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VOL. 268, FEBRUARY 10, 1997 5

Tecnogas Philippines Manufacturing Corp. vs. Court
of Appeals
*
G.R. No. 108894. February 10, 1997.

TECNOGAS PHILIPPINES MANUFACTURING CORPORATION,

petitioner,  vs.  COURT OF APPEALS (FORMER SPECIAL SEVENTEENTH
DIVISION) and EDUARDO UY, respondents.

Civil Law;  Property;  Unless one is versed in the science of surveying, “no one can
determine the precise extent or location of his property by merely examining his paper
title.”—We disagree with respondent Court. The two cases it relied upon do not support
its main pronouncement that a registered owner of land has presumptive knowledge of
the metes and bounds of its own land, and is therefore in bad faith if he mistakenly
builds on an adjoining land. Aside from the fact that those cases had factual moorings
radically different from those obtaining here, there is nothing in those cases which
would suggest, however remotely, that bad faith is imputable to a registered owner of
land when a part of his building encroaches upon a neighbor’s land, simply because he is
supposedly presumed to know the boundaries of his land as described in his certificate
of title. No such doctrinal statement could have been made in those cases because such
issue was not before the Supreme Court. Quite the contrary, we have rejected such a
theory in Co Tao vs. Chico, where we held that unless one is versed in the science of
surveying, “no one can determine the precise extent or location of his property by merely
examining his paper title.”
Same;  Same;  Good faith consists in the belief of the builder that the land he is
building on is his, and his ignorance of any defect or flaw in his title.—There is no
question that when petitioner purchased the land from Pariz Industries, the buildings
and other structures were already in existence. The record is not clear as to who
actually built those structures, but it may well be assumed that petitioner’s predecessor-
in-interest, Pariz Industries, did so. Article 527 of the Civil Code presumes good faith,
and since no proof exists to show that the encroachment over a narrow, needle-shaped
portion of private respondent’s land was done in bad faith by the builder of the
encroaching structures, the latter should be presumed to have built them in good faith.
It is presumed that possession continues to

____________________________

* THIRD DIVISION.

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6 SUPREME COURT REPORTS

ANNOTATED

Tecnogas Philippines Manufacturing Corp. vs.

Court of Appeals

be enjoyed in the same character in which it was acquired, until the contrary is
proved. Good faith consists in the belief of the builder that the land he is building on is
his, and his ignorance of any defect or flaw in his title. Hence, such good faith, by law,
passed on to Pariz’s successor, petitioner in this case. Further, “(w)here one derives title
to property from another, the act, declaration, or omission of the latter, while holding
the title, in relation to the property, is evidence against the former.” And possession
acquired in good faith does not lose this character except in case and from the moment
facts exist which show that the possessor is not unaware that he possesses the thing
improperly or wrongfully. The good faith ceases from the moment defects in the title are
made known to the possessor, by extraneous evidence or by suit for recovery of the
property by the true owner.
Same; Same; Same; The builder, if sued by the aggrieved landowner for recovery of
possession, could have invoked the provisions of Art. 448 of the Civil Code.—Recall that
the encroachment in the present case was caused by a very slight deviation of the
erected wall (as fence) which was supposed to run in a straight line from point 9 to point
1 of petitioner’s lot. It was an error which, in the context of the attendant facts, was
consistent with good faith. Consequently, the builder, if sued by the aggrieved
landowner for recovery of possession, could have invoke the provisions of Art. 448 of the
Civil Code.
Same; Same; Same; Builder can compel landowner to make a choice between the two
options: (1) to appropriate the building by paying the indemnity required by law, or (2)
sell the land to the builder.—The obvious benefit to the builder under this article is that,
instead of being outrightly ejected from the land, he can compel the landowner to make
a choice between the two options: (1) to appropriate the building by paying the
indemnity required by law, or (2) sell the land to the builder. The landowner cannot
refuse to exercise either option and compel instead the owner of the building to remove
it from the land.
Same; Same; Same; Petitioner is deemed to have stepped into the shoes of the seller
in regard to all rights of ownership over the immovable sold, including the right to
compel the private respondent to exercise either of the two options provided under Article
448 of the Civil Code.—Upon delivery of the property by Pariz Industries, as seller, to
the petitioner, as buyer, the latter acquired ownership of

VOL. 268, FEBRUARY 10, 1997 7

Tecnogas Philippines Manufacturing Corp. vs.

