Personal Blog of Atty. Charizma Cortez-Catague C.P.A., R.E.A., R.E.B.

Liability for Rentals When Property Which Serves as Payment is Lost or Destroyed During the Lease Period and Prior to Transfer of Ownership

The Liability is Not Extinguished

Contract of Lease

In a contract of lease, rentals are normally paid in cash or its equivalent like check. The more common practice is for the lessor to require the lessee to issue post-dated checks which cover the entire period of the lease contract.

Should the lessee fail or refuse to pay (or should the check bounce), the lessor may institute an action to collect the unpaid rentals.

It may happen, however, that the parties agree on a different mode of payment. For instance, the lessee may construct a building on the premises leased, the ownership of which will be transferred to the lessor upon the expiration of the lease contract.

Loss of Property as Form of Compensation

In the event that the building is lost or destroyed before the lease contract ends and while ownership remains with the lessee, may the lessor collect from the lessee the cash equivalent of the rentals? Conversely, is the obligation of the lessee extinguished?

The Supreme Court had the occasion to resolve this issue.

SPOUSES RICARDO and ELENA C. GOLEZ -versus- MELITON NEMEÑO (G.R. No. 178317; September 23, 2015).

Spouses Golez (Petitioners) and Nemeño (Respondent) entered into a contract, with a term of 4 years, whereby Petitioners leased a lot owned by Respondent.

Petitioners would construct on the lot a building costing ₱143,823.00, inclusive of building permit fees and miscellaneous items. The building would be turned-over to the lessor at the end of the contract.

Respondent would not collect the monthly rental in the amount of ₱2,000.00. Instead, Petitioners (lessees) would retain the rental as payment for the building.

Before the lease expired, however, the building was gutted by fire.

Respondent sought to collect the total rentals amounting to ₱96,000.00.

Petitioners refused to pay. They argued that the destruction of the building extinguished their obligation pursuant to Art. 1262 of the Civil Code. The Article, in part, provides:

“ART. 1262. An obligation which consists in the delivery of a determinate thing shall be extinguished if it should be lost or destroyed without the fault of the debtor, and before he has incurred in delay.”

Petitioners further contended that even if they were liable for rentals, their liability would only cover the period within which they actually occupied the premises.

Who was correct?

Contractual DisputeThe Supreme Court held that the destruction of the building did not extinguish the obligation of Petitioners to pay rentals. Their obligation to compensate Respondent subsisted despite the loss of the building. The Supreme Court explained that it would be a clear case of ‘unjust enrichment’ to exempt Petitioners from paying compensation considering that they already benefitted from using the lot owned by Respondent.

Citing a previous ruling, The Supreme Court expounded:

“The fundamental doctrine of unjust enrichment is the transfer of value without just cause or consideration. The elements of this doctrine are: enrichment on the part of the defendant; impoverishment on the part of the plaintiff; and lack of cause. The main objective is to prevent one to enrich himself at the expense of another. It is commonly accepted that this doctrine simply means that a person shall not be allowed to profit or enrich himself inequitably at another’s expense.”

However, the Supreme Court ruled that Petitioners could not be held liable for the amount equivalent to the cost of the building or the total rentals covering the entire duration of the lease. It would also be a case of ‘unjust enrichment’, this time on the part of Respondent, considering that Petitioners did not enjoy anymore the use of the property beginning from the time the building was burned down.

The Supreme Court held that Petitioners were only liable for accumulated rentals covering the period which ended when the building was destroyed.

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