G.R. No. L-10061; April 22, 1957
ALFREDO C. YULO, plaintiff-appellant, vs. CHAN PE, defendant-appellee.

FACTS

On October 14, 1953, Alfredo C. Yulo filed a complaint in the municipal court of Bacolod City against Chan Pe. Yulo alleged that by a deed (Exhibit A) executed in January 1951, he leased Door No. 11 of a Commercial Building to Pe for five years at a monthly rental of P450, payable in advance, with an advance payment of P6,000. On March 1, 1952, Yulo leased an additional door to Pe at P200 monthly. Pe failed to pay rentals from May to October 1953, aggregating P3,900, and refused to vacate despite demands. Yulo prayed for payment of the rentals, vacating of the premises, attorney’s fees, and costs. The municipal court rendered judgment for Yulo for P1,200, interest, attorney’s fees, and costs. On appeal to the Court of First Instance (CFI), Pe filed an answer alleging that from the P6,000 advance, P100 was deducted for rentals for February, March, and April 1953, leaving a balance of P5,700 as of May 1, 1953; that rentals from May to October 1953 were already paid in advance by deduction from this balance, leaving a balance of P1,800 in Pe’s favor by end of October 1953; and that Pe accepted Yulo’s demand for rescission and vacated the premises on October 31, 1953. Pe prayed for dismissal of the complaint and a refund of P1,800. The parties agreed to submit the case for judgment on the pleadings. The CFI rendered a decision ordering Yulo to pay Pe the sum of P1,800, after deducting the P3,900 in rentals due from the P5,700 balance. Yulo appealed.
The lease contract (Exhibit A) stipulated, among others: (1) a five-year lease at P450 monthly, with an advance payment of P6,000; no discount from the advance for the first two years, but a discount of P100 per month for the last three years; monthly rental payable on the first day of each month; (2) the lessee agrees to pay 12% interest per annum for unpaid rentals after 15 days from default, with the understanding that such default automatically cancels the contract and grants the lessor the right to confiscate the advance payment as damages, and the lessee agrees to immediately vacate; (5) if the lessee cannot finish the five-year term due to force majeure, the advance payment is forfeited as damages, except if the premises become unusable, then the balance is returnable.
Pe complied with his obligations until February 1952. From March 1, 1952, with the additional door, the aggregate monthly rental was P650, paid up to January 1953. From February to April 1953, Pe paid only P550 monthly, deducting P100 monthly from the advance as per the contract. No payments were made from May 1953. Yulo made demands, and after the complaint was filed, Pe vacated on October 31, 1953.

ISSUE

Whether Yulo may collect the sum of P3,900 for unpaid rentals from May to October 1953 in addition to confiscating the balance of the P6,000 advance payment (P5,700 as of May 1, 1953) under the penal clause of the contract.

RULING

The Supreme Court modified the decision of the CFI. It held that the stipulation in paragraph 2 of Exhibit A is a valid penal clause, liquidated damages, or a forfeiture clause, and is not void. Pe was in default for failing to pay the monthly rentals of P550 from May to October 1953, as the contract allowed a discount of only P100 per month from the advance for the last three years, not a full deduction of the rental from the advance. The CFI erred in declaring the clause null and void. However, in the exercise of its authority under Articles 2227 and 2232 of the Civil Code, the Court found that the balance of the advance payment (P5,700) after deducting the P3,900 in unpaid rentals, leaving P1,800 in Yulo’s favor, was sufficient to compensate Yulo for the damages suffered due to Pe’s breach. Therefore, Yulo is entitled to retain the entire P5,700 balance, and Pe is not entitled to recover anything. The decision was modified accordingly, with costs against Pe.