Court of Appeals

the property. Consequently and as earlier discussed, petitioner is deemed to have

stepped into the shoes of the seller in regard to all rights of ownership over the
immovable sold, including the right to compel the private respondent to exercise either
of the two options provided under Article 448 of the Civil Code.
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Same;  Same;  Same;  The supervening awareness of the encroachment by petitioner

does not militate against its right to claim the status of a builder in good faith.—In the
context of the established facts, we hold that petitioner did not lose its rights under
Article 448 of the Civil Code on the basis merely of the fact that some years after
acquiring the property in good faith, it learned about—and aptly recognized—the right
of private respondent to a portion of the land occupied by its building. The supervening
awareness of the encroachment by petitioner does not militate against its right to claim
the status of a builder in good faith. In fact, a judicious reading of said Article 448 will
readily show that the landowner’s exercise of his option can only take place after the
builder shall have come to know of the intrusion—in short, when both parties shall have
become aware of it. Only then will the occasion for exercising the option arise, for it is
only then that both parties will have been aware that a problem exists in regard to their
property rights.
Same;  Same;  Same;  The settlement may have recognized the ownership of private
respondent but such admission cannot be equated with bad faith.—From the foregoing,
it is clear that petitioner agreed only to the demolition of a portion of the wall
separating the adjoining properties of the parties—i.e. “up to the back of the building
housing the machineries.” But that portion of the fence which served as the wall
housing the electroplating machineries was not to be demolished. Rather, it was to “be
subject to negotiation by herein parties.” The settlement may have recognized the
ownership of private respondent but such admission cannot be equated with bad faith.
Petitioner was only trying to avoid a litigation, one reason for entering into an amicable
settlement.

PETITION for review on certiorari of a decision of the Court of Appeals.

The facts are stated in the opinion of the Court.

     De Jesus, Paguio & Manimtim for petitioner.
8

8 SUPREME COURT REPORTS ANNOTATED

Tecnogas Philippines Manufacturing Corp. vs. Court
of Appeals

          M.R. Pamaran Law Offices and  Acebes,  Del Carmen,Cinco & Cordova  for
private respondent.

PANGANIBAN, J.:

The parties in this case are owners of adjoining lots in Parañaque, Metro
Manila. It was discovered in a survey that a portion of a building of petitioner,
which was presumably constructed by its predecessor-in-interest, encroached
on a portion of the lot owned by private respondent. What are the rights and
obligations of the parties? Is petitioner considered a builder in bad faith
because, as held by respondent Court, he is “presumed to know the metes and
bounds of his property as described in his certificate of title?” Does petitioner
succeed into the good faith or bad faith of his predecessor-in-interest which
presumably constructed the building?
These1 are the questions raised in the petition for review of the
Decision
2
  dated August 28, 1992,3 in  CA-G.R. CV No. 28293  of respondent
Court  where the disposition reads:
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“WHEREFORE, premises considered, the Decision of the Regional Trial Court is hereby
reversed and set aside and another one entered—

1. Dismissing the complaint for lack of cause of action;

2. Ordering Tecnogas to pay the sum of P2,000.00 per month as reasonable rental
from October 4, 1979 until appellee vacates the land;
3. To remove the structures and surrounding walls on the encroached area;
4. Ordering appellee to pay the value of the land occupied by the two-storey
building;
5. Ordering appellee to pay the sum of P20,000.00 for and as attorney’s fees;

____________________________
1 Rollo,pp. 10-17.
2 Special Seventeenth Division composed of J. Antonio M. Martinez,  ponente, and  JJ. Serafin
V.C. Guingona and Salome A. Montoya, concurring.
3 Rollo, pp. 16-17.

VOL. 268, FEBRUARY 10, 1997 9

Tecnogas Philippines Manufacturing Corp. vs. Court
of Appeals

6. Costs against appellee.”

Acting on the motions for reconsideration of both petitioner and private

respondent, respondent Court ordered the deletion of paragraph 4 of the4
dispositive portion in an Amended Decision dated February 9, 1993, as follows:
“WHEREFORE, premises considered, our decision of August 28, 1992 is hereby modified
deleting paragraph 4 of the dispositive portion of our decision which reads:

‘4. Ordering appellee to pay the value of the land occupied by the two-storey
building.’

The motion for reconsideration of appellee is hereby DENIED for lack of merit.”

The foregoing Amended Decision is also challenged in the instant petition.

The Facts

The facts are not disputed. Respondent 5

Court merely reproduced the factual
findings of the trial court, as follows:

“That plaintiff (herein petitioner) which is a corporation duly organized and existing
under and by virtue of Philippine laws is the registered owner of a parcel of land
situated in Barrio San Dionisio, Parañaque, Metro Manila known as Lot 4331-A (should
be 4531-A) of Lot 4531 of the Cadastral Survey of Parañaque, Metro Manila, covered by
Transfer Certificate of Title No. 409316 of the Registry of Deeds of the Province of Rizal;
that said land was purchased by plaintiff from Pariz Industries, Inc. in 1970, together
with all the buildings and improvements including the wall existing thereon; that the
defendant (herein private respondent) is the registered owner of a parcel of land known
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as Lot No. 4531-B of Lot 4531 of the Cadastral Survey of Parañaque, LRC (GLRO) Rec.
No. 19645 covered by Transfer Certificate of Title No. 279838, of the Registry of Deeds
for the Province of Rizal; that said land which adjoins plaintiff’s land was purchased by
defendant from a certain Enrile Antonio

