
which entrusted or accepted the agency;
5. By the accomplishment of the object or
purpose of the agency;
6. By the expiration of the period for which the
agency was constituted. (NCC, Art. 1919)
(1997 BAR)
 Special Contracts - Agency
NOTE: The list is not exclusive. Agency may also
be extinguished by the modes of extinguishment
of obligations in general whenever they are
applicable, like loss of the thing and novation.
Agency may be terminated:
1. by agreement (Nos. 5 and 6);
2. by the subsequent acts of the parties which
may be either:
a. by the act of both parties or by
mutual consent; or
b. by unilateral act of one of them (Nos.
1 and 2);
3. by operation of law (Nos. 3 and 4). (De Leon,
2014)
Kinds of revocation
Revocation may either be express or implied.
(NCC, Art. 1920) (2014 BAR)
REVOCATION OF AGENCY BY THE PRINCIPAL
GR: Agency is revocable at will by the principal.
(NCC, Art. 1920)
XPNs: An agency is irrevocable:
1. If a bilateral contract depends upon it.
2. If it is the means of fulfilling an obligation
already contracted.
3. If partner is appointed manager and his
removal from the management is
unjustifiable (NCC, Art 1927); (2010, 2015
BAR)
4. If it has been constituted in the common
interest of the principal and the agent (NCC,
Art. 1930); or
5. If it has been constituted in the interest of a
third person who has accepted the
stipulation in his favor i.e., stipulation pour
autrui. (NCC, Art. 1930; Art. 1311)
XPN to the XPN: When the agent acts to defraud
the principal.
Q: A lawyer was given an authority by means
of a Special Power of Attorney by his client to
sell a parcel of land for the amount of P3
Million. Since the client owed the lawyer P1
Million in attorney's fees in a prior case he
handled, the client agreed that if the property
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
is sold, the lawyer was entitled to get 5%
agent's fee plus P1 Million as payment for his
unpaid attorney's fees.
The client, however, subsequently found a
buyer of his own who was willing to buy the
property for a higher amount. Can the client
unilaterally rescind the authority he gave in
favor of his lawyer? Why or why not? (2015
BAR)
A: NO, the agency in the case presented is one
which is coupled with an interest. As a rule,
agency is revocable at will except if it was
established for the common benefit of the agent
and the principal. In this case, the interest of the
lawyer is not merely limited to his commission
for the sale of the property but extends to his
right to collect his unpaid professional fees.
Hence, it is not revocable at will. (NCC, Art.1927)
A contract of agency is impliedly revoked
when the principal:
1. Appoints a new agent for the same business
or transaction provided there is
incompatibility (NCC, Art. 1923);
2. Directly manages the business entrusted to
the agent (NCC, Art. 1924); or
3. After granting general power of attorney to
an agent, grants a special one to another agent
which results in the revocation of the former
as regards the special matter involved in the
latter. (NCC, Art. 1926)
NOTE: A special power of attorney is not revoked
by a subsequent general power of attorney given
to another agent, unless that the latter refers also
to the act authorized under the special power.
(Tolentino, 1992)
Revocation of agency when the agent is
appointed by two or more principals
When two or more principals have granted a
power of attorney for a common transaction, any
one of them may revoke the same without the
consent of the others. (NCC, Art. 1925)
Necessity of notice of revocation
1. As to the agent – Express notice is not
always necessary; sufficient notice if the
party to be notified actually knows, or has
reason to know, a fact indicating that his
authority has been terminated or
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 Civil Law
suspended. Revocation without notice to the
agent will not render invalid an act done in
pursuance of the authority. (De Leon, 2014)
2. As to 3rd persons – Express notice is
necessary.
a. As to former customers – Actual
notice must be given to them
because they always assume the
continuance of the agency
relationship. (NCC, Art. 1873)
b. As to other persons – Notice by
publication is enough. (NCC, Art.
1922)
NOTE: There is implied revocation of the previous
agency when the principal appoints a new agent
for the same business or transaction, provided
there is incompatibility. But the revocation does
not become effective as between the principal
and the agent until it is in some way
communicated to the latter.
Effect of the direct management by the
principal
GR: The agency is revoked for there would no
longer be any basis for the representation
previously conferred. But the principal must act
in good faith and not merely to avoid his
obligation to the agent.
XPN: The only desire of the principal is for him
and the agent to manage the business together.
Q: Richard sold a large parcel of land in Cebu
to Leo for P100 million payable in annual
installments over a period of ten years, but
title will remain with Richard until the
purchase price is fully paid. To enable Leo to
pay the price, Richard gave him a power-of-
attorney authorizing him to subdivide the
land, sell the individual lots, and deliver the
proceeds to Richard, to be applied to the
purchase price. Five years later, Richard
revoked the power of attorney and took over
the sale of the subdivision lots himself. Is the
revocation valid or not? Why? (2001 BAR)
A: The revocation is not valid. The power of
attorney given to the buyer is irrevocable because
it is coupled with an interest – the agency is the
means of fulfilling the obligation of the buyer to
pay the price of the land. (NCC, Art. 1927) In other
words, a bilateral contract (contract to buy and
607
sell the land) is dependent on the agency.
Q: Eduardo executed a SPA authorizing
Zenaida to participate in the pre-qualification
and bidding of a NIA project and to represent
him in all transactions related thereto. It was
granted to them. Zenaida leased Manuel’s
heavy equipment to be used for the NIA
project. Manuel interposed no objection to
Zenaida’s actuations. Eduardo later revoked
the SPA alleging that Zenaida acted beyond
her authority in contracting with Manuel
under the SPA. Records show that Eduardo
and Zenaida entered into a partnership in
regard to the NIA project. Decide.
A: Under Art. 1818 of the NCC, every partner is an
agent of the partnership for the purpose of its
business and each one may separately execute all
acts of administration, unless, under Art. 1801, a
specification of their respective duties has been
agreed upon, or else it is stipulated that any one
of them shall not act without the consent of all the
others. As such, even granting that Zenaida
exceeded the authority granted by the SPA, being
a partner in the constituted partnership between
her and Eduardo, she can still execute acts of
administration absent any agreement that one
cannot act without the consent of all others.
(Mendoza v. Paule, G.R. No. 175885, February 13,
2009)
WITHDRAWAL OR RENUNCIATION OF THE
AGENCY BY THE AGENT
When the agent can withdraw from the
agency
The agent may renounce or withdraw from the
agency at any time, without the consent of the
principal, even in violation of the latter’s
contractual rights; subject to liability for breach
of contract or for tort. (NCC, Art. 1928; De Leon,
2014)
Duties and responsibilities of the
withdrawing agent:
1. If the principal should suffer any damage by
reason of the withdrawal by the agent, the
latter must indemnify the principal therefor,
unless the agent should base his withdrawal
upon the impossibility of continuing the
performance of the agency without grave
detriment to himself. (NCC, Art. 1928)
 Special Contracts - Agency
2. The agent must continue to act until the
principal has had reasonable opportunity to
take the necessary steps to meet the
situation, even if he should withdraw from
the agency. (NCC, Art. 1929)
Kinds of withdrawal by the agent
1. Without just cause – The law imposes upon
the agent the duty to give due notice to the
principal and to indemnify the principal
should the latter suffer damage by reason of
such withdrawal. (NCC, Art. 1928)
2. With just cause – If the agent withdraws from
the agency for a valid reason (NCC, Art. 1929)
as when the withdrawal is based on the
impossibility of continuing with the agency
without grave detriment to himself (NCC,
Art. 1928) or is due to a fortuitous event
(NCC, Art. 1174), the agent cannot be held
liable. (De Leon, 2014)
Effect of Death of Principal to the contract of
agency
GR: The agency is terminated by the death of the
principal even if the agency is for a definite
period. (Lopez v. Court of Appeals, G.R. No. 163959,
August 1, 2018; NCC, Art. 1919)
XPN:
1. If it has been constituted in common interest
of the principal and the agent.
2. If it has been constituted in the interest of a
third person who accepted the stipulation in
his favor. (NCC, Arts. 1911 and 1930).
3. Anything done by the agent, without the
knowledge of the death of the principal or on
any other cause which extinguishes the
agency is valid and shall be fully effective
with respect to third persons who may have
contracted with him in good faith. (NCC, Art.
1931)
NOTE: The death of the principal
extinguishes the agency; but in the same
way that revocation of the agency does not
prejudice third persons who have dealt
with the agent in good faith without notice
of the revocation (NCC, Arts. 1921 & 1922)
such third persons are protected where it is
not shown that the agent had knowledge of
the termination of the agency because of
the death of the principal or of any other
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
cause which extinguishes the agency.
(Hererra v. Luy Kim Guan, G.R. No. L-17043,
January 31, 1961)
4. The agent is bound by his acceptance to carry
out the agency and is liable for the damages
which, through his non-performance, the
principal may suffer. He must also finish the
business already began on the death of the
principal, should delay entail any danger.
(NCC, Art. 1884)
Duty of Agent’s Heirs Upon the Death of Agent
If the agent dies, his heirs must notify the
principal thereof, and in the meantime adopt
such measures as the circumstances may demand
in the interest of the latter. (NCC, Art. 1932)
Heirs continuing the contract of agency
GR: Heirs cannot continue the contract of agency.
The rights and obligations of the agent arising
from the contract are not transmissible to his
heirs.
Ratio: The agency calls for personal services on
the part of the agent since it is founded on a
fiduciary relationship.
XPNs:
1. Agency by operation of law, or a presumed or
tacit agency; and
2. Agency is coupled with an interest in the
subject matter of the agency (e.g. power of
sale in a mortgage).
Q: Is the sale of the land by the agent after the
death of the principal valid?
A: Article 1931 provides that an act done by the
agent after the death of the principal is valid and
effective if these two requisites concur:
1. That the agent acted without the
knowledge of the death of the principal;
and
2. That the third person who contracted with
the agent himself acted in good faith.
Good faith here means that the third person was
not aware of the death of the principal at the time
that he contracted with said agent. (Rallos v. Felix
Go Chan, G.R. No. L-24332, January 31, 1978)
608
 Civil Law
OTHER MODES OF EXTINGUISHING AN
AGENCY

War

During the existence of a state of war, a contract

of agency is inoperative if the agent or the
principal is an enemy alien.

