G.R. No. 87047 October 31, 1990
FRANCISCO LAO LIM, petitioner, vs. COURT OF APPEALS and BENITO VILLAVICENCIO DY, respondents.

FACTS

Petitioner Francisco Lao Lim and private respondent Benito Dy entered into a lease contract from 1976 to 1979. Upon its expiration, Dy refused to vacate, prompting Lao Lim to file an ejectment suit. The case was settled via a judicially approved compromise agreement stipulating that the lease term “shall be renewed every three years” retroactive from October 1979, with rentals increasing by 20% every three years “for as long as defendant needed the premises and can meet and pay the said increases,” provided Dy gives a 60-day notice of intent to renew before each term’s expiration. The lease continued under this agreement from 1979 to 1982 and then 1982 to 1985.
In April 1985, Lao Lim informed Dy he would no longer renew the lease effective October 1985. Despite this, Dy sent a notice in August 1985 of his intent to renew for another three-year term. Lao Lim rejected this renewal. Upon Dy’s continued refusal to vacate, Lao Lim filed a new ejectment suit in 1986. The Metropolitan Trial Court dismissed the complaint, ruling the lease was continuous based on Dy’s need and ability to pay, and that the compromise agreement constituted res judicata. The Regional Trial Court and the Court of Appeals affirmed this decision.

ISSUE

The primary issue is whether the stipulation “for as long as the defendant needed the premises and can meet and pay said increases” in the compromise agreement creates a valid lease for an indefinite period, binding the lessor to renew automatically at the lessee’s option.

RULING

The Supreme Court reversed the Court of Appeals. The disputed stipulation constitutes a purely potestative and suspensive condition dependent solely on the lessee’s will, violating the principle of mutuality of contracts under Article 1308 of the Civil Code. A contract cannot place its effectivity and continuation exclusively within the power of one party. The Court, citing Encarnacion v. Baldomar, held that such a condition is void as it allows the lessee to unilaterally perpetuate the lease, completely depriving the lessor of any say.
Interpreting the compromise agreement in its entirety, the Court ruled it provides for a definite three-year lease period, requiring mutual agreement for renewal. The clause for a 60-day notice of intent to renew is subject to the initial provision that “the term of the lease shall be renewed every three years,” implying mutual consent. A renewal presupposes the expiration of a prior term; there is nothing to renew if the lease is perpetual. Consequently, the lease expired in October 1985, and Lao Lim validly refused further renewal.
On res judicata, the Court held the compromise agreement settled only the first ejectment case. The present cause of action arose from the lease’s expiration in 1985 under the agreement’s terms, requiring different evidence. Thus, res judicata does not bar the second suit. The Court ordered Dy to vacate the premises and pay accrued rentals until actual vacation.