SALES
Atty. Busmente – CLASS DISCUSSION AND DE LEON BOOK
1st Semester S.Y. 2021-2022
PART II - LEASE
CHAPTER I. GENERAL PROVISIONS
Article 1642. The contract of lease may be of things, or of work and service.
Concept and nature of contract of lease
1. The contract of lease is an agreement whereby one person (lessor) binds himself
to grant temporarily the enjoyment or use of a thing or to render some work or
service to another (lessee) who undertakes to pay rent, compensation, or price
therefor.
2. Lease is only a personal right.
a. It is a real right only by exception as in the case of lease of real
estate recorded in the Registry of Property, which makes it binding
upon third persons, like a purchaser.
b. In the absence of registration, the purchaser may terminate the lease,
save when there is a stipulation in the contract of sale, or when the
purchaser knows of the existence of the lease (Art. 1676.), actual
knowledge being equivalent to registration. (Art. 1648.)
3. A lease contract is NOT essentially personal in character.
a. General rule: lease contracts survive the death of the parties and
continue to bind the heirs
b. Exception: if the contract states otherwise
c. In other words, the rights and obligations under a lease contract are
generally transmissible to the heirs of the lessor or lessee.
d. The death of a party does NOT excuse non-performance of a contract,
which involves a property right, and the rights and obligations thereunder
pass to the successors or representatives of the deceased.
4. The same principle applies to the option to renew the lease.
a. As a general rule, covenants to lease or to renew lease are not personal
but will run with the land.
Kinds of lease according to subject matter
Lease contract may be:
1. Lease of things
a. whether real or personal, involving an obligation on the part of the lessor
to deliver the thing that is the object thereof and the correlative right of the
lessee to the peaceful and adequate enjoyment thereof for a price certain
(Art. 1654.);
2. Lease of work
a. which refers to a contract for a piece of work, involving an obligation on
the part of the independent contractor (lessor) to execute a piece of work
for the employer (lessee) in consideration of a certain price or
compensation) (Art. 1713).
3. Lease of service
a. involving an obligation on the part of the housekeeper (Art. 1689.),
laborer or employee (Art. 1700.), or common carrier (Art. 1732.) to do or
perform a service for the head of a family or master, employer, or
passenger or shipper of goods, respectively, in consideration of
compensation.
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b. Under the CC, the second and third kinds of lease cover household
service (Arts. 1689-1699.), contract of labor (Arts. 1700- 1712.), contract
for a piece of work (Arts. 1713-1731.), and common carriers. (Arts.
1732-1766.)
Characteristics and elements of the contract
● The contract of lease is consensual, bilateral, onerous commutative, nominate, and
principal.
1. In lease as in sale, there is an exchange of equivalent values.
a. The use by the lessee of the thing, work, or service is considered the
equivalent to the rent, compensation, or price paid to the lessor.
2. As in ordinary contracts, a contract of lease has three (3) elements, namely:
a. consent of the contracting parties;
b. object certain which is the subject matter of the contract; and
c. cause of the obligation which is established. (Art. 1318.)
Article 1643. In the lease of things, one of the parties binds himself to give to another the
enjoyment or use of a thing for a price certain, and for a period which may be definite or
indefinite.
HOWEVER, no lease for more than ninety-nine years shall be VALID.
Lease of things.
In legal parlance and in ordinary usage, the term "landlord" means lessor or owner and the
word "tenant" means lessee.
1. Essence of lease
a. The essence or essential purpose of the lease of things is the transmission of the
temporary enjoyment or use by the lessee of a thing for a certain period in
consideration of the undertaking to pay rent therefor.
b. Where a customer simply pays a fee, parks his car in any available space in the
parking lot, locks the car, and takes the key with him, the possession and control of
the car (necessary elements in bailments) do not pass to the parking lot operator;
hence contractual relationship between the parties is one of lease.
c. In short, the act of parking a vehicle in garage, upon payment of a fixed amount, is
a lease.
d. The lease of a building naturally includes the lease of the lot on which it stands, and
the rentals of a building include those of the land.
2. Subject matter of lease
a. Article 1643 applies to lease of things, whether movable or immovable.
b. The CC makes no special provisions for the lease of movables.
c. Nevertheless, the provisions of the Code on lease of lands are also applicable to
leases of personal property except those provisions which by their nature and intent
can only be applied where the object of the lease is immovable.
d. In a lease of chattels, the lessor loses complete control over the chattel leased
although the lessee would be responsible to the lessor should he make bad use
thereof.
e. The object of the lease must be within the commerce of man (Art. 1374.); otherwise,
it is void. Thus, a lease of property belonging to the public domain such as a road or
a public plaza is void ab initio.
3. Ownership of thing
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Atty. Busmente – CLASS DISCUSSION AND DE LEON BOOK
1st Semester S.Y. 2021-2022
a. The lessor need NOT be the owner of the thing leased as long as he can transmit
its enjoyment or use to the lessee since ownership is not being transferred.
b. Example: the usufructuary may personally enjoy the thing in usufruct or he may
lease it to another but the lease contract shall terminate upon the expiration of the
usufruct saving only leases of rural lands (Infra.), which shall be considered as
subsisting during the agricultural year. (Art. 572.)
c. But an easement cannot be leased independently of the estate to which it actively
or passively belongs as it is inseparable therefrom (Art. 617.), being an accessory
thing whose very existence depends upon the principal thing (immovable).
d. Even the lessee himself may lease the property to another; in such case, a
sublease result.
4. Consideration of lease
a. The cause of a contract of lease of things must be a price certain generally called
"rent" or "rental" in money or its equivalent, such as products, fruits, or other useful
things, or some other prestation or labor which the lessee binds himself to
undertake.
b. As regards the lessee, the cause is the enjoyment of the thing leased.
c. The phrase "price certain" means that the price of the lease or rent has been
determined by the parties or is at least capable of determination under the contract.
A price certain exists when the same can be ascertained according to the usages or
customs of the place.
d. The amount must NOT be nominal or so insignificant as to indicate an intention to
enter into a contract of commodatum which is essentially gratuitous.
e. Since lease is essentially a consensual contract, in the absence of a law fixing a
ceiling on rentals, the lessor has the right to fix the amount of the rent, and
upon the expiration of the contract, to demand an increase thereof. The lessee
may agree with the rent or not consent to the lease.
f. Of course, during the period fixed in the contract where there is a stipulated rent,
the lessor cannot increase the rental without the consent of the lessee. Neither can
a court fix a different rental, even where there is an increase in realty taxes.
5. Period of lease
a. The period may be definite or indefinite. In any case, the period is temporary, not
perpetual.
b. When the period is definite or fixed: the longest is 99 years.
i. According to the Code Commission, Article 1643 "limits a lease to 99 years
because it is an unsound economic policy to allow ownership and enjoyment
to be separated for a very long time.
ii. A similar limitation applies in Philippine law to sales with a right of
redemption, fideicommissary substitutions, and other cases.
iii. In fact, the period of 99 years is even too long.
iv. Under the old Civil Code (Art. 1543 thereof.), there was no maximum period;
it only provides that the lease must be for "definite period.”
c. In case the period fixed is more than 99 years: the lease should ​be considered
as having expired after the end of said term.
i. Where there is an implied new lease (see Art. 1670.), the lease will be for an
indefinite time.
d. If the term is fixed but it is indefinite,but from the circumstances it can be
inferred that a period was intended: the court may fix the duration thereof.
i. A contract established to be a lease can only be for a determinate period for
a lease, by its very nature, must be temporary.
e. If no term is fixed:
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i. For leases of rural lands - Art. 1682: when its duration has not been fixed, is
understood to have been
1. for all the time necessary for the gathering of the fruits which the whole
estate leased may yield in one year, or
2. which it may yield once, although two or more years have to elapse for
the purpose.
ii. For leases of urban lands - Art. 1687: If the period for the lease has not been
fixed, it is understood to be
1. from year to year, if the rent agreed upon is annual;
2. from month to month, if it is monthly;
3. from week to week, if the rent is weekly; and
4. from day to day, if the rent is to be paid daily.