Loss or destruction of subject matter

GR: The loss or destruction of the subject matter

of agency or the termination of the principal’s
interest therein terminates the agent’s authority.

XPNs:

1. If substitution is possible without substantial

detriment to either party;
2. If the destroyed subject matter was not in
fact essential to the contract.

Change of circumstance surrounding the

transaction

GR: The authority of the agent is terminated.

XPNs:

1. If the original circumstances are restored

within a reasonable period of time, the
agent's authority may be revived;
2. Where the agent has reasonable doubts as to
whether the principal would desire him to
act, his authority will not be terminated if he
acts reasonably; or
3. Where the principal and agent are in close
daily contact, the agent's authority to act will
not terminate upon a change of
circumstances if the agent knows the
principal is aware of the change and does not
give him new instructions. (De Leon, 2014)

609
 Special Contracts - Lease
2. Object of subject matter; and
LEASE
3. Rent. (Rabuya, 2017)
GENERAL PRINCIPLES
Kinds of Lease according to subject matter
Lease
1. Lease of things – whether real or personal,
involving an obligation on the part of the
The contract of lease may be of things, or of
lessor to deliver the thing, which is the
work and service. A lease of a thing is a contract
object thereof, and the correlative right of
where one of the parties binds himself to give to
the lessee to the peaceful and adequate
another the enjoyment or use of a thing for a
enjoyment thereof for a price certain (NCC,
certain price and for a period which may be
Art. 1654); or
definite or indefinite, but not longer than 99
years. (NCC, Art. 1643; 1997 BAR)
2. Lease of work – which refers to a contract
for a piece of work, involving an obligation
It is a consensual, bilateral, onerous and
on the part of the contractor (lessor) to
commutative contract by which the owner
execute a piece of work for the employer
temporarily grants the use of his property or the
(lessee) in consideration of a certain price or
rendering of some service to another who
compensation. (NCC, Art. 1713)
undertakes to pay some rent, compensation or
price. (Rabuya, 2017)
NOTE: Duties of a contractor who furnishes
work and materials:
NOTE: The lessor’s right of use is impaired,
therein. He may even be ejected by the lessee if
To deliver;
the lessor uses the leased realty. Therefore, lease
To transfer ownership and warrant
is a burden on the land; it is an encumbrance on
title; and
the land. (Roxas v. Court of Appeals, G.R. No.
To warrant against eviction and hidden
92245, June 26, 1991)
defects.
Essential Elements of Lease
3. Lease of service – involving an obligation
on the part of the housekeeper, laborer or
1. Consent
employee, or common carrier to do or
perform a service for the head of a family, or
a. On part of owner – nobody can force an
master, employer, or passenger or shipper
owner to lease out his property if he is
of goods, respectively, in consideration of
not willing.
compensation.
b. On part of lessee
NOTE: Since lease is consensual and is not
GR: No person can be compelled to become
imposed by law, only the lessor has the right
a lessee against his will.
to fix the rents, to which the lessee may or
may not agree. However, the increasing of
XPN: In the case of industrial accession
the rent is not an absolute right on the part
where both the landowner, and the builder,
of the lessor.
planter and sower acted in good faith, the
builder or planter can be compelled to pay
Characteristics or Requisites for Lease of
reasonable rent if they cannot be obliged by
Things
the landowner to buy the land because its
value is considerably more than that of the
1. Consensual;
building or trees. In case of the sower, he
2. Principal;
can also be compelled by the landowner to
3. Nominate;
pay the proper rent. Here, the parties shall
4. Purpose is to allow enjoyment or use of a
agree upon the terms of the lease and in
thing;
case of disagreement, the court shall fix the
NOTE: The person to enjoy is the lessee
terms thereof. (NCC, Art. 448)
while the person allowing the enjoyment by
another is the lessor.

UNIVERSITY OF SANTO TOMAS 610

2021 GOLDEN NOTES
 Civil Law
5. Purpose to which the thing will be devoted in no case shall the lessor be allowed to increase
should not be immoral; the rental when the term has not yet expired,
6. Onerous; unless the tenant consents. (Paras, 2008)

NOTE: There must be rent or price certain. Form of Lease Contract

7. Period is Temporary; GR: Lease may be made orally.

NOTE: Not perpetual; hence, the longest XPN: If the lease of real property is made for
period is 99 years. more than one year, it must be in writing, in
compliance with the Statute of Frauds. [NCC, Art.
8. Period is either definite or indefinite: 1403 (2)(e)]

a. If no term is fixed, we should apply Lease vs. Sale

Art. 1682 of NCC (for rural leases),
and Art. 1687 of NCC (for urban LEASE SALE
leases). Only the enjoyment or
b. If the term is fixed but indefinite, use is transferred.
the court will fix the term under the
law of obligations and contracts; NOTE: In lease of
and things, the transfer
which one of the Ownership is
9. Lessor need not be the owner. parties obligates transferred.
himself to make is not
NOTE: A usufructuary may thus lease out the one of ownership over
premises in favor of a stranger, such lease to end the thing, but merely
at the time that the usufruct itself ends. the enjoyment or use
thereof. (Rabuya, 2017)
Consideration of Lease Transfer is permanent,
Transfer is temporary. unless subject to a
The cause of a contract of lease of things must be resolutory condition.
a price certain, generally called “rent” in money The seller must be the
or its equivalent, or some other prestation which owner or at least
the lessee binds himself to undertake. The authorized by the
The lessor need not be
important thing is that what is given by the owner to transfer
lessee has value. (De Leon, 2005) the owner.
ownership, of the thing
sold at the time it is
Rent delivered.
The price of the subject
The price of the thing is
The compensation either in money, provisions, matter is usually not
usually fixed in the
chattels, or labor, received by the lessor from the mentioned, being
contract.
lessee. (Tolentino and Manio v. Gonzalez Sy immaterial.
Chiam, G.R. No. 26085, August 12, 1927)
NOTE: A lease of personal property with option
Rent under Rent Control Act of 2009 (RA to buy (at a nominal amount) (NCC, Art. 1485) at
9653) the end of the lease can be considered a sale.
(Elisco Tool Manufacturing Corporation v. CA, et
It is the amount paid for the use or occupancy of al, G.R No. 109966, May 31, 1999)
a residential unit, whether payment is made on a
monthly or other basis. (Sec. (3), R.A. No. 9653, Lease v. Usufruct
Rent Control Act)
LEASE USUFRUCT
Owner has the right to fix the rent because the Real right only in the
contract is consensual and not imposed by law, case of the lease of real Always a real right.
but increasing the rent is not an absolute right of property where the
the lessor. The new rate must be reasonable and lease is registered.

611
 Special Contracts - Lease
A lease of real property Real contract, as it is
becomes a real right perfected only upon
and thereby binds third Consensual contract.
delivery of the object
persons when the lease thereof.
is registered in the
Both contracts consist in the transmission of the
Registry of property.
enjoyment or use of a thing to another.
However, even if not
registered, a lease is a
real right if the term is Lease of Work vs. Lease of Service
for more than one year.
The creator of the right LEASE OF WORK LEASE OF SERVICE
The lessor may or may It is the performance of
must be the owner or The object is the
not be the owner. some service or an
one duly authorized by execution of a piece of
him. employer by a
work for an employer
The lessor has the househelper or laborer
The owner has the by an independent
active obligation to or for a passenger or
passive duty to allow contractor.
maintain the lessee in owner of goods by
the usufructuary to common carrier.
the enjoyment or use of
enjoy or use the same. In both kinds of lease, the employer or
the property.
The usufructuary pays passenger or owner of goods binds himself to
The lessee generally pay some remuneration or compensation in
the annual charges and
pays no taxes. favor of the independent contractor, employee,
taxes on the fruits.
The usufructuary is or common carrier, and the relation of principal
The lessee generally obliged to make the and agent does not exist between the parties.
has no obligation to ordinary repairs
pay for repairs. needed by the thing Lease of Services vs. Contract for a Piece of
given in usufruct. Work
The lessee cannot The usufructuary may
constitute a usufruct on lease the thing in LEASE OF SERVICES CONTRACT FOR A
the property. usufruct to another. (Locatio Operatum PIECE OF WORK
May be created by law, Operarum) (Locatio Operas
As a rule, may be Operis)
contract, last will and
created only by
testament or
contract. The object of the
prescription. The object of the
contract is the work
Generally covers As a rule covers all contract is the labor or
done (the result of the
particular uses limited possible uses of the service itself
labor) without
by the contract. property. performed by the
considering the labor
lessor.
that produced it.
Lease vs. Commodatum The result is generally The result is generally
not important, hence important; the price is
LEASE COMMODATUM the laborer is entitled not payable until the
Onerous contract, to be paid even if there work is completed, and
although the rent is destruction of the said price cannot be
Essentially gratuitous. work through lawfully demanded if
may subsequently be
condoned or fortuitous event or the the work is destroyed
remitted. result intended not before it is finished and
attained. accepted.
Not essentially Purely personal in There is a price certain (compensation).
personal in character, and The relation of principal and agent does not exist
character and, consequently, the death of between the lessor and lessee.
therefore, the right either the bailor or the
may be transmitted bailee extinguishes the
to the heirs. contract. Lease of Services or Work vs. Agency

