G.R. No. 157568 ; May 18, 2004
LEONARDO CHUA and HEIRS OF YONG TIAN, petitioners, vs. MUTYA B. VICTORIO, herein represented by her Attorney-in-Fact ARMANDO Z. COSME, respondent.

FACTS

The case originated from ejectment complaints filed by respondent Mutya Victorio against petitioners Leonardo Chua and the Heirs of Yong Tian, who were occupants of her commercial units in Santiago City. Their lease was governed by a court-approved Compromise Agreement, which stipulated a rental increase review every four years based on prevailing rates, capped at 25%. In 1994, based on a survey, Victorio demanded a 25% increase. Petitioners refused, leading to earlier ejectment cases that culminated in a final Court of Appeals decision ordering petitioners to vacate. However, before that decision became final, petitioners paid and Victorio accepted the increased rentals, prompting the MTCC to quash the writs of execution. Petitioners thus remained in possession.
Subsequently, in 1998, Victorio demanded a new increase, more than doubling the rent. Petitioners refused, arguing it violated the 25% cap in the Compromise Agreement. Victorio filed new ejectment cases. The MTCC dismissed the complaints, a decision initially reversed but later affirmed by the RTC. The Court of Appeals reversed the RTC, ruling that petitioners’ 1994 refusal to pay the increased rent constituted a rescission of the old lease, and Victorio’s subsequent acceptance of payments created a new month-to-month lease under Article 1687 of the Civil Code, allowing her to freely increase rents upon expiration of each month.

ISSUE

Whether the Compromise Agreement continued to govern the lease relationship, thereby limiting rental increases to 25% every four years.

RULING

The Supreme Court denied the petition and affirmed the Court of Appeals with modification. The legal logic is that petitioners’ refusal to pay the lawfully demanded rental increase in 1994 constituted a breach of their obligation under the lease contract, which is a reciprocal obligation. Under Article 1659 of the Civil Code, in relation to Article 1657, such breach granted the lessor, Victorio, the right to seek rescission of the contract. The final and executory decision in the earlier ejectment cases, which ordered petitioners to vacate, constituted a judicial declaration of rescission, thereby severing the juridical tie established by the Compromise Agreement. Consequently, when Victorio accepted the rental payments thereafter, this act created an entirely new contract of lease. Since this new arrangement did not stipulate a fixed period and rentals were paid monthly, the lease was on a month-to-month basis pursuant to Article 1687. As such, Victorio was legally entitled to demand a new rental rate upon the expiration of each monthly period. The Court modified the appellate decision by shortening the vacate period to one month after finality and set the reasonable compensation for use at the demanded rate from November 1998 until vacation.