● 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.
f. A lease of things during the lifetime of one of the parties: for an indefinite
period
i. Ends upon death of either party
g. In a reciprocal contract like a lease: period must be deemed to have been agreed
upon for the benefit of both parties UNLESS there is language showing that the
term was deliberately set for the benefit of the lessee or lessor alone.
i. There is no mutuality in a contract of lease since the life of the contract is
dictated by one of the parties
h. The continuance and fulfillment of a lease of a house: cannot be made to
depend solely upon the uncontrolled choice of the lessee on whether or not the
lessee would pay rentals, thus depriving the lessor of any say on the matter
i. If the lessee elected to pay rentals, the lessor would never be able to
terminate the lease.
ii. If the lessor should desire to continue the lease, the lessee could thwart his
purpose by the simple expedient of stopping the payment of rentals.
iii. Contrary to Art 1308 which prohibits the validity or compliance with a contract
to be left to the will of one of the parties.
6. Where contract failed to specify terms and conditions to be embodied in renewed
contract
● Ledesma v Javellana: Lessee was given the sole option to renew the lease, but
the contract failed to specify the terms and conditions that would govern the new
contract
○ When the lease expired, the lessee demanded an extension under the same
terms and conditions.
○ The lessor expressed conformity to the renewal of the contract but refused to
accede to the claim of the lessee that the renewal should be under the same
terms and conditions as the original contract
○ Hicks v Manila Hotel Company: ”Such clause relates to the very contract in
which it is placed, arnd does not permit the defendant upon the renewal of the
contract in which the clause is found, to insist upon different terms than those

Atty. Busmente – CLASS DISCUSSION AND DE LEON BOOK
1st Semester S.Y. 2021-2022
embraced in the contract to be renewed; and that 'a stipulation to renew
always relates to the contract in which it is found and the rights granted
thereunder
○ unless it expressly provides for variations in the terms of the contract to be
renewed.
○ American Law Principle in Renewal of Lease Contracts: The rule is
well-established that a general covenant to renew or extend a lease which
makes no provision as to the terms of a renewal or extension implies a
renewal or extension upon the same terms as provided in the original lease.
● In the lease contract under consideration, there is no provision to indicate
that the renewal will be subject to new terms and conditions that the parties
may yet agree upon.
● It is to renewal provisions of lease contracts of the kind presently considered that
the principles stated above squarely apply. We do not agree with the contention of
the appellants that if it was intended by the parties to renew the contract under the
same terms and conditions stipulated in the contract of lease, such should have
expressly so stated in the contract itself.
● Same argument could easily be interposed by the appellee who could likewise
contend that if the intention was to renew the contract of lease under such new
terms and conditions that the parties may agree upon, the contract should have so
specified. Between the two assertions, there is more logic in the latter.
● The settled rule is that in case of uncertainty as to the meaning of a provision
granting extension to a contract of lease, the tenant is the one favored and not the
landlord.
○ GR: In construing provisions relating to renewals or extensions, where there is
any uncertainty, the tenant is favored, and not the landlord, because the latter,
having the power of stipulating in his own favor, has neglected to do so; and also
upon the principle that every man's grant is to be taken most strongly against
himself.
(7) Terms and conditions no longer subject to mutual agreement
● Besides, if we were to adopt the contrary theory that the terms and conditions to be
embodied in the renewed contract were still subject to mutual agreement by and
between the parties, then the option which is an integral part of the consideration for the
contract- would be rendered worthless.
● For then, the lessor could easily defeat the lessee's right of renewal by simply imposing
unreasonable and onerous conditions to prevent the parties from reaching an
agreement, as in the case at bar.
● As in a statute no word, clause, sentence, provision or part of a contract shall be
considered surplusage or superfluous, meaningless, void, insignificant or nugatory, if
that can be reasonably avoided.
● To this end, a construction which will render every word operative is to be preferred
over that which would make some words idle and nugatory
Estoppel against lessee.
A lessee (or bailee) is STOPPED FROM asserting title to the thing leased (or received) as
against the lessor (Art. 1436.), or to deny the lessor's title, or to assert a better title or right of
possession not only in himself; but also in some third person, INCLUDING the State while
SALES
he remains in possession of the leased property and until he surrenders possession to the
lessor.(VSCCommercial Enterprises, Inc. vs. CA)
(1) Lessor without title or his title invalid
This estoppel applies even though the lessor had no title (or valid title) at the time the relation
of lessor and lessee was created.
● According to Sec. 2[a], Rule 131 of the ROC, the rule on estoppel is that “Whenever a
party has by his own declaration, act or omission intentionally and deliberately led
another to believe a particular thing true, and to act upon such belief, he cannot in any
litigation arising out of such declaration, act, or omission be permitted to falsify it."
● It may be asserted not only by the original lessor, but also by those who succeed to his
title. (Geminiano vs. Court of Appeals)
● (Jurisprudence) Thus, where the contract of lease was entered into by the respondent
corporation and the father of the petitioner who has been enjoying the possession of the
property by virtue of the said lease it would run counter to the rules of fair play to
now allow the petitioner to deny the efficacy of the lease contract by claiming that said
contract has been repudiated but the ground for such repudiation was the question of
ownership and not the capacity of the contracting parties.
○ Having derived his right to occupy the premises from the lease entered into by his
father, the petitioner was held covered by the notice to vacate addressed to his
father and all those persons claiming rights under him. (Mendoza vs. CA)
(2) Relation of lessor and lessee not dependent on the former's title
● The relation of lessor and lessee does not depend on the former's title but on the
agreement between the parties as long as the lessee remains in undisturbed possession,
it is IMMATERIAL whether the lessor has a valid title-or any title at all –at the time the
relationship was entered into.
○ HOWEVER, due to the peculiar circumstances availing in a case, the rule was
relaxed to avoid unjust enrichment in favor of the lessor at the expense of the
lessee such as in a case where the lessee would, in effect, be paying in rental twice
for the use of the same property for the same period of time - to the real owner if he
were to still pay the lessor. (Tamio vs. Ticson)
(3) Relation of lessor and lessee not dependent on the former's title
● Under the Rules of Court, conclusive presumptions include: "(b) The tenant is not
permitted to deny the title of his landlord at the time of the commencement of the
relation of landlord and tenant between them." (Sec.3-b, Rule 131, Rules of Court.)
(a) If the title asserted is one that is alleged to have been acquired subsequent to the
commencement of the landlord-tenant relation, the presumption will not apply.
Hence, the tenant may show that the landlord's title has expired or been conveyed
to another or himself and he is not estopped from denying a claim for rent if he has
been ousted or evicted by title. (Ermitano vs Paglas)
(b) A judgment rendered in ejectment cases, shall not bar an action between the
same parties respecting title to land and shall not be conclusive as to the facts
found therein in a case between the same parties upon a different cause of action
involving possession of the same property.
In ejectment cases, the issue is the physical or material possession and any
pronouncement made by the trial court on the question of ownership is provisional
in nature. (Heirs of R.S. Florencio vs. Heir of TS. De Leon)
Lease v. Sale
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Atty. Busmente – CLASS DISCUSSION AND DE LEON BOOK
1st Semester S.Y. 2021-2022
● Not essentially personal in character ● Real contract as it is perfected only
Lease Sale and, therefore, the right may be upon delivery of the object thereof (Art.
● In lease of things, only the enjoyment ● In sale, ownership is transferred (Art. transmitted to the heirs 1934)
or use is transferred 1460) ● Consensual contract,
● Transfer is temporary ● Transfer is permanent, UNLESS
● The lessor need not be the owner subject to a resolutory condition (Art. Both contracts consist in the transmission of the enjoyment or use of a thing to another. (Art.
● The price of the subject matter, is 1465.); 1933.)
usually not mentioned, being ● The seller must be the owner or at
immaterial least authorized by the owner to Lease v. Mutuum
transfer ownership, of the thing sold at
the time it is delivered (Art. 1459) Lease Commodatum
● The price of the thing is usually fixed in ● The owner of the property does not ● The lender or creditor loses ownership
the contract. (Art. 1473) lose his ownership, of the thing loaned which becomes the
● The relationship is one of lessor and property of the borrower or debtor (Art.
In case of doubt, the INTENTION of the parties is an important factor in determining the lessee 1953)
contract entered into. ● The subject matter may be real and/or ● The relationship is that of creditor or
● (Jurisprudence) Thus, the fact that the price of the thing (machine) was fixed in the personal property obligee and debtor or obligor (Ibid)
contract, makes said contract a sale and not a lease, because in contracts of lease, as ● Governed by the Statute of Frauds ● It is only money or any other fungible
distinguished from those sale, it is plain redundancy to fix or make any mention of the where the thing leased is real property thing (Ibid.)
price of the thing which is the subject matter thereof. (H.E. Heacock Co. vs Buntal Mfg. for more than one year (Art. 1403[e]) ● Not governed by the Statute of Frauds
Co.) ● Not governed by the Usury Law, (Art. 1403)
● Governed by the Usury Law
Conditional sales of goods
Simple loan may be gratuitous or with a stipulation. (Art. 1933.)
