G.R. No. L-13064; June 29, 1963
THE BACHRACH MOTOR CO., INC., plaintiff-appellant, vs. UNIVERSAL TRADING CO., INC., ET AL., defendants-appellants.

FACTS

Bachrach Motor Co., Inc. (Bachrach) was the lessee of a government-owned parcel of land in Manila under a 25-year lease contract executed in 1928, renewable for another 25 years. The contract contained a clause prohibiting the lessee from subleasing the property without the prior written consent of the Secretary of Agriculture and Natural Resources. Bachrach constructed a permanent building on the land. After the building was damaged during World War II, Bachrach, having reconstructed its operations elsewhere, subleased the premises to Universal Trading Co., Inc. (Universal) in 1946 without securing the required governmental consent.
Upon discovery of the unauthorized sublease, the Director of Lands, with the Secretary’s approval, issued an order cancelling Bachrach’s original lease contract and forfeiting the improvements in favor of the government. The government subsequently awarded a new lease over the same land to Universal. Bachrach filed an action seeking to nullify the cancellation and forfeiture order and to compel Universal to pay unpaid rentals under their sublease contract.

ISSUE

The primary issues were: (1) Whether the unauthorized sublease by Bachrach justified the cancellation of its original lease and the forfeiture of improvements; and (2) Whether Universal Trading Co. remained liable to Bachrach for rentals under their sublease contract for the period before Universal entered into a direct lease with the government.

RULING

The Supreme Court affirmed the lower court’s decision. On the first issue, the Court upheld the government’s right to cancel the lease and forfeit the improvements. The lease contract was a reciprocal obligation where the lessee’s right to the land was contingent upon compliance with its terms, including the clause requiring prior consent for any sublease. By subleasing without consent, Bachrach violated a material condition, giving the government a valid cause for rescission under the Civil Code. The forfeiture clause was a valid contractual stipulation and not a penalty, as the improvements were considered accessions to the land, which belonged to the state as the owner. The government’s act was an exercise of its contractual right, not a confiscatory act of state power.
On the second issue, the Court sustained Universal’s liability to Bachrach for unpaid rentals from June 1, 1947, to March 16, 1948. Universal’s obligation arose from its valid and binding sublease contract with Bachrach. The subsequent cancellation of Bachrach’s lease by the government and the award of a new lease to Universal did not retroactively invalidate the parties’ private contract or extinguish Universal’s accrued liabilities thereunder for the period it occupied the premises under that agreement. Universal’s duty to pay Bachrach persisted until the government’s direct order for it to pay rentals to the Bureau of Lands, which only took effect upon Universal’s receipt of that order in February 1948.