G.R. No. 170923 , January 20, 2009.
Sulo Sa Nayon, Inc. and/or Philippine Village Hotel, Inc. and Jose Marcel E. Panlilio, Petitioners, vs. Nayong Pilipino Foundation, Respondent.

FACTS

Respondent Nayong Pilipino Foundation, a government-owned corporation, leased a portion of its Nayong Pilipino Complex in Pasay City to petitioner Sulo sa Nayon, Inc. (later Philippine Village Hotel, Inc. or PVHI) for 21 years starting June 1, 1975, for the construction and operation of the Philippine Village Hotel. The lease was renewable for 25 years. Petitioners notified respondent of their intent to renew, and on July 4, 1995, the parties executed a Voluntary Addendum renewing the lease until 2021, with increased rentals. Beginning January 2001, petitioners defaulted on rental payments. Respondent demanded payment and vacatur, and subsequently filed an unlawful detainer complaint before the Metropolitan Trial Court (MeTC) of Pasay City. The MeTC ruled in favor of respondent, ordering petitioners to vacate, pay arrears of ₱26,183,225.14 as of July 31, 2001, and pay monthly compensation and attorney’s fees. On appeal, the Regional Trial Court (RTC) modified the decision, declaring petitioners as builders in good faith under Article 448 of the Civil Code and upholding their right to indemnity, thus ordering respondent to choose between appropriating the improvements upon payment or selling the land to petitioners. The Court of Appeals (CA) reversed the RTC, ruling that petitioners, as mere lessees, cannot be considered builders in good faith entitled to the rights under Articles 448 and 546 of the Civil Code.

ISSUE

Whether petitioners, as lessees who constructed improvements on the leased property with the consent of the lessor, are considered builders in good faith entitled to the rights of indemnity and retention under Articles 448 and 546 of the Civil Code.

RULING

No. The Supreme Court affirmed the decision of the Court of Appeals. The Court held that petitioners, being lessees, are not builders in good faith as contemplated under Article 448 of the Civil Code. The provisions of Articles 448 and 546, which grant a builder in good faith the right to indemnity and retention, apply only to a possessor who builds on land believing himself to be the owner thereof, and not to a lessee who constructs improvements with the knowledge and consent of the lessor. The right of retention does not apply to a mere lessee; otherwise, it would enable the lessee to “improve” the lessor out of the property. The proper remedy for the lessee is under Article 1678 of the Civil Code, which grants reimbursement for one-half the value of useful improvements upon termination of the lease, provided the lessee did not act contrary to the lessor’s wishes. The Court found that petitioners defaulted in paying rentals, which justified respondent’s action for unlawful detainer. Thus, the MeTC decision ordering petitioners to vacate and pay arrears was reinstated.