A lease is a contract where one [lessor] gives to another [lessee] the use or enjoyment of a thing for a price certain and for a period [Article 1542, new Civil Code]. Obligation arising from contracts have the force of law between the contracting parties and must be complied with in good faith [Article 1159, new Civil Code]. In this sense, a contract is a law between the parties, who are allowed to enter into stipulations, clauses, terms and conditions they may deem convenient so long as they are not contrary to law, morals, good customs, public order or public policy [Article 1306, new Civil Code]. It is common to agree on the period, amount of rent and deposit in the lease contract. The lessor may even include the forfeiture of deposit in case of pre-termination of lease, payment of advance rental of three months to apply on the last three months of the lease period and the lessee to pay the unexpired portion of the lease period even if he pre-terminates the lease.
May lessor compel lessee to continue paying rental for the unexpired portion of the lease? Is a lessee still liable to the rentals even if he has vacated the unit? This issue was answered by our Honorable Supreme Court in D.M. Ragasa Ent., Inc. v. Banco De Oro, G.R. 190512, 20 June 2018. In this case, a 5-year lease contract was entered by Ragasa and Equitable Ban from February 1998 to January 2003 for a monthly rent of P122,607.00. It was also agreed that in case of breach, the lease shall be terminated, the lessee will continue to paythe monthly rent for the unexpired term and forfeiture of deposit. Equitable Bank merged with PCI Bank that became Equitable PCI Bank. It later merged with Banco de Oro. For economic reason, it closed some branches that includes the unit being leased from Ragasa. The bank sent a notice of pre-termination of lease in May 2001. Ragasa demanded the monthly rentals for the remaining term from July 2001 to January 2003 totaling P3,146,596.42. In June 2001, the bank vacated the unit. Ragasa sued for collection of P3.1 Million as unpaid monthly rents for the unexpired term. It argued that the forfeiture of security deposit does not exempt the lessee from payment of rentals for the remaining term of the lease. The bank argued that the forfeiture of deposit is a penal clause that would not make the bank liable for rentals for the remaining life of the lease. The Regional Trial Court ruled for the lessor. It ordered the bank to pay P3.1 Million as rentals for the unexpired term. On appeal, the Court of Appeals reversed the RTC. It ruled that the bank’s failure to continue the lease is a breach, which automatically terminated the lease. To allow the lessor to collect rent for the unexpired term of the lease would constitute unjust enrichment. The lessor appealed.
The Supreme Court ruled that the stipulations in the lease contract are not contrary to law, morals, good customs, public order or policy. They are valid, and the parties’ rights shall be adjudicated according to what they agreed upon. There is no question that the bank breached the lease contract when it pre-terminated the lease. Article 1170 of the Civil Code mandates that those who, in the performance of their obligations, are guilty of fraud, negligence, or delay, and those who, in any manner, contravene it’s tenor, are liable for damages.
Is the claim of Ragasa that it is entitled to damages of P3,146,596.42, representing the monthly rent from July 1, 2001 to January 31, 2003, or the unexpired period of the lease, valid? Entitlement to rents after the termination of the lease pursuant to an automatic rescission is possible only if the lessor invokes the clause and the lessee refuses to vacate the leased premises. The bank did not continue to use the unit, but vacated it on 30 June 2001. Instead of leasing it from July 2001, the lessor opted get the rents from the lessee who already vacated the unit. Under Article 2203 of the Civil Code, the party suffering loss must exercise the diligence of a good father of a family to minimize the damages. This was violated by Ragasa. It has no one to blame since under the contract, Ragasa is only entitled to forfeiture of deposit and P15,000.00 as attorney’s fees. The bank’s unauthorized pre-termination resulted to automatic termination of the lease, which precluded Ragasa from claiming rents from lessee and allow the lease to remain in force. With the lease automatically terminated, Ragasa is entitled only to indemnification for damages. If injured party desires to recover the damages actually suffered by him in addition to the penalty, he must prove such damages. But, it did not present proof of damage.
