B. Lease

A. General Provisions (Civil Code, arts. 1642-1645)

> ARTICLE 1642. The contract of lease may be of things, or of work and service. (1542)

ARTICLE 1643. In the lease of things, one of the parties binds himself to give to another the enjoyment or use of a thing for a price certain, and for a period which may be definite or indefinite. However, no lease for more than ninety-nine years shall be valid. (1543a)

ARTICLE 1644. In the lease of work or service, one of the parties binds himself to execute a piece of work or to render to the other some service for a price certain, but the relation of principal and agent does not exist between them. (1544a)

ARTICLE 1645. Consumable goods cannot be the subject matter of a contract of lease, except when they are merely to be exhibited or when they are accessory to an industrial establishment. (1545a)

X. CONTRACT OF LEASE

A. General Provisions (Civil Code, arts. 1642-1645)

B. Rights and Obligations of Lessor and Lessee (Civil Code, arts. 1654-1679)

C. Sublease and Assignment of Lease (Civil Code, arts. 1649-1652)

Lease

The contract of lease may be of things, or of work and service. A lease of a thing is a contract where one of the parties binds himself to give to another the enjoyment or use of a thing for a certain price and for a period which may be definite or indefinite, but not longer than 99 years. (NCC, Art. 1643)

It is a consensual, bilateral, onerous and commutative contract by which the lessor temporarily grants the enjoyment or use of a thing to another who undertakes to pay a price certain; the lessor need not own the thing. (NCC, Art. 1643)

NOTE: The lessor’s right of use is impaired, therein. He may even be ejected by the lessee if the lessor uses the leased realty. Therefore, lease is a burden on the land; it is an encumbrance on the land. (Roxas v. Court of Appeals, G.R. No. 92245, June 26, 1991)

Essential Elements of Lease

• Consent
• On part of owner – nobody can force an owner to lease out his property if he is not willing
• On part of lessee

GR: No person can be compelled to become a lessee against his will.

XPN: In the case of industrial accession where both the landowner, and the builder, planter and sower acted in good faith, the builder or planter cannot be obliged by the landowner to buy the land if its value is considerably more than that of the building or trees; in such case, the builder or planter shall pay reasonable rent if the landowner does not choose to appropriate the building or trees after proper indemnity. In case of the sower, he can also be compelled by the landowner to pay the proper rent. Here, the parties shall agree upon the terms of the lease and in case of disagreement, the court shall fix the terms thereof. (NCC, Art. 448)

• Object of subject matter; and
• Rent.

Kinds of Lease according to subject matter

• Lease of things – whether real or personal, involving an obligation on the part of the lessor to deliver the thing, which is the object thereof, and the correlative right of the lessee to the peaceful and adequate enjoyment thereof for a price certain (NCC, Art. 1654); or
• Lease of work – which refers to a contract for a piece of work, involving an obligation on the part of the contractor (lessor) to execute a piece of work for the employer (lessee) in consideration of a certain price or compensation. (NCC, Art. 1713)

NOTE: Duties of a contractor who furnishes work and materials:

To deliver;

To transfer ownership and warrant title; and

To warrant against eviction and hidden defects.

• Lease of service – involving an obligation on the part of the housekeeper, laborer or employee, or common carrier to do or perform a service for the head of a family, or master, employer, or passenger or shipper of goods, respectively, in consideration of compensation.

NOTE: Since lease is consensual and is not imposed by law, the parties agree on the rent, subject to applicable law and their lease stipulations. The lessor cannot unilaterally increase the rent during the agreed term absent a lawful basis.

Characteristics or Requisites for Lease of Things

• Consensual;
• Principal;
• Nominate;
• Purpose is to allow enjoyment or use of a thing;
• Purpose to which the thing will be devoted should not be immoral;
• Onerous;
• Period is Temporary;
• Period is either definite or indefinite:
• If no term is fixed, we should apply Art. 1682 of NCC (for rural leases), and Art. 1687 of NCC (for urban leases).
• If the term is fixed but indefinite, the court will fix the term under the law of obligations and contracts; and
• Lessor need not be the owner.

NOTE: The person to enjoy is the lessee while the person allowing the enjoyment by another is the lessor.

NOTE: A usufructuary may thus lease out the premises in favor of a stranger, such lease to end at the time that the usufruct itself ends.

Consideration of Lease

The cause of a contract of lease of things must be a price certain, generally called “rent” in money or its equivalent, or some other prestation which the lessee binds himself to undertake. The important thing is that what is given by the lessee has value.

Form of Lease Contract

GR: Lease may be made orally.

XPN: If the lease of real property is made for more than one year, the agreement, or a note or memorandum thereof, must be in writing and subscribed by the party charged or by the party’s agent to be enforceable by action, unless ratified. [NCC, Art. 1403 (2)(e)]

Lease vs. Sale

NOTE: A lease of personal property with option to buy (at a nominal amount) (NCC, Art. 1485) at the end of the lease can be considered a sale. (Elisco Tool Manufacturing Corporation v. CA, et al, G.R No. 109966, May 31, 1999)

Lease v. Usufruct

Lease of private lands by foreigners

• Foreigner investing in the Philippines

Any foreigner investing in the Philippines is allowed to lease private lands, provided that the lease contract shall be for a period not exceeding 99 years, subject to the conditions of R.A. No. 7652 as amended by R.A. No. 12252, and the lease area shall be used solely for the purpose of investment upon the mutual agreement of the parties. (Sec. 4, R.A. No. 7652, as amended by R.A. No. 12252)

NOTE: “Investing in the Philippines” means making an equity investment in the Philippines through actual remittance of foreign exchange or transfer of assets, whether in the form of capital goods, patents, formulae, or other technological rights or processes, upon registration with the SEC.