A lease of personalty with option to buy is an installment sale and not a lease. Lease v. Usufruct
● Sellers desirous of making conditional sales of their goods, but who do not wish openly
to make a bargain in that form, for one reason or another, have frequently resorted to the USUFRUCT - Gives a right to enjoy the property of another with the obligation of preserving
device of making contracts in the form of leases either with option to the buyer to its form and substance, UNLESS the title constituting it or the law otherwise provides. (Art.
purchase for a small consideration at the end of term, provided the so-called rent has 562.)
been duly paid, or with stipulation that if the rent throughout the term is paid, title shall
thereupon vest in the lessee.(see Art. 1485.) Lease Usufruct
● It is obvious that such transactions are leases only in name.
There is a real right only when: Usufruct is always a real right
● The so-called rent must necessarily be regarded as payment of the price in installments As to real rights
a) There is a lease of real (Art. 562)
since the due payment of the agreed amount results, by the terms of the bargain, in the
property; and
transfer of title to the lessee.(Vda. de Jose Vs. Veloso Barrueco)
b) The lease is registered.
The lessor of a property may or Creator of the right is always the
Lease v. Commodatum As to ownership
may not be the owner of the owner, or one duly authorized by
the obligee
property him (Art. 567, par. 3)
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 lessor has an active The owner has a passive duty
As to duties and
the contract is called a commodatum; or money or other consumable thing, upon the condition obligation to maintain the lessee to allow the usufructuary to enjoy
obligations
that the same amount of the same kind and quality shall be paid, in which case the contract is in the enjoyment or use of the or use the property (Art. 562)
simply called a loan or mutuum. (Art. 1933.) property
The lessee generally does not pay The usufructuary pays the
As to taxes
Lease Commodatum any taxes annual charges and taxes on the
fruits (Art. 596)
● Onerous contract, although the rent ● Essentially gratuitous (Art. 1933)
may subsequently be condoned or ● Purely personal in character, and The lessee has no obligation to The usufructuary is obliged to
As to repairs and
remitted consequently, the death of either the pay for repairs make ordinary repairs needed by
maintenance of
bailor or the bailee extinguishes the the thing given in usufruct (Art.
the property or
contract (Art. 1939) 592)
thing

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Atty. Busmente – CLASS DISCUSSION AND DE LEON BOOK
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The lessee cannot constitute a The usufructuary may lease the The lessor loses control or The employer does not lose
As to the right to As to control or
usufruct over the leased thing or thing given in usufruct to another management over the chattel control or management over the
contract a management
property (Art. 581) leased property used by the employee
separate over the thing
lease/usufruct
The lessor does not have any The employer exercises control
As to control or
May only be created by contract Can be created by contract, last control to the lessor or supervision over the employee
As to how it is supervision of
will and testament, or
created the obligor
prescription (Art. 563)
Lease only covers particular uses Usufruct covers all possible uses The lessee pays rent to the lessor The employer pays the employee
As to manner of As to who pays
limited by the contract over the property. (Arts. 562, for the enjoyment or use of the wages for services rendered.
use
564, 566) chattel

Lease v. Deposit Article 1644. In the lease of work or service, one of the parties binds himself to execute a
piece of work or to render to the other some service for a price certain, but the relation of
Deposit - a contract constituted from the moment a person receives a thing belonging to principal and agent does not exist between them.
another, with the obligation of safely keeping it, and of returning the same.
● If safekeeping of the thing delivered is not the practical purpose of the contract, Lease of work or service
there is no deposit, but some other contract. ● In a lease of work, the object is the execution of a piece work for an employer, by an
independent contractor.
Lease Deposit ● On the other hand, a lease of service is the performance of some service to an
Enjoyment or the use of the thing Safekeeping of the thing employer by a househelper, laborer, or for a passenger or owner of goods by a common
Purpose of the carrier.
leased delivered
Constract ● In both kinds of lease, the employer, passenger, or owner of goods binds himself to pay
The lessor cannot demand the Depositor can demand the return compensation in favor of an independent contractor, house helper, laborer, or common
As to the right to carrier.
thing leased before the expiration of the thing in deposit at will.
demand the thing ○ No agent-principal relationship exists in this contract.
of the contract
before the
expiration of the Lease of work or service distinguished from agency
contract.
Contract of Agency - A contract where a person binds himself to render some service, or to
Lease covers both movables and If the deposit is extrajudicial, only
Type of thing do something in representation or on behalf of another, with the consent or authority of the
immovables movable things are covered.
covered latter.
Lease is an onerous contract Deposit may be gratuitous.
Type of contract Lease Agency
(A/N: In the De Leon
commentaries in Credit Basis is Employment Basis is representation
Basis
Transactions, you will see that
there are certain cases where The lessor performs a Agent executes a juridical act for
As to performance
deposit may be onerous.) material act for the benefit of and in behalf of his principal
Lease is consensual. Perfected Deposit is perfected by the his employer, without
Manner of representation of the latter
upon mere agreement of the delivery of the thing.
perfection The work or service must be Representation is presumed for
parties. As to the
for a price or compensation a compensation
consideration
Lease of Chattels v. Employment
Will of both parties is Will of one of the parties is
As to the manner of
Lease of Chattels Employment necessary to extinguish the sufficient.
extinguishment
contract.
Relationship is lessor-lessee Relationship is
Relationship of There are two (2) persons There are three (3) persons
employer-employee As to the parties
the parties involved involved
involved
a. Lessor a. Principal
b. Lessee b. Agent

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Atty. Busmente – CLASS DISCUSSION AND DE LEON BOOK
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c. Third person with evidence to establish the counterclaim of Lepanto therefore, dismissed the same. Nielson
whom the agent appealed. The Supreme Court reversed the decision of the trial court and ordered Lepanto
contracted to pay: 1. 10% Share of cash dividends of December 1941 in the amount of Php 17,500.00
In the lease of work, the risk Risk is borne by the principal with legal interest thereon from the date of the filling of the complaint; 2. Management fee
As to the risk of loss for January 1942 in the amount of Php 2,500.00 with legal interest thereon from the date of
of loss before delivery is since the agent merely acts as
borne by the independent his representative the filing of the complaint; 3. Management fees for the 60-month period of extension
contractor, especially in the amounting to Php 150,000.00 with legal interest; 4. 10% Share in the cash dividends
lease of work for a fixed price during the period of extension; 5. 10% of the depletion reserve amounting to Php
In a lease of work, the Agent is not liable to third 53,928.88 with legal interest; 6. 10% of the expenses of the capital account amounting to
As to liability to third Php 694,364.76 with legal interest; 7. To issue and deliver to Nielson shares of stock at a
independent contractor is persons unless he expressly
persons par value equivalent to the total of Nielson’s 10% share in the stock dividends declared on
personally liable for his binds himself, or exceeds the
contracts with third persons. limits of his authority. November 28, 1948 and August 22, 1950; and 8. The sum of Php 50,000.00 as attorney’s
In the lease of service, the In an agency, the agent fee and the cost that Lepanto seeks for reconsideration.
As to the exercise of
lessor ordinarily performs only exercises discretionary powers.
powers and duties Issue:
ministerial duty.
Whether the contract is a management contract, a contract of lease, or a contract of
agency?
Nielson & Company, Inc. v. Lepanto Consolidated Mining Company (1968)
Topic: Lease of services distinguished from agency
Ruling:
(1) Distinctions between agency and lease of services
Facts:
● In both agency, and lease of services, one of the parties binds himself to render
On January 30, 1937, Nielson & Co. executed an agreement with Lepanto Consolidated
some service to the other party.
Mining Co. Lepanto owned the mining properties. Nielson operated and maintained the
● Agency however, is distinguished from lease of work or services in that the basis
said properties for Php 2,500.00 / month as management fee plus 10% participation in the
of agency is representation, while in lease of work or services, the basis is
net profits for 5 years. In 1940, the 10% share was disputed. Lepanto’s Board of Directors
employment.
authorized C.A. De Witt, president to enter with an agreement with Nielson modifying same
● The lessor does not represent his employer, while the agent represents the
provisions effective January 1, 1940 such that Nielson shall receive : 1. 10% of the
principal.
dividends paid during the contract period and every end of the year; 2. 10% of any
● Agency is also merely a preparatory contract as the purpose of agency is to
depletion reserve that may be set up; 3. 10% of any amount expended during the year out
enter into other contracts.
of surplus earnings for capital account.
