G.R. No. 142131 . December 11, 2002.
SPOUSES DARIO LACAP and MATILDE LACAP, petitioners, vs. JOUVET ONG LEE, represented by Reynaldo de los Santos, respondent.

FACTS

Before 1981, Victor Facundo mortgaged two parcels of land with improvements to Monte de Piedad Savings Bank. In 1981, petitioner spouses Dario and Matilde Lacap assumed Facundo’s mortgage obligation. Due to the spouses’ failure to pay, the bank foreclosed on the mortgage, became the highest bidder at the auction sale, and title passed to it. The bank allowed the petitioner spouses to stay as lessees paying a monthly rental of P800. The petitioner spouses introduced improvements allegedly worth P500,000 after relying on the bank’s assurance that the property would be sold back to them. On May 1, 1996, the bank refused to accept their rental payment, informing them the property had been sold to another person. The bank’s Vice-President advised them to submit a written offer to buy for P1,100,000, which they did that same day. On May 22, 1996, the bank rejected their offer. On June 20, 1996, the petitioner spouses received a demand letter from respondent Jouvet Ong Lee, the new owner, to vacate the premises. The petitioner spouses filed a civil case for cancellation of sale and damages with application for preliminary injunction against the respondent, pending before the RTC of Davao City, Branch 13. Meanwhile, on October 30, 1996, the respondent filed a complaint for unlawful detainer against the petitioners. The MTCC ruled in favor of the respondent, ordering the petitioners to vacate, pay reasonable compensation for use, attorney’s fees, and costs. The RTC affirmed with modification, ordering the respondent to reimburse the petitioners for improvements. Upon the respondent’s motion for reconsideration, the RTC amended its decision, applying Article 1678 of the Civil Code, entitling the petitioners to one-half the value of useful improvements or the right to remove them, and to remove ornamental improvements without damage. The Court of Appeals affirmed the RTC’s decision and order.

ISSUE

1. Whether the Court of Appeals correctly ruled on the jurisdictional question, i.e., the jurisdiction of the Davao City Municipal Court over the unlawful detainer case.
2. Assuming the Municipal Court had jurisdiction, whether the Court of Appeals correctly applied Article 1678 instead of Article 448 of the Civil Code regarding indemnity for the improvements introduced by the petitioners.

RULING

1. Yes, the Court of Appeals correctly ruled on jurisdiction. The Municipal Trial Court had jurisdiction over the unlawful detainer case. The complaint sufficiently alleged that possession was unlawfully withheld from the respondent, the registered owner, and that the petitioners refused to vacate despite demands. The petitioners’ defense questioning the validity of the respondent’s title (based on the bank’s alleged failure to first offer them the property) does not constitute the “defense of ownership” contemplated under Section 16 of the 1997 Rules of Civil Procedure. That rule applies when defendants claim ownership themselves or attribute it to someone other than the plaintiff, not when they merely question the validity of the plaintiff’s title. The petitioners admitted they did not own the property; their claim of a right of first refusal would only give a cause of action for damages for breach of contract, not for recovery of title. Furthermore, the issue of ownership was the subject of a separate pending case for cancellation of sale filed by the petitioners themselves, and ruling on it in the ejectment case would violate the rule against splitting a cause of action and would pre-empt the RTC hearing the main case.
2. Yes, the Court of Appeals correctly applied Article 1678 of the Civil Code. The petitioners were lessees, not builders in good faith under Article 448. Their payment of monthly rentals to the bank after the foreclosure was a conclusive admission of the bank’s title and negated any prior claim of dominion. Their status as lessees was affirmed by the courts a quo. Therefore, Article 1678 governs indemnity for improvements. Under this article, a lessee who makes, in good faith, useful improvements suitable to the lease’s purpose is entitled, upon termination of the lease, to reimbursement of one-half the value of the improvements at that time, or may remove them if the lessor refuses reimbursement, provided no more damage than necessary is caused. For ornamental improvements, the lessee is not entitled to reimbursement but may remove them provided no damage is caused to the principal thing.