• Foreigner not investing in the Philippines

Allowed to lease private lands in the Philippines but for a maximum period of 25 years, renewable for another 25 years upon mutual agreement of both parties. (Sec. 1, P.D. No. 471)

Proper Authority Required

If a lease is to be recorded, the following persons must have special power of attorney to constitute the lease:

• Husband – with respect to the paraphernal real estate of the wife;
• Father or guardian – with respect to the property of the minor or the ward;
• Manager or administrator – with respect to the property under his administration.

NOTE: The “manager” here may be:

• The administrator of conjugal property (Rodriguez v. Borromeo, G.R. No. L17772, June 9, 1922);
• The administrator of a co-ownership (Melencio v. Dy Tiao Lay, G.R. No. L32047, November 1, 1930); or
• The administrator of state patrimonial property. (Tipton v. Andueza ChuaChingco, G.R. No. L-2220, April 4, 1906)

Q: A husband was properly given by his wife the authority to administer her paraphernal real property. Does this necessarily mean that just because the husband is now the administrator, he can lease said property without any further authority?

A: It depends.

• If the lease will be for one year or less, no other authority is required;
• If the lease on the real property will be for more than a year, then a special power of attorney (aside from the public instrument transferring administration) is required [NCC, Art. 1878 (8)]; or
• Whether it be a) or b), if the lease is to be recorded, there must be a special power of attorney. (NCC, Art. 1647)

NOTE: If it is the wife who is administering her paraphernal real property, the husband has no authority whatsoever, to lease, in any way, or administer the property.

Q: If a father, who is administering the real estate of his minor son, wants to record the lease, should he ask for judicial permission?

A: YES. A father who is administering the real estate of his minor son should ask for judicial permission if he wants to record the lease. (NCC, Art. 1647) But even if no judicial authorization is asked, such defect cannot be invoked by a lessee who has dealt with him. (Summers v. Mahinay, [CA] 40 O.G. [11th S] No. 18) Only the son or his own heirs may question the validity of the transaction.

Q: Is lease a real or a personal right?

A: Generally, it is a personal right. A lease of real property binds third persons when registered; a term of more than one year alone does not make an unregistered lease a real right against third persons. (NCC, Arts. 1648 and 1676; P.D. No. 1529)

NOTE: A special power of attorney is required to lease real property by representation for more than one year; proper authority is also required if the lease is to be recorded with the Property Registry. [NCC, Arts. 1647 & 1878(8)]

Rules on the lease of things when the lessee is an alien

• Personal (movable) property – 99-year limit applies;
• Aliens cannot lease public lands, and cannot acquire private lands except through succession;
• If lease of real property (private lands), maximum of 25 years renewable for another 25 years (P.D. No. 713); and
• Under the Investors’ Lease Act (RA 7652, as amended by RA 12252), a qualifying foreign investor’s lease of private land may have a term not exceeding 99 years (Sec. 4, RA 7652, as amended by RA 12252), provided the following conditions are met:
• Lessee must make investments;
• Lease is approved by DTI; and
• If terms are violated, DTI can terminate it.

NOTE: The Investor’s Lease Act of 1993 (RA 7652) did not do away with P.D. No. 713, but under ILA the consent of DTI is required, while in P.D. No. 713 no consent is required.

Right of a purchaser of a leased property

GR: Purchaser of thing leased can terminate the lease.

XPNs:

• Lease is recorded in Registry of Property;
• There is a stipulation in the contract of sale that the purchaser shall respect the lease;
• Purchaser knows the existence of the lease;
• Sale is fictitious; or
• Sale is made with a right of repurchase.

Term of lease contract

GR: The law does not allow perpetual lease. There must be a period which may either be definite or indefinite.

When no period is fixed:

• In case of lease of rural lands – it is understood to have been made for all the time necessary for the gathering of the fruits which the whole estate leased may yield in one year, or which it may yield once, although two or more years may have to elapse for the purpose (NCC, Art. 1682);
• In case of lease of urban lands - from year to year if rent agreed upon is annual; month to month if monthly; week to week if weekly; or day to day if daily. However, the court may fix a longer term after the lessee has occupied the premises for over one year if rent is monthly, over six months if rent is weekly, or over one month if rent is daily. (NCC, Art. 1687); or
• A lease of things during the lifetime of one of the parties is valid, which is considered one for life, ending upon the death of the party who could have terminated the contract.
• If based on the agreement of the parties, the term of the lease is made to depend upon the will of one of the contracting parties (e.g., as the lessee shall deem fit), the term shall be fixed by the courts. (Eleizegui v. Lawn Tennis Club, G.R. No. 967, May 19, 1903)