G.R. No. 188467 & G.R. No. 188764 March 29, 2017
RENATO MA. R. PERALTA, Petitioner, vs. JOSE ROY RAVAL, Respondent; and JOSE ROY B. RAVAL, Petitioner, vs. RENATO MA. R. PERALTA, Respondent.

FACTS

The case involves a 40-year lease agreement executed in 1974 between the Spouses Arzaga (lessors) and Renato Peralta (lessee) over two parcels of land in Laoag City. The contract required Peralta to pay monthly rentals, construct a building that would become the lessors’ property upon lease termination, pay realty taxes, and develop a water system. In 1995, Flaviano Arzaga, Jr., an heir, assigned all his rights and interests over the properties to Jose Roy Raval. Peralta refused to recognize Raval as the new lessor and continued depositing rentals into an account for Flaviano Jr.
Raval demanded that Peralta comply with the lease terms, specifically to vacate the second floor of the house, remove allegedly unauthorized structures, provide an accounting of rentals, and operate the water system. After failed conciliations, Raval filed a complaint for rescission of the lease contract in 1998, alleging Peralta’s breach of obligations. Peralta contested the suit, arguing Raval lacked legal standing due to an invalid assignment and that he had faithfully performed his contractual duties.

ISSUE

The primary issue is whether Raval, as assignee, has the legal standing to seek the judicial rescission of the lease contract against Peralta.

RULING

The Supreme Court ruled that Raval, as the assignee of the lessor’s rights, possesses the legal standing to sue for rescission. An assignment of rights effectively transfers the assignor’s interests to the assignee, who steps into the shoes of the assignor and can enforce the contract. The Court found that the Deed of Assignment from Flaviano Arzaga, Jr. to Raval was valid and transferred the right to collect rentals and enforce the lease covenants. Consequently, Raval became the real party-in-interest obligated to respect the lease, but also entitled to demand Peralta’s compliance.
On the merits for rescission, the Court applied Article 1191 of the Civil Code. Rescission requires a substantial breach of a reciprocal obligation. The Court found that Peralta’s refusal to recognize Raval as the new lessor and his failure to pay rentals directly to Raval upon proper demand constituted a fundamental breach that violated the lease agreement’s reciprocity. This breach went to the essence of the contract, as the lessor’s right to receive payment from the recognized lessee is central. Therefore, Raval was entitled to seek judicial rescission. The Court affirmed the lower courts’ decisions ordering rescission, with modifications regarding liability for unpaid rentals and damages.