____________________________
4 Ibid., pp. 20-21.
5 Ibid., pp. 11-12.

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10 SUPREME COURT REPORTS ANNOTATED

Tecnogas Philippines Manufacturing Corp. vs. Court
of Appeals

also in 1970; that in 1971, defendant purchased another lot also adjoining plaintiff’s
land from a certain Miguel Rodriguez and the same was registered in defendant’s name
under Transfer Certificate of Title No. 31390, of the Registry of Deeds for the Province
of Rizal; that portions of the buildings and wall bought by plaintiff together with the
land from Pariz Industries are occupying a portion of defendant’s adjoining land; that
upon learning of the encroachment or occupation by its buildings and wall of a portion of
defendant’s land, plaintiff offered to buy from defendant that particular portion of
defendant’s land occupied by portions of its buildings and wall with an area of 770
square meters, more or less, but defendant, however, refused the offer. In 1973, the
parties entered into a private agreement before a certain Col. Rosales in Malacañang,
wherein plaintiff agreed to demolish the wall at the back portion of its land thus giving
to defendant possession of a portion of his land previously enclosed by plaintiff’s wall;
that defendant later filed a complaint before the office of Municipal Engineer of
Parañaque, Metro Manila as well as before the Office of the Provincial Fiscal of Rizal
against plaintiff in connection with the encroachment or occupation by plaintiff’s
buildings and walls of a portion of its land but said complaint did not prosper; that
defendant dug or caused to be dug a canal along plaintiff’s wall, a portion of which
collapsed in June, 1980, and led to the filing by plaintiff of the supplemental complaint
in the above-entitled case and a separate criminal complaint for malicious mischief
against defendant and his wife which ultimately resulted into the conviction in court of
defendant’s wife for the crime of malicious mischief; that while trial of the case was in
progress, plaintiff filed in Court a formal proposal for settlement of the case but said
proposal, however, was ignored by defendant.”
6
After trial on the merits, the Regional Trial Court  of Pasay City, Branch 117,
in  Civil Case No. PQ-7631-P, rendered a decision dated December 4, 1989 in 7
favor of petitioner who was the plaintiff therein. The dispositive portion reads:
“WHEREFORE, judgment is hereby rendered in favor of plaintiff and against defendant
and ordering the latter to sell to plaintiff that portion of land owned by him and
occupied by portions of plain-

____________________________
6 Presided by Judge Leonardo M. Rivera.
7 Rollo, p. 10.

11

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Tecnogas Philippines Manufacturing Corp. vs. Court
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tiff’s buildings and wall at the price of P2,000.00 per square meter and to pay the
former:

1. The sum of P44,000.00 to compensate for the losses in materials and properties
incurred by plaintiff through thievery as a result of the destruction of its wall;
2. The sum of P7,500.00 as and by way of attorney’s fees; and
3. The costs of this suit.”

Appeal was duly interposed with respondent Court, which as previously stated,
reversed and set aside the decision of the Regional Trial Court and rendered
the assailed Decision and Amended Decision. Hence, this recourse under Rule
45 of the Rules of Court.

The Issues
8
The petition raises the following issues:
“(A)

Whether or not the respondent Court of Appeals erred in holding the petitioner a
builder in bad faith because it is ‘presumed to know the metes and bounds of his
property.’

(B)

Whether or not the respondent Court of Appeals erred when it usedthe amicable
settlement between the petitioner and the privaterespondent, where both parties agreed
to the demolition of the rearportion of the fence, as estoppel amounting to recognition by
petitioner of respondent’s right over his property including the portionsof the land
where the other structures and the building stand, whichwere not included in the
settlement.

(C)

Whether or not the respondent Court of Appeals erred in ordering the removal of the
‘structures and surrounding walls on the encroached area’ and in withdrawing its
earlier ruling in its August 28, 1992 decision for the petitioner ‘to pay for the value of
the land

____________________________
8 Ibid., pp. 106-107.

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12 SUPREME COURT REPORTS ANNOTATED

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occupied’ by the building, only because the private respondent has ‘manifested its choice
to demolish’ it despite the absence of compulsory sale where the builder fails to pay for
the land, and which ‘choice’ private respondent deliberately deleted from its September
1, 1980 answer to the supplemental complaint in the Regional Trial Court.”

In its Memorandum, petitioner poses the following issues:

“A.