● Furthermore, the agent is destined to execute juridical act, while in a lease of
services, it merely contemplates material acts.
In 1941, the parties renewed their contract for another 5 years but the Pacific War broke
(2) Principal and paramount undertaking of Nielson
out in December 1941. In January 1942, the operation was disrupted. The U.S. Army
● It appears that the principal and paramount undertaking of Nielson under the
ordered that the mill, power plant, supplies, equipment, concentrates on hand and mines
management contract was the operation and development of the mine and the
be destroyed to prevent the Japanese from using. Thereafter, the Japanese army occupied
operation of the mill.
the mining properties and was ousted only in August 1945. Lepanto then rebuilt the mines
● All other undertakings are necessary or incidental to the principal undertaling.
and mills including setting up new organizations, repairs, clearings, salvages, etc. The
● In the case at bar, the performance of the principal undertaking by Nielson was
reconstruction was completed until 1948. On June 26, 1948 the mines resumed the
not in any way executing juridical acts for Lepanto. In other words, Nielsen was
operation under the exclusive management of Lepanto. However, after the mines were
not acting as an agent of Lepanto, as Nielsen is merely performing material acts
liberated in 1945, a disagreement arose between Nielson and Lepanto over the status of
for an employer, for compensation.
the operating contract which expired in 1947. Under the terms thereof the management
● While it is true that the management contract provides that Nielson would act as
contract shall remain in suspension in case of fortuitous event or force majeure such as
a purchasing agent of supplies and enter into contracts regarding the sale of
war, which adversely affects the work of the mining and milling. On February 6, 1958,
minerals, the contract also states that Nielson could not make any purchases, or
Nielson brought an action against Lepanto before the Court of First Instance (CFI) of
sell minerals without the prior consent of Lepanto. This means that Nielson could
Manila to recover damages suffered in view of the refusal of Lepanto to comply with the
not make juridical acts that would bind Lepanto without their consent. Therefore,
terms of a management contract entered into between them on January 30, 1937.
Nielson merely acts as an intermediary, instead of being an agent.
(3) Contact not terminable at will
In its answer, Lepanto denied the allegations and set up certain defenses, prescription and
● Under par. XI of the management contract, Lepanto could terminate or cancel
laches as bars against the institution of the action. After trial, the court a quo rendered a
the agreement by giving notice of termination 90 days in advance only in the
decision dismissing the complaint with costs. The court stated that it did not find sufficient
event that Nielson should prosecute in bad faith and not in accordance with the

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approved mining practice of the operation and development of the mining Work or service must be for a price Partners share in the profits or
Consideration
properties of Lepanto or compensation losses
● Lepanto could not terminate the agreement if Nielson should cease to prosecute Will of both parties is necessary for Will of any partner is sufficient
the operation and development of the mining properties by reasons of acts of Extinguishment
the extinguishment of the
God, strike, and other causes beyond the control of Nielson relationship
(4) Cause for revocation of contract Independent contractor is A partner is generally not
● No showing that Nielson had ceased to prosecute the operation and Liability
personally liable for his contracts
development of the mines in good faith and in accordance with approved mining with third persons
practice which would warrant the termination of the contract upon 90 days The lessor (like a servant) Every partner as an agent of
written notice. In fact there was no written notice of termination. Power or duties
ordinarily performs only ministerial partnership, exercises
● Nielsen ceased to operate and develop mines due to the war – a cause beyond duties discretionary powers
the control of Nielson
● Indeed, if the management contract in question was intended to create a Compensation in lease of work or service
relationship of principal and agent between Lepanto and Nielson, paragraph XI (1) Where there is an agreement
of the contract should not have been inserted because as provided in Article ● Lessee must be compelled to pay the agreed price unless it is found to be iniquitous
1733 (now Art. 1920), agency is essentially revocable at the will of the principal or unreasonable
○ BUT, precisely said par. XI was inserted in the management contract to ○ In which case, the court may fix a reasonable and just remuneration
provide for the cause of revocation. Such provision must be given effect. ● Where the compensation is renounced or waived after the service has been
rendered → there is still a lease of service although it has become gratuitous
Lease of work or service distinguished from partnership (2) Where the agreement may be implied
● On principle one who performs work or service in favor of another who impliedly
Lease of Work/Service Partnership consents thereto and who benefits thereby → is entitled to compensation by virtue
Lease of Work – (contract for a 2 or more persons bind of an innominate contract (Art. 1307.) of facio ut des (I give that you may do) or of
Definition
piece of work) involving an themselves to contribute money, the case of services tacitly contracted in which case the courts will fix the
obligation on the part of the property, or industry to a reasonable worth of the services rendered.
independent contractor (lessor) to common fund, with the intention ● No one should be enriched by the work of another unless the services are expressly
execute a piece of work for the of dividing the profits among stated to be gratuitous.
employer (lessee) in consideration themselves (a) Tacit agreement of both parties with respect to the services of interpreter
of a certain price or compensation rendered by the plaintiff to the defendant and reciprocal benefits accruing to
each → are the best evidence that there was an implied contract sufficient to
Lease of Service – involving an be binding. Art. 1644 is applicable
obligation on the part of the (b) When a vessel has been disabled by breaking of its shaft at sea and hoists
housekeeper, laborer or employee, signals for aid, and another vessel goes to its relief and takes it in tow → such
or common carrier, to perform a service is one of salvage and not merely towage, and must be remunerated
service for the head of family, (3) Where no rate or amount is fixed in the contract
master, employer, or passenger or ● Although no exact amount may have been determined by the parties as the
shipper of goods, respectively, in consideration for the contract of hiring, the contract is nevertheless valid if––
consideration of compensation ○ the amount can be ascertained in the light of the customs and usages of the
No principle of representation Every partner is an agent of the place; or
Representation
partnership for the purpose of its ○ by findings of fact on basis of evidence submitted in case of disagreement
business ● Price certain exists → when the same can be ascertained according to the customs
Lessor performs a material act for Partners enter into commercial or and usages of the place
Act involved
the benefit of the employer business transactions for the
realization of profits Service as driver under the boundary system
Only 2 persons are involved A juridical personality ● BOUNDARY SYSTEM - scheme by an owner/operator engaged in transporting
Persons involved passengers as a common carrier to primarily govern, the compensation of the driver, that
(partnership) separate and
distinct front hat of each of the is, the latter’s daily earnings are remitted to the owner/operator less the excess of the
partner is formed boundary which represents the driver’s compensation
Dependent upon the ends or Partners perform acts conducive ○ Under such system, the relation between the driver and the jeepney owner is that
Dependence of employer and employee, not lessor and lessee
purposes of the lessee to their own business purposes

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● Villamaria, Jr. v. CA: Under the system, the owner/operator exercises control and
supervision over the driver.
○ It is unlike in lease of chattels where the lessor loses complete control over the
chattel leased but the lessee is still ultimately responsible for the consequences of
its use.
○ The management of the business is still in the hands of the owner/operator, who,
being the holder of the certificate of public convenience, must see to it that the
driver follows the route prescribed by the franchising and regulatory authority, and
the rules promulgated with regard to the business operations.
○ The fact that the driver does not receive fixed wages but only the excess of the
"boundary" given to the owner/operator is not sufficient to change the relationship
between them.
○ Indubitably, the driver performs activities which are usually necessary or desirable
in the usual business or trade of the owner/operator.
Article 1645. Consumable goods cannot be the subject matter of a contract of lease, except
when they are merely to be exhibited or when they are accessory to an industrial
establishment.
Lease of consumable goods
● GENERAL RULE: fungible things which are consumed by use cannot be the subject
matter of lease
○ The essence of a lease of things is the enjoyment or use of the property (Art.
1643.) with the obligation on the part of the lessee to return the same upon the
expiration of the lease. (Art. 1665.)
○ Ownership is not transferred to the lessee.
○ Hence, things which by their nature cannot be used without being consumed,
cannot be the subject matter of lease.
