FACTS:

The case involves a complaint for rescission of a lease agreement filed by Raval against Peralta. The controversy arose from a lease agreement entered into by the spouses Arzaga and Peralta over two parcels of residential land, which included the construction of a building by Peralta. Flaviano Jr. initially filed a complaint for annulment of the lease contract but it was dismissed and later assigned his interests in the properties to Raval. Raval demanded compliance with the lease contract from Peralta, including the removal of structures allegedly constructed outside the scope of the agreement. After failed settlement attempts, Raval filed the complaint for rescission, alleging breaches by Peralta.

Raval's complaint alleged that he acquired rights over the properties through an assignment from Flaviano Jr. and that Peralta failed to pay the monthly rentals. Peralta opposed the complaint, arguing that Raval was not his lessor and that the assignment was void. The RTC dismissed both the complaint and Peralta's counterclaim, ruling that rescission should be denied because Peralta had been depositing his rentals in a bank account opened for Raval. The CA denied Raval's plea for rescission but granted an award of unpaid rentals and held Peralta liable for moral damages. Peralta and Raval filed separate motions for reconsideration, which were denied by the CA.

In the first petition, Peralta challenges the CA's dismissal of his counterclaim for damages and attorney's fees. Peralta claims that the deed of assignment is void, Raval engaged in forum shopping, and the action for rescission has prescribed. In the second petition, Raval insists on the rescission of the lease agreement, claiming that Peralta failed to fulfill his obligations.

The Court is tasked with determining Raval's rights over the properties and the validity of the deed of assignment. The Court upholds the validity of the assignment, stating that Raval is not a total stranger to the lease contract. Peralta disputes the validity of the deed and challenges Raval's right to seek rescission. The Court notes a separate petition filed by Raval for the registration of the deed, which was declared valid by the trial court.

ISSUES:

1. Whether Raval can be deemed a "total stranger" to Peralta's contract of lease with the Spouses Arzaga.

2. Whether Peralta can collaterally attack the validity and enforceability of the deed of assignment executed between Flaviano Jr. and Raval.

3. The issues in this case are as follows:

4. Whether the action for rescission of the lease agreement had already prescribed.

5. Whether the provisions under the Civil Code on rescission apply to contracts of lease.

6. Whether the action for rescission was timely filed.

7. Whether Raval is entitled to rescission of the contract of lease or only indemnification for damages.

8. Whether Peralta's mode of payment through the "in-trust-for" account is proper and constitutes valid payment of the monthly rentals.

9. Whether the filing of rescission was done in bad faith.

10. Whether the awards of moral damages, exemplary damages, and attorney's fees are justified.

RULING:

1. Raval cannot be deemed a "total stranger" to Peralta's contract of lease with the Spouses Arzaga because by the subsequent transfers of rights over the leased premises, Peralta became the original lessors' successor-in-interest.

2. Peralta cannot collaterally attack the validity and enforceability of the deed of assignment as it would also be an attack on the validity of the titles issued in favor of Raval, which is prohibited. Collateral attacks on land titles are not allowed, and the issue on their validity can only be raised in an action expressly instituted for that purpose.

3. The Court ruled in favor of the plaintiff and held that the action for rescission of the lease agreement had not prescribed. It also held that the provisions under the Civil Code on rescission apply to contracts of lease. The Court further ruled that the action for rescission was timely filed.

4. Raval is entitled to indemnification for damages and not rescission of the contract of lease. If the option chosen is for specific performance, then the demand is to pay rent or comply with the conditions of the lease violated. However, if rescission is chosen, the demand must be for the lessee to pay rents or comply with the conditions of the lease and to vacate. In this case, the Court finds that Raval is not entitled to rescission and only his monetary claims for damages should be denied.

5. Peralta's mode of payment through the "in-trust-for" account is proper and constitutes valid payment of the monthly rentals. The evidence shows that Peralta had been depositing rentals to the ITF accounts even up to the year 2004. The trial court found that this mode of payment was a proper modus vivendi adopted by Peralta's wife earlier in the lease contract and was sustained by the Court of Appeals in a prior case. The Court holds that all payments made by Peralta through the bank accounts in trust for Flaviano Jr. shall be deemed valid payments for the monthly rentals.

6. The filing of rescission was not done in bad faith. The petitioner sought redress for what he believed was a violation of his rights as the new owner of the lots. Bad faith requires a dishonest purpose or moral obliquity, which was not present in this case. The dismissal of the petitioner's complaint does not automatically make the act unlawful.

7. The awards of moral damages, exemplary damages, and attorney's fees are not justified. Moral damages are only warranted in acts tainted with bad faith, which was not present in this case. Exemplary damages require bad faith and a wanton, fraudulent, reckless, or malevolent act, which was also not established. Attorney's fees are awarded only if a party was forced to litigate and incur expenses due to an unjustified act or omission, which was not proven.

PRINCIPLES:

• A certificate of title shall not be subject to collateral attack. It cannot be altered, modified, or cancelled except in a direct proceeding in accordance with the law.

• Collateral attacks on land titles are not allowed. The validity of a title can only be questioned in an action expressly instituted for that purpose.

• A moot and academic case is one that ceases to present a justiciable controversy by virtue of supervening events, rendering a declaration on the issue of no practical value.

• In contracts of reciprocal obligations, the power to rescind lies in the aggrieved party. (Article 1191, Civil Code)

• Contracts validly agreed upon by parties to be rescissible are governed by Article 1380 of the Civil Code.

• Rescissible contracts under the law are governed by Article 1381 of the Civil Code.

• The prescriptive period for actions for rescission is 10 years from the time the right of action accrues. (Article 1144, Civil Code)

• Article 1659 of the Civil Code applies to the rescission of lease agreements.

• Article 1659 of the Civil Code gives the lessor the right to ask for rescission of the contract of lease and indemnification for damages or only indemnification for damages, allowing the contract to remain in force.

• Rescission of a contract of lease requires a demand for the lessee to pay rents or comply with the conditions of the lease and to vacate.

• The mode of payment through an "in-trust-for" account can constitute valid payment of monthly rentals if it is recognized and accepted by the lessor.

• Moral damages are not recoverable simply because a contract has been breached. They are recoverable only if the party from whom it is claimed acted fraudulently or in bad faith or in wanton disregard of his contractual obligations.

• Bad faith requires a dishonest purpose or moral obliquity.

• The dismissal of a complaint does not automatically make the act unlawful.

• Moral damages are only awarded for acts tainted with bad faith.

• Exemplary damages require bad faith and a wanton, fraudulent, reckless, or malevolent act.

• Attorney's fees are awarded when a party was forced to litigate and incur expenses due to an unjustified act or omission.