LEASE OF SERVICES AGENCY

OR WORK

UNIVERSITY OF SANTO TOMAS 612

2021 GOLDEN NOTES
 Civil Law
The basis is service has been rendered, there is still a lease of
It is representation.
employment. service although it has become gratuitous.
The lessor performs a
material act for the The agent executes a 2. Where the agreement may be implied
benefit of his employer juridical act for and in
without representation behalf of his principal. One who performs work or service in favor of
of the latter. another who impliedly consents thereto and
The work or service It is presumed for a who benefits thereby, is entitled to
must be for a price or compensation. compensation by virtue of an innominate
compensation. contract of facio ut des (I do that you may give)
The will of both parties or of the case of services tacitly contracted, in
The will of one is which case the courts will fix the reasonable
is necessary for the
sufficient. worth of the services rendered.
extinguishment of the
relationship.
Three persons: the 3. Where no rate or amount is fixed in the
Only two persons are contract
principal, the agent and
involved: the lessor and
the third person with
lessee. The contract is nevertheless valid if the amount
whom the agent has
contracted. can be ascertained in the light of the customs
The risk of loss before and usages of the place, or by findings of fact on
The risk is borne by the the basis of evidence submitted in case of
delivery is borne by the
principal since the disagreement.
independent
agent acts merely as his
contractor, esp. in the
representative. NOTE: A price certain exists when the same can
lease of work for a
fixed price. be ascertained according to the customs and
The agent is not liable, usages of the place.
In the lease of work,
unless he expressly
the independent Lease of Consumable Goods
binds himself or
contractor is personally
exceeds the limits of his
liable for his contracts GR: Consumable goods cannot be the subject
authority.
with third persons. matter of a contract of lease of things. (NCC, Art.
In the lease of service, 1645)
The agent exercises
the lessor ordinarily
discretionary powers. Reason: To use or enjoy them, they will have to
performs only
ministerial duties. be consumed. This cannot be done by the lessee
since ownership over them is NOT transferred to
Lease of Things v. Lease of Services him by the contract of lease.

LEASE OF THINGS LEASE OF SERVICES XPNs: They may be leased:

Object of contract is a Object is some work or
thing. service.
Lessor has to deliver Lessor has to perform
the thing leased. some work or service.
In case of breach, there In case of breach, no
can be an action for action for specific
specific performance. performance may lie.
a. If they are merely to be exhibited as for
display purposes; (lease ad pompan et
ostentationem); and
b. If they are accessory to the lease of an
industrial establishment (e.g., oil in an
industrial firm)

Compensation in lease of work or service Persons Disqualified to Be Lessees

1. When there is an agreement 1. Husband and wife cannot lease to each

other their separate properties except:
The lessee must be compelled to pay the agreed
price unless it is found to be iniquitous or If a separation of property was agreed
unreasonable, in which case the courts may fix a upon in the marriage settlement; or
reasonable and just remuneration. Where the
compensation is renounced or waived after the

