G.R. No. L-48290, September 29, 1983
Naty Castillo and Isabelo Castillo, Petitioners, v. Hon. Court of Appeals and Lamberto L. Manalo, Respondents.

FACTS

Private respondent Lamberto L. Manalo filed an unlawful detainer case against petitioners Naty and Isabelo Castillo before the City Court of Manila. Manalo alleged he was the owner of a two-story house on Lot No. 1-B-3, having purchased a portion of an adjacent house from Federico Verzosa that encroached on his lot. He claimed the Castillos were his lessees of the ground floor and mezzanine at a monthly rental of P70.00, and he had terminated the lease to occupy and repair the premises. The Castillos refused to vacate after a grace period.
The Castillos denied Manalo’s ownership and the lease. They asserted they had built the ground floor and mezzanine structure themselves on what they believed was a vacant portion of Verzosa’s lot, paying him P20.00 monthly. They contended Manalo’s award of the lot from the government was under protest, giving them a preferential right to acquire it. The City Court ruled for Manalo, finding a landlord-tenant relationship. The Court of First Instance (CFI) reversed, accepting the Castillos’ claim of ownership over the ground floor. The Court of Appeals then reinstated the City Court’s decision, leading to this appeal.

ISSUE

The core issue is whether an unlawful detainer case was proper, given the conflicting claims of ownership over the ground floor and mezzanine structure between Manalo (as alleged lessor) and the Castillos (as alleged builders-owners).

RULING

The Supreme Court granted the petition and reversed the Court of Appeals, but ultimately ordered the Castillos to vacate the premises without liability for back rentals. The legal logic proceeds from the principle that an ejectment suit requires prior physical possession by the plaintiff and a withholding of possession by the defendant. The Court found the Castillos’ claim of ownership, supported by evidence that they constructed the ground floor, was a substantive defense that placed the true ownership of the structure in genuine dispute.
However, the Court resolved this dispute on its merits to serve justice. It held the Castillos were builders in bad faith under Article 449 of the Civil Code because they built their structure on Lot No. 1-B-3, a lot they did not own, which was later lawfully awarded to Manalo. As builders in bad faith, they lost their building without right to indemnity. Furthermore, even if considered lessees, they would not be entitled to reimbursement for useful improvements under Article 1678. Consequently, the ground floor and mezzanine became the property of Manalo as the landowner. The Castillos’ prolonged possession was offset by waiving all claims for accrued rentals or compensation for use and occupation. Thus, while the ejectment order was affirmed, it was based on the final adjudication of ownership in favor of Manalo, not on a simple lessor-lessee relationship.