● EXCEPTION: consumable goods may be the object of lease when they are merely to be
exhibited or when they are accessory to an industrial establishment
CHAPTER II. LEASE OF RURAL AND URBAN LANDS
Section 1. General Provisions
Article 1646. The persons disqualified to buy referred to in Articles 1490 and 1491, are also
disqualified to become lessees of the things mentioned therein. (n)
Rural lands distinguished from urban lands
(1) Location of the property generally determining
● focal or determining factor is generally the location of the property
● construction of the word “rural” thats is a consonance with the legislative
purpose must be followed.
(2) Meaning Intended by legislature to be followed
● RURAL - relating to or constituting tenement in land adopted and used
for agricultural or pastoral purposes; regardless of site, is principally used
for the purpose of obtaining products from the soil
● URBAN - principally for the purpose of residence.
Persons disqualified to become lessees
8
● Article 1646 provides that persons disqualified to buy in accordance with Articles
1490 and 1491 are likewise disqualified to lease the thing therein mentioned.
○ Article 1490 refers to the relative incapacity of husband and wife to sell
property to each other
○ Article 1491, to the incapacity of the persons enumerated therein who, by
the special relations they have with the property under their charge or
peculiar control, are prohibited from purchasing said property.
● The prohibition is adopted in Article 1646 because of the similarity between the
contract of lease and that of sale.
Lease of real property by aliens
● Foreigners are prohibited by the Constitution, except only in cases of hereditary
succession, to acquire lands in the Philippines. (Secs. 7, 2, par. 1, Art. XII,
Constitution.) Nevertheless, they can lease real or immovable property in the
Philippines.
(1) Ownership preserved in lessor
● The lessee has apparently the same rights as the owner;
● Ownership and lessor difference:
a. The lessor does not have the possession of the thing but he
preserves the title, the ownership.
b. The lessee enjoys the use of the immovable, nothing more; he
does not exercise any proprietary right.
c. The foreigner who buys a land becomes the owner, exercises
ownership over the same; but a lessee does not obtain more
than the possession or use of the land; there is no danger that
a lessee be converted into an owner of the land; the ownership
is preserved in the lessor
(2) Where lease contract amounts to virtual transfer of ownership.
● Since the residence of aliens in the Philippines is temporary, they may be
granted temporary rights such as a lease contract which is not forbidden
by the Constitution.
● The parties, however, will not be permitted to resort to another transaction
for the purpose of disguising the transfer in violation of the Constitution.
● it has been held that a contract whereby an alien is given not only a lease
but also an option to buy a parcel of land by virtue of which the Filipino
owner cannot sell or otherwise dispose of her property, this to last for 50
years, is a virtual transfer of ownership and circumvents the constitutional
ban against alien landholding.
(3) Maximum period of lease to aliens
● Under Pres. Decree No. 471, the maximum period allowable for the
duration of leases of private lands to aliens or alien-owned entities not
qualified to acquire private lands under the Constitution is 25 years,
renewable for another period of 25 years upon mutual agreement of
both lessor and lessee.
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(4) Lease to foreign investors.
● R.A. No. 6752, otherwise known as the Investors' Lease Act, regulates
the long-term lease of private lands by foreign investors. Under the Act,
any foreign investor investing in the Philippines shall be allowed to lease
private lands, subject to these conditions:
(a) NO lease contract shall be for a period exceeding 50 years,
renewable once for a period of not more than 25 years;
(b) The leased area shall be used solely for the purpose of the
investment upon the mutual agreement of the parties;
(c) The leased premises shall comprise such area as may reasonably
be required for the purpose of the investment subject however to the
Comprehensive Agrarian Reform Law and the Local Government
Code
(d) The leasehold right acquired under long-term lease contracts
entered into pursuant to the Act may be sold, transferred, or
assigned. However, when the buyer, transferee, or assignee is a
foreigner or a foreign-owned enterprise, the conditions and
limitations in respect to the use of the leased property as provided
for under the Act shall continue to apply
(e) Any lease agreement under the Act which is renewable at the option
of the lessee subject to the same terms and conditions of the
original contract shall be interpreted to mean as renewable upon the
mutual agreement of the parties.
(f) A foreign investor is one who has made an equity investment in the
Philippines through actual remittance of foreign exchange or transfer
of assets, whether in the form of capital goods, patents, formulas, or
other technological rights or processes, upon registration with the
Securities and Exchange Commission.
● Foreign individuals, corporations, associations, or partnerships not otherwise
investing in the Philippines as defined in the Act continues to be covered by Pres.
Decree No. 471 and other existing laws in lease of lands to foreigners.
Article 1647. If a lease is to be recorded in the Registry of Property, the following persons
cannot constitute the same without proper authority: the husband with respect to the wife's
paraphernal real estate, the father or guardian as to the property of the minor or ward, and
the manager without special power. (1548a)
Proper authority required if leased to be recorded in Registry of Property
(1) Persons required to secure special power
● If a lease is to be recorded in the Registry of Property, the persons
mentioned in Article 1647 cannot constitute the same without proper
authority (i.e., power of attorney) to constitute the same.
● Under the old Civil Code (Art. 1548 thereof.), said persons could not
lease for a term of more than six (6) years without a special power of
9
attorney for the purpose because such a lease was considered an act of
strict ownership and not a mere act of administration.
(2) Reason for requirement
● Every lease of real estate may be recorded, and if recorded, creates a
real right binding upon third persons. (Arts. 1648, 1676.) The registration
of the lease is, therefore, an act of strict ownership; hence, a special
power of attorney is necessary.
● But if the lease is not to be recorded, the lease entered into by said
persons is valid even without a special power.
(3) Lease for more than one year.
● Article 1647 does not specify the term of the lease.
● Under Article 1878(8), a special power of attorney is necessary "to lease
any real property to another person for more than one year." This
requirement is imposed whether or not the lease will be recorded.
● In the absence of a special power, a lease for more than one (1) year
executed by the persons mentioned in Article 1647 is valid only for one
(1) year but void as to the excess.
Note: The word "administrator" in the old Civil Code is changed to "manager" in Article 1647.
Said word has been held to apply to an administrator of conjugal property, property owned in
common, property of a decedent, and patrimonial or private property of the State
Article 1648. Every lease of real estate may be recorded in the Registry of Property. Unless
a lease is recorded, it shall not be binding upon third persons. (1549a)
Effect of registration of lease of real estate
(1) As against third persons
(a) A lease contract is valid and binding between the parties, their privies,
and their heirs, unless it be an oral lease for a longer period than one
year in which case it cannot be enforced by action for non-compliance
with the Statute of Frauds.
(i) For real property, it should be registered in the Registry of
Property to affect or bind third persons.
(b) The purpose of this provision is to protect the lessee, who cannot be
ousted by the buyer if the lease is recorded.
(i) The lessor cannot be compelled by the court to deliver to the
lessee the certificate of title over the property leased so that the
lease may be annotated therein.
(2) As between the parties
(a) lease is a mere personal right
(b) Its inscription in the Registry of Property to bind third persons does not in
any way alter or modify the rights and obligations of the parties under the
contract which has a life of its own independent of the registration.
Leases of personal property
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● Article 1648 applies only to lease of real estate; hence, leases of personal or
movable property cannot be registered.
● Read this in relation to Article 1635. By analogy of this rule, leases of personal
property shall be binding on third persons if they appear in a public instrument.
Effect of actual notice of unregistered lease by purchaser
● GR: Where the contract of lease entered into by the lessee with the former owner
was not recorded, said contract cannot bind a purchaser of the property.
Article 1649. The lessee cannot assign the lease without the consent of the lessor, unless
there is a stipulation to the contrary.
Assignment of lease by lessee
● In an assignment of lease, the personality of the lessee 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.
○ Novation → substitution of the person of the debtor WITH the consent of
the creditor
● Consent of the lessor is MANDATORY unless there is a stipulation granting the
lessee the right to assign.
○ This is for the protection of the lessor or the owner of the leased property.
○ What is being contemplated in this provision is that there is the transfer of
the contract itself and not just the rights of the lessee.
● This is different from a sublease which is to be discussed in Article 1650.
Article 1650. When in the contract of lease of things there is no express prohibition, the
lessee may sublet the thing leased, in whole or in part, without prejudice to his responsibility
for the performance of the contract toward the lessor.
Sublease by lessee of thing leased
● The lessee may sublease the property in the absence of express prohibition.
