G.R. No. 164728 ; November 23, 2007
MERCURY DRUG CORPORATION, Petitioner, vs. REPUBLIC SURETY AND INSURANCE COMPANY, INC., Respondent.

FACTS

Petitioner Mercury Drug Corporation leased a building from respondent Republic Surety and Insurance Company. The lease contract was executed based on a prior certification from Engineer Serafin Policarpio stating the building was structurally sound. Several months into the lease, Mercury’s own inspection found the building to be structurally unsound and a safety risk. Mercury engaged another engineer, Fernando Enriquez, who confirmed serious defects, including termite-infested wooden posts and unsafe connections, recommending extensive repairs costing over seven million pesos. Mercury then referred the matter back to the original certifying engineer, Policarpio, who issued a superseding report retracting his prior certification and recommending immediate demolition due to the hazardous condition.
Mercury informed Surety of these findings and suspended rental payments starting February 1997, demanding necessary structural repairs and a certification of structural integrity from the City Engineer’s Office. Surety subsequently undertook repairs and remodeling of the ground floor in September 1997. However, Surety failed to secure the requested certification from the City Engineer. Mercury continued to withhold rent, leading Surety to file a complaint for a sum of money to recover unpaid rentals.

ISSUE

Was Mercury Drug Corporation legally justified in suspending its rental payments under the lease contract?

RULING

No, Mercury was not justified in suspending rental payments. The Supreme Court affirmed the decisions of the lower courts, ruling that Mercury’s suspension of payment was improper. The legal logic hinges on the application of Article 1658 of the Civil Code, which allows a lessee to suspend rent if the lessor fails to make necessary repairs or maintain the lessee in peaceful and adequate enjoyment. The Court found that respondent Surety had, in fact, undertaken the necessary repairs as testified to by the District Building Inspector of Manila. The repairs were deemed to have generally strengthened the building.
The Court emphasized that the obligation to pay rent is separate from the warranty against hidden defects. Mercury’s remedy for any alleged hidden defects at the time of the lease’s perfection was to pursue an action for reduction of rent or damages, not unilaterally suspend payment after the lessor had performed remedial work. Furthermore, the pre-trial stipulation identifying the sole issue as whether suspension was justified was interpreted broadly to include all pertinent matters, such as the condition of the building at the contract’s inception and the lessor’s subsequent repair actions. Since Surety made repairs, Mercury’s continued non-payment was unjustified.