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VICTORIA N. RACELIS v. SPS. GERMIL JAVIER

FACTS:

Before his death, Pedro Nacu, Sr. appointed his daughter, Victoria Racelis, to administer his properties. One of these properties was a residential house and lot in Marikina City. Racelis advertised the property for sale and in August 2001, the Spouses Germil and Rebecca Javier offered to lease it. They used the property as their residence and tutorial school. In July 2002, Racelis asked if the Spouses Javier were still interested in purchasing the property. They reassured her and paid P65,000.00 as "initial payment or goodwill money." However, they only delivered a total of P78,000.00 by the end of 2003. In February 2004, they started falling behind on rent payments.

Racelis terminated the lease agreement and demanded the Spouses Javier vacate the premises by May 30, 2004. She mentioned that the earnest money would be forfeited if the sale did not proceed due to the buyer's fault, but they would consider returning the amount if they sold the property. The Spouses Javier refused to vacate, claiming that the P78,000.00 was advanced rent and proposed using it to offset their outstanding liability. They filed a complaint for damages against Racelis for disconnecting the electrical service to the property. Racelis was absolved from liability.

Racelis filed an ejectment case against the Spouses Javier for non-payment of rent and the balance due. The Metropolitan Trial Court ruled in favor of the Spouses Javier, stating that they were justified in suspending rental payments under Article 1658 of the Civil Code. The court considered the P78,000.00 as earnest money and ordered Racelis to return the amount. On appeal, the Regional Trial Court reversed the decision, ruling that the Spouses Javier were not justified in suspending rental payments. The court held that the P78,000.00 was part of the purchase price of the property. The court ordered the Spouses Javier to pay accrued rent and allowed them to recover the P78,000.00 in a separate proceeding. The Court of Appeals reversed the Regional Trial Court's ruling and declared the Spouses Javier justified in withholding rental payments. They ordered Racelis to reimburse them with P24,000.00. Racelis filed a Petition for Review before the Supreme Court, challenging the Court of Appeals' ruling.

ISSUES:

  1. Whether or not respondents can invoke their right to suspend the payment of rent under Article 1658 of the Civil Code.

  2. Whether or not the initial payment made by respondents can be used to offset their accrued rent.

  3. Whether the respondents' obligation to pay rent was extinguished when they transferred to their new residence.

  4. Whether the initial payment made by the respondents can be considered as advanced rent.

  5. Whether the earnest money should be forfeited in favor of the seller.

  6. Whether the unpaid rent can be offset by the earnest money.

RULING:

  1. Respondents cannot invoke their right to suspend the payment of rent under Article 1658 of the Civil Code. Article 1658 allows a lessee to postpone the payment of rent if the lessor fails to make necessary repairs or maintain the lessee in peaceful and adequate enjoyment of the property leased. However, lessees may only suspend the payment of rent if their legal possession is disrupted. In this case, although there was a disconnection of electrical service, the lease had already expired when this occurred and the respondents unlawfully withheld possession of the property. Therefore, the respondents cannot use the disconnection of electrical service as justification to suspend the payment of rent.

  2. The P78,000.00 initial payment made by the respondents cannot be used to offset their accrued rent. Since the lease had already expired and the respondents unlawfully withheld possession of the property, the lessor was no longer obligated to maintain the respondents in peaceful and adequate enjoyment of the lease. As a result, the respondents cannot use the initial payment to offset their accrued rent.

  3. The respondents' obligation to pay rent was not extinguished when they transferred to their new residence. They are liable for a reasonable amount of rent for the use and continued occupation of the property upon the expiration of the lease. Lessees who exercise their right under Article 1658 of the Civil Code are not freed from the obligations imposed by law or contract.

  4. The initial payment made by the respondents cannot be considered as advanced rent. The payment was characterized as initial payment or goodwill money and not as advanced rent in the receipt. Both the Metropolitan Trial Court and the Regional Trial Court rejected the respondents' assertion that the payment was advanced rent and characterized it as earnest money. Earnest money is given as proof of the perfection of a contract of sale or a contract to sell. In this case, the contract between the parties was deemed a contract to sell, and the earnest money given by the respondents can be retained by the petitioner.

  5. Yes, the earnest money should be forfeited in favor of the seller. Earnest money is paid for the seller's benefit and is intended to be forfeited if the sale does not happen without the fault of the seller. The burden is on the potential buyer to prove that the earnest money was intended for a different purpose. In this case, the burden was not discharged by the respondents, and there is no unjust enrichment on the part of the seller.

  6. No, the unpaid rent cannot be offset by the earnest money. The petitioner failed to establish that the respondents' advanced deposit had already been consumed or deducted from the unpaid rent. Therefore, the unpaid rent should be paid separately from the earnest money.

PRINCIPLES:

  • A lease contract is a consensual, bilateral, onerous, and commutative contract by which the owner temporarily grants the use of his property to another who undertakes to pay rent.

  • Article 1658 of the Civil Code allows a lessee to postpone the payment of rent if the lessor fails to make necessary repairs or maintain the lessee in peaceful and adequate enjoyment of the property leased.

  • Lessees may only suspend the payment of rent under Article 1658 if their legal possession is disrupted.

  • The duty to maintain the lessee in peaceful and adequate enjoyment of the lease is a warranty that the lessee shall not be disturbed in their legal possession.

  • Lessees who exercise their right under Article 1658 of the Civil Code are still obligated to pay rent.

  • Earnest money is given in a contract of sale or a contract to sell and serves as proof of the perfection of the contract.

  • A contract to sell is different from a contract of sale, where ownership of the property passes to the buyer upon delivery. In a contract to sell, ownership remains with the prospective seller until full payment of the purchase price.

  • Earnest money is part of the purchase price and is intended to be forfeited if the sale does not happen without the fault of the seller.

  • The burden is on the potential buyer to prove that the earnest money was intended for a different purpose.

  • Unpaid rent cannot be offset by earnest money unless there is evidence that the advanced deposit has already been consumed or deducted from the unpaid rent.