613
 Special Contracts - Lease
If there has been a judicial separation
under Art. 135 of the Family Code.
(NCC, Art. 1490);
Reasons for the disqualification:
i. To prevent prejudice to
creditors;
ii. To prevent the stronger
spouse from influencing
unduly the weaker spouse.
NOTE: The prohibition applies
even to common law spouses;
otherwise, said spouses would
be placed in a better position
than legitimate spouses
2. Persons referred to under Art. 1491 of NCC
are disqualified because of fiduciary
relationships.
NOTE: While foreigners in general cannot
buy rural or urban lands, they are not
completely excluded by the Constitution
from use of lands for residential purposes.
Since their residence in the Philippines is
temporary, they may be granted temporary
rights such as a lease contract which is not
forbidden by the Constitution. However, if
an alien is given not only a lease of, but also
an option to buy a piece of land, by virtue of
which the Filipino owner cannot sell or
otherwise dispose of his property (e.g., for
fifty years), then it becomes clear that the
arrangement is a virtual transfer of
ownership. If this can be done, then the
Constitutional ban against alien landholding
in the Philippines, is indeed in grave peril.
(Fullido v. Grilli, G.R. No. 215014, February
29, 2016)
Hence, foreigners may lease land from
others. (NCC, Art. 1643)
Lease of private lands by foreigners
a. Foreigner investing in the
Philippines
Any foreigner investing in the Philippines is
allowed to lease private lands, provided that
the lease contract shall be for a period not
exceeding 50 years renewable once for a
period of not more than 25 years, and the
lease area shall be used solely for the
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
purpose of investment upon the mutual
agreement of the parties. (Sec. 4, R.A. No.
7652)
NOTE: “Investing in the Philippines”
means making an equity investment in the
Philippines through actual remittance of
foreign exchange or transfer of assets,
whether in the form of capital goods,
patents, formulae, or other technological
rights or processes, upon registration with
the SEC.
b. Foreigner not investing in the
Philippines
Allowed to lease private lands in the
Philippines but for a maximum period of 25
years, renewable for another 25 years upon
mutual agreement of both parties. (Sec. 1,
P.D. No. 471)
Estoppel against lessee
A lessee is estopped from asserting title to the
thing leased as against the lessor (NCC, Art.
1436), or to deny the lessor’s title, or to assert a
better title not only in himself, but also in some
third person, including the State while he
remains in possession of the leased property and
until he surrenders possession to the lessor.
(VSC Commercial Enterprises, Inc. v. CA, G.R. No.
121159, December 16, 2002)
This estoppel applies even though the lessor had
no title at the time the relation of lessor and
lessee was created. It may be asserted not only
by the original lessor, but also by those who
succeed to his title. (Geminiano v. CA, G.R. No.
120303, July 24, 1996)
Q: Fred sold to Juan a parcel of land,
belonging to his minor son, Lino, then under
his guardianship, without judicial approval.
After the sale, Juan immediately took
possession of the land, built a house and
religiously paid the taxes thereon. Nine years
thereafter, Lino, no longer a minor, rented
the ground floor of the house built by Juan.
Lino paid the rent for the first month, then
stopped paying. Two years thereafter, when
pressed for payment of the accrued rent, Lino
refused, claiming ownership over the
property, alleging that the sale of the
property to Juan while he was a minor
without the approval of the guardianship
614
 Civil Law
court rendered the sale null and void. Is the
claim of Lino valid and meritorious? Explain.
(1987 BAR)
A: NO. Lino’s claim is not valid and not
meritorious because Lino is in estoppel. A lessee
cannot assail the right and title of the lessor and
cannot claim ownership as against the lessor.
The fact that the sale was made while Lino was a
minor is of no moment because he recognized
and ratified the contract Juan’s ownership after
he was already of majority age.
Purpose in Recording a Lease
A lease DOES NOT have to be recorded in the
Registry of Property to be binding between the
parties.
Registration is useful only for the purposes of
notifying strangers to the transaction. (NCC, Art.
1648) Registration is not essential for the
validity of the contract but is needed to make it
effective regarding third persons. (Rabuya, 2017)
Proper Authority Required
If a lease is to be recorded, the following persons
must have special power of attorney to
constitute the lease:
1. Husband – with respect to the paraphernal
real estate of the wife;
2. Father or guardian – with respect to the
property of the minor or the ward;
3. Manager or administrator – with respect
to the property under his administration.
NOTE: The “manager” here may be:
a. The administrator of conjugal property
(Rodriguez v. Borromeo, G.R. No. L-
17772, June 9, 1922);
b. The administrator of a co-ownership
(Melencio v. Dy Tiao Lay, G.R. No. L-
32047, November 1, 1930); or
c. The administrator of state patrimonial
property. (Tipton v. Andueza Chua-
Chingco, G.R. No. L-2220, April 4, 1906)
Q: A husband was properly given by his wife
the authority to administer her paraphernal
real property. Does this necessarily mean
that just because the husband is now the
administrator, he can lease said property
without any further authority?
615
A: It depends.
1. If the lease will be for one year or less, no
other authority is required;
2. If the lease on the real property will be for
more than a year, then a special power of
attorney (aside from the public instrument
transferring administration) is required
[NCC, Art. 1878 (8)]; or
3. Whether it be a) or b), if the lease is to be
recorded, there must be a special power of
attorney. (NCC, Art. 1647)
NOTE: If it is the wife who is administering her
paraphernal real property, the husband has no
authority whatsoever, to lease, in any way, or
administer the property.
Q: If a father, who is administering the real
estate of his minor son, wants to record the
lease, should he ask for judicial permission?
A: YES. A father who is administering the real
estate of his minor son should ask for judicial
permission if he wants to record the lease. (NCC,
Art. 1647) But even if no judicial authorization is
asked, such defect cannot be invoked by a lessee
who has dealt with him. (Summers v. Mahinay,
[CA] 40 O.G. [11th S] No. 18) Only the son or his
own heirs may question the validity of the
transaction.
Q: Is lease a real or a personal right?
A: Generally, it is a personal right. But it
partakes of the nature of a real right if:
a. the lease of real property is for more
than one year; or
b. the lease of real property is registered
regardless of duration.
NOTE: In both cases a special power of
attorney is required to constitute
thereon a lease by representation and
record the same with the Property
Registry, because these are acts of strict
dominion, and not merely of
administration. [NCC, Arts. 1647 &
1878(8)]
Effects if the lease of real property is not
registered
 Special Contracts - Lease
1. The lease is not binding on innocent third
persons such as a purchaser. (Salonga, et al.
v. Acuña, CA, 54 O.G. 2943)
2. Naturally, such an innocent third person is
allowed to terminate the lease in case he
buys the property from the owner-lessor,
unless there is a stipulation to the contrary
in the contract of sale. (NCC, Art. 1676; 2009
BAR)
3. When a third person already knows of the
existence and duration of the lease, he is
bound by such lease even if it has not been
recorded. The reason is simple: actual
knowledge is, for this purpose, equivalent to
registration. (Soriano v. CA, et al, G.R. No.
78975, September 7, 1989)
NOTE: But if the sale is fictitious and was
only resorted to for the purpose of
extinguishing the lease, the supposed
vendee cannot terminate the lease. The sale
is presumed fictitious if at that time the
supposed vendee demands the termination
of the lease, the sale is not recorded in the
Registry of Property. [NCC, Art. 1676(3)]
4. If the stranger knows of the existence of the
lease, but has been led to believe that the
lease would expire very soon, or before the
new lease in favor of him begins (when in
fact this was not true), the stranger can still
be considered innocent. (Quimson v. Suarez,
G.R. No. L-21381, April 5, 1924)
Rules on lease of things when lessee is an
alien
1. Personal property – 99-year limit applies;
2. Aliens cannot lease public lands, and cannot
acquire private lands except through
succession;
3. If lease of real property (private lands),
maximum of 25 years renewable for another
25 years (P.D. No. 713); and
4. Under the Investor’s Lease Act of 1995 (ILA),
the 25-year period was extended to 50 years
provided the following conditions are met:
a. Lessee must make investments;
b. Lease is approved by DTI; and
c. If terms are violated, DTI can terminate
it.
NOTE: The Investor’s Lease Act of 1995 (ILA)
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
did not do away with P.D. No. 713, but under ILA
the consent of DTI is required, while in P.D. No.
713 no consent is required.
Right of a purchaser of a leased property
GR: Purchaser of thing leased can terminate the
lease.
XPNs:
1. Lease is recorded in Registry of Property;
2. There is a stipulation in the contract of sale
that the purchaser shall respect the lease;
3. Purchaser knows the existence of the lease;
4. Sale is fictitious; or
5. Sale is made with a right of repurchase.
Term of lease contract
GR: The law does not allow perpetual lease.
There must be a period which may either be
definite or indefinite.
When no period is fixed:
1. In case of lease of rural lands – it is
understood to have been made for all the
time necessary for the gathering of the fruits
which the whole estate leased may yield in
one year, or which it may yield once,
although two or more years may have to
elapse for the purpose (NCC, Art. 1682);
2. In case of lease of urban lands - from year to
year if rent agreed upon is annual; week to
week if weekly; or day to day if daily.
However, the court may fix a longer term, if
the lessee has occupied the premises for a
long period of time. (NCC, Art. 1687); or
3. A lease of things during the lifetime of one of
the parties is valid, which is considered one
for life, ending upon the death of the party
who could have terminated the contract.
(Rabuya, 2017)
4. If based on the agreement of the parties, the
term of the lease is made to depend upon
the will of one of the contracting parties
(e.g., as the lessee shall deem fit), the term
shall be fixed by the courts. (Eleizegui v.
Lawn Tennis Club, G.R. No. 967, May 19,
1903)
ASSIGNMENT OF LEASE
(1990, 1994, 2005 BAR)
Assignment of lease by lessee
616
 Civil Law
Lessee cannot assign the lease contract without
the consent of the lessor, unless there is a
stipulation to the contrary. (NCC, Art. 1649)
In an assignment of lease, the personality of the
lessee (assignor/debtor) disappears. The lessee
makes an absolute transfer of his lease, involving
not only his rights but also obligations as such
lessee and thus, dissociates himself from the
original contract of lease. There arises the new
juridical relation between the lessor and the
assignee who is converted into a new lessee.
There is in effect, a novation by substituting the
person of the debtor [NCC, Art. 1291 (2)], and
novation cannot take place without the consent
of the creditor. (NCC, Art. 1293) Hence, the lessee
cannot assign the lease without the consent of
the lessor (creditor), unless there is a stipulation
granting him that right.
Objective: To protect the lessor or owner of the
leased property. An assignment of lease without
the consent of the lessor is a ground for
rescission of the lease.
SUBLEASE
It is a separate and distinct contract of lease
wherein the original lessee becomes a sublessor
to a sublessee of the thing, in whole or in part,
without prejudice to his responsibility for the
performance of the contract toward the lessor.
(NCC, Art. 1650)
The lessee may sublet the thing leased, in whole
or in part, unless expressly prohibited in the
contract of lease. (NCC, Art. 1650)
Nature of Sublease
It is a separate and distinct contract of lease
wherein the original lessee becomes a sublessor
to a sublessee. The reason why assignment is
generally prohibited while subleasing is
generally allowed is because the assignment of
the lease contract is a novation where the
personality of the lessee disappears. In sublease,
on the other hand, the lessee remains to be a
party to the lease contract and he remains liable
to the lessor. (Rabuya, 2017)
Right of Lessee to Sublease (1990, 1999,
2005 BAR)
Unlike in assignment, a lessee may generally
sublease the property in the absence of express
617
prohibition because he (the) lessee remains a
party to the lease even if he has already created
a sublease thereon. Hence, for example, he still
must pay rents to the lessor. (Paras, 2008)
Note: Art. 1650 of NCC says “express
prohibition.” Hence, if the prohibition is merely
implied, a sublease will still be allowed. (Susana
Realty v. Hernandez, et al., CA, 54 O.G. 2206)
In sublease, the lessee remains a party to the
contract.
There are two leases and two distinct juridical
relations:
1. Between the lessor and the lessee, and
2. Between the sublessor (lessee) and the
sublessee.
The lessee is still responsible for the
performance of his obligations toward the
lessor.
A judgment of eviction against the lessee affects
the sublessee even if the latter is not sued in the
ejectment case.
Reason: The sublessee (lessee) can invoke no
right superior to that of the sublessor from
which his own right is derived, and from the
moment the sublessor is duly ousted from the
premises, the sublessee has no leg to stand on.
Parties to a Sublease
1. Lessor;
2. Sublessor (original lessee in the contract of
lease); and
3. Sublessee
Juridical relationships in a sublease
arrangement
1. Principal lease; and
2. Sublease
These relationships co-exist and are intimately
related to each other but are distinct from one
another. (Albano, 2013)
Q: Alfonso was the owner of a building being
leased to Beatriz. The contract allowed
subleasing of the building, thus, Beatriz
subleased it to Charlie. Charlie directly paid
his rent to Alfonso after the lease expired.
 Special Contracts - Lease
Was Charlie correct?
A: NO. There are two (2) distinct leases
involved, the principal lease and the sublease. In
such agreement, the personality of the lessee
does not pass on to or is acquired by the
sublessee. Thus, the payment to the lessor was
not payment to the sublessor. Alfonso was a
stranger to the sublease agreement. (Blas v. CA,
G.R. No. 82813, December 14, 1989)
Sublease v. Assignment (1990, 1994, 2005
BAR)
between the lessor and the lessee or with the
nature of the property. It is not necessary that
the sublessor be joined as a defendant. (NCC, Art.
1651)
This is true, notwithstanding the fact that the
sublessee is not a party to the lease contract.
(Paras, 2008)
Subsidiary liability of sublessee to lessor
(1999 BAR)
1. Remedy to collect rents from the sublessee

SUBLEASE ASSIGNMENT The law grants the lessor the right to demand
The lessee makes an payment from the sublessee the rents which
The lessee retains an absolute transfer of his the sublessor failed to pay the lessor. The
interest in the lease; he interest as lessee; thus, demand to pay rents made by the lessor on the
remains a party to the he dissociates himself sublessee does not exempt the latter from his
contract. from the original obligation to pay the sublessor the rents which
contract of lease. said sublessee failed to pay the lessor.
The sublessee does not The assignee has a
have any direct action direct action against Purpose: To prevent a situation where the
against the lessor. the lessor. lessee collects rents from the sublessee but
Can be done even does not pay his rents to the lessor.
without the permission
Cannot be done unless 2. Amount of rent recoverable
of the lessor unless
the lessor consents.
there be an express
prohibition. The liability of the sublessee is limited to the
amount of rent due from him to the sublessor
Liability of Sublessee towards Lessor (1999, under the terms of the sublease at the time of
2000 BAR) the extrajudicial demand by the lessor. Future
rents cannot be recovered. He is liable to the
Although the sublessee is not a party to the lessor only for rents the lessee failed to pay
contract of lease, the sublessee is still directly the lessor.
liable to the lessor for acts appertaining to the
use and preservation of the property. This is of NOTE: The liability of the sublessee is
course in addition to the sublessee’s obligation subsidiary.
to the sublessor. (Paras, 2008)
3. Liability for rents paid in advance
Note also that the subsidiary liability of the
sublessee for rent due to the original lessor is The sublessee continues to be subsidiarily
decreed under Art. 1652 of NCC, but only to the liable to the lessor for any rent unpaid by the
extent of the rent still due from him in lessee, although the sublessee may have made
accordance with the terms of the sublease. advance rent payments to the lessee. The rule
Payments of rent in advance by the sublessee is to avoid collusion between the lessee and
shall be deemed not to have been made, so far as the sublessee.
the lessor’s claim is concerned, unless said
payments were effected in virtue of the customs Warranty of the lessor
of the place.
1. That he has a right to lease the thing;
Direct Action by the Lessor (Accion Directa) 2. That the lessee shall enjoy the legal and
peaceful possession of the thing;
The lessor may bring an action directly against 3. That the thing is fit for the use for which it is
the sublessee if he does not use and preserve the intended; and
thing leased in accordance with the agreement