○ A violation of the prohibition entitles the lessor to rescission of the
contract and indemnification for damages or only the latter allowed the
contract to remain in force (Article 1659).
○ Sublease is still allowed even though it is only implied.
● In sublease, the lessee remains a party to the contract. The personality of the
lessee does not disappear.
● Contract of lease is not affected by the sublease. The sublease of a leased property
cannot affect the efficacy of the contract of lease which subsists with all its legal
consequences notwithstanding said sublease.
○ The lessee is still responsible for the performance of his obligations
toward the lessor.
Facts:
Alleging that the petitioner had violated the lease contract, the Gopiaos demanded that he
vacate the premises. When he did not comply, they filed a complaint for ejectment in the
barangay court. Eventually, the case reached the courts.
10
Petitioners alleged that the boarders were his nephew, nieces, grandchildren or other
relatives, who are students at the Far Eastern University, and that the respondents filed the
ejectment suit because they had demanded an increase in his rent from P300 to )600 per
month which he refused to pay.
Issue: Did the petitioner violate the lease agreement by taking in of boarders?
Ruling: NO.
(1) Accepting boarders not equivalent to subleasing.
● The taking in of boarders by the petitioner in the leased premises, without the
consent of the lessors, did not violate the lease agreement, for a prohibition
against subleasing may not embrace the taking in of boarders. Accepting
boarders is not equivalent to subleasing the premises. The lessee, by
accepting boarders and assigning rooms or bed spaces for them in the leased
premises, does not relinquish or surrender his lease to them. He did not cease
to become the actual occupant and possessor of the demised premises. He did
not surrender the possession and control of the leased premises or a part
thereof.
● The word “sublet” has a clear and distinct meaning, that is, it means to make a
sublease, accompanied by a surrender of the possession and control of the
premises, or at least a part thereof.
(2) Boarders merely provided with meals and lodging for a price
● By accepting boarders in the apartment, the petitioner did not sublease portions
of the apartment to the boarders, but only agreed to provide them with meals
and/or lodging for a price.
● To this effect are the following rulings:
○ Letting a room for personal occupation to a lodger does not constitute
a subletting.
○ Since a roomer or lodger is not a tenant in the strict legal sense, it has
generally been held that the taking in of roomers or lodgers by a
lessee does not constitute a violation of a covenant or provision
against subletting. However, where the lease of one of the two houses
of a double brick dwelling contained a provision that there should be
no subletting of the leased premises, it was held that there was a
technical violation of the lease where the lessees rented on of the
rooms of such house to a person who was not related to the lessees in
any way, and who, in addition to having a room and private bath, had
breakfast with the lessees, and who was certified by such lessees as a
tenant to hte Price Administration.
○ A sublease is a grant by a tenant of an interest in the demised
premises less than his own, retaining to himself a reveersion, and a
subtenant is a person who rents all or a portion of leased premises
from the lessee for a term less than the original one, leaving a
reversionary interest in the first lessee.
○ A lessee’s common-law right to sublet may be expressly restricted by
a covenant or stipulation against subletting, but since such restriction
are in restraint of alienation, they are not looked upon with favor by the
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courts; they are construed with the utmost jealousy, and very easy
modes have always been countenanced for defeating them.
○ Permitting lodgers or boarders to occupy rooms in a demised building
is not subletting.
(3) Lease contract has not been violated
● Since neither the law (BP Blg. 25, as amended) nor his contract with the
property owner prohibits the petitioner from accepting roomers, bed spacers, or
boarders in the leased apartment, the lease has not been violated. The lessors
have no cause of action for the judicial ejectment of petitioner-lessee.
Article 1651. Without prejudice to his obligation toward the sublessor, the sublessee is
bound to the lessor for all acts which refer to the use and preservation of the thing leased in
the manner stipulated between the lessor and the lessee. (1551)
Direct liability of sublessor to lessor
● The sublessee is not a party to the contract between the lessor and the lessee; hence,
under the general rule in contracts (Article 1311), the sublessee can only be held liable
directly to the sublessor.
○ Article 1651 provides an exception to the rule.
○ The lessor may bring an action directly against the sublessee if he does not use
and preserve the thing leased in accordance with the agreement 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.
● The duty of the sublessee insofar as the use and preservation of the thing leased is
concerned is without prejudice to his obligation toward the sublessor.
Article 1652. The sublessee is subsidiary liable to the lessor for any rent due from the
lessee. However, the sublessee shall not be responsible beyond the amount of rent due from
him, in accordance with the terms of the sublease, at the time of the extrajudicial demand by
the lessor.
Payments of rent in advance by the sublessee shall be deemed not to have been made, so
far as the lessor’s claim is concerned, unless said payments were effected in virtue of the
custom of the place.
Subsidiary liability of sublessee to lessor
● As earlier stated, in a sublease arrangement, there are two (2) distinct leases: the
principal lease and the sublease.
○ These two (2) juridical relationships co-exist and are intimately related to each
other but nonetheless distinct from one another.
○ The lessee’s rights and obligations vis-a-vis the lessor are not passed on to the
sublessee.
(1) Remedy to collect rents from the sublessee
● Although the sublessee has assumed no direct obligation to answer for the
rents due from the lessee to the lessor, the Article 1652 grants the lessor the
right to demand payment from the sublessee the rents which the sublessor
failed to pay the lessor.
11
○ The evident purpose of the remedy is to prevent a situation where the
lessee collects rents from the sublessee but does not pay his rents to
the lessor.
● Article 1652 does not annul the contractual relations between the lessee and
sublessee but simply helps the owner of the property to collect rentals on the
saem.
○ The demand to pay rents made by the lessor on the sublessee does not
exempt the latter from his obligation to pay the sublessor the rents which
said sublessee failed to pay the lessor.
(2) Amount or rent recoverable
● The liability of the sublessee is limited to the amount of rent due from him to the
sublessor under the terms of the sublease at the time of the extrajudicial
demand by the lessor.
○ Future rents cannot be recovered.
○ Note that the liability of the sublessee is subsidiary, i.e., he is liable to
the lessor only for the rents the lessee failed to pay the lessor.
● The sublessee is not liable to the lessor under Article 1652 upon mere demand
by the lessor on him.
○ He is primarily liable to his sublessor.
○ There must be a judgment cancelling the lessee’s principal lease
contract or ousting the lessee from the premises before the sublessee
becomes subsidiarily liable.
(3) Liability for rents paid in advance
● Articles 1651 and 1652 impose upon the sublessee certain obligations which
imply the grant of a direct action in favor of the lessor against the former.
○ Under the second paragraph of Article 1652, payments of rent in
advance by the sublessee shall be deemed not to have been made, so
far as the lessor’s claim is concerned, unless said payments were
effected in virtue of the custom of the place.
○ The sublessee continues to be subsidiarily liable to the lessor for any
rent unpaid by the lessee.
○ The rule is a precaution to avoid collusion between the lessee and
lessee.
○ With the insolvency of the sublessee and the supposed advance
payment by the sublessee, the rights of the lessor might be rendered
nugatory.
Article 1653. The provisions governing warranty, constrained in the Title on Sales, shall be
applicable to the contract of lease.
In the cases where the return of the price is required, reduction shall be made in proportion
to the time during which the lessee enjoyed the thing.
Warranty of the lessor
● Article 1653 applies to leases the warranties in sales.
● In a lease contract, the lessor likewise warrants that he has a right to lease the thing,
that the lessee shall enjoy the legal and peaceful possession of the thing, and that the
thing is fit for the use for which it is intended and free from any hidden fault or defect.
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● 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 to ask for the 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.
Lessor’s warranty distinct from his liability for damages
● In connection with a lease, warranty is the obligation to repair or correct any fault or
defect existing when the lessee took over the property leased, but when the law
declares that the lessor must warrant the thing leased; it is not to be understood that he
must also indemnify the lessee.
○ 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.
● In a lease of a cold storage plant for foodstuffs, the lessor is understood as having
warranted that the leased premises would be free from rats.
○ In this warranty, fraud or bad faith on the part of the lessor is not a necessary
element.
○ A lessor of a cold storage plant may be held liable for the deterioration of the
foodstuffs stored therein by the lessee because some foodstuff was gnawed by
the rodents.
Section 2. Rights and Obligations of the Lessor and Lessee
Article 1654. The lessor is obliged:
1. To deliver the thing which is the object of the contract in such a condition as to
render it fit for the use intended;
2. To make on the same during the lease all the necessary repairs in order to keep it
suitable for the use to which it has been devoted, unless there is a stipulation to
the contrary;
3. To maintain the lessee in the peaceful and adequate enjoyment of the lease for the
entire duration of the contract.
