G.R. No. 85869 November 6, 1992
THE NATIONAL IRRIGATION ADMINISTRATION (NIA), represented by the Project Manager, Magat River Multi-Purpose Project, petitioner, vs. ESTANISLAO GAMIT and THE HONORABLE COURT OF APPEALS, respondents.

FACTS

On June 5, 1975, plaintiff Estanislao Gamit and defendant National Irrigation Administration (NIA), through its Officer-in-Charge of the Magat River Multi-Purpose Project, entered into a Contract of Lease over 25,000 square meters of Gamit’s urban land in San Manuel, Isabela, for a rental of ten centavos (P0.10) per square meter per year for ten years, for NIA to construct an administration building. The contract contained stipulations (paragraphs 4, 8, and 9) stating that: if NIA decides to continue using the land after the lease, it may purchase the property with all rentals paid considered part of a purchase price not exceeding P25,000; six months before lease expiration, parties must communicate in writing their intentions, and failure to do so would deem the contract in force after the ten-year period, allowing NIA continued use without additional compensation; and upon payment of P25,000, Gamit shall be deemed to have ceded all his rights to NIA. Gamit alleged these stipulations were surreptitiously inserted, that NIA took advantage of his financial distress, and that the real agreement was only for a lease with the right to purchase at a price to be negotiated after the lease term. Gamit filed a complaint for reformation of contract, recovery of possession, and damages. The trial court ruled in Gamit’s favor, declaring the contract a lease with option to purchase, ordering NIA to pay damages for occupying an additional 5,000 square meters, and granting NIA the option to buy the 2.5-hectare portion at a reasonable price. The Court of Appeals affirmed the trial court’s decision. NIA appealed to the Supreme Court.

ISSUE

Whether the contract between the parties is a contract of lease with a right to purchase or a contract of sale.

RULING

The Supreme Court affirmed the decision of the Court of Appeals. The contract is a contract of lease with a right to purchase, not a contract of sale. The Court found that the stipulations in paragraphs 4, 8, and 9 of the contract did not express the true intention of the parties. Gamit successfully proved by clear and convincing evidence that there was a mistake on his part and fraud or inequitable conduct on the part of NIA, which took advantage of Gamit’s financial distress. The real agreement was for a lease for ten years, after which NIA could purchase the property at a price to be agreed upon later. The fixing of a purchase price not exceeding P25,000, which was grossly inadequate, and the provision for automatic extension without compensation were contrary to this real agreement. The contract was one of adhesion, prepared solely by NIA, and must be construed strictly against NIA. The Court upheld the reformation of the instrument to reflect the true intention of the parties.