The time when to determine the good faith of the builder under Article 448 of the New
Civil Code, is reckoned during the period when it was actually being built; and in a case
where no evidence was presented nor introduced as to the good faith or bad faith of the
builder at that time, as in this case, 9he must be presumed to be a ‘builder in good faith,’
since ‘bad faith cannot be presumed.’

B.

In a specific ‘boundary overlap situation’ which involves a builder in good faith, as in

this case, it is now well settled that the lot owner, who builds on the adjacent lot
is not charged with ‘constructive notice’ of the technical metes and bounds contained in
their torrens
10
titles to determine the exact and precise extent of his boundary
perimeter.

C.

The respondent court’s citation of the twin cases of  Tuason & Co. v.
Lumanlan  and  Tuason & Co. v. Macalindong  is  not  the ‘judicial authority’ for a
boundary dispute situation between adjacent torrens titled lot owners, as the facts of
the present
11
case do not fall within nor square with the involved principle of a dissimilar
case.

D.

Quite contrary to respondent Uy’s reasoning, petitioner Tecnogas continues to be a

builder in good faith, even if it subsequently

____________________________
9 Ibid., p. 392.
10 Ibid., p. 399.
11 Ibid., p. 402.

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Tecnogas Philippines Manufacturing Corp. vs. Court
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built/repaired the walls/other permanent structures thereon while the case  a quo  was
pending 12 and even while respondent sent the petitioner many letters/filed cases
thereon.

D.(E.)

The amicable settlement between the parties should be interpreted as a contract and
enforced only in accordance with its explicit terms, and not over and beyond that agreed

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upon; 13because the courts do  not  have the power to create a contract  nor  expand its
scope.

E.(F.)

As a  general rule, although the landowner has the option to choose between: (1)
‘buying the building built in good faith,’ or (2) ‘selling the portion of his land on which
stands the building’ under Article 448 of the Civil Code; the first option is not absolute,
because an exception thereto, once it would be impractical for the landowner to choose to
exercise the first alternative, i.e. buy that portion of the house standing on his land, for
the whole building might be rendered useless. The workable solution is for him to select
the second alternative, namely, to sell
14
to the builder that part of his land on which was
constructed a portion of the house.”

Private respondent, on the

15
other hand, argues that the petition is “suffering
from the following flaws:

1. It did not give the exact citations of cases decided by the Honorable
Supreme Court that allegedly contradicts the ruling of the Hon. Court
of Appeals based on the doctrine laid down in Tuason vs. Lumanlan
case citing also Tuason vs. Macalindong case (Supra).
2. Assuming that the doctrine in the alleged Co Tao vs. Chico case is
contradictory to the doctrine in Tuason vs. Lumanlan and Tuason vs.
Macalindong, the two cases being more current, the same should
prevail.”

____________________________
12 Ibid., p. 410.
13 Ibid., p. 416.
14 Ibid., p. 423.
15 Ibid., p. 247.

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14 SUPREME COURT REPORTS ANNOTATED

Tecnogas Philippines Manufacturing Corp. vs. Court
of Appeals

Further, private respondent contends that the following “unmistakably” point

to the bad faith of petitioner: (1) private respondent’s purchase of the two lots,
“was ahead of the purchase by petitioner of the building and lot from Pariz
Industries”; (2) the declaration of the General Manager of Tecnogas that the
sale between petitioner and Pariz Industries “was not registered” because of
some problems with China Banking Corporation; and (3) the Deed of Sale in 16
favor of petitioner was registered in its name only in “the month of May 1973.”

The Court’s Ruling

The petition should be granted.

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Good Faith or Bad Faith

Respondent 17Court, citing the cases of  J.M. Tuason & Co., Inc.18 vs. Vda. de
Lumanlan    and  J.M. Tuason & Co., Inc. vs. Macalindong,   ruled that
petitioner “cannot be considered in good faith” because as a land owner, it is
“presumed to know the metes and bounds of his own property, specially if the
same are reflected in a properly issued certificate of title. One who erroneously
builds on the adjoining lot should be considered a builder in (b)ad (f)aith, there
being presumptive
19
knowledge of the Torrens title, the area, and the extent of
the boundaries.”
We disagree with respondent Court. The two cases it relied upon do not
support its main pronouncement that a registered owner of land has
presumptive knowledge of the metes and bounds of its own land, and is
therefore in bad faith if he mistakenly builds on an adjoining land. Aside from
the fact that those cases had factual moorings radically different from those
obtaining here, there is nothing in those cases which would suggest, however
remotely, that bad faith is imputable

____________________________
16 Ibid.,pp. 253-255.
17 23 SCRA 230, April 26, 1968.
18 6 SCRA 938, December 29, 1962.
19 Rollo, p. 14.