Obligations of the lessor
● Article 1654 enumerates the three (3) principal obligations of the lessor.
● Another obligation of the lessor is that he cannot alter the form of the thing
leased (Article 1651).
● Failure to fulfill any of these obligations will render him liable for damages.
● The lessee may ask for the rescission of the lease contract and indemnification for
damages or only the latter, allowing the contract to remain in force.
(1) Delivery of the property
● The thing leased must be delivered in order that the lessee may enjoy the
use the same. The delivery may be actual or constructive.
a. At the time of delivery, the thing must be in a condition fit for the
use intended. The contract may validly provide that the thing,
when delivered, shall be in the same condition in which it might
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be at the time of the perfection of the contract. The parties may
stipulate regarding the fitness of the thing and the particular
use to which it will be devoted by the lessee.
b. When a lessee rents a building which turns out to be occupied
by another person, and the former cannot obtain possession,
his (the lessee's) cause of action is against the lessor for
breach of contract in that the latter violated the obligation of
delivering to him the peaceful possession of the leased
premises. The lessee has no cause of action against the
possessor because he has no relation, contractual or ex
delicto, with the latter.
c. A lessee who fails to take possession of the leased premises
on account of the presence of third persons unwilling to vacate
the premises because of some previous act or transaction of
the lessor, should institute the action against the lessor based
upon the latter's failure to comply his obligation to deliver the
same.
(2) Making of necessary repairs
● Article 1654 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.
a. If the lessor fails in the performance of this duty, the lessee may suspend
the payment of rent (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.
b. The lessee may agree to do the repairs and relieve the lessor of the duty,
as where the lessee is to pay only a very moderate if not nominal, rent.
c. 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
d. The word "repairs" in its ordinary acceptation, must be understood to
apply to the restoration of things after injury or partial destruction, without
complete loss of identity in the thing repaired.
e. The obligation to make repairs is very different from reconstruction in
case of total loss. Thus, the lessor's obligation to make repairs does not
extend to the obligation to reconstruct a camarin which has been totally
destroyed by fire. Repairs mean the restoration of the camarin which had
deteriorated from use or has been partially destroyed without total loss of
identity.
f. When the lessor agrees to keep a building under lease in a proper
condition but fails to do so, and the lessee vacates the building before the
expiration of the lease, the lessor cannot recover damages nor rent for
the unexpired term.
g. There are no authorities to the effect that it is incumbent upon the owner
to constantly inspect the premises and that if he fails to do so or through
error of judgment fails to make repairs before the damage is material, the
lessee has a cause of action. As the lessee is in possession and if repairs
are necessary, which it is the duty of the owner to make, the lessee
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should call upon the owner to make the necessary repairs. If the owner
then fails to perform his duty, action would lie.
h. There the lessee's goods got wet as a result of torrential rain even though
the roof of the building occupied by the lessee was in good condition and
there was no proof that the lessor knew that it had cracks or defects, the
lessor cannot be held liable for damages in the absence of express
agreement to that effect.
(3) Keeping lessee in peaceful and adequate enjoyment
● 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.
a. The lessor who fails in the performance of his obligation shall be subject
to indemnity for the losses and damages caused thereby. The true
measure of damages for the breach of such a contract is what the plaintiff
has lost by the breach.
b. The warranty of the lessor is that the lessee shall not be disturbed in
his legal, not physical possession of the property.
c. It has been held that the act of the Japanese Armed Forces in evicting
the lessee from the leased premises constituted not merely an act of
trespass (pertubacion de mero hecho) but a trespass under a color of title
(perturbacion dederecho) chargeable to the lessor.
d. In a case where the agreement of the parties is for the lease of an
entire area and "the term of the lease shall be considered as extended
for a period equal to that during which the lessee was not in possession
of the leased premises," the failure of the lessee to use a portion of the
leased premises was held equivalent to a dispossession from the entire
area in question, for there was incomplete performance by the lessor of
its principal prestation, thereby calling for the application of the
contractual provision on extension of term.
e. The obligation of the lessor to maintain the lessee in the peaceful and
adequate enjoyment of the lease persists only for the duration of the
contract.
f. In one case, the Supreme Court ruled that the while a lessor-lessee
relationship existed between the parties, the lessor is not liable for the
loss of a car parked by the lessee in the lessor's garage.
Where lease contract contains right of first refusal
● Stipulations on right of first refusal (see Art. 1479.) over the leased premises have
been held to be valid as they are commonly inserted in contracts of lease for the
benefit of lessees who wanted to be assured that they shall be given the first crack
or the first option to buy the property at the price the owner is willing to accept.
● When a lease of contract contains a ROFR, the lessor is under a legal duty to the
lessee not to sell to anybody at any price until after he has made an offer to sell to
the latter at a certain price and the lessee has failed to accept it.
● The lessee has a right that the lessor's first offer shall be in his favor. His right of
first refusal is an integral and indivisible part of the contract of lease and is
inseparable from the whole contract.
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● The consideration for the lease includes the consideration for the right of first
refusal and is built into the reciprocal obligations of the parties.
● Only after the lessee has failed to exercise his right of first priority could the lessor
sell the property to other buyers under the same terms and conditions, or under
terms and conditions more favorable (e.g., higher selling price) to the lessor.
● A right of first refusal means identity of terms and conditions to be offered to the
lessee and all other prospective buyer. The basis of the right must be the current
offer to sell of the seller or offer to purchase of any prospective buyer. The rule is
that a sale made in violation of a right of first refusal (or pre-emptive right) is valid.
However, it may be rescinded, or may be the subject of an action for specific
performance.
● The aggrieved party may file an action to rescind the sale and compel the lessor (or
owner) to execute the necessary deed of sale in his favor.
Article 1655. 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 a proportional
reduction of the rent and a rescission of the lease.
Effect of destruction of thing leased by fortuitous event
1. Destruction total
● In this case, the lease is extinguished.
○ Reason: Absence of the object of the contract
○ Example: The lessee of a room in a building which is
subsequently destroyed cannot consider himself a lessee of the
land on which said building was constructed and from which he
is sought to be ousted, just because he was a lessee of one of
the rooms of said buildings.
■ His lease came to an end when the building was
destroyed, so that, to make him lessee of the land
thereafter, a new contract of lease would have to be
made.
● Where the buildings and the land, which formed part of the causa or
consideration of the lease contract, constituted an indivisible unit
○ Destruction of the buildings - extinguished the obligation or
terminated the lease contract
2. Destruction partial
● In this case,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.
● If the reduction of rent is chosen
○ the same shall be retroactive to the date the partial destruction
occurred.
● In case of rescission
○ the general rule is that it will not be granted for slight or trivial
causes.
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● 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.
Article 1656. The lessor of a business or industrial establishment may continue engaging in
the same business or industry to which the lessee devotes the thing leased, unless there is a
stipulation to the contrary.
Right of lessor to continue same business or industry engaged in by lessee.
● This provision permits the lessor of a business or industrial establishment to
continue engaging in the same business or industry to which the lessee has
devoted the thing leased.
● A lease is no warranty by the lessor to the lessee that the latter's business would
be successful.
● Even if the lessee should suffer losses, he would still be bound to fulfill the terms of
the lease
● Neither does a lease create a right in favor of the lessee to be free from competition
offered by the lessor or other persons.
● GENERAL RULE: It is submitted that the lessor may engage or continue to engage
in the same business of the lessee
○ EXCEPTION: unless there is a stipulation to the contrary.
Article 1657. The lessee is obliged:
(1) To pay the price of the lease according to the terms stipulated;
(2) To use the thing leased as a diligent father of a family, devoting it to the use stipulated;
and in the absence of stipulation, to that which may be inferred from the nature of the thing
leased, according to the custom of the place;
(3) To pay the expenses for the deed of lease.
Obligations of the lessee.
● Generally, if the lessor or lessee should not comply with his obligations, the
aggrieved party may ask for either the rescission of the contract and indemnification
for damages, or only the latter allowing the contract to remain in force.
● Article 1657 enumerates the three (3) principal obligations of the lessee.
○ Another obligation of the lessee is to notify the lessor of every
usurpation or untoward act by any third person and of the necessity of
urgent repairs.
