G.R. No. 150806; January 28, 2008
EUFEMIA ALMEDA and ROMEL ALMEDA, petitioners, vs. BATHALA MARKETING INDUSTRIES, INC., respondent.

FACTS

Petitioners Eufemia and Romel Almeda, as lessors, and respondent Bathala Marketing Industries, Inc., as lessee, were bound by a 1997 Contract of Lease. The contract contained two key stipulations: Condition No. 6 stated the lessee would pay additional rental for any “new tax, charge or burden” imposed on the property, and Condition No. 7 provided for rental adjustment in case of “extraordinary inflation or devaluation.” After the death of the original lessor, petitioners demanded that respondent pay a 10% Value Added Tax (VAT) on the monthly rentals, invoking Condition No. 6. They also demanded a 73% rental increase, citing Condition No. 7 and Article 1250 of the Civil Code, claiming extraordinary inflation had supervened.
Respondent refused both demands, insisting VAT was not a “new tax” and there was no extraordinary inflation. It continued paying the original rental but, under protest, paid the VAT and adjusted rental for three months. Respondent filed an action for declaratory relief to interpret the contract clauses. The Regional Trial Court ruled in favor of respondent, declaring it not liable for VAT or rental adjustment and ordering petitioners to return the excess payments. The Court of Appeals affirmed the substantive rulings but deleted the order for restitution, holding that affirmative relief cannot be granted in a declaratory relief action.

ISSUE

The core issues were: (1) Whether VAT is a “new tax” under the lease contract’s Condition No. 6, making the lessee liable to pay it; and (2) Whether there was an “extraordinary inflation” justifying a rental increase under Condition No. 7 and Article 1250 of the Civil Code.

RULING

The Supreme Court denied the petition and affirmed the Court of Appeals. On the first issue, the Court held that VAT is not a “new tax” under the contract. The VAT law (R.A. No. 7716) was enacted in 1994 and had been in effect for three years prior to the lease contract’s execution in 1997. The parties are presumed to have contracted with knowledge of the existing law, and the stipulated rental was deemed inclusive of all existing taxes, including VAT. A “new tax” refers to one imposed after the contract’s perfection, not one already in existence.
On the second issue, the Court ruled there was no extraordinary inflation to trigger the contractual or statutory provision. The Court distinguished ordinary from extraordinary inflation, the latter being an uncommon, drastic, and sudden decrease in purchasing power. The petitioners’ claim, based on general peso devaluation from 1970 to 1998, pertained to a long-term, gradual trend of ordinary inflation. The Court reiterated that absent an official declaration by competent authorities (like the Bangko Sentral ng Pilipinas) of the existence of extraordinary inflation for a specific period, its legal effects cannot be applied. Consequently, no rental adjustment was warranted.