UNIVERSITY OF SANTO TOMAS 618

2021 GOLDEN NOTES
 Civil Law
4. That the thing is free from any hidden fault
or defect. (De Leon, 2005)
In case of eviction of the lessee, and the return of
the rents paid is required, a reduction shall be
made taking into account the period during
which the lessee enjoyed the thing.
The lessee has also the right of proportionate
reduction of the rents agreed upon where the
area or number of the object of the lease is less
than that stated in the contract. (NCC, Art. 1542)
2.
Lessor’s warranty is distinct from his liability
for damages
Liability for the warranty is not equivalent to
liability in damages, as the latter is an obligation
distinct from the former.
The lessor’s obligation to warrant the thing
leased, whether or not he knew of the existence
therein of defects that rendered it unsuitable for
the use for which the lessee intended it, is
distinct from his liability for damages, which
only attaches when he knew about such defects
and failed to reveal them to the lessee or
concealed them, in which case fraud and bad
faith may be presumed on his part. (Yap Kim
Chuan v. Tiaoqui, G.R. No. 10006, September 18,
1915)
RIGHTS AND OBLIGATIONS OF
THE LESSOR AND THE LESSEE
Rights and obligations arising from lease
contract are transmissible to the heirs
1. A lease contract is not essentially personal
in character;
2. The rights and obligations are transmissible
to the heirs; and
3. The death of the party does not excuse
nonperformance of contract which involves
a property right, and the rights and
obligations pass to the successors or
representatives of the deceased.
OBLIGATIONS OF THE LESSOR
(1996, 2010 BAR)
3.
1. Delivery of the property
a. The thing leased must be delivered, in
619
such conditions as to render it fit for in
the use intended, in order that the
lessee may enjoy or use the same. [NCC,
Art. 1654(1)] Delivery may, of course, be
actual or constructive. [NCC, Art.
1496(1)]
b. The thing must be delivered, for without
delivery, there could be no lease because
delivery goes to the essence of the
contract. Delivery cannot be waived.
Making of necessary repairs
a. Includes all the repairs needed, whether
the damage be caused by nature,
fortuitous event or lapse of time, but not
those brought about by the fault of the
lessee himself or by his privies or his
servants, whether the defect was caused
prior to or after the delivery of the
object. (Rabuya, 2017)
b. Article 1654 of NCC speaks of necessary
repairs to keep the thing leased suitable
for the use to which it has been devoted
unless there is a stipulation to the
contrary. In default of a special
stipulation, the custom of the place shall
be observed as to the kind of repairs on
urban property. (NCC, Art. 1686) In case,
the lessor fails in the performance of
this duty, the lessee may suspend the
payment of rent (NCC, Art. 1658) or avail
himself of the other remedies provided
in the law. The lessor is not liable for
repairs for damages or deterioration
caused by the lessee himself.
NOTE: The word “repairs” implies the
putting back of something in the
condition in which it was originally,
while an “improvement’’ is the adding of
something new thereto; hence, the
filling of a vacant lot is not a repair
[Albano v. Villanueva, 7 Phil. 277 (1906)]
(Coca-Cola Bottlers Philippines, Inc. v. CA,
et al, G.R. No. 100957, January 27, 1994)
nor is the construction of a house.
[Valencia v. Ayala de Roxas, 13 Phil. 45
(1909)] (Parilla, et al v. Pilar, G.R. No.
167680, November 30, 2006)
Duty of the lessee to notify lessor (NCC, Art.
1663)
 Special Contracts - Lease
a. Peaceful and adequate enjoyment refers
to legal, not physical possession. Hence,
a lessor is not, for instance, liable for
physical disturbances in the
neighborhood, but is liable if the lessee
is evicted due to non-payment of taxes
by the lessor. (Paras, 2008)
b. The lessor’s obligation to maintain the
lessee arises when acts termed “legal
trespass” disturb, dispute, or place
difficulties in the lessee’s peaceful and
adequate enjoyment of the leased
premises that in some manner or other
cast doubt upon the right of the lessor to
execute the lease. The lessor must
answer for such legal trespass. (Nakpil v.
Manila Towers Development
Corporation, G.R. No. 160867, September
20, 2006)
c. There is mere act of trespass when a
third person claims no right
whatsoever. In trespass in law, the third
person claims a legal right to enjoy the
premises. (Rabuya, 2017)
NOTE: When it is merely trespass in fact,
the lessor cannot be faulted for any breach.
The lessee can file a direct action against
the trespasser such as forcible entry or
illegal detainer.
4. Duty not to Alter Form
The lessor has also the duty not to alter the
form of the thing leased as to impair the use
of the said thing to which it is devoted under
the terms of the lease. (NCC, Art. 1661)
Rules if urgent repairs are necessary (NCC,
Art. 1662)
1. If repairs last for NOT MORE THAN 40
days
Lessee is obligated to tolerate the work,
although it may be annoying to him and
although during the same time, he may be
deprived of a part of the premise.
2. If repairs last for more than 40 DAYS
Lessee can ask for reduction of the rent in
proportion to the time (including the first 40
days and the part of the property of which he is
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
deprived).
NOTE: In either case, rescission may be
availed of if the main purpose of the lease is
to provide a dwelling place and the property
becomes uninhabitable.
Effects if the lessor fails to make urgent
repairs
The lessee may:
1. Order repairs at the lessor’s cost;
2. Sue for damages;
3. Suspend the payment of the rent; or
4. Ask for rescission, in case of substantial
damage to him.
If the contract of lease is silent as to who will
pay for repair expenses
Major repairs – Shouldered by the lessor; and
Minor repairs – Shouldered by the lessee.
Remedy of the lessee if the lessor fails to
make major or necessary repairs
Lessee may ask for:
1. Rescission of contract and indemnification
for damages; or
2. Indemnification only, while the contract
remains in force. (NCC, Art. 1659)
Effect of destruction of thing leased by
fortuitous event (1993 BAR)
Total destruction
1. The lease is extinguished if the thing is
totally destroyed;
2. The lessee cannot compel the lessor to
reconstruct the destroyed property;
3. The lessee of the lot and building which has
been totally destroyed by fortuitous event
cannot be considered as lessee of the land
after the building had been totally destroyed
by the fortuitous event (Roces v. Rickards,
[CA] 45 O.G. [Supp.] 97); and
4. While the land has not been affected,
consideration should be taken of the fact
that generally the land was leased only as an
incident to the lease of the building. (Rohde
620
 Civil Law
Shotwell v. Manila Motors Co., Inc., G.R. No. L-
7637, December 29, 1956)
Partial Destruction
Lease is not extinguished. The lessee is given the
option to choose between a proportionate
reduction of the rent and rescission of the lease.
Once the choice of the lessee has been
communicated to the lessor, the former cannot
change it. (NCC, Art. 1201)
If reduction of rent is chosen, the same shall be
retroactive to the date when the partial
destruction occurred. In case of rescission, the
general rule is that it will not be granted for
slight or trivial causes. The partial destruction,
under the circumstances, should be important or
substantial as to defeat the purpose of the lessee
in entering into the contract of lease.
NOTE: The choice is on the LESSEE, and not on
the lessor.
When lessee may suspend payment of rent
1. When lessor fails to undertake necessary
repairs; and
2. When lessor fails to maintain the lessee in
peaceful and adequate enjoyment of the
property leased.
Effectivity of the suspension
1. In the case of repairs, from the time he made
the demand for said repairs, and the
demand went unheeded; or
2. In the case of eviction, from the time the final
judgment for eviction becomes effective.
OBLIGATIONS OF THE LESSEE
Principal Obligations of the Lessee (NCC, Art.
1657)
1. Payment of agreed price of lease
The obligation of the lessee to pay the rent
agreed upon arises only when the thing leased
has been delivered to the lessee for the purposes
stipulated in the contract.
2. Proper use of the thing leased
The lessee must exercise the diligence of a good
father of a family in the use of the thing leased.
621
He must devote the thing to the use stipulated,
and if none was stipulated, to that which may be
inferred from the nature of the thing leased,
according to the custom of the place.
NOTE: The use of the thing for an illegal purpose
entitles the lessor to terminate the contract.
3. Payment of expenses for deed of lease
In lease, the law imposes upon the lessee the
obligation to pay the expenses for the deed of
lease. By agreement, the obligation may be
assumed by the lessor.
Other Obligations of the Lessee
1. To tolerate the urgent repairs upon the
thing leased even if annoying to him, and
although during the same, he may be
deprived of a part of the premises [NCC, Art.
1662(1)];
2. To notify the lessor of every usurpation by a
third person or persons on the property and
of the urgent repairs needed (NCC, Art.
1663); and
NOTE: If the lessee fails to comply, he would be
liable for damages which the lessor would suffer
and which could have been avoided by lessee’s
diligence.
3. To return the property leased upon
termination of the lease in the same
condition as he received it, save what has
been lost or impaired by:
a. Lapse of time
b. Ordinary wear and tear; or
c. Inevitable cause/fortuitous event.
(NCC, Art. 1665)
Responsibility for deterioration or loss of the
thing leased
GR: The presumption is that the lessee is
responsible for the deterioration or loss of the
thing leased unless he proves that it took place
without his fault. Such liability also extends to
deterioration caused by the members of his
household and by guests and visitors.
XPN: When destruction is due to earthquake,
flood, storm or other natural calamity. (Rabuya,
2017)
 Special Contracts - Lease
Q: Jude owned a building which he had leased
out to several tenants. Without informing his
tenants, Jude sold the building to Ildefonso.
Thereafter, the latter notified all the tenants
that he is the new owner of the building.
Ildefonso ordered the tenants to vacate the
premises within thirty (30) days from notice
because he had other plans for the building.
The tenants refused to vacate, insisting that
they will only do so when the term of their
lease shall have expired. Is Ildefonso bound
to respect the lease contracts between Jude
and his tenant? Explain your answer. (2009
BAR)
A: YES. Ildefonso must respect the lease
contracts between Jude and his tenants. While it
is true that the said lease contracts were not
registered and annotated on the title to the
property, Ildefonso is still not an innocent
purchaser for value. He ought to know the
existence of the lease because the building was
already occupied by the tenants at the time he
bought it. Applying the principle of caveat
emptor, he should have checked and known the
status of the occupants or their right to occupy
the building before buying it.
REMEDIES
Accion Directa
A direct action which the lessor may bring
against a sublessee who misuses the subleased
property or for unpaid rents otherwise due from
the original lessee (sublessor).
Alternative remedies of aggrieved party
1. Rescission of the contract with damages
Failure of lessor to place the lessee in
possession of the premises leased is a case
of lessor’s non-compliance with his
obligation. (1999, 2001 BAR)
Restrictions to Rescission
a. Requires judicial action;
b. Can be brought only by the aggrieved
party; and
c. Must be substantial, not slight or minor
breach.
2. Action for damages only, allowing the lease
to remain subsisting.
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
Q: Under a written contract dated December
1, 1989, Victor leased out his land to Joel for
a period of five (5) years at a monthly rental
of P1,000.00, to be increased to P1,200.00
and P1,500.00 on the third and fifth year,
respectively. On January 1, 1991, Joel
subleased the land to Conrad for a period of 2
years at a monthly rental of P1,500.00. On
December 31, 1992, Joel assigned the lease to
his compadre, Ernie, who acted on the belief
that Joel was the rightful owner and
possessor of the said lot. Joel has been
faithfully paying the stipulated rentals to
Victor. When Victor learned on May 15, 1992
about the sublease and assignment, he sued
Joel, Conrad and Ernie for rescission of the
contract of lease and for damages.
1. Will the action prosper? If so, against
whom? Explain.
2. In case of rescission, discuss the rights and
obligations of the parties. (2005 BAR)
A:
1. YES, the action for rescission of the lease will
prosper because Joel cannot assign the lease to
Ernie without the consent of Victor. (NCC, Art.
1649) But Joel may sublet to Conrad because
there is no express prohibition therefor. (NCC,
Art. 1650; Alipio v. CA, G.R. No. 134100,
September 29, 2000)
Victor can rescind the contract of lease with
Joel, and the assignment of the lease to Ernie,
on the ground of violation of law and of
contract. The sub-lease to Conrad remained
valid for 2 years from January 1, 1991, and had
