G.R. No. 123855; November 20, 2000
NEREO J. PACULDO, petitioner, vs. BONIFACIO C. REGALADO, respondent.

FACTS

Petitioner Nereo Paculdo and respondent Bonifacio Regalado entered into a 25-year lease contract for a parcel of land with a wet market building in Quezon City, commencing January 1, 1991. The monthly rental was P450,000.00. Paculdo also leased eleven other properties from Regalado and purchased heavy equipment from him. In mid-1992, Regalado sent demand letters for alleged unpaid rentals for May, June, and July 1992, threatening to cancel the lease. Paculdo claimed he had made substantial payments, which Regalado unilaterally applied to his other obligations for the separate properties and equipment.
Regalado filed an ejectment complaint in the Metropolitan Trial Court (MeTC) in August 1992 but withdrew it five days later. He re-filed the complaint in April 1993. The MeTC ruled for Regalado, ordering Paculdo’s ejectment and payment of back rentals and attorney’s fees. The Regional Trial Court (RTC) affirmed this decision, and a writ of execution was issued, leading Paculdo to vacate the premises in July 1994. The Court of Appeals subsequently dismissed Paculdo’s petition, finding he impliedly consented to the application of his payments to his other obligations.

ISSUE

The core issue is whether Paculdo was in arrears in his rental payments for the wet market property at the time of the ejectment complaint, which hinges on the proper application of the payments he made to Regalado.

RULING

The Supreme Court reversed the Court of Appeals and dismissed the ejectment complaint. The legal logic centers on the rules of application of payments under the Civil Code. When a debtor has several obligations with the same creditor and makes a payment, the debtor has the right to designate to which obligation the payment shall be applied, provided the designation is communicated to the creditor at the time of payment. If the debtor does not make such a designation, the right passes to the creditor. However, the creditor must apply the payment to an obligation that is already due and demandable.
The Court found that Paculdo, as debtor, had indeed made a designation. The vouchers and receipts for his payments clearly indicated they were intended for “rentals” on the specific wet market property. This explicit designation bound Regalado. Therefore, Regalado could not unilaterally reallocate these payments to Paculdo’s other obligations for different properties or equipment purchases. When the payments were correctly applied solely to the lease for the wet market, the computation showed Paculdo had actually made an overpayment and was not in arrears. Consequently, there was no lawful ground for ejectment based on non-payment of rent. The Court dismissed the complaint without prejudice to the separate resolution of the parties’ other monetary claims.