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Tecnogas Philippines Manufacturing Corp. vs. Court
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to a registered owner of land when a part of his building encroaches upon a

neighbor’s land, simply because he is supposedly presumed to know the
boundaries of his land as described in his certificate of title. No such doctrinal
statement could have been made in those cases because such issue was not
before the Supreme 20Court. Quite the contrary, we have rejected such a theory
in Co Tao vs. Chico,  where we held that unless one is versed in the science of
surveying, “no one can determine the precise extent or location of his property
by merely examining his paper title.”
There is no question that when petitioner purchased the land from Pariz
Industries, the buildings and other structures were already in existence. The
record is not clear as to who actually built those structures, but it may well be
assumed that petitioner’s predecessor-in-interest, Pariz Industries, did so.
Article 527 of the Civil Code presumes good faith, and since no proof exists to
show that the encroachment over a narrow, needle-shaped portion of private
respondent’s land was done in bad faith by the builder of the encroaching 21
structures, the latter should be presumed to have built them in good faith.  It
is presumed that possession continues to be enjoyed 22
in the same character in
which it was acquired, until the contrary is proved.  Good faith consists in the
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belief of the builder that the land

23
he is building on is his, and his ignorance of
any defect or flaw in his title.   Hence, such good faith, by law, passed on to
Pariz’s successor, petitioner in this

____________________________
20 83 Phil. 543 (1949).
21  U.S. vs. Rapiñan,  1 Phil. 294, 296 (1902);  City of Manila vs. del Rosario,  5 Phil. 227, 231
(1905); Gabriel, et al. vs. Bartolome, et al., 7 Phil. 699, 706 (1907); Sideco vs. Pascua, 13 Phil. 342,
344 (1909); Arriola vs. Gomez De la Serna, 14 Phil. 627, 629 (1909); Cea vs. Villanueva,  18 Phil.
538, 542 (1911); Bondad vs. Bondad, 34 Phil. 232, 233 (1916);  Serra vs. National Bank,  45 Phil.
907 (1924); Escritor vs. Intermediate Appellate Court, 155 SCRA 577, 583, November 12, 1987.
22 Article 529 of the Civil Code.
23 Pleasantville Development Corporation vs. Court of Appeals,  253 SCRA 10, 18, February 1,

1996.

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of Appeals

case. Further, “(w)here one derives title to property from another, the act,
declaration, or omission of the latter, while24holding the title, in relation to the
property, is evidence against the former.”   And possession acquired in good
faith does not lose this character except in case and from the moment facts
exist which show that the 25possessor is not unaware that he possesses the thing
improperly or wrongfully.   The good faith ceases from the moment defects in
the title are made known to the possessor, 26by extraneous evidence or by suit for
recovery of the property by the true owner.
Recall that the encroachment in the present case was caused by a very slight
deviation of the erected wall (as fence) which was supposed to run in a straight
line from point 9 to point 1 of petitioner’s lot. It was an error which, in the
context of the attendant facts, was consistent with good faith. Consequently,
the builder, if sued by the aggrieved landowner for recovery of possession, could
have invoked the provisions of Art. 448 of the Civil Code, which reads:
“The owner of the land on which anything has been built, sown or planted in good faith,
shall have the right to appropriate as his own the works, sowing or planting, after
payment of the indemnity provided for in Articles 546 and 548, or to oblige the one who
built or planted to pay the price of the land, and the one who sowed, the proper rent.
However, the builder or planter cannot be obliged to buy the land if its value is
considerably more than that of the building or trees. In such case, he shall pay
reasonable rent, if the owner of the land does not choose to appropriate the building or
trees after proper indemnity. The parties shall agree upon the terms of the lease and in
case of disagreement, the court shall fix the terms thereof.”

The obvious benefit to the builder under this article is that, instead of being
outrightly ejected from the land, he can com-

____________________________

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24 Robleza vs. Court of Appeals, 174 SCRA 354, 365, June 28, 1989 citing Section 28, Rule 130,
Rules of Court.
25 Article 528 of the Civil Code.
26 Ortiz vs. Kayanan, 92 SCRA 146, 159, July 30, 1979 citing Article 528, Civil Code.