not yet lapsed when the action was filed on
May 15, 1992.
2. In case of rescission, the rights and obligations
of the parties should be as follows: At the time
that Victor filed suit on May 15, 1992, the
assignment had not yet lapsed. It would lapse
on December 1, 1994, the very same date that
the 5-year basic lease would expire. Since the
assignment is void, Victor can get the property
back because of the violation of the lease. Both
Joel and Ernie have to surrender possession
and are liable for damages. But Conrad has not
yet incurred any liability on the sublease
which still subsisted at the time of the filing of
the action on May 15, 1992.
622
 Civil Law
Ernie can file a cross-claim against Joel for
damages on account of the rescission of the
contract of assignment. Conrad can file a
counter-claim against Victor for damages for
lack of causes of action at the time of the filing
of the suit.
Q: A is the owner of a lot on which he
constructed a building in the total cost of
P10, 000,000. Of that amount, B contributed
P5,000,000 provided that the building as a
whole would be leased to him (B) for a
period of ten years from January 1, 1985 to
December 31, 19954 at a rental of P100,000
a year. To such condition, A agreed. On
December 20, 1990, the building was totally
burned. Soon thereafter, A’s workers cleared
the debris and started construction of a new
building. B then served notice upon A that he
would occupy the building being constructed
upon completion, for the unexpired portion
of the lease term, explaining that he had
spent partly for the construction of the
building that was burned. A rejected B’s
demand. Did A do right in rejecting B’s
demand? (1993 BAR)
A: YES. A was correct in rejecting the demand of
B. As a result of the total destruction of the
building by fortuitous event, the lease was
extinguished. (NCC, Art. 1655)
Grounds for judicial ejectment under the
Rental Reform Act of 2002
1. Assignment of lease or subleasing of
residential units in whole or in part,
including the acceptance of boarders or
bedspacers, without the written consent of
the lessor; or
2. Rental payment in arrears for 3 months;
Provided, that in case of refusal by the lessor
to accept the payment of the rent, the lessee
may deposit the amount in court or with the
city or municipal treasurer, as the case may
be, or in the bank in the name of and with
notice to the lessor, within one month after
the refusal of the lessor to accept payment.
Q: Jane leased a truck to Ed for two (2) years.
After one (1) year from delivery, the truck
was destroyed by a strong typhoon. What is
the effect of the destruction of the truck with
respect to the lease?
623
A: It depends. If the thing leased is totally
destroyed by a fortuitous event, the lease is
extinguished. If the destruction is partial, the
lessee may choose between: proportional
reduction of rent or, rescission of lease. (NCC,
Art. 1655)
NOTE: On the part of the lessor, instead of
rescinding the contract, he may directly file an
action for ejectment against the lessee.
If the aggrieved party has chosen the option of
rescission under Art. 1659 of NCC, the court has
no discretion to grant the fixing of a period in an
ordinary obligation under Art. 1191 of NCC.
Q: What are the damages recoverable in
ejectment cases?
A: Only the rents or the fair rental value of the
premises.
The following cannot be successfully claimed:
1. Profits plaintiff could have earned were it
not for the forcible entry or unlawful
detainer;
2. Material injury to the premises; and
3. Actual, moral, or exemplary damages. (Baens
v. CA, G.R. No. L-57091, November 23, 1983)
When lessee may immediately terminate the
lease (NCC, Art. 1660)
By notice to the lessor in case the dwelling place
or building is unfit for human habitation and is
dangerous to life or health.
Even if at the time the contract was perfected,
the lessee KNEW of the dangerous condition or
WAIVED the right to rescind.
Reason: Public safety cannot be stipulated
against.
Two Kinds of trespass with Respect to the
Property Leased
1. Mere act of trespass (disturbance in fact)
The physical enjoyment is reduced and may take
place in a case of forcible entry. The third person
claims no right whatever. (Paras, 2008)
NOTE: If the leased premises are expropriated
and the tenant is evicted from the premises, the
 Special Contracts - Lease
lessor is not liable for damages. The lessee must
look to the expropriator for his compensation.
(Sayo v. Manila Railroad Co., G.R. No. 17357, June
21, 1922)
2. Trespass in law (disturbance in law)
A third person claims a LEGAL right to enjoy the
premises. The lessor is responsible for trespass
in law. (Paras, 2008)
Lessee is presumed at fault in case of loss or
deterioration of the property
This presumption is rebuttable. The burden of
proof is on the LESSEE to show that the loss or
deterioration is not due to his own fault, such as
when the deterioration resulted from lapse of
time, ordinary wear and tear, or from inevitable
cause. (NCC, Art. 1665)
Non-applicability of presumption when the loss
or destruction is due to:
1. Earthquake;
2. Flood;
3. Storm; and
4. Other natural calamities.
Reason: It is unjust to impose upon the lessee
the burden of proving due diligence. It is more
probable that in such cases, he was not
negligent.
NOTE: Ordinarily, fire is NOT a natural calamity.
But if the tenant can prove that he had no fault in
the case of fire, and that it was impossible for
him to stop its spread, he will not be liable.
(Lizares v. Hernaez and Alunan, G.R. No. 14977,
March 30, 1920)
Deterioration caused by others
Although the deterioration was not caused by
the lessee himself, he is still liable under the law
if the deterioration was made by his household,
guests and visitors. (NCC, Art. 1668) His liability
is akin to civil liability in quasi-delict. (NCC, Art.
2180)
DURATION AND TERMINATION OF LEASE
When lease is supposed to end
1. When the lease was made for a
DETERMINATE TIME, the lease ends on the
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
DAY FIXED, without need of a demand (NCC,
Art. 1669); or
2. If the understanding between the parties as
to the term of the lease was vague and
uncertain, it cannot be said that a definite
period was agreed upon; hence the proper
Article to apply would be Art. 1687 of NCC.
(Guitarte v. Sabaco, et al., G.R. No. L-13688-
91, March 28, 1960)
NOTE: Under Article 1687 of NCC, 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.
Q: May the courts fix a different period for
the lease?
A: YES. 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. If the rent is weekly, the courts may
likewise determine a longer period after the
lessee has been in possession for over six
months. In case of daily rent, the courts may also
fix a longer period after the lessee has stayed in
the place for over one month. (NCC, Art. 1687)
When demand is necessary as a procedural
requirement
For purposes of an action for unlawful detainer
on the ground of the lessee’s failure to pay rents
or violation of the terms of the lease, Rule 70
(Rules of Court) requires that demand be made
upon the lessee giving him 5 days (in case of
buildings) and 15 days (in case of land), within
which to pay the unpaid rentals and to vacate
the premises.
The demand to vacate must be definite and must
not provide an alternative.
The demand required under Rule 70 is only a
procedural requirement and does not, if not
complied with, change the fact that the lease
contract has ended upon the termination of the
period fixed for its existence. (Paras, 2008)
When demand to vacate is unnecessary
When the action is to terminate the lease,
624
 Civil Law
demand is not necessary. The expiration of the
term of the lease immediately gives rise to a
cause of action for unlawful detainer in which
case, demand to vacate is no longer necessary.
(Paras, 2008)
Extinguishment of Lease
1. By the expiration of the period (NCC, Art.
1673);
2. Total loss or destruction of the thing leased
(NCC, Art. 1655);
3. Rescission due to non-performance of the
obligations of a party;
4. Mutual agreement to terminate the lease
contract;
5. By action of the purchaser or transferee of
the property leased in good faith against the
lessee whose lease contract is not duly
recorded;
6. In case the dwelling place or any other
building is unfit for human habitation and is
dangerous to life or health (NCC, Art. 1660);
7. By resolution of the right of the lessor; or
8. By will of the purchaser or transferee of the
thing. (Rabuya, 2017)
Extension or renewal of lease
1. Authority of Court
When the parties have stipulated on the
period of the lease, upon its expiration, the
Court cannot extend the period since it has
no authority to do so.
2. Lease not to be deemed extended or
renewed by implication
Where a lease contract expressly stipulates
that the lease shall not be deemed extended
or renewed by implication beyond the
contractual period for any cause or reason
whatsoever but only by negotiations, the
mere fact that the lessee was willing to pay
what he claimed to be a reasonable rent –
which was less than that demanded by the
lessor – did not operate in any sense to
extend the lease.
3. Lease extendible for a similar period
A stipulation that a lease is “extendible” for a
further similar period is to be understood as
giving the lessee the right to the additional
period or to quit upon the expiration of the
625
first term.
4. Lease renewable at the option of both
parties
A stipulation that the lease of a parcel of
land will be “renewable for another 10 years
at the option of both parties under such
terms, conditions and rentals reasonable at
the time,” means that there should be
mutual agreement as to the renewal of the
lease.
5. Option to renew given to lessor
If the option is given to the lessor, the lessee
cannot renew the lease against the former’s
refusal. The lease is deemed terminated.
6. Extension exclusively for the benefit of the
lessor
The stipulation in a lease contract extending
the lease term beyond that originally agreed
upon, in order to save the lessor the trouble
of reimbursing the lessee in cash for the
expenses incurred on the leased premises
was exclusively for the benefit of the lessor;
hence, the latter has the right to terminate
the lease upon the expiration of the original
period, or at any other time thereafter, by
tendering to the lessee, or consigning to the
court, the outstanding balance of his
expenditures.
The lessor should be given the option to
either reimburse the balance of the
expenditures or demand that the lessee
should account for and credit the lessor for
the fruits of the properties since the
expiration of the lease against the balance
due to the lessee, turning over any excess to
the lessor.
7. Option to renew given to lessee
Where a lessee is given the option to
continue or renew the contract of lease and
is silent upon the rentals, the old terms are
to be followed in the renewed lease.
Implied New Lease or Tacita Reconduccion
(1990, 1999, 2001 BAR)
Tacita Reconduccion refers to the right of the
lessee to continue enjoying the material or de
 Special Contracts - Lease
facto possession of the thing leased within a no longer consents to the continued occupation
period of time fixed by law. (Rabuya, 2017) by the lessee of the leased property. (Tagbilaran
Integrated Settlers Assoc. v. CA, G.R. No. 148562,
Arises if at the end of the contract, the lessee November 25, 2004)
should continue enjoying the thing leased for at
least 15 DAYS with the acquiescence of the Instances when implied renewal NOT
lessor — unless of course a notice to the applicable
contrary had previously been given by EITHER
PARTY. 1. Stipulation against implied renewal;
2. Invalidity of original lease;
Effects of the implied new lease 3. Acceptance of rentals beyond original term;
4. Acceptance of rentals less than amounts
1. The period of the new lease is not that stipulated; and
stated in the original contract, but the time 5. Non-payment of rentals.
in Arts. 1682 and 1687 of NCC (month to
month, year to year, etc.); and Rule if lessor objects to lessee’s continued
possession
2. Other terms of the original contract are
revived. (Paras, 2008) Note that under Art. 1671 of NCC, there are
three requisites:
Terms which are revived
1. The contract has expired;
The original terms of the original contract which 2. The lessee continues enjoying the thing; and
are revived are only those which are germane to 3. The lessor has objected to this enjoyment.
the lessee’s right of continued enjoyment of the
property leased or related to such possession, If the three requisites are present, the lessee
such as the amount of rental, the date when it shall be considered a possessor in BAD FAITH.
must be paid, the care of the property, and the
responsibility for repairs. If the lessee still makes a construction after he
has become a possessor in bad faith, he may be
NOTE: No such presumption may be indulged in compelled:
with respect to special agreements which by
their nature are foreign to the right of 1. To forfeit the construction without
occupation or enjoyment inherent in a contract indemnity;
of lease. 2. To buy the land regardless of whether or not
its value is considerably more than the value
e.g., preferential right given to the lessee to of the construction; or
purchase the leased property. 3. To demolish the construction at his expense.