1. Payment of agreed price of lease
○ The obligation of the lesseeto pay the rent agreed upon arises only when
the thing leased has been delivered to thelessee for the purposes
stipulated in the contract.
○ Thus, where the agreement to lease a vessel was never consummated
■ Reason: that the defendant did not accept delivery of the same
because it was not what it was represented to him
● the lessee is not liable for rent.
a.) Only the lessor has the right to fix the rents.
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● The court cannot determine the rent and compel the lessor to conform
thereto and allow the lessee to enjoy the premises on the basis of the
rents fixed by it.
● It is an error for the court to fix a monthly rental at an amount which is
lower than what the lessee is willing to pay for the leased premises.
b.) The lessor has not only the right to terminate the lease upon the expiration of the
term but also to increase the rent in case of renewal.
● The lessee has the option to accept the new rate or vacate the premises;
otherwise, he will be considered a possessor in bad faith of the property.
c.) Where the lessee was in continuous possession of the leased building and lot
during the pendency of the case, operating its business therein and making profits
thereby, whereas the lessor was not only deprived of the possession of his property
but also of the rental therefor, said lessee must be required to compensate the
lessor for such occupancy until it vacates the premises.
● The lessee is obliged to pay rentals during the pendency of the action for
rescission of the lease.
d.) Where on a few occasions the lessee paid late the rentals due, but the delay
was only for a few days, such breaches are not so substantial and fundamental to
warrant the rescission of the lease.
e.) The fact that the vendor-lessee has a right to repurchase the lots sold by him
under a pacto de retro sale and leased to him by the vendee, is no excuse for
failure to pay rentals. The sale and the lease are independent of each other.
f.) The disagreement between a lessor and a lessee as to the amount of rent to be
paid cannot be decided in an action of Consignation (see Art. 1256.)
● but in that of forcible entry and unlawful detainer that the
lessor institutes when the lessee refuses to pay the rents that
the lessor has fixed for the property.
g.) The proper rate for back rentals is 12% (now 6% undor Bangko Sentral, Circ.
No. 799, Series of 2013) per annum computed from the time of demand. Back
rentals in this case are equivalent to a loan or forbearance of money.
h.) The place for the payment of rental is governed by the same rules regarding
payment of obligations in general.
2.) Proper use of the thing leased - The lessee must exercise the diligence of a good father of
a family.
a.) 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.
● The use of the thing for an illegal purpose entitles the lessor to terminate
the contract.
○ When a thing by its nature is susceptible to various uses, the
lessee may use it for any of the purposes for which it may be
suitable. The lessee need limit himself to the use to which the
thing was devoted at the time of the lease.
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○ Thus, a lot may at the time of the contract may have been used
as a depositary for lumber; the lessee may use it as a motor
compound or even for purposes of constructions suitable to the
place.
○ But when the lease is of a commercial establishment dedicated
to a particular business, such as a bakery or grocery, the
lessee cannot change the purpose of such establishment
b.) If pre-termination is allowed or agreed upon in the contract it should be allowed
only on the ground or grounds stated therein.
● Due process, however, demands that a party to the contract should be
fully apprised as to why the contract is being pre-terminated so that he
will know if the ground or grounds are provided for in the contract.
● If there are other grounds, the same should be included in the termination
notice, otherwise, it should not be considered.
3. Payment of expenses for deed of lease
● In sale,the expenses for the execution and registration of the deed of sale shall be
borne by the vendor, unless there is a stipulation to the contrary.
● In lease, the law imposes the obligation to pay expenses for the deed of lease on
the lessee.
○ By agreement, the obligation may be assumed by the lessor.
D.M. Ragasa v. BDO
Topic: A lease contract was entered into by D.M. Ragasa (lessor) and Equitable Bank
(predecessor of BDO; lessee) for 5 years. Equitable Bank merged with PCI Bank then later
on merged with BDO. As a result of the merger, one of the branches which had to be
closed is the branch located in the subject premises. The bank sent a notice informing
Ragasa that they are pre-terminating their Lease Contract. Ragasa responded with a
demand letter for the payment of monthly rentals for the remaining term of the Lease
Contract, because there is no express provision in the Lease Contract allowing
pre-termination. The bank alleged that its only liability for pre-terminating the contract is the
forfeiture of its security deposit. Ragasa filed before the RTC a Complaint for Collection of
Sum of Money and Damages. RTC held in favor of Ragasa as the bank may not
unilaterally pre-terminate the Lease Contract; hence, it is still liable to pay the rentals for
the remaining duration of the said contract. CA reversed the ruling of RTC and held that
the bank's failure to continue the Lease Contract until its expiration constituted a breach of
its provision. SC held that Pursuant to the automatic termination clause of the Lease
Contract, which is in furtherance of the autonomy characteristic of contracts, the Lease
Contract was terminated upon its unauthorized pre-termination by the bank on June 30,
2001. Ragasa is, thus, precluded from availing of the second option which is to claim
damages by reason of the breach and allow the lease to remain in force. With the lease
having been automatically resolved or terminated by agreement of the parties, Ragasa is
entitled only to indemnification for damages. Clearly, the requisites for the demandability of
the penal clause are present in this case. These are: (1) that the total non- fulfillment of the
obligation or the defective fulfillment is chargeable to the fault of the debtor; and (2) that
the penalty may be enforced in accordance with the provisions of law. Ragasa cannot
insist on the performance of the lease, i.e., for the lease to continue until expiration of its
term, because the lease has been automatically terminated when the bank breached it by
pre-terminating its terms. Thus, Ragasa is only entitled to damages.
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Doctrine: Entitlement to rentals after the termination of the lease pursuant to an automatic
rescission or termination clause is possible in the case where the lessor invokes the clause
and the lessee refuses to vacate the premises. The lessee shall then be liable for damages
of its possession from the termination of the lease until he vacates the premises. The bank
did not continue to possess the leased premises after its automatic termination, as it
vacated the same.
Cruz v. Yap
Facts:
Dr. Vergel G. Cruz, was the bona fide tenant of Amado Q. Bugayon, Jr. for almost five
years in the premises in question just before this controversy started. He religiously paid
the monthly rentals, introduced several improvements and operated a veterinary clinic.
Sometime in the latter part of July, 1985, he offered for sale the goodwill of the veterinary
clinic and some of its equipment to Dr. Wendelyn V. Yap, Evelia H. Badiagan, Teresita A.
Baladad and Florencia C. de Vera, the petitioners herein. During the period of
negotiations, private respondent Cruz introduced to the landlord Dr. Wendelyn V. Yap as
the person interested in taking over the clinic. However, the negotiations did not materialize
but the petitioners managed to enter into a contract of lease for the said premises at a
monthly rental of P1,800.00 with the landlord. Private respondent Cruz brought an action
for "Forcible Entry with Damages" against petitioners herein and the landlord. The
Metropolitan Trial Court decided in favor of private Cruz which was then affirmed by the
Regional Trial Court. The Court of Appeals dismissed the petition for review of petitioners
and affirmed the decision of the Regional Trial Court, hence, this petition.
Issues:
1) WON the transfer of leasehold to respondents is valid - NO.
2) WON petitioners are guilty of forcible entry - YES.
Ruling:
On the first issue, when the petitioners and the landlord executed a new contract of lease,
the lease of private respondent was still valid and subsisting. Private respondent has not
effectively relinquished his leasehold rights over the premises in question in view of the
failure of negotiations for the sale of the goodwill. The transfer of the leasehold rights is
conditional in nature and has no force and effect if the condition is not complied with.
On the second issue, the lease of private respondent is on a month-to-month basis and
may be terminated at the end of any month after proper notice or demand to vacate has
been given. In the case at bar, however, the lack of proper notice or demand to vacate
upon the private respondent is clearly evident. In the absence of such notice, the lease of
private respondent continues to be in force and cannot be deemed to have expired as of
the end of the month automatically. Neither can the non-payment of the rent for the month
of August, 1985 be a ground for termination of the lease without a demand to pay and to
vacate. Thus, when the landlord and the petitioners entered into a new contract of lease
effectively depriving the private respondent of his lease, they were clearly guilty of forcible
entry in view of the subsisting lease of private respondent.
Doctrine: In the absence of proper notice or demand to vacate, the lease of private
respondent continues to be in force and cannot be deemed to have expired as of the end
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of the month automatically. Neither can the non-payment of the rent be a ground for
termination of the lease without a demand to pay and to vacate.

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