G.R. No. 177120; July 14, 2008
PAUL T. IRAO, Petitioner, vs. BY THE BAY, INC., Respondent.

FACTS

Respondent By the Bay, Inc. was the lessee of a property under a five-year contract. After respondent’s restaurant business was closed by the city government and it defaulted on rental payments, the lessor sent a demand letter on January 16, 2004, requiring payment of arrears within five days “otherwise the Contract of Lease would be terminated without notice.” Respondent received the letter on January 23 but failed to pay. The lessor then terminated the contract pursuant to a clause allowing termination at the lessor’s discretion upon lessee’s default. Subsequently, on February 4, 2004, the lessor executed a new lease contract with petitioner Paul T. Irao. A clause in this new contract obligated Irao to take necessary legal measures to eject the previous lessee. Consequently, on February 6, 2004, Irao, accompanied by a barangay official and security guards, entered and took possession of the premises.
Respondent filed a forcible entry case against Irao before the Metropolitan Trial Court (MeTC), arguing its lease was not validly terminated because the demand letter was merely for payment and not a clear notice to vacate, thus it had the right to possess the premises until the lease expiry in 2007. The MeTC ruled in favor of Irao, a decision affirmed by the Regional Trial Court (RTC). However, the Court of Appeals (CA) reversed these rulings, holding that the lessor’s demand letter was insufficient to terminate the lease as it did not unequivocally communicate an intention to rescind, thereby making Irao’s entry forcible.

ISSUE

Whether the Court of Appeals erred in ruling that the lessor’s demand letter did not effect a valid termination of the lease contract, thereby rendering petitioner’s entry forcible.

RULING

Yes, the Supreme Court reversed the CA decision and reinstated the RTC ruling. The Court held that the lease contract was validly terminated. The demand letter, stating the lease “would be terminated without notice” if arrears were not paid within five days, was a positive and definite communication of the lessor’s intention to rescind the contract upon respondent’s continued default. This complied with the contractual stipulation and the requirement for a demand under Article 1169 of the Civil Code. Since respondent failed to heed this demand, the termination became effective.
Consequently, respondent’s right to possess the premises ceased upon termination. Petitioner Irao, as the new lessee, derived his right of possession from the new contract with the lessor. His entry, while physically effecting a turnover, was pursuant to a legal right and was not “forcible” in the legal sense contemplated in ejectment cases, as there was no more right in respondent to be violated. The CA’s contrary interpretation would lead to the absurdity of allowing a defaulting lessee to indefinitely retain possession despite a valid contractual termination.