G.R. No. 187930 & 188250, February 23, 2015.
NEW WORLD DEVELOPERS AND MANAGEMENT, INC., Petitioner, vs. AMA COMPUTER LEARNING CENTER, INC., Respondent. [and the consolidated case] AMA COMPUTER LEARNING CENTER, INC., Petitioner, vs. NEW WORLD DEVELOPERS AND MANAGEMENT, INC., Respondent.

FACTS

New World Developers and Management, Inc. (New World) owned a commercial building. In 1998, AMA Computer Learning Center, Inc. (AMA) leased the entire second floor under an eight-year Contract of Lease (June 15, 1998 to March 14, 2006). The contract stipulated a monthly rental with an annual 15% escalation, an advance rental and security deposit of ₱450,000 each, and a pretermination clause. The clause required AMA to give a six-month written notice and to pay liquidated damages equivalent to six months of the prevailing rent. AMA paid rent for the first three years. Due to financial constraints, AMA requested and was granted rent reductions through an Addendum to the Contract of Lease. On the evening of July 6, 2004, AMA vacated the premises. The next day, New World received AMA’s letter preterminating the lease effective immediately due to business losses. New World demanded payment for two months’ unpaid rent, liquidated damages for six months, and other charges. AMA refused, leading New World to file a complaint for sum of money and damages. The Regional Trial Court (RTC) ordered AMA to pay the unpaid rent with 3% monthly interest, liquidated damages equivalent to six months’ rent (with deductions for the advance rental and security deposit), damages for repairs, attorney’s fees, and costs. The Court of Appeals (CA) modified the decision, deleting the 3% monthly interest and imposing legal interest instead, reducing the liquidated damages to an amount equivalent to four months’ rent, and deleting the awards for repair damages and attorney’s fees. Both parties filed petitions for review.

ISSUE

1. Whether AMA is liable to pay six months’ worth of rent as liquidated damages.
2. Whether AMA remained liable for the rental arrears.

RULING

1. Yes, AMA is liable for liquidated damages equivalent to six months’ rent. The Supreme Court reinstated the RTC’s ruling on this point, reversing the CA’s reduction. The Contract of Lease clearly stipulated that pretermination would make AMA liable for liquidated damages equivalent to six months of current rental. The Court emphasized that contracts have the force of law between the parties under Article 1159 of the Civil Code and should be complied with in good faith. While Article 2227 allows courts to equitably reduce iniquitous or unconscionable liquidated damages, the Court found no basis for reduction. AMA, as a business entity, voluntarily assumed the obligation. Its alleged business losses, which were not substantiated by clear evidence, do not justify relieving it from its contractual obligations. The Court also noted AMA’s failure to give the required six-month notice and its surreptitious vacating of the premises as indicative of bad faith, making it undeserving of equitable relief.
2. Yes, AMA remained liable for the rental arrears. The Court affirmed the CA’s finding that AMA was liable for two months of unpaid rent totaling ₱466,620. However, it modified the interest rate. The Court ruled that since the obligation to pay rent does not constitute a loan or forbearance of money, and there was no stipulation on interest for delay, the proper interest on the unpaid rent is 6% per annum from the date of extrajudicial demand (July 12, 2004) until the finality of the judgment. Thereafter, the total monetary judgment shall earn interest at 6% per annum from finality until full satisfaction, following the guidelines in Nacar v. Gallery Frames. The Court rejected AMA’s claim of compensation, noting that the advance rental was intended for the last months of the lease, which did not occur due to pretermination, and thus there was no concurrence of credits to extinguish the obligation for arrears.