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pel the landowner to make a choice between the two options: (1) to appropriate
the building by paying the indemnity required by law, or (2) sell the land to the
builder. The landowner cannot refuse to exercise either option 27
and compel
instead the owner of the building to remove it from the land.
The question, however, is whether the same benefit can be invoked by
petitioner who, as earlier stated, is not the builder of the offending structures
but possesses them as buyer.
We answer such question in the affirmative.
In the first place, there is no sufficient showing that petitioner was aware of
the encroachment at the time it acquired the property from Pariz Industries.
We agree with the trial court that various factors in evidence adequately show
petitioner’s lack of awareness thereof. In any case, contrary proof has not
overthrown the presumption of good faith under Article 527 of the Civil Code,
as already stated, taken together with the disputable presumptions of the law
on evidence. These presumptions state, under Section 3(a) of Rule 131 of the
Rules of Court, that the person is innocent of a crime or wrong; and under
Section 3(ff) of Rule 131, that the law has been obeyed. In fact, private
respondent Eduardo Uy himself was unaware of such intrusion into his
property until after 1971 when he hired a surveyor, following his purchase of
another adjoining lot, to survey all his newly acquired lots. Upon being
apprised of the encroachment, petitioner immediately offered to buy the area
occupied by its building—a species of conduct consistent with good faith.
In the second place, upon delivery of the property by Pariz Industries, as
seller, to the petitioner, as buyer, the latter acquired ownership of the property.
Consequently and as earlier discussed, petitioner is deemed to have stepped
into the shoes of the seller in regard to all rights of ownership over the
immovable sold, including the right to compel the private respondent to
exercise either of the two options provided under Article 448 of the Civil Code.

____________________________
27 Ignacio vs. Hilario, 76 Phil. 605 (1946); Sarmiento vs. Agana, 129 SCRA 122, April 30, 1984.

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Estoppel

Respondent Court ruled that the amicable settlement entered into between
petitioner and private respondent estops the former from questioning the
private respondent’s “right” over the disputed property. It held that by
undertaking to demolish the fence under said settlement, petitioner recognized
private respondent’s right over the property, and “cannot later on compel”
private respondent28 “to sell to it the land since” private respondent “is under no
obligation to sell.”  We do not agree. Petitioner cannot be held in estoppel29 for
entering into the amicable settlement, the pertinent portions of which read:
“That the parties hereto have agreed that the rear portion of the fence that separates
the property of the complainant and respondent shall be demolished up to the back of
the building housing the machineries which demolision (sic) shall be undertaken by the
complainant at anytime.
That the fence which serve(s) as a wall housing the electroplating machineries shall
not be demolished in the mean time which portion shall be subject to negotiation by
herein parties.”

From the foregoing, it is clear that petitioner agreed only to the demolition of a
portion of the wall separating the adjoining properties of the parties—i.e. “up to
the back of the building housing the machineries.” But that portion of the fence
which served as the wall housing the electroplating machineries was not to be
demolished. Rather, it was to “be subject to negotiation by herein parties.” The
settlement may have recognized the ownership of private respondent but such
admission cannot be equated with bad faith. Petitioner was only trying to avoid
a litigation, one reason for entering into an amicable 30
settlement.
As was ruled in Osmeña vs. Commission on Audit,

____________________________
28 Rollo,
p. 14.
29 OriginalRecords, p. 179.
30 238 SCRA 463, 470-471, November 29, 1994.

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Tecnogas Philippines Manufacturing Corp. vs. Court
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“A compromise is a bilateral act or transaction that is expressly acknowledged as a

juridical agreement by the Civil Code and is therein dealt with in some detail. ‘A
compromise,’ declares Article 2208 of said Code, ‘is a contract whereby the parties, by
making reciprocal concessions, avoid a litigation or put an end to one already
commenced.’
x x x      x x x      x x x
The Civil Code not only defines and authorizes compromises, it in fact encourages
them in civil actions. Art. 2029 states that ‘The Court shall endeavor to persuade the
litigants in a civil case to agree upon some fair compromise.’ x x x.”

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In the context of the established facts, we hold that petitioner did not lose its
rights under Article 448 of the Civil Code on the basis merely of the fact that
some years after acquiring the property in good faith, it learned about—and
aptly recognized—the right of private respondent to a portion of the land
occupied by its building. The supervening awareness of the encroachment by
petitioner does not militate against its right to claim the status of a builder in
good faith. In fact, a judicious reading of said Article 448 will readily show that
the landowner’s exercise of his option can only take place after the builder shall
have come to know of the intrusion—in short, when both parties shall have
become aware of it. Only then will the occasion for exercising the option arise,
for it is only then that both parties will have been aware that a problem exists
in regard to their property rights.

Options of Private Respondent

What then is the applicable provision in this case31which private respondent

may invoke as his remedy: Article 448 or Article 450  of the Civil Code?

____________________________
31 Article450. The owner of the land on which anything has been built, planted or sown in bad
faith may demand the demolition of the work, or that the planting or sowing be removed, in order
to replace things in their former condition at the expense of the person who built, planted or sowed;
or he may compel the builder or planter to pay the price of the land, and the sower the proper rent.

