G.R. No. 219698 , September 27, 2021
PNTC Colleges, Inc., Petitioner, vs. Time Realty, Inc., Respondent.

FACTS

PNTC Colleges, Inc. (PNTC) and Time Realty, Inc. (Time Realty) entered into a Contract of Lease for a property in Sampaloc, Manila, from 2005 to 2007. After the term ended on December 31, 2005, the lease was impliedly renewed on a monthly basis. Time Realty later notified PNTC of its intent not to extend the lease on the fourth floor, offering options to extend until April 2007 or transfer to the second floor. PNTC informed Time Realty of its decision to terminate the lease effective end of April 2007. In April 2007, PNTC began transferring operations to a new site. Time Realty alleged PNTC vacated without settling outstanding rentals, electricity, water charges, and surcharges. Invoking Paragraph 23 of the Contract of Lease, which authorized the lessor to take possession of the leased premises and the lessee’s properties therein upon breach, Time Realty retained PNTC’s remaining properties in the premises. PNTC filed a Complaint for Delivery of Personal Properties with Damages before the RTC, alleging unjustified withholding of properties valued at P561,360.00. Time Realty filed an Answer with Counterclaim, seeking payment of unpaid rentals, utility charges, costs for restoring the premises (P5,095,822.24), and attorney’s fees, while admitting PNTC had rental deposits of P743,640.00. The RTC dismissed PNTC’s complaint, upholding Time Realty’s right to retain the properties under the contract, but denied Time Realty’s counterclaims, fearing unjust enrichment since Time Realty already possessed the properties. The Court of Appeals reversed the RTC’s denial of the counterclaims, ordering PNTC to pay Time Realty specified amounts for unpaid rentals, utilities, restoration costs, and attorney’s fees. PNTC elevated the case via a Petition for Review on Certiorari.

ISSUE

Whether the Court of Appeals erred in awarding Time Realty’s counterclaims for unpaid rentals, utility charges, restoration costs, and attorney’s fees despite the retention of PNTC’s properties under Paragraph 23 of the Contract of Lease.

RULING

The Supreme Court partially granted the petition. It modified the CA decision, setting aside the awards for restoration costs and attorney’s fees, and adjusting the awards for unpaid rentals and utility charges. The Court held:
1. The Contract of Lease was impliedly renewed on a month-to-month basis under Article 1670 of the Civil Code after its original term. PNTC’s vacation of the premises in April 2007 constituted a valid termination of this monthly lease.
2. Paragraph 23 of the contract is a valid contractual stipulation constituting a pledge of PNTC’s personal properties to secure its obligations. Time Realty’s act of retaining the properties was a legitimate exercise of this right, not an act of spoliation, as PNTC was in breach for non-payment.
3. However, Time Realty’s retention of the properties is akin to a pledge. Under Article 2112 of the Civil Code, a pledgee must extrajudicially sell the pledged property and apply the proceeds to the obligation. Time Realty cannot simply retain the properties indefinitely and simultaneously demand full payment of monetary claims. The value of the retained properties must first be accounted for and applied to PNTC’s debts.
4. The CA erred in awarding the full amount of restoration costs (P5,095,822.24) and attorney’s fees. The restoration costs were not sufficiently proven, as the contractor’s affidavit was hearsay and the detailed breakdown was not formally offered in evidence. The award of attorney’s fees was also deleted for lack of justification.
5. The awards for unpaid rentals and utility charges were upheld as PNTC judicially admitted these liabilities. However, the amounts were to be offset by PNTC’s security deposit (P743,640.00) and the value of the retained properties. The surcharges/interest on these unpaid amounts were reduced from 5% per month to 12% per annum (from judicial demand until June 30, 2013) and 6% per annum (from July 1, 2013 until full payment), as the original rate was iniquitous.
6. The case was remanded to the RTC to determine the actual value of the retained properties through an accounting, to effect the extrajudicial sale thereof pursuant to the contract and the Civil Code, and to apply the proceeds to PNTC’s adjudged monetary obligations.