Requisites for an implied renewal of lease:
1. The term of the original contract of lease
must have already expired;
2. The lessee continues enjoying the thing
leased for at least 15 days;
3. The continuation of the occupation by the
lessee is with the acquiescence of the lessor;
and
4. The lessor or lessee has not previously given
a notice to vacate.
NOTE: The notice required under Article 1670 is
the one given after the expiration of the lease
period for the purpose of aborting an implied
renewal of lease. The notice to vacate constitutes
an express act on the part of the lessor that he
NOTE: In any of the 3 cases hereinabove
referred to, he will still be subject to the
payment of damages. (NCC, Arts. 449-451)
Judicial Grounds for Ejectment of Lessees
(1994, 2004 BAR) (ENVI)
1. Expiration of period of the lease
The period of the lease contract may be:
a. Conventional – when the period is by
agreement of the parties; or
b. Legal – when the period is fixed by law
under Arts. 1682 and 1687 of NCC;

UNIVERSITY OF SANTO TOMAS 626

2021 GOLDEN NOTES
 Civil Law
GR: Upon the expiration of the period, the
lease contract is terminated. If a determinate
time was stipulated, the lease ceases without
need of a demand. (NCC, Art. 1669)
XPN: In case of implied new lease. After
termination of the lease, the lessor is free to
dispose of the property in favor of another
lessee. The payment of all rents then due will
be immaterial. As long as the period has
expired, the lessee can be ejected.
2. Non-payment of the rentals agreed upon
One of the principal obligations of the lessee
is to pay the rentals agreed upon. [NCC, Art.
1657(1)] It is the cause or consideration for
the use and enjoyment of the property leased.
Non-payment of the rentals after a demand
therefor is a justifiable ground for the lessor
to rescind the contract and eject the lessee.
3. Violation of any condition
Any violation of the terms and conditions of a
contract of lease, whether it is essential or
accidental in nature, will constitute a
violation of the lease contract and will justify
the filing of an ejectment case against the
lessee.
The theory that a lease could continue for an
indefinite term as long as the lessee pays the
rentals had already been rejected by the SC
because the validity or compliance of
contracts cannot be left to the will of one of
the parties. (NCC, Art. 1308)
Where the contract of lease prohibits the
lessee from introducing improvements and
making repairs and the lessee did so, he
violated this condition. This violation is a
basis for ejectment.
4. Improper use or enjoyment of the
property leased
The lessee is obliged to use the thing leased
as a diligent good father of a family. If due to
improper use of the property, the same is
lost, destroyed or deteriorated, the lessor
may immediately file a suit for restitution or
ejectment. He need not wait for the
expiration of the period of the lease.
Q: Cruz is the owner of property in San Juan
627
which she inherited from her late mother.
She alleged that Christensen had been
occupying the property during her mother’s
lifetime, as they had a verbal agreement.
Cruz claimed that ever since she inherited
the property, she tolerated Susan’s
occupancy of the property. However, due to
Susan's failure and refusal to pay rentals of
P1,000.00 per month, she was constrained to
demand that Susan vacate the property and
pay all unpaid rentals. The matter was
referred to barangay conciliation, but the
parties was not able to enter into a
compromise. Three years later, Cruz, through
counsel, sent Susan a final demand letter,
demanding her to pay unpaid rentals.
Cruz filed an unlawful detainer case in MTC.
Cruz alleged that despite Susan receiving the
final demand refused to vacate and pay.
Susan, in her Answer, contends that they had
only month to month lease and continuously
paying rent until sometime, Cruz refused to
accept payment for the accrued rents. Also,
she claims that she did not receive the final
demand letter. Whether final demand letter
is necessary in an unlawful detainer case due
to expiration of lease contract.
A: NO. Although the demand letter in this case
contains only demand to pay unpaid rentals and
as such, the case would have been enough to
categorize the complaint for unlawful detainer
as one for non-payment of rentals, this case is
still considered as unlawful detainer case for
expiration of lease and therefore, final demand
letter is not necessary. SC ruled that the month-
month lease contract between Cruz and
Christensen had long been expired when Cruz
refused to receive the rent in the past as
Christensen admitted in her Answer. Also,
Christensen cannot feign ignorance of
petitioner’s demand to vacate since the matter
was brought to barangay conciliation
proceedings. The demand letter would have
been unnecessary since respondents’ continued
refusal to vacate despite the expiration of their
verbal lease was sufficient ground to bring the
action. (Velia Cruz v. Sps. Christensen, G.R. No.
205539, October 4, 2017, J. Leonen)
Preliminary mandatory injunction to restore
possession pending appeal (NCC, Art. 1674)
The LESSOR is entitled to a writ of preliminary
injunction to restore him in his possession in
 Special Contracts - Lease
case the higher court is satisfied that the lessee’s
appeal is frivolous or dilatory (i.e., without
merit) or the lessor’s appeal is prima facie
meritorious.
Reason: The remedy is intended “to put an end
to the present state of the law which unjustly
allows the lessee to continue in possession
during an appeal.” (Report of the Code
Commission)
Use by lessee of legal period
The lessee is entitled to periods agreed upon in
the lease contract (conventional) or those
established in Articles 1682 and 1687 of NCC
(implied new lease).
However, these rights are restricted if there are
grounds or causes for the ejectment of the lessee
under Art. 1673 of NCC. To enjoy peace, the
lessee must be faithful to his obligations as such.
When the lessee is guilty of a cause of ejectment
under Art. 1673 of NCC, he is also deprived of
the right to enjoy the period of grace under Art.
1687 of NCC.
Effect of Sale of Leased Property on the Lease
Contract
1. The purchaser shall respect the lease in the
following situations:
a. When the lease is registered with the
proper Register of Deeds;
b. When the deed of sale provides for the
recognition and respect of the lease by the
purchaser until termination of the period;
c. When the purchaser has actual knowledge
of the existence of the lease; or
d. The lease cannot also be terminated by
the purchaser in a fictitious sale, and by
the purchaser in a sale with pacto de retro
until the expiration of the period to
redeem. Only a purchaser in good faith of
the leased property is granted protection
by the law.
2. In any other case, the purchaser is not
obliged to respect the lease contract. He has
the option to continue or discontinue the
lease.
The sale of a leased property places the
vendee into the shoes of the original lessor
UNIVERSITY OF SANTO TOMAS
2021 GOLDEN NOTES
to whom the lessee bound himself to pay.
Right of lessee if new owner terminates the
unrecorded lease
The lessee may demand that he be allowed to
gather the fruits of the harvest which
corresponds to the current agricultural year and
that the vendor indemnify him for damages
suffered. [NCC, Art. 1676 (2)]
Fictitious sale of leased property
1. If at the time the supposed buyer demands
the termination of the lease, the deed of sale
is not yet registered in the appropriate
Registry of Property. [NCC, Art. 1676 (3)]
2. If it is a simulated sale intended merely to
extinguish the existing lease. In the eyes of
the law, it does not exist. (NCC, Art. 1409)
Effect: The false “vendee” cannot terminate the
lease even if the same is unrecorded.
Reason: To discourage the practice which has
developed in recent years of fictitiously selling
the premises in order to oust the lessee before
the termination of the lease.
Rights of the lessee who introduced
improvements (1990, 1996 BAR)
Introduction of valuable improvement on the
leased premises does not give the lessee the
right of retention and reimbursement which
rightfully belongs to the builder in good faith.
Otherwise, such a situation would allow the
lessee to easily “improve” the lessor out of its
property. (Rabuya, 2017)
The lessor shall pay the lessee one-half of the
value of the improvements computed at the time
of the termination of the lease if the following
conditions are fulfilled:
1. That the lessee should have made the
useful improvements in good faith;
2. The improvements are suitable to the
purpose or use for which the lease is
intended; and
3. That the form and substance of the thing
leased are not altered or modified. (NCC,
Art. 1678)
These requisites will prevent the lessee from
628
 Civil Law
making such valuable improvements that the
lessor may never recover the property leased. It
is the lessor who has the option to appropriate
the useful improvements and reimburse the
lessee therefor. It is discretionary with the lessor
to retain the useful improvements by paying
one-half of their value. The lessee cannot compel
the lessor to appropriate and reimburse him for
the improvements.