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20 SUPREME COURT REPORTS ANNOTATED

Tecnogas Philippines Manufacturing Corp. vs. Court
of Appeals

In view of the good faith of both petitioner and private respondent, their rights
and obligations are to be governed by Art. 448. The essential fairness of this
codal provision has been pointed out by Mme. Justice Ameurfina Melencio-
Herrera,32citing  Manresa  and applicable precedents, in the case of  Depra vs.
Dumlao,  to wit:
“Where the builder, planter or sower has acted in good faith, a conflict of rights arises
between the owners, and it becomes necessary to protect the owner of the improvements
without causing injustice to the owner of the land. In view of the impracticality of
creating a state of forced co-ownership, the law has provided a just solution by giving
the owner of the land the option to acquire the improvements after payment of the
proper indemnity, or to oblige the builder or planter to pay for the land and the sower to
pay the proper rent. It is the owner of the land who is authorized to exercise the option,
because his right is older, and because, by the principle of accession, he is entitled to the
ownership of the accessory thing. (3 Manresa 213; Bernardo vs. Bataclan, 37 Off. Gaz.
1382; Co Tao vs. Chan Chico, G.R. No. 49167, April 30, 1949; Article applied; see Cabral,
et al. vs. Ibanez[S.C.] 52 Off. Gaz. 217; Marfori vs. Velasco, [C.A.] 52 Off. Gaz. 2050).”

The private respondent’s insistence on the removal of the encroaching

structures as the proper remedy, which respondent Court sustained in its
assailed Decisions, is thus legally flawed. This is not one of the remedies
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bestowed upon him by law. It would be available only if and when he chooses to
compel the petitioner
33
to buy the land at a reasonable price but the latter fails to
pay such price.  This has not taken place.

____________________________
32 136SCRA 475, 483, May 16, 1985.
33 Ignacio
vs. Hilario, supra. In Sarmiento vs. Agana 129 SCRA 122, 126, April 30, 1984), it was
held that:

“The owner of the building erected in good faith on a land owned by another, is entitled to retain the
possession of the land until he is paid the value of his building, under Article 453 (now Article 546). The owner
of the land, upon the other hand, has the option, under Article 361 (now Article 448), either to pay for the
building or to sell his land to the owner of

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Hence, his options are limited to: (1) appropriating the encroaching portion of
petitioner’s building after payment of proper indemnity, or (2) obliging the
latter to buy the lot occupied by the structure. He cannot exercise a remedy of
his own liking.
Neither
34
is petitioner’s prayer that private respondent be ordered to sell the
land   the proper remedy. While that was dubbed as the “more 35
workable
solution” in Grana and Torralba vs. The Court of Appeals, et al.,  it was not the
relief granted in that case as the landowners were directed to exercise “within
30 days from this decision their option to either buy the portion of the
petitioners’ house on their 36
land or sell to said petitioners the portion of their
land on which it stands.”  Moreover, in Grana and Torralba, the area 37involved
was only 87 square meters while this 38
case involves 520 square meters.  In line
with the case of Depra vs. Dumlao,  this case will have to be remanded to the
trial court for further proceedings to fully implement the mandate of Art. 448.
It is a rule of procedure for the Supreme Court to strive to settle the entire
controversy in a 39single proceeding leaving no root or branch to bear the seeds of
future litigation.

____________________________

the building.  But he cannot, as respondents here did,  refuse both to pay for the building and to sell the
land and compel the owner of the building to remove it from the land where it is erected. He is entitled to such
remotion only when, after having chosen to sell his land, the other party fails to pay for the same.”
34 Rollo, pp. 423-426.
35 109 Phil. 260, 264 (1960).
36 At p. 265.
37 In view of the compromise agreement, the encroaching wall was torn down. As explained in

private respondent’s Memorandum, the area encroached by petitioner’s building is only 520 square
meters, no longer the original 770 referred to in the statement of facts narrated by the two lower
courts. (Rollo, p. 467).
38 Supra.
39 Heirs of Crisanta Y. Gabriel-Almoradie vs. Court of Appeals,  229 SCRA 15, 29, January 4,

1994.

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Tecnogas Philippines Manufacturing Corp. vs. Court
of Appeals

Petitioner, however, must also pay the rent for the property occupied by its
building as prescribed by respondent Court from October 4, 1979, but only up
to the date private respondent serves notice of its option upon petitioner and
the trial court; that is, if such option is for private respondent to appropriate
the encroaching structure. In such event, petitioner 40
would have a right of
retention which negates the obligation to pay rent.  The rent should however
continue if the option chosen is compulsory sale, but only up to the actual
transfer of ownership.
The award of attorney’s fees by respondent Court against petitioner is
unwarranted since the action appears to have been 41
filed in good faith. Besides,
there should be no penalty on the right to litigate.
WHEREFORE, premises considered, the petition is hereby GRANTED and
the assailed Decision and the Amended Decision are REVERSED 42
and SET
ASIDE.  In accordance with the case of  Depra vs. Dumlao,   this case is
REMANDED to the Regional Trial Court of Pasay 43
City, Branch 117, for further
proceedings consistent with Articles 448 and 546  of the Civil Code, as follows:
The trial court shall determine:

