Parilla vs. Pilar, G.R. No.

167680, November 30, 2006

Re: Useful improvements

FACTS:
 Petitioner-spouses Samuel and Chinita Parilla and their co-petitioner-son Deodato Parilla, as dealers of Pilipinas Shell
Petroleum Corporation (Pilipinas Shell), have been in possession of a parcel of land (the property) located at the poblacion
of Bantay, Ilocos Sur, which was leased to it by respondent Dr. Prospero Pilar under a 10-year Lease Agreement entered
into in 1990
 When the lease contract between Pilipinas Shell and respondent expired in 2000, petitioners remained in possession of the
property on which they built improvements consisting of a billiard hall and a restaurant, maintained a sari-sari store
managed by Leonardo Dagdag, Josefina Dagdag and Edwin Pugal, and allowed Flor Pelayo, Freddie Bringas and Edwin Pugal
to use a portion thereof as parking lot.
 Despite demands to vacate, petitioners and the other occupants remained in the property.
 Hence, respondent who has been residing in the United States, through his attorney-in-fact Marivic Paz Padre, filed on
February 4, 2002 a complaint for ejectment before the Bantay MTC with prayer for the issuance of a writ of preliminary
injunction with damages against petitioners and the other occupants of the property.

MTC’s Ruling
 Ordered herein petitioners and their co-defendants and all persons claiming rights under them to vacate the property and
to pay the plaintiff-herein respondent the amount of P50,000 as reasonable compensation for the use of the property and
P10,000 as attorney’s fees and to pay the cost of suit
 And it ordered the plaintiff-herein respondent to reimburse defendants Samuel Parilla, Chinita Parilla and Deodato Parilla
the amount of P2,000,000 representing the value of the improvements introduced on the property.

RTC’s Ruling
 Respondent appealed to RTC the portion of trial court’s decision ordering him to reimburse petitioners the amount of
P2,000,000
 However, the RTC affirmed the MTC Decision.

In CA
 Set aside the questioned order for respondent to reimburse petitioners
o Applied Art. 546 of the New Civil Code, and held that the herein petitioners tolerated occupancy ... could not be
interpreted to mean ... that they are builders or possessors in good faith, and that for one to be a builder in good
faith, it is assumed that he claims title to the property which is not the case of petitioners.
 Hence, this petition.

Petitioners’ Arguments, among others:

ISSUE: Whether the petitioners are entitled to their claim for reimbursement on the entire value of improvements.

RULING:
 No.
 The evidence shows that in 1960, a lease contract over the property was forged between Shell Company of the Philippines
Limited and respondent’s predecessors-in- interest.
o In 1990, the lease contract was renewed by Pilipinas Shell and respondent
o Petitioners, being dealers of Pilipinas Shell’s petroleum products, were allowed to occupy the property.
o Petitioners are thus considered agents of Pilipinas Shell.
 The factual milieu of the instant case calls then for the application of the provisions on lease under the New Civil Code.
 The right of the lessor upon the termination of a lease contract with respect to useful improvements introduced on the
leased property by a lessee is covered by Article 1678, as follows:
1
 o “Art. 1678. If the lessee makes, in good faith, useful improvements which are suitable to the use for which the lease is
intended, without altering the form or substance of the property leased, the lessor upon the termination of the lease shall pay
the lessee one-half of the value of the improvements at that time. Should the lessor refuse to reimburse said amount, the
lessee may remove the improvements, even though the principal thing may suffer damage thereby. He shall not, however,
cause any more impairment upon the property leased than is necessary. xxxx” (Emphasis supplied)

 The foregoing provision is a modification of the old Code under which the lessee had no right at all to be reimbursed for the
improvements introduced on the leased property, he being entitled merely to the rights of a usufructuary – right of removal
and set-off, but not of reimbursement.
 The modification introduced in the above-quoted paragraph of Article 1678 on partial reimbursement was intended to
prevent unjust enrichment of the lessor which now has to pay one-half of the value of the improvements at the time the
lease terminates because the lessee has already enjoyed the same, whereas the lessor could enjoy them indefinitely
thereafter.
 As the law on lease under the New Civil Code has specific rules concerning useful improvements introduced by a lessee on
the property leased, it is erroneous on the part of petitioners to urge this Court to apply Art. 448, in relation to Art. 546,
regarding their claim for reimbursement and to invoke the right of retention before reimbursement is made.
 Jurisprudence is replete with cases which categorically declare that Article 448 covers only cases in which the builders,
sowers or planters believe themselves to be owners of the land or, at least, have a claim of title thereto, but not when the
interest is merely that of a holder, such as a mere tenant, agent or usufructuary.
o A tenant cannot be said to be a builder in good faith, as he has no pretension to be owner.
 In a plethora of cases, this Court has held that Articles 448 of the Civil Code, in relation to Article 546 of the same Code,
which allows full reimbursement of useful improvements and retention of the premises until reimbursement is made,
applies only to a possessor in good faith.
o It does not apply where one’s only interest is that of a lessee under a rental contract; otherwise, it would always
be in the power of the tenant to “improve” his landlord out of his property.

Application
 Clearly, it is Article 1678 of the New Civil Code, which applies to the present case.
 Petitioners’ claim for reimbursement of the alleged entire value of the improvements does not thus lie under Article 1678.
 Not even for one-half of such alleged value, there being no substantial evidence , e.g., receipts or other documentary
evidence detailing costs of construction.
 Besides, by petitioners’ admission, of the structures they originally built – the billiard hall, restaurant, sari-sari store and a
parking lot, only the “bodega-like” sari-sari store and the parking lot now exist.
 At all events, under Article 1678, it is the lessor who is given the option, upon termination of the lease contract, either to
appropriate the useful improvements by paying one-half of their value at that time, or to allow the lessee to remove the
improvements.
 This option solely belongs to the lessor as the law is explicit that “should the lessor refuse to reimburse said amount, the
lessee may remove the improvements, even though the principal thing may suffer damage thereby”
 In this case, it appears that the lessor has opted not to reimburse.