A lessee who builds on the property leased is not

a possessor in good faith, thus, he has no right of
retention until reimbursed for the value of the
improvement.

The lessor and lessee may stipulate that all

improvements introduced by the lessee shall
pertain to the lessor. However, if the value of the
improvement is considerably more than the
value of the leased premises, merely creating
prejudice to the lessee instead of enforcing the
contract literally, Art. 1678 of the Civil Code may
be applied.

Ornamental Expenses

Expenses incurred which cater only to the

personal comfort, convenience or enjoyment of a
person.

The lessee has no right of reimbursement for

ornamental expenses. He may remove them
provided he does not cause any damage to the
thing leased. The lessor, if he so desires, may
retain them after paying their value to the lessee
at the time the lease is extinguished.

629
 Special Contracts – Credit Transactions
CREDIT TRANSACTIONS the present, with a promise to pay or deliver in
the future.
Note: Per the 2020 Bar Syllabus, the rules
governing Articles 2047-2092; 2124-2131; Kinds of credit transactions
and 2140-2141; and Concurrence and
Preference of Credits (Articles 2236-2251) 1. As contracts of security
are now transferred to the 2020 Golden
Notes for Commercial Law. Nonetheless, the a. Contracts of real security – These
succeeding discussions may include some of are contracts supported by
the foregoing topics for educational purposes collateral/s or burdened by an
and future references.
encumbrance on property such as
mortgage and pledge; and
Note: R.A. No. 11057, or the Personal
Property Security Act, took effect on
b. Contracts of personal security –
December 3, 2019 expressly repealing,
These are contracts where
amending and/or modifying the Civil Code
performance by the principal
provisions on mortgage and pledge,
debtor is not supported by
particularly, Articles 2085-2123, 2127, 2140-
collateral/s, but only by a promise
2141, 2241, 2243 and 2246-2247; Sections 1-
to pay or by the personal
16 of the Chattel Mortgage Law (Act No.
undertaking or commitment of
1508); and Sections 114-116 of the Property
another person such as in surety or
Registration Decree (P.D. No. 1529), among
guaranty.
others. Section 68 of said law, however, states
that notwithstanding the entry into force of
2. As to their existence
this Act under Section 67, the implementation
of the Act shall be conditioned upon the
a. Principal contracts – those that can exist
Registry being established and operational
alone. Its existence does not depend on
under Section 26.
the existence of another contract (e.g.
commodatum and mutuum); and
GENERAL PRINCIPLES
b. Accessory contracts – those the
Credit existence of which depend on another
contract. These accessory contracts
It is a person’s ability to borrow money or things depend on the existence of a principal
by virtue of confidence or trust reposed in him contract of loan (e.g. guaranty proper,
by the lender that he will pay what he may suretyship, pledge, mortgage and
promise. (People v. Concepcion, G.R. No. L-19190, antichresis).
November 29, 1922)
3. As to their consideration
Significance of Credit
a. Onerous – a contract where there is
By virtue of the use of credit, more exchanges consideration or burden imposed like
are possible: persons are able to enjoy a thing interest; and
today but pay it for later, and through the
banking system, the transfer of actual money is b. Gratuitous – a contract where there is
eliminated by cancellation of debts and credits. no stipulation to pay any consideration
(De Leon et. al., 2016) or no burden imposed (e.g.
commodatum).
Credit transaction
Security
It refers to an agreement based on trust or belief
of someone on the ability of another person to It is something given, deposited, or serving as a
comply with his obligations. means to ensure the fulfillment or enforcement
of an obligation or of protecting some interest in
It includes all transactions involving the the property.
purchase or loan of goods, service, or money in

UNIVERSITY OF SANTO TOMAS 630

2021 GOLDEN NOTES
 Civil Law
Bailment
It signifies a situation in which one person holds
personal property, the ownership of which is in
another. The person who has possession is
under the obligation to return the same goods,
either in the same or in altered form to the
owner, or dispose of them for his benefit when
the purpose of the bailment shall have been
Generally, no fiduciary relationship is created by
bailment. No trustee-beneficiary relationship is
created.
Parties in a contract of bailment
1. Bailor – The giver; the party who delivers
the possession or custody of the thing
bailed; and
2. Bailee – The recipient; the party who
receives the possession or custody of the
thing thus delivered.
Kinds of contractual bailment
1. Ordinary bailments:
a. For the sole benefit of the bailor;
b. For the sole benefit of the bailee;
c. For the benefit of both parties (mutual-
benefit bailments) – deposit for
compensation; and
d. Fortuitous bailments – miserable
deposit.
2. Extra-ordinary bailments – these cover
businesses that peculiarly serve the public.
Bailments for Hire
They arise when goods are left with the bailee
for some use or service by him, in exchange for
compensation.
Kinds
1. Hire of things (location rei) – where goods
are delivered for the temporary use of the
hirer (lease)
2. Hire for service (location operas faciendi) –
where goods are delivered for some work or
labor upon it by the bailee (contract of piece
of work)
3. Hire for carriage of goods (location operas
mercium vehendarum) – where goods are
delivered either to a common carrier or to a
631
private person for the purpose of being
carried from place to place
4. Hire for custody (location custodiae) –
where goods are delivered for storage
LOAN
GENERAL PROVISIONS
Art. 1933. By the contract of loan, one of the
parties delivers to another, either
something not consumable so that the latter
may use the same for a certain time and
return it, in which case the contract is called
a commodatum; or money or other
consumable thing, upon the condition that
the same amount of the same kind and
quality shall be paid, in which case the
contract is simply called a loan or mutuum.
Commodatum is essentially gratuitous.
Simple loan may be gratuitous or with a
stipulation to pay interest.
In commodatum the bailor retains the
ownership of the thing loaned, while in
simple loan, ownership passes to the
borrower.
Loan
It is a contract where one of the parties delivers
to another, either something not consumable so
that the latter may use the same for a certain
time and return it, in which case is called a
commodatum; or money or other consumable
things, upon the condition that the same amount
of the same kind and quality shall be paid, in
which case the contract is simply called a loan or
mutuum. (NCC, Art. 1933) (1993, 2004, 2005
Bar)
Kinds of loan
1. Commodatum – where the bailor (lender)
delivers to the bailee (borrower) a non-
consumable thing so that the latter may use
it for a given time and return the identical
thing;
2. Mutuum or Simple Loan – where the lender
delivers to the borrower money or other
consumable thing upon the condition that
the latter shall pay same amount of the same
kind and quality.