____________________________
40 Grana vs. Court of Appeals, supra.
41 Castillo vs. Court of Appeals,  205 SCRA 529, 537, January 27, 1992, citing  Ilocos Norte
Electric Company vs. Court of Appeals, 179 SCRA 5, November 6, 1989 and Espiritu vs. Court of
Appeals, 137 SCRA 50, June 19, 1985.
42 Supra, at pp. 483-486.
43 Article 546. Necessary expenses shall be refunded to every possessor; but only the possessor in

good faith may retain the thing until he has been reimbursed therefor.
Useful expenses shall be refunded only to the possessor in good faith with the same right of
retention, the person who has defeated him in the possession having the option of refunding the
amount of the expenses or of paying the increase in value which the thing may have acquired by
reason thereof.

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a) the present fair price of private respondent’s 520 square-meter area of

land;
b) the increase in value (“plus value”) which the said area of 520 square
meters may have acquired by reason of the existence of the portion of
the building on the area;
c) the fair market value of the encroaching portion of the building; and
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d) whether the value of said area of land is considerably more than the
fair market value of the portion of the building thereon.

2. After said amounts shall have been determined by competent evidence, the
regional trial court shall render judgment as follows:

a) The private respondent shall be granted a period of fifteen (15) days

within which to exercise his option under the law (Article 448, Civil
Code), whether to appropriate the portion of the building as his own by
paying to petitioner its fair market value, or to oblige petitioner to pay
the price of said area. The amounts to be respectively paid by petitioner
and private respondent, in accordance with the option thus exercised by
written notice of the other party and to the court, shall be paid by the
obligor within fifteen (15) days from such notice of the option by
tendering the amount to the trial court in favor of the party entitled to
receive it;
b) If private respondent exercises the option to oblige petitioner to pay the
price of the land but the latter rejects such purchase because, as found
by the trial court, the value of the land is considerably more than that
of the portion of the building, petitioner shall give written notice of such
rejection to private respondent and to the trial court within fifteen (15)
days from notice of private respondent’s option to sell the land. In that
event, the parties shall be given a period of fifteen (15) days from such
notice of rejection within which to agree upon the terms of the lease,
and give the trial court formal written notice of the agreement and its
provisos. If no agreement is reached by the parties, the trial court,
within fifteen (15) days from and after the termination of the said
period fixed for negotiation, shall then fix the terms of the lease
provided that the monthly rental to be fixed by the Court shall not be
less than two thousand pesos (P2,000.00) per month, payable within the
first five (5) days of each calendar month. The period for the forced
lease shall not be more than two (2) years, counted from the finality of
the

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24 SUPREME COURT REPORTS ANNOTATED

Tecnogas Philippines Manufacturing Corp. vs. Court
of Appeals

judgment, considering the long period of time since 1970 that petitioner has
occupied the subject area. The rental thus fixed shall be increased by ten
percent (10%) for the second year of the forced lease. Petitioner shall not make
any further constructions or improvements on the building. Upon expiration of
the two-year period, or upon default by petitioner in the payment of rentals for
two (2) consecutive months, private respondent shall be entitled to terminate
the forced lease, to recover his land, and to have the portion of the building
removed by petitioner or at latter’s expense. The rentals herein provided shall
be tendered by petitioner to the trial court for payment to private respondent,
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and such tender shall constitute evidence of whether or not compliance was
made within the period fixed by the said court.

c) In any event, petitioner shall pay private respondent an amount

computed at two thousand pesos (P2,000.00) per month as reasonable
compensation for the occupancy of private respondent’s land for the
period counted from October 4, 1979, up to the date private respondent
serves notice of its option to appropriate the encroaching structures,
otherwise up to the actual transfer of ownership to petitioner or, in case
a forced lease has to be imposed, up to the commencement date of the
forced lease referred to in the preceding paragraph;
d) The periods to be fixed by the trial court in its decision shall be non-
extendible, and upon failure of the party obliged to tender to the trial
court the amount due to the obligee, the party entitled to such payment
shall be entitled to an order of execution for the enforcement of
payment of the amount due and for compliance with such other acts as
may be required by the prestation due the obligee.

No costs.
SO ORDERED.

     Narvasa (C.J., Chairman), Davide, Jr., Melo and Francisco, JJ., concur.

Petition granted, judgment reversed and set aside. Case remanded to court a
quo for further proceedings.

Note.—Article 448 of the Civil Code does not apply to a case where the
owner of the land is the builder, sower or
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planter who then later loses ownership of the land by sale or donation. (Pecson
vs. Court of Appeals, 244 SCRA 407[1995])

——o0o——

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